<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1999
REGISTRATION NO. 333-69947
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TC PIPELINES, LP
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4922 52-2135448
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
FOUR GREENSPOINT PLAZA
16945 NORTHCHASE DRIVE
HOUSTON, TEXAS 77060
(281) 539-4500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
KENNETH R. BLACKMAN, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
(212) 859-8000
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
------------------------------
PLEASE SEND COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
KENNETH R. BLACKMAN, ESQ. MICHAEL ROSENWASSER, ESQ.
CRAIG F. MILLER, ESQ. Andrews & Kurth L.L.P.
Fried, Frank, Harris, Shriver & Jacobson 805 Third Avenue
One New York Plaza New York, New York 10022
New York, New York 10004 (212) 850-2800
(212) 859-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION. DATED MARCH , 1999.
[LOGO]
15,640,000 Common Units
TC PIPELINES, LP
Representing Limited Partner Interests
------------
This is an initial public offering by TC PipeLines, LP of common units
representing limited partner interests. TC PipeLines was recently formed to
acquire, own and participate in the management of United States-based pipeline
assets. TC PipeLines will own a 30% general partner interest in Northern Border
Pipeline Company, which is engaged in pipeline transportation of natural gas.
Common units are entitled to receive distributions of operating cash of
$0.375 per quarter or $1.50 on an annualized basis, before any distributions are
paid on the subordinated units. This priority is expected to continue until at
least June 30, 2004.
Prior to the offering, there has been no public market for the common units.
TC PipeLines anticipates that the initial public offering price per common unit
will be between $ and $ . TC PipeLines intends to list the common units on
the NYSE under the symbol " ".
TC PipeLines will not use any of the proceeds from this offering to fund its
operations.
SEE "RISK FACTORS" ON PAGE 16 TO READ ABOUT CERTAIN FACTORS THAT YOU SHOULD
CONSIDER BEFORE BUYING COMMON UNITS.
These risks include the following:
- Cash distributions are not assured.
- FERC regulatory decisions may adversely affect the operations of Northern
Border Pipeline.
- Loss of a major shipper could adversely affect the operations of Northern
Border Pipeline.
- TC PipeLines' affiliates may compete with TC PipeLines or Northern Border
Pipeline for existing or new business.
- The legal duties of TC PipeLines' general partner and its affiliates to
unitholders are limited.
-----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per
Common Unit Total
-------------- -----------
<S> <C> <C>
Initial public offering price......................... $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to TC PipeLines............ $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 2,346,000 common units from TC PipeLines at the initial public
offering price less the underwriting discount.
----------------
The underwriters expect to deliver the common units against payment in New
York, New York on , 1999.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
----------------
Prospectus dated , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.................................................................... 1
TC PipeLines, LP.................................................................... 1
Business Strategy and Competitive Strengths......................................... 2
The Offering........................................................................ 3
Summary Pro Forma Financial Data of TC PipeLines.................................... 5
Summary Historical Financial and Operating Data of Northern Border Pipeline......... 6
Summary of Risk Factors............................................................. 7
TC PipeLines Structure and Management............................................... 9
Ownership Chart..................................................................... 10
Summary of Conflicts of Interest and Fiduciary Responsibilities..................... 11
Distributions and Payments to the General Partner and Its Affiliates................ 12
Summary of Tax Considerations....................................................... 14
RISK FACTORS.......................................................................... 16
Risks Inherent in TC PipeLines' Business............................................ 16
Risks Inherent in an Investment in TC PipeLines..................................... 21
Tax Risks........................................................................... 26
THE TRANSACTIONS...................................................................... 28
USE OF PROCEEDS....................................................................... 30
PRO FORMA CAPITALIZATION.............................................................. 31
DILUTION.............................................................................. 32
CASH DISTRIBUTION POLICY.............................................................. 33
Quarterly Distributions of Available Cash........................................... 33
Distributions of Available Cash from Operating Surplus During Subordination
Period............................................................................ 33
Distributions of Available Cash from Operating Surplus After Subordination Period... 34
Subordination Period; Conversion of Subordinated Units.............................. 34
Incentive Distribution Rights--Hypothetical Yearly Yield............................ 36
Distributions from Capital Surplus.................................................. 37
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels......... 38
Distributions of Cash Upon Liquidation.............................................. 38
CASH AVAILABLE FOR DISTRIBUTION....................................................... 41
SELECTED PRO FORMA FINANCIAL DATA OF TC PIPELINES..................................... 43
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF NORTHERN BORDER PIPELINE.......... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 45
Pro Forma Financial Condition and Results of Operations of TC PipeLines............. 45
Results of Operations of Northern Border Pipeline................................... 45
Liquidity and Capital Resources of Northern Border Pipeline......................... 47
Description of Indebtedness of Northern Border Pipeline............................. 48
Interest Rate Risk Management of Northern Border Pipeline........................... 50
Project Cost Containment Mechanism.................................................. 50
Recent Developments................................................................. 51
Year 2000........................................................................... 51
MARKET OVERVIEW....................................................................... 55
BUSINESS OF TC PipeLines.............................................................. 57
Business Strategy and Competitive Strengths of TC PipeLines......................... 57
BUSINESS OF NORTHERN BORDER PIPELINE.................................................. 59
Structure........................................................................... 59
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
General............................................................................. 59
The Northern Border Pipeline System................................................. 59
Interconnects....................................................................... 60
Project 2000........................................................................ 60
Competition......................................................................... 61
Shippers............................................................................ 62
FERC Regulation..................................................................... 62
Environmental and Safety Matters.................................................... 65
Properties.......................................................................... 66
Litigation.......................................................................... 67
TRANSCANADA PIPELINES LIMITED......................................................... 68
Energy Transmission................................................................. 68
Other Businesses.................................................................... 69
MANAGEMENT............................................................................ 70
TC PipeLines Management............................................................. 70
Directors and Executive Officers of the General Partner............................. 71
Reimbursement of Expenses of the General Partner and Its Affiliates................. 72
Executive Compensation.............................................................. 72
Compensation of Directors........................................................... 73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 74
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES.................................. 75
Conflicts of Interest............................................................... 75
Fiduciary and Other Duties Owed to Unitholders by the General Partner as Prescribed
by Law and the Partnership Agreement.............................................. 77
DESCRIPTION OF THE COMMON UNITS....................................................... 80
The Units........................................................................... 80
Transfer Agent and Registrar........................................................ 80
Transfer of Common Units............................................................ 80
DESCRIPTION OF THE SUBORDINATED UNITS................................................. 82
Conversion of Subordinated Units.................................................... 82
Limited Voting Rights............................................................... 83
Distributions Upon Liquidation...................................................... 83
THE PARTNERSHIP AGREEMENT............................................................. 84
Organization and Duration........................................................... 84
Purpose............................................................................. 84
Power of Attorney................................................................... 84
Capital Contributions............................................................... 84
Limited Liability................................................................... 85
Issuance of Additional Securities................................................... 86
Amendment of Partnership Agreement.................................................. 86
Merger, Sale or Other Disposition of Assets......................................... 88
Termination and Dissolution......................................................... 89
Liquidation and Distribution of Proceeds............................................ 89
Withdrawal or Removal of the General Partner........................................ 89
Transfer of General Partner Interest and Incentive Distribution Rights.............. 91
TransCanada Ownership of General Partner............................................ 91
Change of Management Provisions..................................................... 91
Limited Call Right.................................................................. 92
Meetings; Voting.................................................................... 92
Status as Limited Partner or Assignee............................................... 93
Non-Citizen Assignees; Redemption................................................... 93
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Indemnification..................................................................... 93
Books and Reports................................................................... 94
Right to Inspect TC PipeLines Books and Records..................................... 94
Registration Rights................................................................. 94
UNITS ELIGIBLE FOR FUTURE SALE........................................................ 96
NORTHERN BORDER PIPELINE PARTNERSHIP AGREEMENT........................................ 98
Organization and Partners........................................................... 98
Purpose............................................................................. 98
Management and Voting............................................................... 98
Operator............................................................................ 100
Cash Distribution Policy............................................................ 100
Audit and Compensation Committee.................................................... 101
Allocation of Income, Gain, Loss and Deduction...................................... 101
Transfer of Interest................................................................ 101
Additional Capital Requirements..................................................... 101
Change to Corporate Form............................................................ 102
Withdrawal of General Partners...................................................... 102
Indemnification..................................................................... 102
Termination and Dissolution......................................................... 102
Liquidation and Distribution of Proceeds............................................ 102
TAX CONSIDERATIONS.................................................................... 103
Legal Opinions and Advice........................................................... 103
Partnership Status.................................................................. 104
Limited Partner Status.............................................................. 105
Tax Consequences of Unit Ownership.................................................. 106
Tax Treatment of Operations......................................................... 111
Disposition of Common Units......................................................... 113
Tax-Exempt Organizations and Other Investors........................................ 116
Administrative Matters.............................................................. 116
State, Local and Other Tax Considerations........................................... 119
INVESTMENT IN TC PIPELINES BY EMPLOYEE BENEFIT PLANS.................................. 120
VALIDITY OF THE COMMON UNITS.......................................................... 121
EXPERTS............................................................................... 121
HOW TO OBTAIN OTHER INFORMATION ABOUT TC PIPELINES.................................... 122
FORWARD-LOOKING STATEMENTS............................................................ 122
UNDERWRITING.......................................................................... U-1
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Appendix A--Amended and Restated Agreement of Limited Partnership..................... A-1
Appendix B--Application for Transfer of Common Units.................................. B-1
Appendix C--Glossary of Terms......................................................... C-1
Appendix D--Pro Forma Available Cash from Operating Surplus........................... D-1
</TABLE>
iii
<PAGE>
GUIDE TO READING THIS PROSPECTUS
The following should help you understand some of the conventions and defined
terms used in this prospectus:
- Periodically throughout this prospectus, we refer to ourselves, TC
PipeLines, LP, as "we," "us", and "TC PipeLines". Generally we refer to
ourselves as "we" or "us" when discussing operations, for example, "We
were recently formed to acquire a 30% general partner interest in Northern
Border Pipeline Company", and as "TC PipeLines" when discussing our entity
or its structure for example "TC PipeLines conducts its operations through
the TC PipeLines intermediate partnership". In addition, as the context
requires, references to "we", "us" and "TC PipeLines" include the TC
PipeLines Intermediate Limited Partnership, our subsidiary partnership.
- For ease of reference, a glossary of some of the terms used in this
prospectus is included as Appendix C to this prospectus. Capitalized terms
not otherwise defined have the meanings given in the glossary.
- Unless otherwise specified, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
- Unless otherwise specified, references in this prospectus to "$" or
"dollars" are to United States dollars.
iv
<PAGE>
PROSPECTUS SUMMARY
THE SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN THE COMMON UNITS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE "RISK FACTORS" SECTION AND THE FINANCIAL STATEMENTS AND THE NOTES
TO THOSE STATEMENTS.
TC PIPELINES, LP
We were recently formed to acquire, own and participate in the management of
United States based pipeline assets. We will own a 30% interest in Northern
Border Pipeline Company.
Northern Border Pipeline owns a 1,214-mile United States interstate pipeline
system that currently transports natural gas from the Montana-Saskatchewan
border to natural gas markets in the midwestern United States. The Northern
Border pipeline system was initially constructed in 1982 and was expanded or
extended in 1991, 1992 and 1998. The Chicago project, completed in late 1998,
increased the Northern Border pipeline system's ability to receive natural gas
by 42% to its current capacity of 2,373 million cubic feet per day.
Interconnecting pipeline facilities provide Northern Border Pipeline's shippers
with flexible access to natural gas markets. In January 1999, the first full
month of operations that include the Chicago project, we estimate that the
Northern Border pipeline system's share of Canadian natural gas exported to the
United States was approximately 24%.
In 1998, approximately 88% of the natural gas transported by the Northern
Border pipeline system was produced in the western Canadian sedimentary basin
located in the provinces of Alberta, British Columbia and Saskatchewan. As of
December 31, 1997, this basin had remaining established natural gas reserves of
65 trillion cubic feet. In 1997 Northern Border Pipline utilized 102% of the
capacity for which the pipeline was designed, and all additional capacity added
by the Chicago project in 1998 is fully subscribed by shippers. The amount of
natural gas that can be transported in the pipeline is referred to as "capacity"
and is measured in cubic feet.
Northern Border Pipeline serves a number of shippers with well known and
diverse financial and business profiles. As of December 31, 1998, at least 90%
of Northern Border Pipeline's capacity is under contract through mid-September,
2003, with a weighted average contract life of 7.6 years.
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the Federal Energy Regulatory Commission, which allows it to earn a
regulated equity return of 12.0% as well as recover all operations and
maintenance costs, taxes other than income taxes, interest, depreciation and
amortization and an allowance for income taxes. Shippers contract to pay for an
allocable share of the Northern Border pipeline system's cost of service. During
any given month, all shippers pay a uniform mileage-based charge for the amount
of capacity contracted. The shippers are obligated to pay their allocable share
of the cost of service regardless of the amount of natural gas they transport.
As a result of the long-term nature of its shipper contracts, the financial
results of Northern Border Pipeline are not immediately affected by reductions
in the level of system use. Northern Border Pipeline does not own the natural
gas that it transports and therefore it does not assume any natural gas
commodity price risk.
The Northern Border pipeline system is operated by Northern Plains Natural
Gas Company, a wholly owned subsidiary of Enron Corp. Management of Northern
Border Pipeline is overseen by a four-member management committee. We will
designate one representative to the Northern Border Pipeline management
committee with 30% voting power and the general partners of Northern Border
Partners L.P., a publicly traded
1
<PAGE>
partnership that is not affiliated with us, select three representatives having
a combined 70% voting power.
We are managed by our general partner, which is a wholly-owned subsidiary of
TransCanada PipeLines Limited. TransCanada has extensive operations in four
principal lines of business: energy transmission, energy marketing, energy
processing and international energy services.
TransCanada is the largest carrier of natural gas in North America by volume
and operates the longest and most extensive pipeline network in Canada. As of
December 31, 1998, it transported approximately 80% of all Canadian natural gas
production, which represented 18% of all North American natural gas production.
Through the Canadian mainline and the Alberta system, TransCanada owns and
operates natural gas transmission systems with approximately 22,800 miles of
pipeline.
TransCanada extends its reach in North America through various ownership
interests in approximately 6,840 miles of natural gas and crude oil pipelines.
TransCanada's various United States pipeline assets may provide opportunities
for our growth through acquisitions.
BUSINESS STRATEGY AND COMPETITIVE STRENGTHS
Our business strategy combines the acquisition of high quality pipeline
transmission and related assets with the further development of our existing
asset base. Our business strategy is twofold:
1 Acquire United States transmission assets from TransCanada.
TransCanada has developed and expects to continue to develop pipeline assets
which either link western Canadian natural gas supplies directly to United
States markets or complement pipelines which do so. TransCanada views TC
PipeLines as its preferred acquisition and growth vehicle in the United States.
We believe that TransCanada's United States based pipeline assets will provide
acquisition opportunities for TC PipeLines.
2 Benefit from the increased flow of natural gas from western Canada to
growing markets in the United States.
We believe the growing market for natural gas in the northeastern United
States is a logical market for the large reserves of natural gas in western
Canada.
TC PipeLines can capitalize on the growth opportunities inherent in the
northeast markets through our participation in further expansions and extensions
of the Northern Border pipeline system, as well as through selected acquisitions
of ownership interests and other United States pipeline transmission and related
assets. Northern Border Pipeline currently provides an interconnecting pathway
between pipeline systems accessing supply in western Canada and the pipeline
systems serving the market areas in the northeastern United States. We plan to
be involved in the expansion of the pathway as the market in the northeastern
United States continues to grow.
We believe we have various strengths that will assist in implementing our
strategy. These strengths include:
- a substantial interest in a large and efficient pipeline system well
positioned for future growth;
- access to the experienced management of TransCanada, the largest carrier
of natural gas by volume in North America;
- our affiliation with TransCanada, whose United States based pipeline
assets may provide potential acquisition opportunities for us; and
- the efficiency of the partnership structure and access to debt and capital
markets.
We cannot assure that we will be able to implement the above strategies.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 15,640,000 common units.
17,986,000 common units if the underwriters'
over-allotment option is exercised in full.
Units outstanding after the
offering........................ 15,640,000 common units and 3,960,000 subordinated
units, representing 78.2% and 19.8% limited partner
interests in TC PipeLines.
If the underwriters' over-allotment option is exercised
in full:
- 2,346,000 additional common units will be issued
and 2,346,000 subordinated units will be redeemed;
and
- 17,986,000 common units and 1,614,000 subordinated
units, representing 89.9% and 8.1% limited partner
interests in TC PipeLines, will be outstanding.
Distributions of available cash... We intend to distribute, to the extent there is
sufficient available cash, at least a minimum quarterly
distribution of $0.375 per common unit per quarter. This
minimum quarterly distribution is not guaranteed.
"Available cash" for any quarter consists generally of
all cash on hand at the end of that quarter, as adjusted
for reserves. The general partner has broad discretion
in establishing reserves.
In general, available cash will be distributed per
quarter based on the following priorities:
- First, 98% to the common units and 2% to the
general partner until each common unit has
received $0.375 plus any unpaid arrearages from
prior quarters.
- Second, 98% to the subordinated units and 2% to
the general partner until each subordinated unit has
received $0.375.
If distributions of available cash per unit exceed
target levels greater than $0.3945 in a quarter, the
general partner will receive incentive distributions.
Available cash will generally be distributed within 45
days after the end of each quarter. The first
distribution to the unitholders will be made within 45
days after the quarter ending June 30, 1999. The minimum
quarterly distribution for the period from the closing
of the offering through June 30, 1999 will be adjusted
downward based on the actual length of that period.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Although we can provide no assurances, based on the
assumptions listed on page 41 of this prospectus, we
believe that we will generate sufficient available cash
to enable us to distribute $0.375 per quarter on the
common units and the subordinated units for each quarter
through June 30, 2002.
Subordination period.............. The subordination period will end once we meet the
financial tests in the partnership agreement, but it
generally cannot end before June 30, 2004.
When the subordination period ends, all remaining
subordinated units will convert into common units on a
one-for-one basis.
Early conversion of subordinated
units........................... If the financial tests for conversion in our partnership
agreement are met for any quarter ending on or after
June 30, 2002, one-third of the subordinated units will
convert into common units. If these tests have been met
for any quarter ending on or after June 30, 2003, an
additional one-third of the subordinated units will
convert into common units.
Use of proceeds................... We estimate that we will receive approximately $285
million from the sale of the common units, after
deducting underwriting discounts and commissions but
before deducting offering expenses. We will use the net
proceeds to:
- pay offering expenses; and
- redeem common units issued to subsidiaries of
TransCanada.
We will use the net proceeds from any exercise of the
underwriters' over-allotment option to redeem
subordinated units held by our general partner on a
one-for-one basis equal to the number of common units
issued upon the exercise of that option.
Accordingly, we will not retain any of the net proceeds
of the offering.
Issuance of additional units...... In general, during the subordination period we can issue
up to 9,400,000 additional common units without
obtaining unitholder approval. We can also issue an
unlimited number of common units for acquisitions which
increase cash flow from operations per unit on a pro
forma basis.
NYSE listing...................... We intend to apply to list the common units on the NYSE
under the symbol " ".
</TABLE>
4
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA OF TC PIPELINES
The following unaudited Summary Pro Forma Financial Data as of and for the
nine months ended September 30, 1998 and for the year ended December 31, 1997 is
derived from TC PipeLines' Pro Forma Financial Statements appearing elsewhere in
this prospectus.
TC PipeLines' pro forma equity income represents 30% of the net income of
Northern Border Pipeline. Our general partner's allocation of pro forma net
income is based on a combined 2% interest in TC PipeLines, which has been
deducted before calculating the pro forma net income per unit. The computation
of pro forma net income per unit assumes that 15,640,000 common units and
3,960,000 subordinated units are outstanding at all times during the periods
presented. The pro forma investment balance as of September 30, 1998 represents
the combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCan Northern and TransCanada Border
PipeLine as of that date. The pro forma investment balance also equates to 30%
of the net assets of Northern Border Pipeline as of September 30, 1998. Pro
forma partners' capital is allocated 2% to our general partner, 78.2% to common
unitholders and 19.8% to subordinated unitholders.
For a more complete description of the assumptions used in preparing the
Summary Pro Forma Financial Data of TC PipeLines, see Notes to the Pro Forma
Financial Statements of TC PipeLines, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(thousands of dollars,
except per unit amounts)
<S> <C> <C>
INCOME STATEMENT DATA:
Equity income from investment in Northern Border
Pipeline................................................ 21,615 21,832
General and administrative expenses....................... (900) (1,200)
-------------- --------------
Net income to partners.................................... 20,715 20,632
-------------- --------------
-------------- --------------
Net income per unit....................................... $ 1.04 $ 1.03
-------------- --------------
-------------- --------------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline.................... 236,777
Total assets.............................................. 236,778
Partners' capital
General partner......................................... 4,737
Common units............................................ 185,159
Subordinated units...................................... 46,882
--------------
236,778
--------------
--------------
</TABLE>
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF
NORTHERN BORDER PIPELINE
Some of the 1994 and 1993 figures have been reclassified to conform with the
presentation used in the audited financial statements for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(thousands of dollars, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues, net......... 145,476 140,369 186,050 201,943 206,497 211,580 205,242
Operations and maintenance...... 16,872 21,027 28,522 26,974 25,573 27,682 25,793
Depreciation and amortization... 30,060 28,988 38,708 46,979 47,081 41,959 39,539
Taxes other than income......... 17,267 17,793 22,393 24,390 23,886 24,438 21,393
----------- ----------- ---------- ----------- ---------- ---------- ----------
Operating income.............. 81,277 72,561 96,427 103,600 109,957 117,501 118,517
Interest expense................ (30,422) (24,162) (33,020) (33,117) (35,205) (38,424) (40,671)
Other income (expense).......... 21,196 4,955 9,365 3,360 (217) (1,919) (2,440)
----------- ----------- ---------- ----------- ---------- ---------- ----------
Net income.................... 72,051 53,354 72,772 73,843 74,535 77,158 75,406
----------- ----------- ---------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ----------- ---------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating
activities.................... 83,390 121,604 115,328 136,808 127,429 121,679 118,333
Capital expenditures............ 484,219 69,773 152,070 18,597 8,310 3,086 1,268
Distributions to partners....... 61,205 99,322 99,322 102,845 98,517 87,509 90,036
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment..................... 1,602,862 998,361 1,100,890 937,859 957,587 983,843 1,015,567
Total assets.................... 1,653,804 1,043,262 1,147,120 974,137 1,011,361 1,063,210 1,097,383
Long-term debt, including
current maturities............ 724,000 410,000 459,000 377,500 410,000 445,000 470,000
Partners' capital............... 789,258 520,994 581,412 526,962 555,964 579,946 590,297
OPERATING DATA (UNAUDITED):
Natural gas delivered (millions
of cubic feet)................ 463,209 471,695 633,280 633,908 615,133 597,898 570,469
Average throughput (millions of
cubic feet per day)........... 1,733 1,761 1,770 1,764 1,720 1,663 1,592
</TABLE>
6
<PAGE>
SUMMARY OF RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH TC PIPELINES WILL BE
SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A
SIMILAR BUSINESS. YOU SHOULD CONSIDER THE FOLLOWING SUMMARY OF RISK FACTORS
TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS IN
EVALUATING AN INVESTMENT IN THE COMMON UNITS.
RISKS INHERENT IN TC PIPELINES' BUSINESS
- - Cash distributions are not guaranteed and may fluctuate with our performance
- - If the FERC requires that Northern Border Pipeline's tariff be changed,
Northern Border Pipeline's operations could be adversely affected
- - If any shipper fails to perform its contractual obligations or exercises its
contractual termination rights, Northern Border Pipeline's operations could be
adversely affected
- - If Northern Border Pipeline does not maintain or increase its rate base by
successfully completing projects, Northern Border Pipeline's cash
distributions or earnings could be adversely affected
- - If there is a decline in the availability of western Canadian natural gas,
Northern Border Pipeline's operations could be adversely affected
- - If demand for western Canadian natural gas decreases, Northern Border Pipeline
could be adversely affected
- - Because of the highly competitive nature of the natural gas transmission
business, Northern Border Pipeline may not be able to maintain existing
customers or acquire new customers, which could have an adverse effect on its
operations
- - Northern Border Pipeline's indebtedness may limit its ability to make
distributions to us and borrow additional funds, which could adversely affect
its operations
- - Northern Border Pipeline's operations may be adversely affected by litigation
or governmental regulation and associated environmental and regulatory costs
- - If the FERC does not allow Northern Border Pipeline to include a portion of
the costs of the Chicago project in its rate base, Northern Border Pipeline's
cash distributions or earnings could be adversely affected
- - If we are unable to make acquisitions on economically and operationally
acceptable terms, our future financial performance will be limited
- - Northern Border Pipeline's operations are subject to operational hazards and
unforeseen interruptions
RISKS INHERENT IN AN INVESTMENT IN
TC PIPELINES
- - Majority control of the Northern Border Pipeline management committee by
Northern Border Partners may limit our ability to influence Northern Border
Pipeline
- - You will have limited voting rights and will not control our general partner
- - Our assumptions concerning future operations may not be realized
- - Purchasers of common units will experience immediate and substantial dilution
- - We may issue additional common units, which would dilute existing unitholders'
interests
- - Issuance of additional common units, including upon conversion of subordinated
units, will increase the risk that we will be unable to pay the full minimum
quarterly distribution on all common units
- - Cost reimbursements due to our general partner may be substantial and could
reduce our cash available for distributions
- - A trading market may not develop for the units or you may not be able to
resell your units at the initial offering price
7
<PAGE>
- - Our general partner has a limited call right that may require you to sell your
units at an undesirable time or price
- - You may not have limited liability in some circumstances
- - Without the consent of each unitholder, Northern Border Pipeline might be
converted into a corporation, which would adversely affect cash available for
distributions
- - If we are to be found by a court to be an "investment company" under the
Investment Company Act of 1940, our operations would be adversely affected
- - If we were to lose TransCanada's management expertise, our operations could be
adversely affected
- - See "Summary of Tax Considerations" for a brief summary of the material tax
consequences of owning and disposing of common units
8
<PAGE>
TC PIPELINES STRUCTURE AND MANAGEMENT
We will own our 30% general partner interest in Northern Border Pipeline
through the TC PipeLines intermediate partnership. Upon completion of the
transactions contemplated in this prospectus, TC PipeLines will own a 98.9899%
limited partner interest in the TC PipeLines intermediate partnership and our
general partner will own a 1% general partner interest in TC PipeLines and a
1.0101% general partner interest in the TC PipeLines intermediate partnership.
The general partner, therefore, will own a 2% general partner interest in TC
PipeLines and the TC PipeLines intermediate partnership on a combined basis.
Following the offering, the executives who currently manage TransCanada's
investment in Northern Border Pipeline will manage and operate our business as
the executives of our general partner or its affiliates. Our general partner
will not receive any management fee or other compensation in connection with its
management of TC PipeLines, but will be reimbursed for all direct and indirect
expenses incurred on behalf of TC PipeLines.
TransCanada has agreed with the underwriters of the offering that it will
retain beneficial ownership of our general partner until the later to occur of
(1) the date when TransCanada or an affiliate is no longer providing the
revolving credit facility and (2) six months after the date when there are no
officers of our general partner who are also directors, officers or employees of
TransCanada or its other affiliates. Our general partner has agreed not to
voluntarily withdraw prior to June 30, 2009 without obtaining unitholder
approval.
Our principal executive offices are located at Four Greenspoint Plaza, 16945
Northchase Drive, Houston, Texas 77060 and our phone number is (281) 539-4500.
The following chart depicts the organization and ownership of TC PipeLines,
the TC PipeLines intermediate partnership and Northern Border Pipeline after
giving effect to the completion of the transactions contemplated in this
prospectus, and assuming that the underwriters' over-allotment option is not
exercised. The percentages reflected in the organization chart represent the
approximate ownership interest in each of TC PipeLines and the TC PipeLines
intermediate partnership individually and not on a combined basis. Except for
the organization chart, the ownership percentages referred to in this prospectus
reflect the approximate effective ownership interest of the unitholders in TC
PipeLines and the TC PipeLines intermediate partnership on a combined basis. The
2% ownership of the general partner interest referred to in this prospectus
reflects the approximate effective ownership interest of our general partner in
TC PipeLines and the TC PipeLines intermediate partnership on a combined basis.
9
<PAGE>
[LOGO]
- ------------------------
(1) Northern Border Intermediate Limited Partnership, a subsidiary of Northern
Border Partners, L.P., is not affiliated with us.
10
<PAGE>
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
TC PipeLines GP, our general partner, has a fiduciary duty to manage us in a
manner beneficial to us and the unitholders. Because TC PipeLines GP is a
corporate subsidiary of TransCanada, its officers and directors have fiduciary
duties to manage its business in a manner beneficial to TransCanada. As a result
of this relationship, conflicts of interest may arise in the future between us
and our unitholders, on the one hand, and TransCanada, on the other hand.
The following situations, among others, could give rise to conflicts of
interest:
-- our general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings and reserves, which can
impact the amount of distributions to unitholders;
-- our general partner may take actions on our behalf that have the effect
of enabling our general partner or its affiliates to receive repayment of
amounts outstanding under the revolving credit facility, distributions on
their own units or incentive distribution rights or hastening the
expiration of the subordination period or the conversion of their
subordinated units into common units;
-- certain officers of our general partner, who will provide services to us,
will also devote significant time to the businesses of our general
partner's affiliates and competition for their services may arise; and
-- our general partner would negotiate the terms of any asset acquisition
from TransCanada, subject to approval by our conflicts committee
consisting of the independent directors of the general partner.
Our general partner is permitted to resolve conflicts of interest by
considering the interests of all the parties involved. Therefore, our general
partner can consider the interests of TransCanada if a conflict of interest
arises.
Our general partner will have a conflicts committee, consisting of two
independent members of its board of directors, that will be available to review
matters involving conflicts of interest.
Our partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. Our partnership agreement also
restricts the remedies available to unitholders for actions that might otherwise
constitute breaches of its fiduciary duty. By purchasing a common unit, you are
treated as having consented to the above and to various actions contemplated in
the partnership agreement and conflicts of interest that might otherwise be
considered a breach of fiduciary or other duties under applicable state law.
Affiliates of the general partner currently engage in and in the future are
expected to continue to engage in other businesses or activities, including
those that might be in direct competition with TC PipeLines.
11
<PAGE>
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the transactions
and the ongoing operation of TC PipeLines. These distributions and payments were
determined by and among affiliated entities and, consequently, are not the
result of arm's length negotiations.
<TABLE>
<S> <C>
ACQUISITION STAGE
The consideration paid to our 3,960,000 subordinated units, an aggregate 2% general
general partner, TransCanada and partner interest in TC PipeLines and the TC PipeLines
their affiliates for the transfer of intermediate partnership on a combined basis, the
the 30% interest in Northern Border incentive distribution rights and all of the net
Pipeline to TC PipeLines............ proceeds of the offering expected to be approximately
$282 million, after payment of the expenses of the
offering.
OPERATIONAL STAGE
Distributions of available cash from Available cash from our operating surplus will
operating surplus to our general generally be distributed 98% to the unitholders,
partner............................. including to our general partner as holder of the
subordinated units, and 2% to the general partner,
except that if distributions of available cash from
operating surplus exceed the target levels, our
general partner will receive a percentage of such
excess distributions that will increase distributions
to up to 50% of the excess distributions above the
target distribution levels. On a pro forma basis, for
the nine months ended September 30, 1998, our general
partner would have received distributions of
approximately $ million on the combined 2% general
partner interest and $ million on the subordinated
units.
Payments to our general partner and Our general partner will not receive any management
its affiliates...................... fee or other compensation in connection with its
management of TC PipeLines, but will be reimbursed
for all direct and indirect expenses incurred on
behalf of TC PipeLines. These expenses will include
wages, salaries, incentive compensation and the cost
of employee benefit plans paid or provided to
employees, officers, and directors of our general
partner, and all other necessary or appropriate
expenses allocable to TC PipeLines or otherwise
reasonably incurred by our general partner and its
affiliates in connection with our operations. On a
pro forma basis, we estimate that expense
reimbursement to the general partner and its
affiliates would have been approximately $1.2 million
for 1998.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Withdrawal or removal of our general If the general partner withdraws in violation of the
partner............................. partnership agreement or is removed for cause, then a
successor general partner has the option to buy the
general partner interests and incentive distribution
rights for a cash price equal to fair market value.
If the general partner withdraws or is removed under
any other circumstances, then the departing general
partner has the option to require the successor
general partner to buy the departing general partner
interests and its incentive distribution rights for a
cash price equal to fair market value. If either
option is not exercised the departing general
partner's interests and incentive distribution rights
will automatically convert into common units equal to
the fair market value of those interests. In
addition, TC PipeLines will be required to pay the
departing general partner for expense reimbursements.
LIQUIDATION STAGE
Liquidation......................... Upon the liquidation of TC PipeLines, the partners,
including our general partner, will be entitled to
receive liquidating distributions in accordance with
their respective capital account balances.
</TABLE>
13
<PAGE>
SUMMARY OF TAX CONSIDERATIONS
THE TAX CONSEQUENCES OF AN INVESTMENT IN TC PIPELINES WILL DEPEND IN PART ON
YOUR OWN TAX CIRCUMSTANCES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR ABOUT THE
UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
COMMON UNITS.
THE FOLLOWING IS A BRIEF SUMMARY OF MATERIAL TAX CONSEQUENCES OF OWNING AND
DISPOSING OF COMMON UNITS. THE FOLLOWING DISCUSSION, INSOFAR AS IT RELATES TO
UNITED STATES FEDERAL INCOME TAX LAWS, IS BASED UPON THE OPINION OF FRIED,
FRANK, HARRIS, SHRIVER & JACOBSON (A PARTNERSHIP INCLUDING PROFESSIONAL
CORPORATIONS), SPECIAL COUNSEL TO THE GENERAL PARTNER AND TO TC PIPELINES. THIS
IS A SUMMARY OF THE DISCUSSION IN "TAX CONSIDERATIONS", AND YOU SHOULD NOTE
PARTICULARLY THE QUALIFICATIONS ON THE OPINIONS OF COUNSEL DESCRIBED IN THE FULL
DISCUSSION.
WE WILL BE CLASSIFIED AS A PARTNERSHIP FOR TAX PURPOSES
In the opinion of counsel, we will be classified for federal income tax
purposes as a partnership, and the beneficial owners of common units will
generally be considered our partners. Accordingly, we will pay no federal income
taxes, and you will be required to report on your federal income tax return your
share of our income, gains, losses and deductions. In general, cash
distributions to you will be taxable only if, and to the extent that, they
exceed the tax basis in your common units.
ALLOCATIONS AND DISTRIBUTIONS ARE BASED ON YOUR PERCENTAGE INTEREST IN US
In general, our income and loss will be allocated to the general partner and
the unitholders for each taxable year in accordance with their respective
percentage interests in us. You will be required to take into account, in
determining your federal income tax liability, your share of income generated by
us for each of our taxable years ending within or with your taxable year even if
cash distributions are not made to you. As a consequence, your share of our
taxable income, and possibly the income tax payable by you with respect to such
income, may exceed the cash actually distributed to you.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS ALLOCATED TO PURCHASERS OF COMMON UNITS
IS APPROXIMATELY PERCENT
We estimate that if you purchase common units in the offering and hold them
through December 31, 2002 you will be allocated an amount of federal taxable
income for that period that will be approximately % of the cash distributed
with respect to that period. We anticipate that after the taxable year ending
December 31, 2002, the ratio of taxable income to cash distributions to holders
of common units will increase. No assurance can be given that this estimate will
be correct.
LOSSES ARE ONLY AVAILABLE TO OFFSET OUR FUTURE INCOME
In the case of taxpayers subject to the passive loss rules our losses will
only be available to offset our future income and cannot be used to offset
income from other activities, including passive activities or investments,
salary, or active business income. Any losses unused by virtue of these rules
may be fully deducted when you dispose of all of your common units in a taxable
transaction with an unrelated party.
WE INTEND TO MAKE THE SECTION 754 ELECTION
We intend to make the election provided for by Section 754 of the Internal
Revenue Code, which will generally give you income and deductions calculated by
reference to the portion of your purchase price attributable to each of our
assets.
DISPOSITION OF COMMON UNITS WILL RESULT IN RECOGNITION OF A GAIN OR LOSS
If you sell common units you will recognize gain or loss equal to the
difference between the amount realized and your adjusted tax basis in those
common units.
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<PAGE>
Thus, distributions of cash from us to you in excess of the income allocated to
you will, in effect, become taxable income if you sell the common units at a
price greater than your adjusted tax basis even if the price is less than your
original cost. A substantial portion of the amount realized, whether or not
representing gain, may be ordinary income.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS RAISES TAX ISSUES
An investment in common units by tax-exempt organizations, including IRAs
and other retirement plans, regulated investment companies and foreign persons
raises issues unique to them. Virtually all of our income allocated to a
unitholder that is a tax-exempt organization will be unrelated business taxable
income and thus will be taxable to it. Furthermore, no significant amount of our
gross income will be qualifying income for purposes of determining whether a
unitholder will qualify as a regulated investment company. A unitholder who is a
nonresident alien, foreign corporation or other foreign person will be subject
to withholding on his or her distributions and will be required to file federal
income tax returns and to pay tax on his or her share of our taxable income.
WE WILL REGISTER AS A TAX SHELTER
The general partner has applied to register us as a tax shelter with the
Secretary of the Treasury.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN
THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will likely be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which you reside or in which we do business or own property.
You will likely be required to file state income tax returns and to pay taxes in
these various states and may be subject to penalties for failure to comply with
these requirements.
15
<PAGE>
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH WE WILL BE SUBJECT ARE
SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A SIMILAR
BUSINESS. YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN
THE COMMON UNITS. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES WE ENCOUNTER. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US
OR THAT WE CURRENTLY BELIEVE TO BE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THAT CASE THE TRADING PRICES OF OUR COMMON UNITS COULD DECLINE AND YOU MAY LOSE
ALL OR PART OF YOUR INVESTMENT.
RISKS INHERENT IN TC PIPELINES' BUSINESS
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH OUR PERFORMANCE
Although we will distribute all of our available cash, we can give no
assurance regarding the amounts of available cash that we will generate. At the
start, we will derive all of our cash flow from our 30% general partner interest
in Northern Border Pipeline. The actual amounts of available cash will depend
upon numerous factors relating to both our and Northern Border Pipeline's
businesses which may be beyond our control, including, generally:
- profitability of operations;
- required principal and interest payments on any debt;
- the cost of acquisitions, including related debt service payments;
- our issuance of debt and equity securities;
- fluctuations in working capital;
- capital expenditures;
- adjustments in reserves;
- prevailing economic conditions;
- fuel conservation measures;
- alternate fuel requirements;
- government regulations; and
- technical advances in fuel economy and energy generation devices.
The following factors will also influence cash distributions:
- the tariff and transportation charges to be collected by Northern Border
Pipeline for transportation services on the Northern Border pipeline
system;
- the amount of cash distributed to us by Northern Border Pipeline;
- the amount of cash set aside by us; and
- the amount of any cash required to be contributed by us to Northern Border
Pipeline.
Under some circumstances, the application of Northern Border Pipeline's cash
distribution policy could result in a reduced distribution to its partners,
including us, in any particular quarter. For example, in the fourth quarter of
1997 Northern Border Pipeline made no cash distributions to its partners because
of a rate refund to shippers. This rate refund resulted from a retroactive
adjustment to Northern Border Pipeline's depreciation schedule that was required
by the FERC. See "Business of Northern Border Pipeline--FERC Regulation--Cost of
Service Tariff" and "Northern Border Pipeline Partnership Agreement--Cash
Distribution Policy".
Cash distributions are dependent primarily on our cash flow, including from
our reserves. Cash distributions are not dependent directly on our
profitability, which is affected by non-cash items. Therefore, cash
distributions may be made during periods when we record losses and may not be
made during periods when we record profits. Our partnership
16
<PAGE>
agreement gives our general partner discretion in establishing reserves for the
proper conduct of our business that will affect the amount of available cash.
The amount of available cash constituting operating surplus that we will
need to pay the minimum quarterly distribution for four quarters on the common
units, the subordinated units and the general partner interest to be outstanding
immediately after the transactions is approximately:
<TABLE>
<S> <C>
$23.5
Common units.................. million
Subordinated units............ 5.9 million
General partner interest...... 0.6 million
------------
$30.0
Total....................... million
</TABLE>
These amounts for three quarters would be approximately:
<TABLE>
<S> <C>
$17.6
Common units.................. million
Subordinated units............ 4.4 million
General partner interest...... 0.5 million
------------
$22.5
Total....................... million
</TABLE>
If the transactions contemplated in this prospectus had been completed on
January 1, 1997, pro forma available cash from operating surplus generated
during 1997 would have been approximately $28.6 million. The amount of pro forma
available cash from operating surplus generated for the nine months ended
September 30, 1998 would have been approximately $17.5 million. These amounts
would not have been sufficient to allow us to distribute the minimum quarterly
distribution on the common units and the subordinated units and the related
distribution on the general partner interest for those periods by approximately
$1.4 million for 1997 and approximately $5.0 million for the nine months ended
September 30, 1998.
IF THE FERC REQUIRES THAT NORTHERN BORDER PIPELINE'S TARIFF BE CHANGED, NORTHERN
BORDER PIPELINE'S OPERATIONS COULD BE ADVERSELY AFFECTED
Northern Border Pipeline is subject to extensive regulation by the FERC.
FERC's regulatory authority extends to matters including:
- Northern Border Pipeline's cost of service form of tariff;
- Northern Border Pipeline's allowed rate of return on equity;
- the services that Northern Border Pipeline is permitted to perform or
abandon;
- the ability of Northern Border Pipeline to seek recovery of various
categories of costs; and
- the acquisition, construction and disposition of pipeline facilities by
Northern Border Pipeline.
We cannot give any assurance that the FERC will continue to permit Northern
Border Pipeline to use the present form of tariff. Northern Border Pipeline is
required by the terms of its tariff to file a rate proceeding with the FERC by
May 31, 1999 for a redetermination of its allowed equity rate of return. Under
FERC regulations, customers are allowed to contest Northern Border Pipeline's
rates or rate structure and terms and conditions of service. Cash available for
distribution to you could be adversely affected by:
- a reduction in the FERC-allowed rate of return on equity, which is
currently 12.0%,
- exclusion of an allowance for corporate income taxes due to the transfer
of the Northern Border Pipeline interest to TC PipeLines,
- the exclusion of any other cost of service amounts, or
- any other adverse change to Northern Border Pipeline's rates, rate
structure and terms and conditions of service.
Given the extent of regulation by the FERC and potential changes to
regulations, we cannot give any assurance regarding:
- the likely federal regulations under which Northern Border Pipeline will
operate in the future;
17
<PAGE>
- the effect that regulation will have on Northern Border Pipeline's or our
financial positions, results of operations and cash flows; or
- whether our cash flow will be adequate to make distributions to you.
IF ANY SHIPPER FAILS TO PERFORM ITS CONTRACTUAL OBLIGATIONS OR EXERCISES ITS
CONTRACTUAL TERMINATION RIGHTS, NORTHERN BORDER PIPELINE'S OPERATIONS COULD BE
ADVERSELY AFFECTED
Northern Border Pipeline has a limited number of major shippers, all of
which have long-term contracts. If any shipper either fails to perform its
contractual obligations or allows its contracts to expire upon its termination
date, Northern Border Pipeline's cash flows and financial condition could be
adversely affected. As a result, the cash available for distribution by us to
you could be adversely affected.
All of the capacity of the Northern Border pipeline system is contractually
committed through October 2001 and over 90% of the Northern Border pipeline
system's contracted capacity is committed through mid-September 2003. We cannot
give any assurances that Northern Border Pipeline will be able to renew or
replace these contracts. The renewal or replacement of the existing long-term
contracts with customers of Northern Border Pipeline depends on a number of
factors beyond our control, including:
- the supply of natural gas in Canada and the United States;
- competition from alternative sources of supply in the United States;
- competition from other pipelines; and
- the price of, and demand for, natural gas in markets served by the
Northern Border pipeline system.
Two of Northern Border Pipeline's customers were responsible for
approximately half of its total revenue in 1997. Its largest customer,
Pan-Alberta Gas U.S., Inc., accounted for approximately 46% of total revenue in
1997 and TransCanada accounted for approximately 7% of total revenue in 1997. No
other single customer of Northern Border Pipeline accounted for more than 5% of
total revenue in 1997. Approximately 93% of total revenue was derived from
Northern Border Pipeline's 20 largest customers.
IF NORTHERN BORDER PIPELINE DOES NOT MAINTAIN OR INCREASE ITS RATE BASE BY
SUCCESSFULLY COMPLETING PROJECTS, NORTHERN BORDER PIPELINE'S CASH DISTRIBUTIONS
OR EARNINGS COULD BE ADVERSELY AFFECTED
Northern Border Pipeline reflects the Northern Border pipeline system in its
financial statements in various accounts collectively referred to as "rate
base". Northern Border Pipeline is generally allowed to collect from its
customers a return on the net book value of the regulated rate base as well as
recover that rate base through depreciation. The amount Northern Border Pipeline
may collect from customers decreases as the rate base decreases through annual
depreciation charges. In order to avoid a reduction in the level of cash
available for distributions to its partners, based on its current FERC-approved
tariff, Northern Border Pipeline must maintain or increase its rate base through
projects that maintain or add to existing pipeline facilities. These projects
will depend upon many factors including:
- sufficient demand for natural gas;
- an adequate supply of proved natural gas reserves;
- available capacity on interconnecting pipeline systems;
- the execution of natural gas transportation contracts;
- the approval of any expansion or extension of the Northern Border pipeline
system by the Northern Border Pipeline management committee, or in some
cases, a ruling from an arbitrator, see "Northern Border Pipeline
Partnership Agreement";
- obtaining financing for these projects; and
- receipt and acceptance of necessary regulatory approvals.
18
<PAGE>
Northern Border Pipeline's ability to complete these projects is also
subject to numerous business, economic, regulatory, competitive and political
uncertainties beyond its control, and there is no assurance that such projects
will be completed.
IF THERE IS A DECLINE IN THE AVAILABILITY OF WESTERN CANADIAN NATURAL GAS,
NORTHERN BORDER PIPELINE COULD BE ADVERSELY AFFECTED
The long-term financial conditions of Northern Border Pipeline and TC
PipeLines are dependent on the continued availability of western Canadian
natural gas for import into the United States. The willingness of Canadian
producers and marketers to export natural gas to the United States is to some
extent dependent upon relative prices for natural gas in United States and
Canadian markets. We believe that substantial additional natural gas reserves
remain to be discovered, developed and produced in western Canada. These natural
gas reserve prospects may require significant capital expenditures by others for
exploration and development drilling and the installation of production,
gathering, storage, transportation and other facilities that permit natural gas
to be produced and delivered to pipelines that interconnect with the Northern
Border pipeline system. Low prices for natural gas, regulatory limitations, or
the lack of available capital for these projects could adversely affect the
development of additional reserves and production, gathering, storage and
pipeline transmission and import and export of natural gas supplies. We cannot
give any assurances as to the timing of discovery or development of additional
natural gas reserves or their availability to interconnect with the Northern
Border pipeline system.
IF DEMAND FOR WESTERN CANADIAN NATURAL GAS DECREASES, NORTHERN BORDER PIPELINE
COULD BE ADVERSELY AFFECTED
Northern Border Pipeline's business depends in part on the level of demand
for western Canadian natural gas in the markets the Northern Border pipeline
system serves. The volumes of natural gas delivered to these markets from other
sources affect the demand for both western Canadian natural gas and use of the
Northern Border pipeline system. Demand for western Canadian natural gas also
influences the ability and willingness of shippers to use the Northern Border
pipeline system to meet demand.
A variety of factors could cause the demand for natural gas to fall in the
markets that the Northern Border pipeline system serves. These factors include:
- economic conditions;
- fuel conservation measures;
- alternative fuel requirements;
- government regulation; and
- technological advances in fuel economy and energy generation devices.
We cannot predict whether or how these or other factors will affect demand
for use of the Northern Border pipeline system. If the Northern Border pipeline
system is used less over the long term, we may have lower revenues and less cash
to distribute to you.
BECAUSE OF THE HIGHLY COMPETITIVE NATURE OF THE NATURAL GAS TRANSMISSION
BUSINESS, NORTHERN BORDER PIPELINE MAY NOT BE ABLE TO MAINTAIN EXISTING
CUSTOMERS OR ACQUIRE NEW CUSTOMERS, WHICH COULD HAVE AN ADVERSE EFFECT ON ITS
OPERATIONS
Other pipeline systems that transport natural gas serve the same markets
served by the Northern Border pipeline system. As a result, Northern Border
Pipeline faces competition from other pipeline systems.
The Alliance Pipeline has received regulatory approval. If constructed, the
Alliance Pipeline will compete directly with Northern Border Pipeline in the
transportation of natural gas from the western Canadian sedimentary basin to
markets in the midwest United States.
TransCanada owns and operates a pipeline system which transports natural gas
from the same natural gas reserves in western Canada that are used by Northern
Border Pipeline's customers.
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Natural gas is also produced in the United States and transported by
competing unaffiliated pipeline systems to the same destinations as natural gas
transported by the Northern Border pipeline system.
NORTHERN BORDER PIPELINE'S INDEBTEDNESS MAY LIMIT ITS ABILITY TO MAKE
DISTRIBUTIONS TO US AND BORROW ADDITIONAL FUNDS WHICH COULD ADVERSELY AFFECT ITS
OPERATIONS
Northern Border Pipeline is prohibited from making cash distributions during
an event of default under its indebtedness. Provisions in Northern Border
Pipeline's indebtedness limit its ability to incur indebtedness and engage in
specific transactions which could reduce its ability to capitalize on business
opportunities that arise in the course of its business. Any future refinancing
of its existing indebtedness or any new indebtedness could have similar or
greater restrictions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Partnership-- Capital Resources,
Liquidity and Financial Condition".
NORTHERN BORDER PIPELINE'S OPERATIONS MAY BE ADVERSELY AFFECTED BY LITIGATION OR
GOVERNMENTAL REGULATION AND ASSOCIATED ENVIRONMENTAL AND REGULATORY COSTS
Northern Border Pipeline's operations are subject to federal and state laws
and regulations relating to environmental protection and operational safety. We
believe that Northern Border Pipeline's operations comply in all material
respects with applicable environmental and safety regulations. However, risks of
substantial costs and liabilities are inherent in pipeline operations and we
cannot give any assurance that these costs and liabilities will not be incurred.
Possible future developments, including stricter environmental and safety laws,
regulations and enforcement policies and claims for personal or property damages
resulting from Northern Border Pipeline's operations, could result in
substantial costs and liabilities to Northern Border Pipeline. If Northern
Border Pipeline is not able to recover these costs, your cash distributions
could be adversely affected.
IF THE FERC DOES NOT ALLOW NORTHERN BORDER PIPELINE TO INCLUDE A PORTION OF THE
COSTS OF THE CHICAGO PROJECT IN ITS RATE BASE, NORTHERN BORDER PIPELINE'S CASH
DISTRIBUTIONS OR EARNINGS COULD BE ADVERSELY AFFECTED
The FERC may not permit Northern Border Pipeline to include a portion of the
costs associated with construction of the Chicago project in its rate base. If
that were to happen, Northern Border Pipeline would not be able to recover those
costs from its shippers and cash available for distribution to you would be
adversely affected.
As part of the settlement of Northern Border Pipeline's 1995 rate case with
the FERC, a project cost containment mechanism was instituted to allocate the
risks of the capital costs associated with the Chicago project between Northern
Border Pipeline and its shippers. The project cost containment mechanism amount
is determined by comparing the final cost of the Chicago project to the budgeted
cost. If there is a cost overrun of $6 million or less, the shippers will bear
the actual cost of the project through its inclusion in Northern Border
Pipeline's rate base. If there is a cost savings of $6 million or less, the full
budgeted cost will be included in the rate base. If there is a cost overrun or
cost savings of more than $6 million but less than 5% of the budgeted cost, that
amount will be allocated 50% to Northern Border Pipeline and 50% to its shippers
(50% of the difference between 5% of the budgeted cost and $6 million will be
included in Northern Border Pipeline's rate base, and 50% will be excluded). All
cost overruns exceeding 5% of the budgeted cost are excluded from the rate base.
The settlement agreement required the budgeted cost for the Chicago project,
which had been initially filed with the FERC for approximately $839 million, to
be adjusted for the effects of inflation and for costs attributable to changes
in project scope, as defined by the agreement. The budgeted cost of the Chicago
project, as adjusted for the effects of inflation and project scope changes, has
been estimated as of the project's in-service date to be $889 million. Northern
Border Pipeline's notification to the FERC and its shippers in late December
1998 reflects the conclusion that,
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based on the information as of that date, once the budget cost has been
established there would be no adjustment to the rate base related to the project
cost containment mechanism. Northern Border Pipeline is obligated by the
settlement agreement to update its calculation of the project cost containment
mechanism six months after the project's in-service date. The settlement
agreement requires the calculation of the project cost containment mechanism to
be reviewed by an independent national accounting firm. Several parties to the
stipulation advised the FERC that they may have questions and desire further
information about the report, and may possibly wish to test it or the final
report and its conclusions at an appropriate proceeding in the future. The
parties also stated that if it is determined that Northern Border Pipeline is
not permitted to include some costs for the Chicago project in its rate base,
they reserve their rights to seek refunds, with interest, of any
overcollections. We believe the initial computation has been completed under the
terms of the settlement agreement. We are unable to make a definitive
determination at this time whether any adjustments will be required. Later
developments may prevent cost recovery under the project cost containment
mechanism, which may result in a non-cash charge to write down the balance sheet
transmission plant line item and that charge could be material to the operating
results of TC PipeLines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Project Cost Containment Mechanism".
IF WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, OUR FUTURE FINANCIAL PERFORMANCE WILL BE LIMITED
There can be no assurance that (1) we will identify attractive acquisition
candidates in the future, (2) we will be able to acquire assets on economically
acceptable terms, (3) any acquisitions will not be dilutive to earnings and
operating surplus or (4) any additional debt incurred to finance an acquisition
will not affect our ability to make distributions to you.
Our acquisition strategy involves many risks, including (1) difficulties
inherent in the integration of operations and systems, (2) the diversion of
management's attention from other business concerns and (3) the potential loss
of key employees of acquired businesses. In addition, future acquisitions also
may involve the expenditure of significant funds. Depending upon the nature,
size and timing of future acquisitions, TC PipeLines may be required to secure
additional financing. No assurance can be given that additional financing will
be available to us on acceptable terms.
NORTHERN BORDER PIPELINE'S OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND
UNFORESEEN INTERRUPTIONS
Northern Border Pipeline's operations are subject to operational hazards and
unforeseen interruptions, including natural disasters, adverse weather,
accidents or other events beyond its control. A casualty occurrence might result
in a loss of equipment or life, as well as injury and extensive property or
environmental damage.
RISKS INHERENT IN AN INVESTMENT IN
TC PIPELINES
MAJORITY CONTROL OF THE NORTHERN BORDER PIPELINE MANAGEMENT COMMITTEE BY
NORTHERN BORDER PARTNERS MAY LIMIT OUR ABILITY TO INFLUENCE NORTHERN BORDER
PIPELINE
TC PipeLines owns a 30% general partner interest in Northern Border
Pipeline. The remaining 70% general partner interest in Northern Border Pipeline
is currently owned by Northern Border Partners, a publicly traded limited
partnership, which is not affiliated with us. The general partners of Northern
Border Partners are Northern Plains and Pan Border Gas Company, both
subsidiaries of Enron Corporation, and Northwest Border Pipeline Company, a
subsidiary of The Williams Companies.
Management of Northern Border Pipeline is overseen by the four-member
management committee. TC PipeLines controls 30% of the voting power of the
Northern Border Pipeline management committee and has the right to
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designate one member. Northern Border Partners controls 70% of the voting power
of the Northern Border Pipeline management committee and has the right to
designate three members. Northern Border Partners has allocated its voting power
on the Northern Border Pipeline management committee among its own general
partners in proportion to their general partner interests in Northern Border
Partners. As a result, the 70% voting power of Northern Border Partners'
representatives on the Northern Border Pipeline management committee is
allocated as follows: 35% to Northern Plains, 22.75% to Pan Border and 12.25% to
Northwest Border. Northern Plains, Pan Border and Northwest Border each have the
right to choose one member of the Northern Border Pipeline management committee.
Enron, through Northern Plains and Pan Border controls 57.75% of the voting
power of the Northern Border Pipeline management committee and has the right to
choose two of its members. Therefore, except as to any matters requiring
unanimity, Enron has the power to approve a particular matter requiring a
majority vote despite the fact that our representative may vote against such
project or other matter. Conversely, with respect to any matter requiring a
majority vote Enron may disapprove a particular matter despite the fact that our
representative may vote in favor of that matter. See "Northern Border Pipeline
Partnership Agreement--Management and Voting".
YOU WILL HAVE LIMITED VOTING RIGHTS AND WILL NOT CONTROL OUR GENERAL PARTNER
The general partner will manage and operate TC PipeLines. Unlike the holders
of common stock in a corporation, you will have only limited voting rights on
matters affecting our business. You will have no right to elect our general
partner on an annual or other continuing basis, and our general partner may not
be removed except pursuant to the vote of the holders of at least 66 2/3% 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 units. The required 66 2/3%
would include units owned by our general partner and its affiliates. The
ownership of an aggregate of 20.2% (8.2% upon exercise of the underwriters'
over-allotment option in full) 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 certain provisions that may
have the effect of discouraging a person or group from attempting to remove our
general partner or otherwise change the management of TC PipeLines. If our
general partner is removed as general partner of TC PipeLines under
circumstances where cause does not exist and units held by our general partner
and its affiliates are not voted in favor of such removal:
(1) the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis,
(2) any existing arrearages in the payment of the minimum quarterly
distributions on the common units will be extinguished, and
(3) 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 such interests.
These provisions may diminish the price at which the common units will trade
under certain 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. All matters, other than removal
of the general partner, requiring the approval of the unitholders during the
subordination period must first be proposed by our general partner. 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% 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, you
will
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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. See "The Partnership Agreement--Withdrawal or Removal of the General
Partner" and "--Change of Management Provisions".
OUR ASSUMPTIONS CONCERNING FUTURE OPERATIONS MAY NOT BE REALIZED
In establishing the terms of the offering, including the number and initial
offering price of the common units, the number of subordinated units to be
received by the general partner and the minimum quarterly distribution, we have
relied on certain assumptions concerning our future operations. See "Cash
Available for Distribution".
Although we believe our assumptions are reasonable, whether the assumptions
are realized is not, in many cases, within our control and cannot be predicted
with any degree of certainty. In the event that our assumptions are not
realized, the actual available cash from operating surplus that we generate
could be substantially less than that currently expected and may be less in any
quarter than that required to make the minimum quarterly distribution. See "Cash
Available for Distribution".
PURCHASERS OF COMMON UNITS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The assumed initial public offering price of $19.50 per unit exceeds pro
forma tangible net book value of $11.84 per unit. You will incur immediate and
substantial dilution of $7.66 per common unit. See "Dilution".
WE MAY ISSUE ADDITIONAL COMMON UNITS, WHICH WOULD DILUTE EXISTING UNITHOLDERS'
INTERESTS
Our general partner can cause us to issue additional common units, without
the approval of unitholders, in the following circumstances:
- upon exercise of the underwriters' over-allotment option
- upon conversion of the subordinated units
- under employee benefit plans
- 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 TC PipeLines making certain acquisitions or capital
improvements that are accretive to our cash flow on a per-unit basis.
In addition, during the subordination period, our general partner has the
authority, without the approval of the unitholders, to cause TC PipeLines to
issue up to an additional 9,400,000 common units or an equivalent number of
securities ranking on a parity with the common units. After the end of the
subordination period, 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 TC PipeLines, dilute the interests of unitholders in distributions by
TC PipeLines and, if issued during the subordination period, reduce the support
provided by the subordination feature of the subordinated units. 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.
ISSUANCE OF ADDITIONAL COMMON UNITS, INCLUDING UPON CONVERSION OF SUBORDINATED
UNITS, WILL INCREASE THE RISK THAT WE WILL BE UNABLE TO PAY THE FULL MINIMUM
QUARTERLY DISTRIBUTION ON ALL COMMON UNITS
Our ability to pay the full minimum quarterly distribution on all the common
units may be reduced by any increase in the number of outstanding common units,
whether as a result of the conversion of subordinated units, upon the conversion
of the general partner interests and the incentive distribution rights or as a
result of the withdrawal of the general partner or future issuances of common
units. Any of these actions will increase the percentage of the aggregate
minimum quarterly distribution payable to the common unitholders and
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decrease the percentage of the aggregate minimum quarterly distribution payable
to the subordinated unitholders, which will in turn have the effect of:
- reducing the amount of support provided by the subordination feature of
the subordinated units; and
- increasing the risk that TC PipeLines will be unable to pay the minimum
quarterly distribution in full on all the common units.
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. The amount of these expenses will be determined by our
general partner in its sole discretion. 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.
A TRADING MARKET MAY NOT DEVELOP FOR THE UNITS OR YOU MAY NOT BE ABLE TO RESELL
YOUR UNITS AT THE INITIAL OFFERING PRICE
Prior to the offering, there has been no public market for the common units.
We are applying to list the common units for trading on the NYSE. We do not know
the extent to which investor interest will lead to the development of a trading
market or how liquid that market might be. The initial public offering price for
the common units will be determined through negotiations between our general
partner and the representatives of the underwriters. Investors may not be able
to resell their common units at or above the initial public offering price. See
"Underwriting".
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
UNITS AT AN UNDESIRABLE TIME OR PRICE
If our general partner and its affiliates own 80% or more of the common
units, the general partner will have the right, which it may assign to any of
its affiliates or us, to acquire all, but not less than all, of the remaining
common units held by such unaffiliated persons at a price generally equal to the
then-current market price of the common units. As a consequence, you may be
required to sell your common units at a time when you may not desire to sell
them or at a price that is less than the price you would desire to receive upon
sale. You may also incur a tax liability upon a sale. See "The Partnership
Agreement--Limited Call Right".
YOU 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
(1) TC PipeLines had been conducting business in any state without
compliance with the applicable limited partnership statute, or
(2) the right or the exercise of the right by the unitholders as a group to
remove or replace our general partner, to approve certain amendments to
the partnership agreement or to take other action under the partnership
agreement constituted participation in the "control" of TC PipeLines'
business,
then you could be held liable in certain circumstances for TC PipeLines'
obligations to the same extent as a general partner. In addition, under certain
circumstances a unitholder may be liable to TC PipeLines for the amount of a
distribution for a period of three years from the date of the distribution. See
"The Partnership Agreement--Limited Liability" for a discussion
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of the implications of the limitations on liability to a unitholder.
WITHOUT THE CONSENT OF EACH UNITHOLDER, NORTHERN BORDER PIPELINE MIGHT BE
CONVERTED INTO A CORPORATION, WHICH WOULD ADVERSELY AFFECT CASH AVAILABLE FOR
DISTRIBUTIONS
If it becomes unlawful to conduct the business of Northern Border Pipeline
and certain other conditions are satisfied, the business and assets of Northern
Border Pipeline will automatically be transferred to a corporation without the
vote or consent of unitholders. Therefore, you would not receive a proxy or
consent solicitation statement in connection with such transaction. However, we
believe that it is unlikely that circumstances requiring such an automatic
transfer will occur. A transfer to corporate form would result in Northern
Border Pipeline being subject to corporate income taxes and would be likely to
be materially adverse to its, and, therefore, our, results of operations and
financial condition.
In addition, Northern Border Pipeline may transfer its business and assets
to a corporation upon the approval of partners owning at least two-thirds in
interest. Since Northern Border Partners holds 70% of the voting power of
Northern Border Pipeline, it could vote its interest in favor of a transfer of
Northern Border Pipeline's business and assets to a corporation. General
partners of Northern Border Pipeline, including those who did not consent to
such a transaction, would be bound by the terms of any such transaction
receiving the requisite unitholder vote and, under current law, would have no
statutory dissenters' appraisal rights in connection with the transaction. Our
partnership agreement prohibits our representative on the Northern Border
Pipeline management committee from approving such a transaction by Northern
Border Pipeline without the prior approval of the holders of at least 66 2/3% of
the units outstanding during the subordination period or a majority of units
outstanding thereafter. We have no present intention of proposing any such
transaction.
IF WE WERE TO BE FOUND BY A COURT TO BE AN "INVESTMENT COMPANY" UNDER THE
INVESTMENT COMPANY ACT OF 1940, OUR OPERATIONS WOULD BE ADVERSELY AFFECTED
If TC PipeLines were deemed to be an unregistered "investment company" under
the Investment Company Act, its contracts may be voidable and its offers of
securities may be subject to rescission, as well as other materially adverse
consequences.
The sole asset of TC PipeLines immediately after the offering will consist
of a 30% general partner interest in Northern Border Pipeline. TC PipeLines
could be deemed to be an "investment company" under the Investment Company Act
if the 30% general partner interest constitutes an "investment security", as
defined in the Investment Company Act. If TC PipeLines were deemed to be an
"investment company", then it 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 TC PipeLines would be in violation of the Investment
Company Act because of the practical inability to register under the Investment
Company Act. TC PipeLines believes that it is not an investment company under
the Investment Company Act. This belief is based upon TC PipeLines'
determination that the 30% general partner interest it holds is not an
"investment security" for purposes of the Investment Company Act. This
determination is based upon, among other things, TC PipeLines' role as a general
partner of, and participation in the management of the affairs of, Northern
Border Pipeline and the assumption that Northern Border Pipeline does not
convert to corporate form. There is, however, a risk that a court could reach a
contrary conclusion.
IF WE WERE TO LOSE TRANSCANADA'S MANAGEMENT EXPERTISE, OUR OPERATIONS WOULD BE
ADVERSELY AFFECTED
We do not presently have sufficient stand-alone management resources to
operate without services to be provided by TransCanada and are largely dependent
upon TransCanada to pursue our business plan as described
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under "Business of the Partnership--Business Strategy and Competitive Strengths
of the Partnership".
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of common units, see "Tax Considerations".
THE IRS COULD TREAT US AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE THE
CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS
The federal income tax benefit of an investment in us depends, in large
part, on our being treated 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 matter affecting us. We have, however, received an opinion from
counsel that we will be treated as a partnership for federal income tax
purposes. Opinions of counsel are based on specified factual assumptions and are
not binding on the IRS or any court.
If we were treated as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently 35%. Distributions would generally be taxed again to the unitholders
as corporate distributions, and no income, gains, losses, deductions or credits
would flow through to the unitholders. Because a tax would be imposed upon us as
an entity, the cash available for distribution to you would be substantially
reduced. Treatment of us as a corporation would result in a material reduction
in the anticipated cash flow and after-tax return to the unitholders and thus
would likely result in a substantial reduction in the value of the common units.
We cannot provide any assurances that the law will not be changed so as to
cause us to be treated as a corporation for federal income tax purposes or
otherwise to be subject to entity-level taxation. The partnership agreement
provides that, if a law is enacted or existing law is modified or interpreted in
a manner that subjects 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, including a decrease in distributions to reflect the
impact of that law on us.
WE HAVE NOT REQUESTED AN IRS RULING WITH RESPECT TO TAX CONSEQUENCES
We have not requested a ruling from the IRS with respect to any matter
affecting us. Accordingly, the IRS may adopt positions that differ from our
counsel's conclusions expressed here or from the positions taken by us. It may
be necessary to resort to administrative or court proceedings in an effort to
sustain some or all of our counsel's conclusions or the positions taken by us,
and some or all of our conclusions or positions ultimately may not be sustained.
Any contest with the IRS may materially and adversely impact the market for the
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.
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU RECEIVE NO CASH
DISTRIBUTIONS
You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your allocable share of our income, whether or not you
receive cash distributions from us. We cannot assure that you will receive cash
distributions equal to your allocable share of our taxable income or even the
tax liability to you resulting from that income. Further, you may incur a tax
liability, in excess of the amount of cash received, upon the sale of your
common units.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN EXPECTED
Upon the sale of common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax
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basis in those common units. Thus, prior distributions in excess of the total
net taxable income you were allocated for a common unit which decreased your tax
basis in that common unit will, in effect, become taxable income if the common
unit is sold at a price greater than your tax basis in that common unit, even if
the price is less than your original cost. A substantial portion of the amount
realized, whether or not representing gain, may be ordinary income. Furthermore,
should the IRS successfully contest some conventions to be used by us, you could
realize more gain on the sale of units than would be the case under those
conventions without the benefit of decreased income in prior years.
INVESTORS OTHER THAN INDIVIDUALS THAT ARE U. S. RESIDENTS MAY HAVE ADVERSE TAX
CONSEQUENCES FROM OWNING UNITS
Investment in common units by tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to them. For example,
virtually all of the taxable income derived by most organizations exempt from
federal income tax, including IRAs and other retirement plans, from the
ownership of a common unit will be unrelated business taxable income and thus
will be taxable to them. Very little of our income will be qualifying income to
a regulated investment company. Distributions to foreign persons will be reduced
by withholding taxes.
TAX SHELTER REGISTRATION COULD INCREASE RISK OF IRS AUDIT OF TC PIPELINES OR A
UNITHOLDER
Our general partner has applied to register us as a "tax shelter" with the
Secretary of the Treasury. We cannot give any assurance that we will not be
audited by the IRS or that tax adjustments will not be made. The rights of a
unitholder owning less than a 1% interest in us to participate in the income tax
audit process are very limited. Further, any adjustments in our tax returns will
lead to adjustments in the unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. Each
unitholder would bear the cost of any expenses incurred in connection with an
examination of his or her personal tax return.
WE TREAT A PURCHASER OF UNITS AS HAVING THE SAME TAX BENEFITS AS THE SELLER; THE
IRS MAY CHALLENGE THIS TREATMENT WHICH COULD ADVERSELY AFFECT THE VALUE OF THE
UNITS
Because we cannot match transferors and transferees of common units, we will
adopt depreciation and amortization conventions that do not conform with all
aspects of specified proposed and final Treasury regulations. A successful
challenge to those conventions by the IRS could adversely affect the amount of
tax benefits available to you or could affect the timing of such tax benefits or
the amount of gain from your sale of common units and could have a negative
impact on the value of the common units or result in audit adjustments to your
tax returns.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES SIMPLY AS A RESULT OF AN
INVESTMENT IN UNITS
In addition to federal income taxes, you will likely be subject to other
taxes, such as 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. You will likely be required to file state
and local income tax returns and pay state and local income taxes in some or all
of the various jurisdictions in which we do business or own property and may be
subject to penalties for failure to comply with those requirements. We will
initially own assets or do business in Illinois, Iowa, Minnesota, Montana,
Nebraska, North Dakota, South Dakota and Texas. Of these states, only Texas and
South Dakota do not currently impose a personal income tax. It is your
responsibility to file all required United States federal, state and local tax
returns. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in us.
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THE TRANSACTIONS
TRANSACTION STEPS
Concurrent with the closing of the sale of common units offered through this
prospectus, the following transactions will take place:
- 1st,
-- TransCanada Border PipeLine will contribute its 6% general partner
interest in Northern Border Pipeline to TC PipeLines intermediate
partnership in exchange for (1) a 1.0101% general partner interest in the
intermediate partnership, and (2) a % limited partner interest in the
intermediate partnership.
-- TransCan Northern will contribute its 24% general partner interest in
Northern Border Pipeline to TC PipeLines intermediate partnership in
exchange for a % limited partner interest in the intermediate
partnership.
- 2nd,
-- TC PipeLines will issue the common units in the public offering.
-- TransCanada Border PipeLine will transfer its limited partner interest in
the intermediate partnership to TC PipeLines in exchange for (1) a 1%
general partner interest in TC PipeLines, (2) subordinated units, (3)
common units, and (4) the incentive distribution rights.
-- TransCan Northern will transfer its limited partner interest in the
intermediate partnership to TC PipeLines in exchange for common
units.
- 3rd
-- TC PipeLines will pay the expenses of the offering.
-- TC PipeLines will use the remaining net proceeds of the offering to
redeem all of the common units issued to TransCanada Border PipeLine and
TransCan Northern.
-- TransCanada Border PipeLine will transfer its subordinated units, the
incentive distribution rights and general partner interests to the
general partner.
- After giving effect to these transactions:
-- TransCanada Border PipeLine and TransCan Northern will not own any direct
interests in TC PipeLines.
-- Our general partner will own subordinated units, the incentive
distribution rights and the general partner interests.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION OF 30% GENERAL PARTNER INTEREST
The 30% general partner interest in Northern Border PipeLine conveyed to TC
PipeLines by TransCanada Border PipeLine and TransCan Northern constitutes all
of the initial assets of TC PipeLines. Prior to the offering, there has been no
public market for the common units of TC PipeLines. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price of the common units.
TransCanada Border PipeLine is an indirect wholly-owned subsidiary and
TransCan Northern is a direct wholly-owned subsidiary of TransCanada. The TC
PipeLines intermediate partnership will be admitted and assume obligations as a
30% general partner of Northern Border Pipeline. In addition, TC PipeLines and
the TC PipeLines intermediate partnership will indemnify TransCanada, its
subsidiaries (including TransCanada Border PipeLine and TransCan Northern) and
their directors, officers, employees and other related persons against
liabilities and expenses associated with the general partner interest in
Northern Border Pipeline. The contribution of this asset and the assumption of
and indemnification against liabilities will be documented under a Contribution,
Conveyance and Assumption Agreement.
UNDERWRITER'S OVERALLOTMENT OPTION
We will use the net proceeds from any exercise of the underwriters'
over-allotment option to redeem subordinated units, from our general partner on
a one-for-one basis equal to
28
<PAGE>
the number of common units issued upon the exercise of such option.
Also at the closing of the offering, TC PipeLines, as borrower, and
TransCanada PipeLine USA Ltd., as lender, will enter into a $40 million
unsecured revolving credit facility. We may borrow under the revolving credit
facility to fund capital expenditures, fund capital contributions to Northern
Border Pipeline and for working capital and other general business purposes,
including enabling TC PipeLines to make distributions on the units. The other
principal terms of this revolving credit facility are:
- Interest rate--United States prime rate, or LIBOR plus % at the option
of the borrower.
- Maturity--The earliest of:
(1) after closing of the sale of common units offered through
this prospectus,
(2) The date on which an affiliate of TransCanada ceases to serve as our
general partner, or
(3) upon cancellation of the facility.
- Cancellation--Upon 180 days notice by either the borrower or the lender.
- Ranking--Senior to all other debt of the borrower.
- Expenses--Out-of-pocket expenses of the lender, including legal fees,
relating to the negotiation and preparation of the revolving credit
facility are reimbursable by the borrower.
The revolving credit facility will also contain customary representations
and warranties, conditions to drawings, covenants and events of default.
TC PipeLines would expect to draw on the revolving credit facility to fund
distributions to unitholders only in the event of temporary interruptions or
delays in the receipt of distributions from Northern Border Pipeline.
29
<PAGE>
USE OF PROCEEDS
The following table shows the estimated proceeds that we will receive from
this offering of common units assuming an initial public offering price of
$19.50 per unit. The gross offering proceeds assume no exercise of underwriters'
over-allotment option. Any proceeds from the exercise of this option will be
used to redeem subordinated units from our general partner on a one-for-one
basis equal to the number of common units issued upon the exercise of such
option.
<TABLE>
<CAPTION>
MAXIMUM DOLLAR AMOUNT PER CENT
------------------------ -----------
<S> <C> <C>
Gross offering proceeds $ 304,980,000 100
Public offering expenses:
Underwriting discount and commissions 19,823,700 6.5
Other expenses of the offering (estimated) 3,000,000 1.0
------------------------ -----
Amount available for investment $ 282,156,300 92.5
------------------------ -----
------------------------ -----
Redeem common units from TransCanada Border PipeLine and TransCan Northern $ 282,156,300 92.5
Public offering expenses 22,823,700 7.5
------------------------ -----
Total application of proceeds $ 304,980,000 100
------------------------ -----
------------------------ -----
</TABLE>
30
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth (1) the capitalization of TC PipeLines as of
September 30, 1998, (2) the pro forma adjustments required to reflect the
transactions contemplated by this prospectus, including the sale of common units
offered hereby (at an assumed initial public offering price of $19.50 per common
unit) and the application of the net proceeds therefrom as described in "Use of
Proceeds" and (3) the pro forma capitalization of TC PipeLines as of September
30, 1998. In each case, the table assumes that the underwriters' over-allotment
option is not exercised. The table is derived from and should be read in
conjunction with the pro forma and historical financial statements and notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TC PIPELINES, LP ADJUSTMENTS TC PIPELINES, LP
--------------------- ------------------- ---------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(thousands of dollars)
<S> <C> <C> <C>
Partners' capital
General partner.................................. -- 1(a) 4,737
4,736(b)
Common units..................................... -- 185,159(b) 185,159
282,156(c)
(282,156)(d)
Subordinated units............................... -- 46,882(b) 46,882
---------- ---------- ----------
Total partners' capital.......................... -- 236,778 236,778
---------- ---------- ----------
Total capitalization........................... -- 236,778 236,778
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------------
(a) Upon formation, cash amounting to $1,000 is deposited into TC PipeLines in
exchange for an initial general partner interest.
(b) As contemplated in the offering, the investment in Northern Border PipeLine
is conveyed to TC PipeLines by TransCanada Border PipeLine and TransCan
Northern in exchange for common units (which will be redeemed as
part of the transactions contemplated in this prospectus), 3,960,000
subordinated units, a 2% combined general partnership interest in TC
PipeLines and TC PipeLines intermediate partnership and the right to receive
incentive distributions.
(c) Net proceeds to TC PipeLines from the sale of common units are expected to
be approximately $282 million, after deducting underwriting discounts and
commissions and expenses of the offering estimated to be approximately $23
million.
(d) The net proceeds will be used to redeem all of the common units issued to
TransCan Northern and TransCanada Border PipeLine.
For a more complete discussion of the assumptions on which the pro forma
capitalization table is based, see the Notes to Pro Forma Financial Statements
of TC PipeLines included elsewhere in this prospectus.
31
<PAGE>
DILUTION
On a pro forma basis as of September 30, 1998 after giving effect to the
transactions contemplated by this prospectus, the tangible net book value of TC
PipeLines' assets would have been approximately $237 million or $11.84 per
common unit (assuming an initial public offering price of $19.50 per common
unit). Purchasers of common units in the offering will experience substantial
and immediate dilution in tangible net book value per common unit for financial
accounting purposes, as illustrated in the following table:
<TABLE>
<S> <C>
Assumed initial public offering price per common unit.............. $ 19.50
Less: Pro forma tangible net book value per common unit after the
offering (1)..................................................... $ 11.84
---------
Immediate dilution in tangible net book value per common unit to
new investors.................................................... $ 7.66
---------
---------
</TABLE>
- ------------------------------
(1) Determined by dividing the total number of units (15,640,000 common units,
3,960,000 subordinated units and the 2% general partner interest having
dilutive effect equivalent to 400,000 units) to be outstanding after the
offering made hereby into the pro forma tangible net book value of TC
PipeLines, after giving effect to the application of the net proceeds of the
offering.
The following table sets forth the number of units that will be issued by TC
PipeLines and the total consideration to TC PipeLines contributed by the general
partner and its affiliates in respect of their units and by the purchasers of
common units in this offering upon the consummation of the Transactions:
<TABLE>
<CAPTION>
UNITS ACQUIRED TOTAL CONSIDERATION
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
NUMBER PER CENT AMOUNT PER CENT
------------- ----------- ---------------- -----------
General Partner and its
affiliates(1)(2)....................... 4,360,000 21.8 $ 236,777,000 43.7
New investors............................ 15,640,000 78.2 304,980,000 56.3
------------- --- ---------------- ---
Total.................................... 20,000,000 100 $ 541,757,000 100
------------- --- ---------------- ---
------------- --- ---------------- ---
</TABLE>
- ------------------------------
(1) Upon the consummation of the transactions contemplated by this prospectus,
the general partner and its affiliates will own an aggregate 3,960,000
subordinated units and a 2% general partner interest in TC PipeLines having
a dilutive effect equivalent to 400,000 units.
(2) The assets and liabilities contributed and sold by TransCanada Border
PipeLine and TransCan Northern will be recorded at historical cost in
accordance with generally accepted accounting principles. Book value of the
consideration provided by TransCanada Border PipeLine and TransCan Northern
as of September 30, 1998 is $237 million.
32
<PAGE>
CASH DISTRIBUTION POLICY
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
GENERAL
We will make distributions to our partners for each of our fiscal quarters
before liquidation in an amount equal to all of our Available Cash for that
quarter. We expect to make distributions of all Available Cash within
approximately 45 days after the end of each quarter, beginning with the quarter
ending June 30, 1999, to holders of record on the applicable record date. The
minimum quarterly distribution and the target distribution levels for the period
from the closing of the offering through June 30, 1999 will be adjusted downward
based on the actual length of this period.
For each quarter during the subordination period, to the extent there is
sufficient Available Cash, the holders of common units will have the right to
receive the minimum quarterly distribution, plus any arrearages on the common
units, before any distribution is made to the holders of subordinated units.
This subordination feature will enhance our ability to distribute the minimum
quarterly distribution on the common units during the subordination period.
There is no guarantee, however, that the minimum quarterly distribution will be
made on the common units.
The holders of subordinated units will have the right to receive the minimum
quarterly distribution only after the common units have received the minimum
quarterly distribution plus any arrearages in payment of the minimum quarterly
distribution. The subordinated units are not entitled to arrearages. Upon
expiration of the subordination period, which will generally not occur before
June 30, 2004, the subordinated units will convert into common units on a
one-for-one basis and will then participate pro rata with the other common units
in distributions of Available Cash. Under circumstances described below, up to
66 2/3% of the subordinated units may convert into common units before the
expiration of the subordination period. Common units will not accrue arrearages
on distributions for any quarter after the subordination period and subordinated
units will not accrue any arrearages on distributions for any quarter.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING SUBORDINATION
PERIOD
Distributions of Available Cash from Operating Surplus for any quarter
during the subordination period will be made in the following manner:
- First, 98% to the common units, pro rata, and 2% to the general partner,
until there has been distributed for each outstanding common unit an
amount equal to the minimum quarterly distribution for that quarter;
- Second, 98% to the common units, pro rata, and 2% to the general partner,
until there has been distributed for each outstanding common unit an
amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units accrued and for any prior quarters during
the subordination period;
- Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until there has been distributed for each outstanding
subordinated unit an amount equal to the minimum quarterly distribution
for that quarter; and
- Thereafter, in the manner described in "--Incentive Distribution Rights--
Hypothetical Yearly Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the general partner are references to the percentage interest in
distributions from TC PipeLines and the TC PipeLines intermediate partnership of
the general partner on a combined basis, exclusive of its or any of its
affiliates' interest as holders of the units. The general partner will own a 1%
general partner interest in TC PipeLines and a
33
<PAGE>
1.0101% general partner interest in the TC PipeLines intermediate partnership.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER SUBORDINATION
PERIOD
Distributions of Available Cash from Operating Surplus for any quarter after
the subordination period will be made in the following manner:
- First, 98% to all units, pro rata, and 2% to the general partner, until
there has been distributed for each unit an amount equal to the minimum
quarterly distribution for that quarter; and
- Thereafter, in the manner described in "--Incentive Distribution Rights--
Hypothetical Yearly Yield" below.
AVAILABLE CASH
Available Cash is defined in the glossary and generally means, for any of
our fiscal quarters, all cash on hand at the end of the quarter less the amount
of cash reserves that is necessary or appropriate in the reasonable discretion
of the general partner to:
(1) provide for the proper conduct of our business;
(2) comply with applicable law, any of our debt instruments or other
agreements; or
(3) provide funds for distributions to unitholders and the general partner
for any one or more of the next four quarters.
OPERATING SURPLUS AND CAPITAL SURPLUS
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to unitholders relative to the general partner, and also determines
whether holders of subordinated units receive any distributions.
Operating Surplus is defined in the glossary and generally means:
(1) our cash balance on the date we begin operations, plus $ million,
plus all of our cash receipts from our operations since the closing of
the transactions contemplated in this prospectus, excluding cash
constituting Capital Surplus; less
(2) all of our operating expenses, debt service payments, maintenance
capital expenditures and reserves established for future operations, in
each case since the closing of the transactions contemplated in this
prospectus.
Capital Surplus is also defined in the glossary and will generally be
generated only by borrowings other than Working Capital Borrowings, sales of
debt and equity securities and sales or other dispositions of assets for cash,
other than inventory, accounts receivable and other assets. These dispositions
must be in the ordinary course of business.
All Available Cash distributed from any source will be treated as
distributed from Operating Surplus until the sum of all Available Cash
distributed since we began operations equals the Operating Surplus as of the end
of the quarter before that distribution. This method of cash distribution avoids
the difficulty of trying to determine whether Available Cash is distributed from
Operating Surplus or Capital Surplus. Any excess of Available Cash, irrespective
of its source, will be deemed to be Capital Surplus, which would represent a
return of capital, and distributed accordingly.
If Capital Surplus is distributed on each common unit in an aggregate amount
per common unit equal to the initial public offering price of the common units,
plus any arrearages on the common units, the distinction between Operating
Surplus and Capital Surplus will cease. All distributions after that date will
be treated as from Operating Surplus. We do not anticipate that there will be
significant distributions of Capital Surplus.
SUBORDINATION PERIOD; CONVERSION OF SUBORDINATED UNITS
The subordination period is defined in the glossary and will generally
extend until the first
34
<PAGE>
day of any quarter beginning after June 30, 2004 that each of the following
three events (the "Conversion Criteria") occur:
(1) distributions of Available Cash from Operating Surplus on the common
units and the subordinated units equal or exceed the sum of the minimum
quarterly distributions on all of the outstanding common units and
subordinated units for each of the three non-overlapping four-quarter
periods immediately preceding that date;
(2) the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equals or
exceeds the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on
a fully diluted basis and the related distribution on the general
partner interests in TC PipeLines and the TC PipeLines intermediate
partnership during those periods; and
(3) there are no arrearages in payment of the minimum quarterly distribution
on the common units.
Before the end of the subordination period, a portion of the subordinated
units will convert into common units on a one-for-one basis on the first day
after the record date established for the distribution for any quarter ending on
or after:
(a) June 30, 2002 for one-third of the subordinated units (1,320,000
subordinated units); and
(b) June 30, 2003 for one-third of the subordinated units (1,320,000
subordinated units),
in either case during which each of the three events described in (1), (2) and
(3) (the "Conversion Criteria") of the preceding paragraph occur, provided,
however, that the early conversion of the second one-third of subordinated units
may not occur until at least one year following the early conversion of the
first one-third of subordinated units.
Upon expiration of the subordination period, all remaining subordinated
units will convert into common units on a one-for-one basis and will then
participate, pro rata, with the other common units in distributions of Available
Cash. In addition, if the general partner is removed as general partner of TC
PipeLines under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
(1) the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
(3) the general partner will have the right to convert its general partner
interest, and the incentive distribution rights, into common units or to
receive cash in exchange for that interest.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during that period, less:
(1) any net increase in Working Capital Borrowings during that period; and
(2) any net reduction in cash reserves for operating expenditures during
that period not relating to an operating expenditure made during that
period; and plus:
(a) any net decrease in Working Capital Borrowings during that period;
and
(b) any net increase in cash reserves for operating expenditures during
that period required by any debt instrument for the repayment of
principal, interest or premium.
"Operating Surplus" generated during a period is equal to the difference
between:
35
<PAGE>
(1) the Operating Surplus determined at the end of that period; and
(2) the Operating Surplus determined at the beginning of that period.
INCENTIVE DISTRIBUTION RIGHTS--HYPOTHETICAL YEARLY YIELD
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. The incentive distribution rights are held by the general
partner. The target distribution levels are based on the amounts of Available
Cash from Operating Surplus distributed in excess of the payments made for the
minimum quarterly distribution and arrearages on the common units, if any, and
the related 2% distribution to the general partner.
For any quarter that both (1) and (2) below occur, unitholders and the
general partner will receive incentive distributions as described below:
(1) Available Cash from Operating Surplus has been distributed to the common
and subordinated unitholders in an amount equal to the minimum quarterly
distribution;
(2) Available Cash from Operating Surplus has been distributed on the common
units in an amount necessary to eliminate any cumulative common unit
arrearages.
After the distributions described in (1) and (2) are met, additional
Available Cash from Operating Surplus for that quarter will be distributed among
the unitholders and the general partner in the following manner:
- First, 98% to all units, pro rata, and 2% to the general partner, until
each unitholder has received, in addition to any distributions to common
unitholders to eliminate any cumulative arrearages in payment of the
minimum quarterly distribution on the common units, a total of $0.3945 for
that quarter (the "First Target Distribution");
- Second, 85% to all units, pro rata, and 15% to the general partner, until
each unitholder has received, in addition to any distributions to common
unitholders to eliminate any cumulative arrearages in payment of the
minimum quarterly distribution on the common units, a total of $0.46625
for that quarter (the "Second Target Distribution");
- Third, 75% to all units, pro rata, and 25% to the general partner, until
each unitholder has received, in addition to any distributions to common
unitholders to eliminate any cumulative arrearages in payment of the
minimum quarterly distribution on the common units, a total of $0.60975
for that quarter (the "Third Target Distribution"); and
- Thereafter, 50% to all units, pro rata, and 50% to the general partner.
The distributions to the general partner described above, other than in its
capacity as a holder of units, that are in excess of its aggregate 2% general
partner interest represent the incentive distribution rights. The right to
receive incentive distributions is not part of the general partner interest and
may be transferred separately from that interest, subject to specified
restrictions. See "The Partnership Agreement--Transfer of General Partner
Interest and Incentive Distribution Rights".
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the unitholders and the general
partner up to the various target distribution levels under the formula described
in the text above. The following table also illustrates a hypothetical yearly
percentage yield that would be realized by a unitholder if each target
distribution level were reached. For purposes of the following table, the yearly
percentage yield is calculated on a pretax basis by dividing each level of
distribution by the assumed initial public offering price of $19.50 per common
unit. The calculations are
36
<PAGE>
also based on the assumption that the quarterly distribution amounts shown do
not include any arrearages in payment of the minimum quarterly distribution on
the common units. The amounts shown under "Marginal Percentage Interest in
Distributions" in the table below are the percentage interests of the general
partner and the unitholders in any Available Cash from Operating Surplus
distributed up to and including the corresponding amount in the column
"Quarterly Distribution Amount per Common Unit". The percentage interests shown
for the unitholders and the general partner for the minimum quarterly
distribution are also applicable to quarterly distribution amounts that are less
than the minimum quarterly distribution.
THIS TABLE IS NOT A PROJECTION OR PREDICTION THAT ANY TARGET DISTRIBUTION
LEVEL WILL BE REACHED.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE INTEREST IN
QUARTERLY
DISTRIBUTION DISTRIBUTIONS
AMOUNT PER HYPOTHETICAL --------------------------------
COMMON UNIT YEARLY GENERAL
(YEARLY) YIELD(1) UNITHOLDERS PARTNER
---------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution....................... $1.500 7.69% 98% 2%
First Target Distribution............................ 1.578 8.09 98 2
Second Target Distribution........................... 1.865 9.56 85 15
Third Target Distribution............................ 2.439 12.51 75 25
Thereafter........................................... above $ 2.439 above 12.51% 50 50
</TABLE>
- ------------------------------
(1) Calculated on a pre-tax basis by dividing each level of distribution
(yearly) by the assumed initial offering price of $19.50 per common unit.
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions of Available Cash from Capital Surplus will be made in the
following manner:
- First, 98% to all units, pro rata, and 2% to the general partner, until
each common unit that was issued in the offering has received
distributions equal to the initial unit price;
- Second, 98% to the common units, pro rata, and 2% to the general partner,
until each common unit that was issued in the offering has received an
aggregate amount equal to any unpaid arrearages in payment of the minimum
quarterly distribution on the common units; and
- Thereafter, all distributions of Available Cash from Capital Surplus will
be distributed as if they were from Operating Surplus.
When a distribution is made from Capital Surplus, it is treated as if it
were a repayment of the unit price from this initial public offering. To reflect
repayment, the minimum quarterly distribution and the target distribution levels
will be adjusted downward by multiplying each amount by a fraction. This
fraction is determined as follows:
- the numerator is the Unrecovered Capital of the common units immediately
after giving effect to the repayment; and
- the denominator is the Unrecovered Capital of the common units immediately
before the repayment.
This adjustment to the minimum quarterly distribution may make it more
likely that subordinated units will be converted into common units, whether upon
the termination of the subordination period or the early conversion of some
subordinated units, and may accelerate the dates at which these conversions
occur.
A "payback" of the unit price from this initial public offering occurs, when
the Unrecovered Capital of the common units is zero. At that time the minimum
quarterly distribution and the target distribution levels will have been reduced
to zero. All distributions of Available Cash from all sources after that time
will be
37
<PAGE>
treated as if they were from Operating Surplus. Because the minimum quarterly
distribution and the target distribution levels will have been reduced to zero,
the general partner will then be entitled to receive 50% of all distributions of
Available Cash in its capacities as general partner and as holder of the
incentive distribution rights, in addition to any distributions to which it may
be entitled as a holder of units.
Distributions from Capital Surplus will not reduce the minimum quarterly
distribution or target distribution levels for the quarter in which they are
distributed.
ADJUSTMENT OF MINIMUM QUARTERLY
DISTRIBUTION AND TARGET
DISTRIBUTION LEVELS
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, the following will each be proportionately adjusted upward or
downward, as appropriate, if any combination or subdivision of units should
occur:
(1) the minimum quarterly distribution;
(2) the target distribution levels;
(3) the Unrecovered Capital;
(4) the number of additional common units issuable during the subordination
period without a unitholder vote;
(5) the number of common units issuable upon conversion of the subordinated
units; and
(6) other amounts calculated on a per unit basis.
For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
Unrecovered Capital of the common units would each be reduced to 50% of its
initial level.
No adjustment will be made by reason of the issuance of additional common
units for cash or property.
The minimum quarterly distribution and the target distribution levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us, the TC Pipelines intermediate
partnership or Northern Border Pipeline to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes. In this event, the minimum quarterly distribution and the target
distribution levels for each quarter after that time would be reduced to amounts
equal to the product of:
(1) the minimum quarterly distribution and each of the target distribution
levels;
multiplied by
(2) one minus the sum of:
(x) the highest marginal federal income tax rate which could apply to
the partnership that is taxed as an entity; plus
(y) any increase in the effective overall state and local income tax
rate that would have been applicable to us, TC PipeLines
intermediate partnership or Northern Border Pipeline in the
preceding calendar year as a result of the new imposition of the
entity level tax, after taking into account the benefit of any
deduction allowable for federal income tax purposes for the payment
of state and local income taxes, but only to the extent of the
increase in rates resulting from that legislation or interpretation.
For example, assuming we are not previously subject to state and local
income tax, if we were to become taxable as an entity for federal income tax
purposes and we became subject to a maximum marginal federal, and effective
state and local, income tax rate of 38%, then the minimum quarterly distribution
and the target distribution levels would each be reduced to 62% of the amount
immediately before the adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the beginning of our dissolution and liquidation, assets will be
sold or otherwise
38
<PAGE>
disposed of and the partners' capital account balances will be adjusted to
reflect any resulting gain or loss. The proceeds of liquidation will first be
applied to the payment of our creditors in the order of priority provided in the
partnership agreement and by law. After that, the proceeds will be distributed
to the unitholders and the general partner in accordance with their capital
account balances, as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding subordinated units
upon the liquidation of TC PipeLines, to the extent required to permit common
unitholders to receive their Unrecovered Capital plus any unpaid arrearages in
payment of the minimum quarterly distribution on the common units. Thus, net
losses recognized upon liquidation of TC PipeLines will be allocated to the
holders of the subordinated units to the extent of their capital account
balances before any loss is allocated to the holders of the common units. Also
net gains recognized upon liquidation will be allocated first to restore
negative balances in the capital account of the general partner and any
unitholders and then to the common unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid arrearages in payment of
the minimum quarterly distribution on the common units. However, no assurance
can be given that there will be sufficient gain upon liquidation of TC PipeLines
to enable the holders of common units to fully recover all of these amounts,
even though there may be cash available for distribution to the holders of
subordinated units.
The manner of the adjustment is as provided in the partnership agreement,
the form of which is included as Appendix A to this prospectus. If our
liquidation occurs before the end of the subordination period, any gain, or
unrealized gain attributable to assets distributed in kind, will be allocated to
the partners in the following manner:
- First, to the general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- Second, 98% to the common units, pro rata, and 2% to the general partner,
until the capital account for each common unit is equal to the sum of:
(1) the Unrecovered Capital on that common unit;
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; and
(3) any unpaid arrearages in payment of the minimum quarterly
distribution on that common unit;
- Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until the capital account for each subordinated unit is equal to
the sum of:
(1) the Unrecovered Capital on that subordinated unit; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
- Fourth, 98% to all units, pro rata, and 2% to the general partner, until
there has been allocated under this paragraph an amount per unit equal to:
(1) the sum of the excess of the First Target Distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of Available
Cash from Operating Surplus in excess of the minimum quarterly
distribution per unit that was distributed 98% to the units, pro
39
<PAGE>
rata, and 2% to the general partner for each quarter of our
existence;
- Fifth, 85% to all units, pro rata, and 15% to the general partner, until
there has been allocated under this paragraph an amount per unit equal to:
(1) the sum of the excess of the Second Target Distribution per unit
over the First Target Distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of Available
Cash from Operating Surplus in excess of the First Target
Distribution per unit that was distributed 85% to the units, pro
rata, and 15% to the general partner for each quarter of our
existence;
- Sixth, 75% to all units, pro rata, and 25% to the general partner, until
there has been allocated under this paragraph an amount per unit equal to:
(1) the sum of the excess of the Third Target Distribution per unit over
the Second Target Distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of Available
Cash from Operating Surplus in excess of the Second Target
Distribution per unit that was distributed 75% to the units, pro
rata, and 25% to the general partner for each quarter of our
existence; and
- Thereafter, 50% to all units, pro rata, and 50% to the general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clauses [(1) and] (3) of the second priority above and all of the third priority
above will no longer be applicable.
Upon our liquidation, any loss will generally be allocated to the general
partner and the unitholders in the following manner:
- First, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to the general partner, until
the capital accounts of the holders of the subordinated units have been
reduced to zero;
- Second, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to the general partner, until
the capital accounts of the common unitholders have been reduced to zero;
and
- Thereafter, 100% to the general partner.
If the liquidation occurs after the subordination period, the distinction
between common units and subordinated units will disappear, so that all of the
first priority above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time we issue additional interests in TC PipeLines or make distributions of
property. These adjustments will be based on the fair market value of the
interests or the property distributed and any gain or loss resulting from the
adjustments will be allocated to the unitholders and the general partner in the
same manner as gain or loss is allocated upon liquidation. In the event that
positive interim adjustments are made to the capital accounts, any later
negative adjustments to the capital accounts resulting from the issuance of
additional TC PipeLines interests, our distributions of property, or upon our
liquidation, will be allocated in a manner which results, to the extent
possible, in the capital account balances of the general partner equaling the
amount which would have been the general partner's capital account balances if
no earlier positive adjustments to the capital accounts had been made.
40
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
We believe that we will generate sufficient Available Cash from Operating
Surplus for each quarter through June 30, 2002, following completion of the
offering to cover the full minimum quarterly distribution on all the outstanding
units. The inclusion of this belief does not constitute an undertaking that we
will provide updates based on future developments. Available Cash for any
quarter will consist generally of all cash on hand at the end of that quarter,
as adjusted for reserves. The definition of Available Cash is in the glossary.
Operating Surplus generally consists of cash generated from operations after
deducting related expenditures and other items, plus $ million.
Our belief is based on a number of assumptions, including the assumptions
that:
- there will be no significant changes in Canadian law or export policy that
would adversely impact the levels of imports of Canadian natural gas into
the United States;
- there will be no significant changes in FERC regulation, including the
ratemaking methodology, which generally allows Northern Border Pipeline to
recover its costs and earn a 12.0% return on equity with a deemed income
tax cost recovery component;
- the project cost containment mechanism, which was instituted to allocate
the risks of the levels of capital costs associated with the Chicago
Project between Northern Border Pipeline and its shippers, will result in
Northern Border Pipeline being allowed to include in its rate base the
entire cost of construction of the Chicago Project;
- Northern Border Pipeline's Project 2000 will achieve an in-service date on
or before November 1, 2000;
- Northern Border Pipeline's debt/equity ratio will remain at approximately
its current ratio;
- business, economic, regulatory, political and competitive conditions will
not change substantially; and
- ongoing maintenance capital expenditures and/or capital contibutions to
Northern Border Pipeline will be funded through a combination of cash
reserved by us and/or short-term financings by us.
Although we believe our assumptions are reasonable, most of our assumptions
are not within our control and cannot be predicted with any degree of certainty.
If our assumptions are not realized, the actual Available Cash from Operating
Surplus that we generate could be substantially less than that currently
expected and could, therefore, be insufficient to permit us to make cash
distributions at the levels described above. In addition, the terms of Northern
Border Pipeline's indebtedness will restrict the ability of Northern Border
Pipeline to distribute cash to the TC PipeLines intermediate partnership, in the
event of a default under the terms of that indebtedness. Accordingly, no
assurance can be given that distributions of the minimum quarterly distribution
or any other amounts will be made.
The amount of Available Cash constituting Operating Surplus needed to pay
the minimum quarterly distribution for four quarters on the common units, the
subordinated units and the general partner interest to be outstanding
immediately after the transactions is approximately:
<TABLE>
<S> <C>
$23.5
Common units.................. million
Subordinated units............ 5.9 million
General partner interest...... 0.6 million
------------
$30.0
Total....................... million
</TABLE>
These amounts for three quarters would be approximately:
<TABLE>
<S> <C>
$17.6
Common units.................. million
Subordinated units............ 4.4 million
General partner interest...... 0.5 million
------------
$22.5
Total....................... million
</TABLE>
41
<PAGE>
If the transactions contemplated in this prospectus had been completed on
January 1, 1997, pro forma Available Cash from Operating Surplus generated
during 1997 would have been approximately $28.6 million. The amount of pro forma
Available Cash from Operating Surplus generated for the nine months ended
September 30, 1998 would have been approximately $17.5 million. These amounts
would not have been sufficient to allow us to distribute the minimum quarterly
distribution on the common units and the subordinated units and the related
distribution on the general partner interest for those periods by approximately
$1.4 million for 1997 and approximately $5.0 million for the nine months ended
September 30, 1998.
The amounts of pro forma Available Cash from Operating Surplus shown above
were derived from our pro forma financial statements and historical financial
statements of Northern Border Pipeline in the manner described in Appendix D.
The pro forma adjustments are based upon currently available information and
specific estimates and assumptions. The pro forma financial statements do not
purport to present our results of operations had the transactions contemplated
in this prospectus actually been completed as of the dates indicated.
Furthermore, Available Cash from Operating Surplus as defined in the partnership
agreement is a cash accounting concept, while our pro forma financial statements
and Northern Border Pipeline's historical financial statements have been
prepared on an accrual basis. As a result, the amount of pro forma Available
Cash from Operating Surplus shown above should only be viewed as a general
indication of the amount of Available Cash from Operating Surplus that we might
have generated had TC PipeLines been formed in earlier periods. For definitions
of Available Cash and Operating Surplus, see the glossary.
42
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA OF TC PIPELINES
The following unaudited Selected Pro Forma Financial Data as of and for the
nine months ended September 30, 1998 and for the year ended December 31, 1997 is
derived from the TC PipeLines' Pro Forma Financial Statements appearing
elsewhere in this prospectus. For the purpose of this pro forma financial data,
it is assumed that TC PipeLines will be in a position to exercise significant
influence over Northern Border Pipeline and the investment is accounted for
using the equity method of accounting. The pro forma financial data is based on
currently available information and certain estimates and assumptions, and
therefore the actual financial data will differ from the pro forma financial
data. For a more complete discussion of the assumptions used in preparing the
Selected Pro Forma Financial Data, see Notes to TC PipeLines, LP Pro Forma
Financial Statements appearing elsewhere in this prospectus. The following
information should not be deemed indicative of future operating results for TC
PipeLines.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(thousands of dollars, except per
unit amounts)
<S> <C> <C>
INCOME STATEMENT DATA:
Equity income from investment in Northern Border Pipeline(1)............. 21,615 21,832
General and administrative expenses...................................... (900) (1,200)
---------- -----------------
Net income to partners................................................. 20,715 20,632
---------- -----------------
---------- -----------------
Net income per unit(1)................................................. $ 1.04 $ 1.03
---------- -----------------
---------- -----------------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline(2)................................ 236,777
Total assets............................................................. 236,778
Partners' capital
General partner(3)..................................................... 4,737
Common units(3)........................................................ 185,159
Subordinated units(3).................................................. 46,882
----------
236,778
----------
----------
</TABLE>
- ------------------------
(1) Pro forma equity income represents 30% of the net income of Northern Border
Pipeline. The general partner's allocation of pro forma net income is based
on an aggregate 2% interest in TC PipeLines which has been deducted before
calculating the pro forma net income per unit. The computation of pro forma
net income per unit assumes that 15,640,000 common units and 3,960,000
subordinated units are outstanding at all times during the periods
presented.
(2) The pro forma investment balance as of September 30, 1998 represents the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCan Northern and TransCanada
Border PipeLine as at that date. The balance also equates to 30% of the net
assets of Northern Border Pipeline as at September 30, 1998.
(3) Pro forma partners' capital is allocated 2% to the general partner, 78.2% to
the common unitholders and 19.8% to subordinated unitholders.
43
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
NORTHERN BORDER PIPELINE
The selected financial information below for Northern Border Pipeline as of
and for the years ended December 31, 1997, 1996 and 1995 is derived from the
audited financial statements of Northern Border Pipeline and the financial
information below for Northern Border Pipeline as of and for the nine months
ended September 30, 1998 and 1997 is derived from the unaudited financial
statements of Northern Border Pipeline. In addition, the financial information
below for Northern Border Pipeline as of and for the years ended December 31,
1994 and 1993 is derived from the audited financial statements of Northern
Border Pipeline, reclassified to conform with the presentation used in the
audited financial statements for the year ended December 31, 1997. The operating
data for all periods presented is derived from the records of Northern Border
Pipeline. Management of Northern Border Pipeline has reported that it is of the
opinion that the unaudited financial statements reflect all adjustments which
are necessary for a fair statement of results of the interim periods. The
Selected Historical Financial and Operating Data below should be read in
conjunction with the financial statements of Northern Border Pipeline, included
elsewhere in this prospectus, and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(thousands of dollars, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues, net......... 145,476 140,369 186,050 201,943 206,497 211,580 205,242
Operations and maintenance...... 16,872 21,027 28,522 26,974 25,573 27,682 25,793
Depreciation and amortization... 30,060 28,988 38,708 46,979 47,081 41,959 39,539
Taxes other than income......... 17,267 17,793 22,393 24,390 23,886 24,438 21,393
----------- ----------- ---------- ----------- ---------- ---------- ----------
Operating income.............. 81,277 72,561 96,427 103,600 109,957 117,501 118,517
Interest expense................ (30,422) (24,162) (33,020) (33,117) (35,205) (38,424) (40,671)
Other income (expense).......... 21,196 4,955 9,365 3,360 (217) (1,919) (2,440)
----------- ----------- ---------- ----------- ---------- ---------- ----------
Net income.................... 72,051 53,354 72,772 73,843 74,535 77,158 75,406
----------- ----------- ---------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ----------- ---------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating
activities.................... 83,390 121,604 115,328 136,808 127,429 121,679 118,333
Capital expenditures............ 484,219 69,773 152,070 18,597 8,310 3,086 1,268
Distributions to partners....... 61,205 99,322 99,322 102,845 98,517 87,509 90,036
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment..................... 1,602,862 998,361 1,100,890 937,859 957,587 983,843 1,015,567
Total assets.................... 1,653,804 1,043,262 1,147,120 974,137 1,011,361 1,063,210 1,097,383
Long-term debt, including
current maturities............ 724,000 410,000 459,000 377,500 410,000 445,000 470,000
Partners' capital............... 789,258 520,994 581,412 526,962 555,964 579,946 590,297
OPERATING DATA (UNAUDITED):
Natural gas delivered (millions
of cubic feet)................ 463,209 471,695 633,280 633,908 615,133 597,898 570,469
Average throughput (millions of
cubic feet per day)........... 1,733 1,761 1,770 1,764 1,720 1,663 1,592
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE PRO FORMA FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF TC PIPELINES SHOULD BE READ IN CONJUNCTION WITH TC PIPELINES' PRO
FORMA FINANCIAL STATEMENTS AND NOTES THERETO AND THE HISTORICAL RESULTS OF
OPERATIONS FOR NORTHERN BORDER PIPELINE SHOULD BE READ IN CONJUNCTION WITH
NORTHERN BORDER PIPELINE'S HISTORICAL FINANCIAL STATEMENTS AND NOTES THERETO.
FOR MORE DETAILED INFORMATION REGARDING THE BASIS OF PRESENTATION OF THE
FOLLOWING FINANCIAL INFORMATION, SEE THE NOTES TO EACH OF THE PRO FORMA AND
HISTORICAL FINANCIAL STATEMENTS, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TC PIPELINES
Upon the closing of the offering, TC PipeLines will own a 30% general
partner interest in Northern Border Pipeline. TC PipeLines will account for this
interest using the equity method of accounting. TC PipeLines' investment
initially will be recorded at the combined carrying values of the investment in
Northern Border Pipeline as reflected in the financial records of the
TransCanada Border PipeLine and TransCan Northern as of that date. In accordance
with the equity method of accounting, the future carrying value of this
investment will be adjusted to include TC PipeLines' 30% share of earnings or
losses of Northern Border Pipeline. Any distributions received or receivable by
TC PipeLines from Northern Border Pipeline will reduce the future carrying value
of the investment and additional contributions to Northern Border Pipeline will
increase the carrying value of the investment.
TC PipeLines' results of operations after the closing of the offering is
expected to be influenced by and to reflect the same factors that influence the
financial results of Northern Border Pipeline until such time as TC PipeLines
owns additional assets.
In connection with the Transactions, TC PipeLines intermediate partnership
will enter into the $40 million unsecured revolving credit facility with
TransCanada PipeLine USA Ltd., a wholly owned subsidiary of TransCanada. The
purpose of the revolving credit facility is to provide borrowings to fund
capital expenditures, to fund capital contributions to Northern Border PipeLine
and for working capital and other general business purposes, including
distributions on the units.
We expect that Northern Border Pipeline will request capital contributions
in aggregate of approximately $21 million from TC PipeLines in 1999 and 2000. We
expect to fund these capital contributions from cash reserves and/or drawings
under the revolving credit facility.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Operating revenue increased $5.1 million (4%) for the nine months ended
September 30, 1998, as compared to the same period in 1997 due primarily to
returns on higher levels of invested equity.
Operations and maintenance expense decreased $4.1 million (20%) for the nine
months ended September 30, 1998, as compared to the same period in 1997
primarily due to a regulatory credit recorded in 1998. During the construction
of the Chicago project, Northern Border Pipeline has placed certain new
facilities into service to maintain natural gas flow while existing facilities
are being modified. The regulatory credit of approximately $4.7 million,
recorded in the nine months ended September 30, 1998, offsets the increase in
cost of service for the new facilities placed in service to date. Northern
Border Pipeline is allowed to recover the regulatory credit from its shippers
over a ten-year period commencing with the in-service date of the Chicago
project.
45
<PAGE>
Depreciation and amortization expense increased $1.1 million (4%) for the
nine months ended September 30, 1998, as compared to the same period in 1997
primarily due to facilities that were placed in service in 1998.
Interest expense increased $6.3 million (26%) for the nine months ended
September 30, 1998, as compared to the same period in 1997 due primarily to an
increase in average debt outstanding, reflecting amounts borrowed to finance a
portion of the capital expenditures for the Chicago project.
Other income increased $16.2 million (328%) for the nine months ended
September 30, 1998, as compared to the same period in 1997. The increase was
primarily due to a $17.3 million increase in the debt and equity allowance for
funds used during construction ("AFUDC"). Equity AFUDC is a regulatory allowance
that represents the capitalization of the allowed equity return associated with
a construction program. The increase in AFUDC primarily relates to Northern
Border Pipeline's expenditures for the Chicago project. (See "--Liquidity and
Capital Resources of Northern Border Pipeline--Cash Flows from Investing
Activities"). Other income for 1997 included $2.8 million received by Northern
Border Pipeline for vacating certain microwave frequency bands.
1997 COMPARED TO 1996
Operating revenue decreased $15.9 million (8%) for the year ended December
31, 1997, as compared to the results for the comparable period in 1996 due
primarily to lower depreciation and amortization expense, taxes other than
income and return on a lower rate base. These lower recoveries were partially
offset by higher operations and maintenance expense recoveries. Additionally, in
accordance with the Stipulation and Agreement ("Stipulation") approved by the
FERC to settle Northern Border Pipeline's November 1995 rate case, the allowed
equity rate of return was 12.75% through September 30, 1996 and 12.0%
thereafter.
Operations and maintenance expense increased $1.5 million (6%) for the year
ended December 31, 1997, from the comparable period in 1996 due primarily to
higher administrative expenses.
Depreciation and amortization expense decreased $8.3 million (18%) for the
year ended December 31, 1997, as compared to the same period in 1996. In
accordance with the terms of the Stipulation, filed with the FERC in 1996 and
approved in August 1997, the depreciation rate applied to Northern Border
Pipeline's gross transmission plant was 2.5% for 1997. The average depreciation
rate applied to gross transmission plant for the year ended December 31, 1996
was 3.1%.
Taxes other than income decreased $2.0 million (8%) for the year ended
December 31, 1997, as compared to the results for the same period in 1996 due
primarily to lower property tax assessments received in various states where the
Northern Border pipeline system operates.
Interest expense for the year ended December 31, 1997 was not significantly
different from the results for the same period in 1996.
Other income increased $6.0 million (179%) for the year ended December 31,
1997, as compared to the same period in 1996. The increase was primarily due to
$4.8 million received by Northern Border Pipeline for vacating certain microwave
frequency bands and a $4.2 million increase in AFUDC. The increase in AFUDC
primarily relates to Northern Border Pipeline's expenditures for the Chicago
project (See "--Liquidity and Capital Resources of Northern Border
Pipeline--Cash Flows from Investing Activities").
1996 COMPARED TO 1995
Operating revenue decreased $4.6 million (2%) for the year ended December
31, 1996, as compared to the results for the comparable period in 1995, due
primarily to equity returns on a lower rate base and lower interest expense.
These lower recoveries were partially offset by higher operations and
maintenance expense recoveries. Operating revenue for 1996 reflect the terms of
the Stipulation filed by
46
<PAGE>
Northern Border Pipeline for FERC approval, which was subsequently approved by
the FERC in 1997, to settle its November 1995 rate case.
Operations and maintenance expense increased $1.4 million (5%) for the year
ended December 31, 1996, from the comparable period in 1995 due primarily to
expenses incurred in conjunction with Northern Border Pipeline's November 1995
rate case proceeding as well as higher administrative expenses.
Depreciation and amortization expense remained constant for the year ended
December 31, 1996, as compared to the results for the same period in 1995.
Depreciation and amortization expense for 1996 is reduced approximately $7.4
million from the level authorized in Northern Border Pipeline's FERC tariff to
reflect the Stipulation discussed above, which results in an average
depreciation rate for transmission plant of 3.1% for the year ended December 31,
1996 which matches the rate used in 1995. In accordance with the terms of the
Stipulation, the depreciation rate applied to Northern Border Pipeline's gross
transmission plant was reduced to 2.7% effective June 1996 from the 3.6% rate in
its FERC tariff.
Interest expense decreased $2.1 million (6%) for the year ended December 31,
1996, as compared to the results for the same period in 1995 due to a decrease
in the average debt outstanding. Average debt outstanding has decreased between
the two periods reflecting principal payments of $32.5 million made under the
Northern Border Pipeline bank loan agreement.
Other income/(expense) increased $3.6 million for the year ended December
31, 1996, from results for the year ended December 31, 1995, primarily due to
the reversal of previously established reserves for regulatory issues.
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities decreased $38.2 million to $83.4
million for the nine-month period ended September 30, 1998, as compared to the
same period in 1997. Operating activities for the 1997 period included $40.4
million collected by Northern Border Pipeline that was subsequently refunded to
its shippers in October 1997 in accordance with its November 1995 rate case
settlement.
Cash flows provided by operating activities decreased $21.5 million to
$115.3 million for the year ended December 31, 1997 as compared to the same
period in 1996 primarily related to a $52.6 million refund in October 1997 in
accordance with the Stipulation approved by the FERC to settle Northern Border
Pipeline's rate case. During 1997, $40.4 million had been collected subject to
refund by Northern Border Pipeline as a result of its November 1995 rate case.
Cash flows provided by operating activities increased $9.4 million to $136.8
million for the year ended December 31, 1996 as compared to the same period in
1995, due primarily to amounts collected subject to refund by Northern Border
Pipeline as a result of its rate case.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $484.2 million for the nine months ended September
30, 1998 are comprised of $474.4 million for the Chicago project and $10.0
million for linepack gas acquired from Northern Border Pipeline's shippers. For
the comparable period in 1997, capital expenditures were $69.8 million, which
included $57.2 million for the Chicago project.
Capital expenditures of $152.1 million for the year ended December 31, 1997,
include $135.7 million for the Chicago project. The remaining $16.4 million of
capital expenditures for 1997 are primarily related to renewals and replacements
of Northern Border Pipeline's existing facilities. For the comparable period in
1996, capital expenditures were $18.6 million,
47
<PAGE>
which included $11.8 million for the Chicago project, and $6.8 million primarily
related to renewals and replacements of Northern Border Pipeline's existing
facilities.
Total capital expenditures for 1998 are estimated to be $683.0 million for
the Chicago project, $12.0 million for linepack gas and $10.0 million for
renewals and replacements of existing facilities. The general partner
anticipates that Northern Border Pipeline will fund approximately 65% of its
1998 capital expenditures by borrowing on its revolving credit facility. Funds
required to meet the remainder of Northern Border Pipeline's capital
expenditures will be provided primarily from capital contributions from the
general partners of Northern Border Pipeline.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities were $400.8 million for the nine
months ended September 30, 1998, as compared to cash flows used in financing
activities of $37.5 million for the comparable period in 1997. Net cash
contributions from partners were $135.8 million for the nine months ended
September 30, 1998, which included amounts needed to finance a portion of the
capital expenditures for the Chicago project, as compared to net cash
distributions of $59.3 million for the comparable period in 1997. Additionally,
in the nine months ended September 30, 1998, borrowings under the Pipeline
Credit Agreement totaled $265.0 million and were used to finance a portion of
the capital expenditures for the Chicago project. For the comparable period in
1997, borrowings under the Pipeline Credit Agreement of $160.0 million were used
primarily to retire amounts related to Northern Border Pipeline's existing bank
loan and credit agreements of $137.5 million.
Cash flows provided by financing activities were $52.4 million for the year
ended December 31, 1997, as compared to cash flows used in financing activities
of $125.3 million for the year ended December 31, 1996. In 1997, sources of
funds from financing activities included a contribution from partners of $81.0
million. Borrowings under the Pipeline Credit Agreement totaled $209 million and
were used primarily to retire amounts related to Northern Border Pipeline's
existing bank loan agreements of $137.5 million and for construction
expenditures related to the Chicago project. In 1996, net principal reductions
on Northern Border Pipeline's bank loan agreements totaled $22.5 million.
DESCRIPTION OF INDEBTEDNESS OF NORTHERN BORDER PIPELINE
DESCRIPTION OF NOTES
The following is a summary of the material terms of $250 million aggregate
principal amount of notes issued by Northern Border Pipeline in a private
placement under a note purchase agreement dated as of July 15, 1992, amended by
a supplemental agreement dated as of June 1, 1995. Copies of note purchase
agreement and the supplemental agreement are filed as an exhibit to the
registration statement of which this prospectus is a part. This summary is
qualified by the full text of the note agreement and supplemental agreement.
Northern Border Pipeline's obligations under the note agreement and
supplemental agreement are unsecured and non-recourse to the general partners of
Northern Border Pipeline. The note agreement and supplemental agreement provide
for four series of notes with varying interest rates and maturity dates. The
Series A Notes in a total principal amount of $66 million bear interest at an
annual rate of 8.26%, payable semiannually, and mature in August 2000. The
Series B Notes in a total principal amount of $41 million bear interest at an
annual rate of 8.38%, payable semiannually, and mature in August 2001. The
Series C Notes in a total principal amount of $78 million bear interest at an
annual rate of 8.49%, payable semiannually, and mature in August 2002. The
Series D Notes in a total principal amount of $65 million bear interest at an
annual rate of 8.57%, payable semiannually, and mature in August 2003.
48
<PAGE>
Northern Border Pipeline may at any time, at its option and on written
notice, prepay the notes of one or more series in whole or in part. Prepayment
must be in a minimum amount of, and otherwise in multiples of, $1.0 million.
Optional prepayments will be payable with accrued interest plus any Make-Whole
Amount (as defined in the note agreement) premium.
The note agreement contains various restrictive and affirmative covenants
applicable to Northern Border Pipeline, including:
- requirement that the ratio of Northern Border Pipeline's total
indebtedness to Partners' Capital (as defined in the note agreement) not
exceed 2.3 to 1 on a consolidated basis. As of September 30, 1998, the
ratio was 1.47 to 1 on a consolidated basis;
- restrictions on any indebtedness senior to the notes;
- requirement that Northern Plains or another person approved by a majority
of the holders of the notes outstanding at the time of selection by the
Northern Border Pipeline management committee be the operator of Northern
Border Pipeline;
- restrictions on specific liens, investments, lines of business, mergers,
consolidations, or sales of assets of Northern Border Pipeline;
- restrictions on amendments, modification, or cancellation of any
Controlled Service Agreement or related Support Agreement (as defined in
the note agreement), subject to some exceptions; and
- restrictions on transactions with affiliates of Northern Border Pipeline
except on an arm's-length basis.
Under the note agreement, so long as no Default or Event of Default (as
defined in the note agreement) exists or would result, Northern Border Pipeline
is permitted to make cash distributions to its partners if the total amount of
cash distributions made from January 1, 1992 to the date of the proposed cash
distribution (the Computation Period, as defined in the note agreement) would
not exceed $20 million plus (or minus in case of a negative amount) the sum of
(1) Consolidated Net Income (as defined in the note agreement) for the
Computation Period, (2) an amount equal to the total net cash proceeds received
by Northern Border Pipeline during the Computation Period from the sale of
partnership interests or from capital contributions treated as equity in
accordance with Required Accounting Principles (as defined in the note
agreement), (3) an amount equal to Current Taxes (as defined in the note
agreement) for the Computation Period and interest payable in respect of any
income tax deficiencies (to the extent recovered pursuant to the FERC tariff
during the Computation Period), (4) an amount equal to 35% of Deferred Income
Taxes (as defined in the note agreement) during the Computation Period, and (5)
an amount equal to 35% of Depreciation (as defined in the note agreement) during
the Computation Period. Under the most restrictive debt covenant, the partners'
capital that could have been distributed as of September 30, 1998 was $176
million.
If an Event of Default (as defined in the note agreement) exists, the
holders of notes may accelerate the maturity of the notes and exercise other
rights and remedies.
DESCRIPTION OF BANK CREDIT FACILITY
Northern Border Pipeline entered into a credit agreement, dated as of June
16, 1997 with financial institutions for which the First National Bank of
Chicago acts as administrative agent, to borrow up to a total principal amount
of $750 million. The following is a summary of the terms of the Pipeline credit
agreement, a copy of which is filed as an exhibit to the registration statement
of which this prospectus is a part. This summary is qualified by the full text
of Pipeline Credit Agreement.
Northern Border Pipeline's obligations under the credit agreement are
unsecured obligations, rank equally with the notes and
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are non-recourse to the general partners of Northern Border Pipeline. The credit
agreement is comprised of a $200 million five-year revolving credit facility to
be used for the retirement of Northern Border Pipeline's prior credit facility
and for general business purposes and a $550 million three-year revolving credit
facility to be used for the construction of the Chicago project. The three-year
revolving credit facility will convert to a term loan maturing in June 2002 once
the Chicago project has been placed in service and other conditions specified in
the credit facility are met. The credit agreement permits Northern Border
Pipeline to choose among various interest rate options, to specify the portion
of the borrowings to be covered by specific interest rate options and to specify
the interest rate period, subject to specific parameters. Northern Border
Pipeline may borrow under either facility at (i) fixed interest rates or a
margin added or subtracted from a London Interbank Offered Rate index and
further adjusted based on Northern Border Pipeline's leverage ratio or (2)
pursuant to an auction procedure set forth in the credit agreement. Northern
Border Pipeline is required to pay a facility fee on the total principal amount
of $750 million. As of September 30, 1998, $127.5 million had been borrowed on
the five-year and $346.5 million had been borrowed on the three-year revolving
credit facilities.
The credit agreement contains various restrictive covenants applicable to
Northern Border Pipeline, including restrictions on liens, additional
indebtedness, investments, mergers, consolidations, sales of assets, guarantees,
entering into transactions with affiliates, allowing final judgments in excess
of $25 million to remain undischarged or unbonded, maintaining or contributing
to any ERISA Plan without obtaining the prior written consent of the Majority
Banks (as defined in the credit agreement), and not permitting the ratio of
Northern Border Pipeline's Indebtedness to the sum of its general partners'
capital plus indebtedness to exceed .65 to 1 on a consolidated basis. As of
September 30, 1998, the ratio was .48 to 1 on a consolidated basis.
The credit agreement also contains various affirmative covenants, customary
for this type of facility, including that Northern Border Pipeline will use its
best efforts to cause its Tariff to remain effective at all times, use it best
efforts to maintain existing Service Agreements and Support Agreements (as
defined in the credit agreement), and that Northern Border Pipeline will require
that all shippers meet certain credit worthiness standards.
If an Event of Default (as defined in the credit agreement) occurs under the
credit agreement, the lending banks may accelerate the maturity of the amounts
due thereunder and exercise other rights and remedies.
INTEREST RATE RISK MANAGEMENT OF NORTHERN BORDER PIPELINE
During September 1998, Northern Border Pipeline executed anticipatory hedge
transactions with an aggregate notional amount of $150 million to fix the
interest rate for a planned issuance of fixed rate debt during 1999. The average
effective interest rate on the transactions, based on ten-year U.S. Treasury
Notes, is 4.90%. As of September 30, 1998, the estimated fair value which would
be payable to terminate the anticipatory hedge transactions, taking into account
current interest rates, was approximately $5 million.
PROJECT COST CONTAINMENT MECHANISM
In connection with the rate case filed with the FERC in November 1995,
Northern Border Pipeline reached a settlement accord with shippers holding
approximately 90% of the aggregate contracted firm capacity as of October 15,
1996 and filed a stipulation to settle that rate case. The stipulation was
approved by the FERC in August 1997. As agreed to in the stipulation, after
completion of construction of the Chicago Project in December 1998, Northern
Border Pipeline implemented a new depreciation schedule with an extended
depreciable life, a $31 million
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settlement adjustment mechanism that effectively reduces the allowed return on
rate base and the project cost containment mechanism. The purpose of the project
cost containment mechanism was to limit Northern Border Pipeline's ability to
include cost overruns in rate base and to provide incentives to Northern Border
Pipeline for cost underruns. The stipulation required the budgeted cost for the
Chicago project, which had been initially filed with the FERC for approximately
$839 million, to be adjusted for the effects of inflation and for costs
attributable to changes in project scope, as defined by the stipulation.
In the determination of the project cost containment mechanism, the actual
cost of the project is compared to the budgeted cost. If there is a cost overrun
of $6 million or less, the shippers will bear the actual cost of the project
through its inclusion in Northern Border Pipeline's rate base. If there is a
cost savings of $6 million or less, the actual cost will be included in the rate
base. If there is a cost overrun or cost savings of more than $6 million but
less than 5% of the budgeted cost, that amount will be allocated 50% to Northern
Border Pipeline and 50% to its shippers (50% of the difference between 5% of the
budgeted cost and $6 million will be included in Northern Border Pipeline's rate
base and 50% will be excluded). All cost overruns exceeding 5% of the budgeted
cost are excluded from the rate base.
The budgeted cost of the Chicago project, as adjusted for the effects of
inflation and project scope changes, has been estimated as of the project's
in-service date to be $889 million. Northern Border Pipeline's notification to
the FERC and its shippers in late December 1998 reflected the conclusion that,
based on the information as of that date, once the budgeted cost has been
established, there would be no adjustment to rate base related to the project
cost containment mechanism. Northern Border Pipeline is obligated by the
stipulation to update its calculation of the project cost containment mechanism
six months after the project's in-service date. The stipulation requires the
calculation of the project cost containment mechanism to be reviewed by an
independent national accounting firm. Several parties to the stipulation advised
the FERC that they may have questions and desire further information about the
report, and may possibly wish to test it or the final report and its conclusions
at an appropriate proceeding in the future. The parties also stated that if it
is determined that Northern Border Pipeline is not permitted to include some
claimed costs for the Chicago project in its rate base, they reserve their
rights to seek refunds, with interest, of any overcollections. Although TC
PipeLines believes the initial computation has been completed pursuant to the
terms of the Stipulation, it is unable to make a definitive determination at
this time whether any adjustments will be required. Should subsequent
developments cause costs not to be recovered pursuant to the project cost
containment mechanism, a non-cash charge to write down transmission plant may
result and such charge could be material to the operating results of TC
PipeLines.
RECENT DEVELOPMENTS
On December 9, 1998, Northern Border Pipeline issued a capital call to its
general partners in the aggregate amount of $26 million. During December 1998,
each of the general partners of Northern Border Pipeline made its full pro rata
contribution of capital pursuant to this call. In addition, on December 22,
1998, the Chicago project went into service.
YEAR 2000
NORTHERN BORDER PIPELINE
Northern Border Pipeline, similar to most businesses, relies heavily on
information systems technology to operate in an efficient and effective manner.
Much of this technology takes the form of computers and associated hardware for
data processing and analysis, but, in addition, a great deal of information
processing technology is embedded in microelectronic devices. The Year 2000
problem results from the use in computer
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hardware and software of two digits rather than four digits to define the
applicable year. As a result, computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. If not corrected, many computer applications could fail or create
erroneous results. The effects of the Year 2000 problem are compounded because
of the interdependence of computer and telecommunication systems in the United
States and throughout the world. This interdependence is true for Northern
Border Pipeline and its respective suppliers and customers.
Northern Border Pipeline has developed a plan, which will be modified as
events warrant, to address Year 2000 problems. This plan is designed to take
reasonable steps to prevent mission-critical functions from being impaired due
to the Year 2000 problem. "Mission-critical" functions are those critical
functions whose loss would cause an immediate stoppage of or significant
impairment to major business areas. A major business area is one of material
importance to Northern Border Pipeline's business. Northern Border Pipeline is
committed to allocating the resources necessary to implement this plan. A core
team of individuals has been established to implement and complete the plan. The
plan includes developing a comprehensive component inventory of computer
hardware, software, embedded chips and third-party interfaces; assessing the
risk of non-compliance of each component; identifying the impact of any
component failure; assessing Year 2000 compliance of each component; identifying
and implementing solutions for non-compliance of components; testing of
solutions implemented; and developing contingency plans for critical components
and systems. As of February 1999, computer software, hardware, embedded chips,
and third-party interfaces have been identified, inventoried, and assessed.
Where necessary, remediation, replacement, or adequate work-arounds have been
identified and implemented or are in the process of being implemented. Testing
of computer hardware, software, and embedded systems is ongoing and is expected
to be substantially completed by the end of the first quarter of 1999.
Northern Border Pipeline's plan recognizes that the computer,
telecommunications and other systems of outside entities have the potential for
major, mission-critical, adverse effects on the conduct of Northern Border
Pipeline's business. Northern Border Pipeline does not have control of these
outside systems. However, its plan includes an ongoing process of identifying
and contacting outside entities whose systems have or may have a substantial
effect on Northern Border Pipeline's ability to continue to conduct the
mission-critical aspects of its businesses without disruption from Year 2000
problems. The plan requires Northern Border Pipeline to attempt to inventory and
assess the extent to which these outside systems may not be Year 2000
compatible. Northern Border Pipeline's Year 2000 team will attempt reasonably to
coordinate with these outside entities in an ongoing effort to obtain assurances
that these outside systems will be Year 2000 compatible well before January 1,
2000.
A listing of critical outside entities has been developed which includes
shippers, electrical suppliers, and interconnecting pipelines. Currently,
Northern Border Pipeline's Year 2000 team is in the process of contacting these
entities to determine their Year 2000 readiness and the extent to which joint
testing or mutual contingency planning is required. All outside entities
contacted have Year 2000 readiness programs underway and they expect to be Year
2000 ready before the end of the year. The assessment of the Year 2000 readiness
of outside entities is an important factor in the internal contingency planning
process.
The processes of inventorying, assessing, analyzing, remediation,
replacement of adequate workarounds, testing, and developing contingency plans
for mission-critical functions in anticipation of the Year 2000 are necessarily
iterative processes. That is, the steps are repeated as Northern
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Border Pipeline's Year 2000 team learns more about the Year 2000 problem and its
effects on internal systems and on outside systems, and about the effects that
embedded chips may have on Northern Border Pipeline's systems and outside
systems. As the steps are repeated, it is likely that new problems will be
identified and addressed. While TC PipeLines expects Northern Border Pipeline's
Year 2000 remediation to be completed by the end of second quarter 1999, TC
PipeLines anticipates that Northern Border Pipeline will continue with these
processes through January 1, 2000 and, if necessary based on experience, into
the Year 2000 in order to assess and remediate problems that reasonably can be
identified only after the start of the new century.
As part of the implementation of its plan, Northern Border Pipeline's Year
2000 team has developed a contingency plan to minimize the consequences of
potential problems that have not been identified or that cannot be remediated
before January 1, 2000. The contingency plan concentrates on those areas that
are essential to continuing business operations and/or safety of its personnel
and the public. These areas include, but are not limited to, systems that are
used to operate and control the pipeline system and enable the physical
transportation of natural gas. The contingency plan includes the creation of
teams that will be standing by December 31, 1999, prepared to respond rapidly
and otherwise as necessary to mission-critical Year 2000-related problems as
soon as they become known. The composition of teams that are assigned to deal
with Year 2000 problems will vary according to the mission-critical nature, and
location of the problem. The contingency plan is dynamic and will be continually
revised as potential new problem areas are identified and areas are remediated.
Northern Border Pipeline has not incurred material historical costs
associated with the Year 2000 issues, Further, TC PipeLines anticipates that
Northern Border Pipeline's future costs of implementing the plan will not be
material. Although TC PipeLines believes Northern Border Pipeline's estimates
are reasonable, there can be no assurance, for the reasons stated in the
following paragraph, that the actual costs of implementing the plan will not
differ materially from the estimated costs or that Northern Border Pipeline will
not be adversely affected by Year 2000 issues.
The extent and magnitude of the Year 2000 problem as it may affect Northern
Border Pipeline, both before and for some period after January 1, 2000, are
difficult to predict or quantify for a number of reasons. Among the most
important is the potential complexity of locating embedded microprocessors that
may be in a great variety of hardware used for process or flow control,
environmental, transportation, access, communications and other systems. TC
PipeLines believes that Northern Border Pipeline will be able to identify and
remediate mission-critical systems containing embedded microprocessors or will
have contingency plans to deal with these systems. Other important difficulties
relate to the lack of control over and difficulty inventorying, assessing,
remediating, verifying and testing outside systems; the complexity of evaluating
all software (computer code) internal to Northern Border Pipeline that may not
be Year 2000 compatible; and the potential limited availability of certain
necessary internal or external resources, including but not limited to trained
hardware and software engineers, technicians and other personnel to perform
adequate remediation, verification and testing of internal systems or outside
systems. Year 2000 costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, the impact of tests of
outside systems, and similar events. There can be no assurance for example that
all outside systems will be adequately remediated so that they are Year 2000
ready by January 1, 2000, or by some earlier date, so as not to create a
material disruption to business. If, despite diligent, prudent efforts under the
plan, there are Year 2000-related failures that create substantial disruptions
to Northern Border Pipeline's business, the adverse impact could be material.
Moreover, the estimated costs of pursuing the current course of action do not
take into account the costs, if any, that might be incurred as a result of Year
2000-related
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failures that occur despite implementation of the plan, as it may be modified
over time.
OUR GENERAL PARTNER
TC PipeLines and the general partner are not materially dependent upon
computer systems to conduct their businesses. Accordingly, we do not believe
that the Year 2000 problem will have a material adverse effect on our business,
financial condition or results of operations.
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MARKET OVERVIEW
The supply of Canadian natural gas imported into the United States has
increased from 2.22 trillion cubic feet in 1993 to 2.91 trillion cubic feet in
1997, an increase of 31%. Total United States natural gas demand in the same
period has increased by over 8%. Canadian natural gas has increased its market
share in the United States relative to United States production from 11% in 1993
to over 13% in 1997.
IMPORTS OF CANADIAN NATURAL GAS
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
United States Natural Gas demand (trillion cubic feet)(1)............ 20.28 20.71 21.58 21.97 21.97
Canadian Imports (trillion cubic feet)(2)............................ 2.22 2.53 2.77 2.85 2.91
Canadian Imports Share of United States Market....................... 11.0% 12.2% 12.8% 13.0% 13.2%
</TABLE>
- ------------------------
(1) Energy Information Administration "Natural Gas Monthly", October 1998.
(2) NEB Report: "Natural Gas Exports--By Export Point".
The Northern Border pipeline system has access to extensive natural gas
reserves in the western Canadian sedimentary basin, located in the provinces of
Alberta, British Columbia, and Saskatchewan. As of December 31, 1997, the
western Canadian sedimentary basin had remaining established reserves of natural
gas of 65 trillion cubic feet with a remaining reserves to production ratio of
approximately 11 years at current levels of production. Western Canadian
sedimentary basin production has increased 6% since 1995 and is expected to
continue to grow until at least 2004. As described in the table below,
marketable natural gas production is expected to increase by 22% for the period
1999 to 2004.
WESTERN CANADIAN SEDIMENTARY BASIN MARKETABLE NATURAL GAS PRODUCTION: HISTORICAL
& FORECAST
<TABLE>
<CAPTION>
1995(1) 1996(1) 1997(1) 1998(2) 1999(2) 2000(2) 2001(2) 2002(2)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Production (billion cubic
feet per day)............. 14.6 15.3 15.5 16.1 17.3 17.8 19.3 19.4
Annual Production Growth.... 5% 1% 4% 7% 3% 8% 1%
<CAPTION>
2003(2) 2004(2)
----------- -----------
<S> <C> <C>
Production (billion cubic
feet per day)............. 19.6 19.7
Annual Production Growth.... 1% 1%
</TABLE>
- ------------------------
(1) Canadian Association of Petroleum Producers Statistical Handbook.
(2) Sproule's Productive Capability Test of the conventional gas supply of the
western Canadian sedimentary basin.
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The Northern Border pipeline system currently serves the east north central
region of the United States as well as Montana, North Dakota, South Dakota,
Minnesota and Iowa. The east north central region is defined by the United
States Energy Information Administration as Ohio, Wisconsin, Indiana, Michigan
and Illinois. As a percentage of the total United States natural gas demand the
east north central region has accounted for between 17% and 18% since 1993, and
is expected to grow at 0.9% per year until at least 2003.
One of our strategic objectives is to expand eastward into the United States
northeast markets. The Energy Information Administration defines the northeast
markets as Maine, Massachusetts, Vermont, Rhode Island, New Hampshire,
Connecticut, New York, New Jersey and Pennsylvania. Between 1993 and 1997,
northeast market demand increased by 19% and currently represents 14.4% of
United States demand for natural gas. The northeast market is forecasted to grow
at approximately 4.3% per year until at least 2003.
Set forth below is the historical gas demand for the east north central
region and the northeast markets of the United States.
HISTORICAL NATURAL GAS DEMAND (1)(2)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
East north central region demand (trillion cubic feet)........... 3.58 3.59 3.78 3.96 3.83
East north central region percentage of total
United States demand........................................... 17.6% 17.3% 17.5% 18.0% 17.4%
Northeast markets demand (trillion cubic feet)................... 2.66 2.80 2.99 3.00 3.12
Northeast markets percentage of total United States demand....... 13.1% 13.5% 13.9% 13.7% 14.2%
</TABLE>
- ------------------------
(1) Energy Information Administration "Natural Gas Monthly", various issues.
(2) Regional demand does not include pipeline, lease and plant fuel.
The growth in natural gas demand in the northeast market and east north
central region has been propelled by the electrical generation business,
including cogeneration and independent power plants, and the commercial and
industrial sectors. The growth reflects not only an increase in United States
demand for energy in general, but also the influence of the Clean Air Act and
other environmental legislation and the favorable environmental impact of using
cleaner burning natural gas rather than fuel oil and coal. We believe these
factors will continue to increase the demand for natural gas in the United
States.
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BUSINESS OF TC PIPELINES
We were recently formed to acquire, own and participate in the management
and growth of United States based pipeline assets. We will initially own a 30%
interest in Northern Border Pipeline. Our general partner will manage and
operate our activities.
BUSINESS STRATEGY AND COMPETITIVE STRENGTHS OF TC PIPELINES
Our business strategy is twofold:
1. ACQUIRE UNITED STATES TRANSMISSION ASSETS FROM TRANSCANADA
TransCanada is one of the largest energy services companies in North
America. One of TransCanada's core strengths is the identification, development
and construction of new pipelines. TransCanada has ownership interests in
numerous United States transmission assets. TransCanada views TC PipeLines as
its preferred acquisition and growth vehicle in the United States. We believe
that TransCanada's United States based pipeline assets will provide us with
acquisition opportunities. Furthermore, we believe that opportunities may exist
for us to make attractive acquisitions of other energy assets that are
consistent with our strategy of investing in businesses with relatively stable
cash flows and additional growth opportunities. Our strategy is designed to
complement our existing assets and increase cash distributions to unitholders.
2. BENEFIT FROM THE INCREASED FLOW OF NATURAL GAS FROM WESTERN CANADA TO
GROWING MARKETS IN THE UNITED STATES
The historical growth in natural gas demand in the northeast region of the
United States has resulted from a number of factors including growth in the
electrical generation business and the influence of Clean Air legislation which
mandates the use of cleaner-burning fuels. This growth in natural gas demand is
projected to continue at a rate of approximately 4.3% until at least 2003. At
the same time, the traditional sources of natural gas supply to this region are
characteristically more mature United States basins which are expected to have
higher long-run supply costs relative to the western Canadian sedimentary basin.
As a result, we believe that the abundant natural gas reserves in the western
Canadian sedimentary basin have the opportunity to capture a share of the
growing demand in the northeast region of the United States in the foreseeable
future. TC PipeLines can capitalize on the growth opportunities inherent in the
northeast markets through our participation in further expansions and extensions
of the Northern Border pipeline system, as well as through select acquisitions
of ownership interests in other United States pipeline transmission and related
assets. Through this strategy we intend to generate increasing amounts of cash
from shippers to distribute to our unitholders.
Through our participation in expansions and extensions of the Northern
Border pipeline system, we will increase the amount of gas transported from
western Canada to the United States, create a wider range of end market options
for our shippers and facilitate the flow of natural gas to the growing markets
in the northeast United States. Project 2000 is a proposed Northern Border
Pipeline extension which compliments our business strategy.
We will also focus on acquiring significant ownership positions in
fully-operating United States pipeline transmission and related assets with
minimal development risk, relatively stable cash flows and growth potential.
These acquisitions will primarily be intended to increase the flow of natural
gas from the western Canadian sedimentary basin to the northeastern United
States. Northern Border Pipeline currently provides an interconnecting pathway
between pipeline systems accessing supply in western Canada and pipeline systems
serving the market areas in the northeastern United States. We envision
completing acquisitions that complement the strategic location of Northern
Border Pipeline and facilitate the flow of natural gas to the
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growing markets in the northeastern United States. Our strategy is to create
access to new markets for our shippers by participating in the establishment of
these cross-country routes.
WE BELIEVE WE HAVE VARIOUS STRENGTHS THAT WILL ASSIST IN IMPLEMENTING OUR
STRATEGY.
THESE STRENGTHS INCLUDE:
- PARTIAL OWNERSHIP IN A LARGE AND EFFICIENT PIPELINE SYSTEM WELL-POSITIONED
FOR FUTURE GROWTH. The Northern Border pipeline system links large natural
gas reserves in western Canada with a number of United States interstate
pipeline systems. We believe that the interconnections with other
interstate natural gas transmission systems as well as the cost
competitiveness of its tariff have made the Northern Border pipeline
system an attractive transportation option for shippers. In addition, we
believe that due to its strategic location, Northern Border Pipeline is
well positioned for further growth and provides TC PipeLines with a base
to serve developing natural gas markets in the northeast United States
markets.
- ACCESS TO THE EXPERIENCED MANAGEMENT OF TRANSCANADA. Through our general
partner we will have access to the management of TransCanada, one of the
largest energy services companies in North America and the largest in
Canada. TransCanada has been in the business of designing, constructing
and operating pipeline transmission assets for 40 years, and we expect to
benefit from the services of its management who has substantial experience
in the transmission business, knowledge of United States regulatory
matters, and a demonstrated ability to operate pipeline assets in an
efficient and profitable manner.
- ACCESS TO ACQUISITION OPPORTUNITIES. One significant component of
TransCanada's corporate strategy is to develop markets in the United
States for the consumption of western Canadian natural gas. TransCanada
has developed and expects to continue to develop pipeline assets which
either link western Canadian natural gas supplies directly to United
States markets or complement pipelines which do so. TransCanada views TC
PipeLines as its preferred acquisition and growth vehicle in the United
States, and hence, TransCanada's current and future transmission assets
may provide acquisition opportunities for us. However, TransCanada has no
obligation to offer any assets to us and no assurances can be given that
it will offer us any assets in the future or, if offered, that they will
be offered on terms attractive to us.
- STABLE AND GROWING CASH FLOW FROM OPERATIONS. Pipeline transportation of
natural gas in a regulated environment is a relatively stable business,
well suited to serve as a base for our strategy. For example, as of
December 31, 1998, at least 90% of the Northern Border pipeline system's
capacity is under contract through September 2003 and the weighted average
contract life as of December 31, 1998 was approximately 7.6 years. Our
strategy of growth through the acquisition of ownership interests in
developed, relatively stable cash flow-producing assets is designed to
minimize some of the risks inherent in the identification, development and
construction of new pipelines.
- ACCESS TO CAPITAL. We believe the efficiency of the partnership structure
and access to debt and equity markets enable us to compete successfully
with large corporate buyers to acquire developed natural gas pipeline
transmission assets in the United States.
No assurance can be given that we will be successful in implementing our
business strategy.
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BUSINESS OF NORTHERN BORDER PIPELINE
STRUCTURE
TC PipeLines owns a 30% general partner interest in Northern Border
Pipeline. The remaining 70% general partner interest is currently owned by
Northern Border Partners, a publicly traded limited partnership that is not
affiliated with TC PipeLines.
The four-member Northern Border Pipeline management committee oversees
management of Northern Border Pipeline. TC PipeLines controls 30% of the voting
power of the Northern Border Pipeline management committee and designates one
member. Northern Border Partners controls 70% of the voting power of the
Northern Border Pipeline management committee and designates three members.
Under the Northern Border Pipeline partnership agreement, voting power on the
Northern Border Pipeline management committee is allocated among Northern Border
Partner's three general partners in proportion to their general partner
interests in Northern Border Partners. As a result, the 70% voting power of
Northern Border Partners' representatives on the Northern Border Pipeline
management committee is allocated as follows: 35% to Northern Plains, 22.75% to
Pan Border and 12.25% to Northwest Border. Northern Plains and Pan Border are
subsidiaries of Enron. Northwest Border is a subsidiary of The Williams
Companies. Each of Northern Plains, Pan Border and Northwest Border has the
right to designate one member of the Northern Border Pipeline management
committee.
Enron controls 57.75% of the voting power of the Northern Border Pipeline
management committee and has the right to designate two of the members of this
management committee. The Northern Border pipeline system is operated by
Northern Plains under an operating agreement.
GENERAL
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the FERC. The tariff specifies the calculation of amounts to be
paid by shippers and the general terms and conditions of transportation service
on the Northern Border pipeline system. Northern Border Pipeline generates
revenues from the receipt and delivery of natural gas at points along the
Northern Border pipeline system according to individual transportation contracts
with its shippers.
The tariff, regulated by the FERC, provides an opportunity to recover: (1)
all of the operations and maintenance costs of the pipeline, (2) taxes other
than income taxes, (3) interest, (4) depreciation and amortization, (5) an
allowance for income taxes and (6) a regulated return on equity. Northern Border
Pipeline is generally allowed to collect from its shippers a return on regulated
rate base as well as recover that rate base through depreciation and
amortization. In the absence of additions to the rate base, the amount received
by Northern Border Pipeline from its regulated return on equity decreases as the
rate base is recovered.
Billings for firm transportation agreements are based on contracted volumes
to determine the allocable share of the cost of service and are not dependent
upon the percentage of available capacity actually used.
Northern Border Pipeline does not own the natural gas that it transports and
therefore Northern Border Pipeline does not assume any natural gas commodity
price risk.
THE NOTHERN BORDER PIPELINE SYSTEM
With the recent completion of the Chicago project in December 1998, Northern
Border Pipeline owns a 1,214-mile United States interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border near Port of Morgan,
Montana, to interconnecting pipelines in the upper midwest of the United States.
The Northern Border pipeline system was initially constructed in 1982 and was
expanded and extended in 1991, 1992, and 1998.
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The Northern Border pipeline system has pipeline access to natural gas
reserves in the western Canadian sedimentary basin in the provinces of Alberta,
British Columbia and Saskatchewan in Canada, as well as the Williston Basin in
the United States. The Pipeline System also has access to production of
synthetic gas processed at the Dakota Gasification Plant in North Dakota.
Interconnections with other pipeline systems provide shippers with flexible
access to natural gas markets, both in Chicago and beyond to markets throughout
the United States.
The Pipeline System consists of 822 miles of 42-inch diameter pipe designed
to transport 2,373 million cubic feet per day from the Canadian border to
Ventura, Iowa; 30-inch diameter pipe and 36-inch diameter pipe, each
approximately 147 miles in length, designed to transport 1,300 million cubic
feet per day from Ventura, Iowa to Harper, Iowa; and 226 miles of 36-inch
diameter pipe and 19 miles of 30-inch diameter pipe designed to transport 645
million cubic feet per day from Harper, Iowa to a terminus near Manhattan,
Illinois (Chicago area). Along the pipeline there are fifteen compressor
stations with total rated horsepower of 476,500 and measurement facilities to
support the receipt and delivery of gas at various points. Other facilities
include five field offices and a microwave communication system with fifty-one
tower sites.
At its northern end, the Northern Border pipeline system is connected to
TransCanada's majority-owned Foothills (Sask.) Pipe Lines Ltd. System in Canada.
The Foothills (Sask.) system is connected to the Alberta system of TransCanada
and the pipeline system of the unaffiliated Transgas Limited in Saskatchewan.
The Alberta system gathers and transports a substantial portion of Canadian
natural gas production. The Northern Border pipeline system also connects with
facilities of Williston Basin Interstate Pipeline at Glen Ullin and Buford,
North Dakota, facilities of Amerada Hess Corporation at Watford City, North
Dakota and facilities of Dakota Gasification Company at Hebron, North Dakota in
the northern portion of the system.
INTERCONNECTS
Interconnecting pipeline facilities provide Northern Border Pipeline's
shippers with flexible access to additional markets. The Northern Border
pipeline system interconnects with pipeline facilities of:
- Northern Natural Gas Company, an Enron subsidiary, at Ventura, Iowa as
well as multiple smaller interconnections in South Dakota, Minnesota and
Iowa;
- Natural Gas Pipeline Company of America at Harper, Iowa;
- Mid American Energy Company at Iowa City and Davenport, Iowa;
- Interstate Power Company at Prophetstown, Illinois;
- Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
- Midwestern Gas Transmission Company near Channahon, Illinois;
- ANR Pipeline Company near Manhattan, Illinois; and
- The Peoples Gas Light and Coke Company near Manhattan, Illinois (Chicago
area) at the terminus of the Northern Border pipeline system.
The Ventura, Iowa interconnect with Northern Natural Gas Company functions
as a large market center, where natural gas transported on the Northern Border
pipeline system is sold, traded and received for transport to significant
consuming markets in the Midwest and to interconnecting pipeline facilities
destined for other markets.
The Northern Border pipeline system is operated by Northern Plains under an
operating agreement. Northern Plains employs approximately 190 individuals
located at its headquarters in Omaha, Nebraska and at locations along the
pipeline route. Northern Plains' employees are not represented by any labor
union and are not covered by any collective bargaining agreements.
PROJECT 2000
In October 1998, Northern Border Pipeline applied to the FERC for approval
of its Project
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2000 to expand and extend its Northern Border pipeline system into Indiana by
November 2000. In addition to providing incremental Canadian natural gas to
United States markets, Project 2000 would afford shippers on the extended
pipeline system access to industrial gas consumers in northern Indiana. Project
2000 capital expenditures are estimated at $190 million and, with timely
regulatory approvals, the general partner anticipates construction activities to
begin in late 1999. TC PipeLines' share of capital expenditures is expected to
be approximately $21.0 million payable during 1999 and 2000. Proposed facilities
will include approximately 34.4 miles of 36-inch pipeline and a total net
increase of 53,000 compressor horsepower.
As a result of the proposed expansion, the pipeline will have the ability to
receive 2,433 million cubic feet per day from the Port of Morgan, Montana to
Ventura, Iowa, 1,491 million cubic feet per day from Ventura to Harper, Iowa,
844 million cubic feet per day from Harper to Manhattan, Illinois, and 544
million cubic feet per day on the new extension from Manhattan to North Hayden,
Indiana. Six project shippers have agreed to take transportation service of all
the capacity, subject to Northern Border Pipeline satisfying specific conditions
including receipt of FERC and other regulatory approvals by specific dates.
The proposed pipeline extension will interconnect with Northern Indiana
Public Service Company, a local distribution company at the terminus. Northern
Indiana Public Service has confirmed to Northern Border Pipeline that the
interconnect will be able to receive the required capacity. The Foothills
(Sask.) System has advised Northern Border Pipeline that it intends to file for
the required authorizations to construct and operate any necessary facilities
needed to accommodate increased deliveries by the Foothills (Sask.) System to
Northern Border Pipeline at Port of Morgan.
COMPETITION
Northern Border Pipeline competes with other pipeline companies that
transport natural gas from the western Canadian sedimentary basin or that
transport natural gas to markets in the midwest. Its competitive position is
affected by the availability of Canadian natural gas for export and demand for
natural gas in the United States. Shippers of natural gas from the western
Canadian sedimentary basin have other options to transport Canadian natural gas
to the United States, including transportation on pipelines eastward in Canada
or to markets on the west coast.
The Alliance Pipeline recently received Canadian and United States
regulatory approvals. The sponsors of Alliance have announced their plans for
the Alliance pipeline to be in service by late 2000. If constructed, the
Alliance Pipeline would compete directly with Northern Border Pipeline. The
Alliance Pipeline would transport gas from the western Canadian sedimentary
basin to the midwestern United States.
It is expected that the Alliance Pipeline would provide its shippers with an
option to ship liquids-rich gas. Further deliveries of natural gas by Alliance
without the liquids-rich element would require facilities to extract the natural
gas liquids. We understand that Alliance may build a natural gas liquids
extraction plant near the pipeline's terminus in Chicago.
While there may be a large increase in natural gas moving from the western
Canadian sedimentary basin to Chicago if the Alliance project is completed,
there are several additional projects proposed to transport natural gas from the
Chicago area to growing eastern markets. The proposed projects currently being
pursued by unrelated third parties are targeting markets in eastern Canada and
the northeast United States. None of these proposed projects have received final
regulatory approval.
TransCanada owns and operates a pipeline system which transports natural gas
from the same natural gas reserves in western Canada that supply Northern Border
Pipeline's customers. Shippers of TransCanada compete for the same supplies of
natural gas as shippers of Northern Border Pipeline.
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Natural gas is also produced in the United States and transported by other
competing unaffiliated pipeline systems to the same destinations as the Northern
Border pipeline system.
SHIPPERS
The Northern Border pipeline system serves a number of shippers with diverse
financial and market profiles. Based upon shippers' cost of service obligations,
93% of the firm capacity, is contracted by producers and marketers. The
remaining firm capacity is contracted to local distribution companies (5%) and
interstate pipelines (2%). At present, the termination dates of these contracts
range from October 31, 2001 to December 21, 2013. The weighted average contract
life as of December 31, 1998, based upon annual cost of service obligations, is
approximately 7.6 years with at least 90% of capacity contracted through at
least mid September 2003.
There are four contracts totaling 143 million cubic feet per day, 3.8% of
projected firm capacity, with termination dates of December 31, 2008 or July 31,
2009 that may be terminated by the shippers if the production of synthetic gas
at the Dakota Gasification Plant by Dakota Gasification Company ceases.
Some of our shippers are affiliated with the general partners and
subsidiaries of Northern Border Partners, LP. TransCanada holds 10.8% of the
capacity. Enron Capital & Trade Resources Corp., a subsidiary of Enron, and
TransContinental Gas Pipe Line Corporation, a subsidiary of Williams, hold 6.1%
of the capacity. Together those shippers are responsible for a portion of the
cost of service recovery when the Chicago project became operational.
Northern Border Pipeline's largest shipper, Pan-Alberta Gas U.S., currently
holds, under three transportation contracts, 707 million cubic feet per day or,
26.5% of revenue. Pan-Alberta Gas U.S. currently has one contract for 150
million cubic feet per day that expires October 31, 2001. Its remaining volumes
under the current contracts expire October 31, 2003. An affiliate of Enron
provides guaranties for 300 million cubic feet per day of Pan-Alberta Gas U.S.'s
contractual obligations through October 31, 2001. In addition, Pan-Alberta Gas
U.S.'s remaining capacity is supported by various credit support arrangements,
including a letter of credit, a guaranty from an interstate pipeline company
through October 31, 2001 for 150 million cubic feet per day, an escrow account,
and an upstream capacity transfer agreement.
Order 636, as discussed below under FERC Regulation, has created a secondary
market in existing Northern Border Pipeline capacity. There have been temporary
releases of capacity where the releasing party receives credit against its firm
transportation contract for revenues received as a result of the temporary
release of the contractually committed capacity to third parties. The releasing
party is not relieved of its obligations under its contract. In addition to the
temporary releases, several shippers have permanently released a portion of
their capacity to other shippers who have agreed to comply with the underlying
contractual and regulatory obligations associated with that capacity.
FERC REGULATION
GENERAL
Northern Border Pipeline is subject to extensive regulation by the FERC as a
"natural gas company" under the Natural Gas Act. Under the Natural Gas Act and
the Natural Gas Policy Act, the FERC has jurisdiction over Northern Border
Pipeline with respect to virtually all aspects of its business, including:
- transportation of natural gas;
- rates and charges;
- construction of new facilities;
- extension or abandonment of service and facilities;
- accounts and records;
- depreciation and amortization policies;
- the acquisition and disposition of facilities; and
- the initiation and discontinuation of services.
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Northern Border Pipeline, where required, holds certificates of public
convenience and necessity issued by the FERC covering its facilities, activities
and services. Under Section 8 of the Natural Gas Act, the FERC has the power to
prescribe the accounting treatment for items for regulatory purposes. The
Northern Border Pipeline books and records are periodically audited under
Section 8.
The FERC regulates Northern Border Pipeline's rates and charges for
transportation in interstate commerce. Natural gas companies may not charge
rates exceeding rates judged just and reasonable by the FERC. In addition, the
FERC prohibits natural gas companies from unduly preferring or unreasonably
discriminating against any person with respect to pipeline rates or terms and
conditions of service. Some types of rates may be discounted without further
FERC authorization.
COST OF SERVICE TARIFF
Northern Border Pipeline's firm transportation shippers contract to pay for
an allocable share of the pipeline system's cost of service. During any given
month, all these shippers pay a uniform mileage based charge for the amount of
capacity contracted, calculated under a cost of service tariff. The shippers are
obligated to pay their allocable share of the cost of service regardless of the
amount of natural gas they actually transport. The cost of service tariff is
regulated by the FERC and provides an opportunity to recover all operations and
maintenance costs of the Northern Border pipeline system, taxes other than
income taxes, interest, depreciation and amortization, an allowance for income
taxes and a regulated equity return. Northern Border Pipeline may not charge or
collect more than its cost of service under its tariff on file with the FERC.
The cost of service includes a return on its unrecovered investment or "rate
base," and recovery of that rate base, through depreciation and amortization.
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency between the cost of service
determined for that period according to the FERC tariff and the estimated
billing is accumulated, including carrying charges. This amount is then either
billed to or credited back to the shippers' accounts.
Northern Border Pipeline also provides interruptible transportation service.
Interruptible transportation service is transportation in circumstances when
surplus capacity is available after satisfying firm service requests. The
maximum rate charged to interruptible shippers is calculated from cost of
service estimates on the basis of contracted capacity. Except for any period
when the risk conditions described in the next paragraph are applicable,
Northern Border Pipeline credits all revenue from the interruptible
transportation service to the firm shippers against cost of service amounts
already paid.
Northern Border Pipeline is at risk for the recovery of the annual cost of
service associated with the capacity from the addition of a compressor station
in 1991 and the addition of four compressor stations and the acquisition of the
147-mile, 30-inch diameter pipeline in 1992. See "Business of Northern Border
Pipeline--The Pipeline System". If a portion of that capacity were to become
uncontracted, or the government authorizations to export or import natural gas
from Canada were to lapse, the FERC has stated that Northern Border Pipeline
would not be allowed to recover from the remaining firm shippers on the system
that portion of its cost of service related to those facilities and the
uncontracted capacity associated with these facilities.
As a result of Northern Border Pipeline's rate case filed in November 1995
and the proposed change in the depreciation schedule in conjunction with the
Chicago project, the depreciation rate applied to Northern Border Pipeline's
gross transmission plant was reduced effective June 1, 1996, from 3.6% to 2.7%.
Beginning January 1, 1997, the depreciation rate was reduced to 2.5% through the
in-service date of the Chicago project, and at that time it was reduced to 2%.
The depreciation rate is scheduled to increase on January 1, 2000 and each year
thereafter until it reaches 3.2% in 2002.
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The November 1995 rate case was filed in compliance with Northern Border
Pipeline's FERC tariff for the determination of its allowed equity rate of
return. In this proceeding, Northern Border Pipeline reached a settlement accord
with shippers holding approximately 90% of the total contracted firm capacity as
of October 15, 1996 and filed for FERC approval of a stipulation and agreement
to settle its rate case. The stipulation was approved by the FERC in August
1997. The stipulation allowed Northern Border Pipeline to retain its 12.75%
equity rate of return through September 30, 1996, and a 12% rate beginning
October 1, 1996. In addition, the depreciation rate applied to Northern Border
Pipeline's gross transmission plant was reduced as described in the previous
paragraph. Under the stipulation, the shippers agreed that for at least seven
years following the completion of the Chicago project, Northern Border Pipeline
may continue to calculate its allowance for income taxes as a part of its cost
of service in the manner it has historically used. In addition, in connection
with the completion of the Chicago project, Northern Border Pipeline has
implemented a new depreciation schedule with an extended depreciable life, a
capital project cost containment mechanism and a $31 million settlement
adjustment mechanism. The settlement adjustment mechanism will effectively
reduce the allowed return on rate base. In October 1997, Northern Border
Pipeline made refunds to its shippers in the amount of $52.6 million, previously
reserved, drawing on an existing $750 million revolving credit facility and
utilizing cash on hand. As a result of this rate refund there was no
distribution to Northern Border Pipeline's partners in the fourth quarter of
1997 and a reduced distribution in the first quarter of 1998.
Northern Border Pipeline's cost of service also includes an incentive rate
of return component related to the original construction of the Pipeline System.
Northern Border Pipeline's rates have reflected the incentive rate of return
component since the pipeline began operations. Northern Border Pipeline will
fully collect the incentive rate of return component from the shippers by the
end of 2001. For 1999, we estimate that the incentive rate of return component
will account for net income of approximately per unit. The impact of the
incentive rate of return component will decrease in 2000 and 2001 until it
reaches zero in 2002. We believe that other components of our cost of service,
such as increases in depreciation, will generally offset these decreases in the
incentive rate of return component. Decreases in the incentive rate of return
component will, however, result in lower reported net income for financial
statement purposes.
OPEN ACCESS REGULATION
Beginning on April 8, 1992, the FERC issued a series of orders, known as,
Order 636, designed to restructure the way that pipelines deliver transportation
services. Among other things, Order 636 required companies to unbundle their
services and offer sales, transportation, storage, gathering and other services
separately; to permanently assign their capacity on upstream pipelines to other
shippers; and to provide all transportation services on a basis that is equal in
quality for all shippers. Order 636 was substantially affirmed by the United
States Court of Appeals for the District of Columbia.
Order 636 adopted "right of first refusal" procedures, imposed by the FERC
as a condition to the pipeline's right to abandon long-term transportation
service, to govern a shipper's continuing rights to transportation services when
its contract with the pipeline expires. The FERC's rules require existing
shippers to match any bid of up to five years in order to renew those contracts.
In a Notice of Proposed Rulemaking issued by the FERC on July 20, 1998, the FERC
has proposed to eliminate the requirement that shippers match any bid up to five
years from the right of first refusal and indicated that it is considering
whether the right of first refusal should be eliminated entirely. The effect of
the Order 636 ROFR procedures and the FERC's proposals to revise those
procedures on Northern Border Pipeline's ability to renew or recontract
long-term service agreements once existing agreements expire cannot be
quantified at this time.
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Beginning in 1996, the FERC issued a series of orders, referred to together
as "Order 587", amending its open access regulations to standardize business
practices and procedures governing transactions between interstate natural gas
pipelines, their customers, and others doing business with the pipelines. These
business standards, developed by the Gas Industry Standards Board ("GISB"),
govern important business practices including as shipper supplied service
nominations, allocation of available capacity, accounting and invoicing of
transportation service, standardized Internet business transactions, and
capacity release. Northern Border Pipeline has implemented changes to its tariff
and internal systems so it can fully comply with the business standards as
required by these orders.
In 1998, the FERC initiated a number of proceedings to further amend its
open access regulations. In a Notice of Proposed Rulemaking issued on July 20,
1998, the FERC proposed changes to its regulations governing short-term
transportation services. Among the proposals considered in the proposed
rulemaking are auctions for short-term capacity, removal of price caps for
secondary market transactions, revisions to reporting requirements, revisions to
tariff provisions governing imbalances, and negotiated services. In a companion
Notice of Inquiry issued the same day, the FERC has requested industry comment
on its pricing policies in the existing long-term market for transportation
services and its pricing policies for new capacity. The FERC also issued a
Notice of Proposed Rulemaking to revise its procedures under which shippers or
others may have complaints considered by the FERC. The impact on Northern Border
Pipeline of any final rules adopted by the Commission as a result of these
proceedings cannot be assessed at this time.
The FERC has also commenced proceedings to revise its pipeline construction
regulations. On September 30, 1998, the FERC issued a Notice of Proposed
Rulemaking to amend its regulations to reflect current FERC policies governing
the issuance of pipeline construction certificates and to codify the filing of
related information. Also on September 30, 1998, the FERC issued a Notice of
Proposed Rulemaking that would give applicants seeking to construct, operate or
abandon natural gas services or facilities the option of using a pre-filing
collaborative process to resolve significant issues among parties and the
pipeline. The proposed rulemaking also proposes that a significant portion of
the environmental review process could be completed as part of the collaborative
process. As part of the proposed rulemaking, the FERC intends to examine
existing landowner notification policies related to pipeline construction and
environmental and pipeline construction issues. The impact on Northern Border
Pipeline of any final rules adopted by the Commission as a result of these
proceedings cannot be assessed at this time.
ENVIRONMENTAL AND SAFETY MATTERS
The operations of Northern Border Pipeline are subject to federal, state and
local laws and regulations relating to safety and the protection of the
environment which include the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, the Compensation and Liability Act of
1980, the Clean Air Act, the Clean Water Act, the Natural Gas Pipeline Safety
Act of 1969, and the Pipeline Safety Act of 1992. The general partner believes
that Northern Border Pipeline's operations and facilities comply in all material
respects with applicable environmental and safety regulations.
Northern Border Pipeline has ongoing environmental and safety audit
programs. As part of the construction of the Chicago project, Northern Border
Pipeline was required to comply with numerous environmental conditions. Northern
Border Pipeline provides environmental training to all construction personnel.
Northern Border Pipeline has obtained the necessary air quality permits for
construction and operation of the new and upgraded compressor stations and is
working with regulatory agencies through the start-up phases of new equipment
and its operations.
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PROPERTIES
Northern Border Pipeline holds the right, title and interest in the Northern
Border pipeline system. Northern Border Pipeline owns all of its material
equipment and personal property and leases office space in Omaha, Nebraska. With
respect to real property, the Northern Border pipeline system falls into two
basic categories: (a) parcels which Northern Border Pipeline owns in fee,
including some of the compressor stations, measurement stations and pipeline
field office sites; and (b) parcels where the interest of Northern Border
Pipeline derives from leases, easements, rights-of-way, permits or licenses from
landowners or governmental authorities permitting the use of the land for the
construction and operation of the Northern Border pipeline system. The right to
construct and operate the pipeline across some property was obtained by Northern
Border Pipeline through exercise of the power of eminent domain. Northern Border
Pipeline continues to have the power of eminent domain in each of the states in
which it operates the Northern Border pipeline system, although it may not have
the power of eminent domain with respect to Native American tribal lands.
Approximately 90 miles of the pipeline is located on fee, allotted and
tribal lands within the exterior boundaries of the Fort Peck Indian Reservation
in Montana. Tribal lands are lands owned in trust by the United States for the
Fort Peck Tribes and allotted lands are lands owned in trust by the United
States for an individual Indian or Indians. In 1980, Northern Border Pipeline
entered into a pipeline right-of-way lease with the Fort Peck Tribal Executive
Board, for and on behalf of the Assiniboine and Sioux Tribes of the Fort Peck
Indian Reservation. This pipeline right-of-way lease, which was approved by the
Department of the Interior in 1981, granted to Northern Border Pipeline the
right and privilege to construct and operate its pipeline on some tribal lands,
for a term of 15 years, renewable for an additional 15 year term at the option
of Northern Border Pipeline without additional rental. Northern Border Pipeline
notified the Bureau of Indian Affairs in March 1996 that it was exercising its
option to renew the pipeline right-of-way lease for an additional 15 year term.
Northern Border Pipeline continues to operate on this portion of the pipeline
located on tribal lands in accordance with its renewal rights.
In conjunction with obtaining a pipeline right-of-way lease across tribal
lands located within the exterior boundaries of the Fort Peck Indian
Reservation, Northern Border Pipeline also obtained a right-of-way across
allotted lands located within the reservation boundaries. This right-of-way,
granted by the Bureau of Indian Affairs on March 25, 1981, for and on behalf of
individual Indian owners, expired on March 31, 1996. Before the termination
date, Northern Border Pipeline undertook efforts to obtain voluntary consents
from individual Indian owners for a new right-of-way, and Northern Border
Pipeline filed applications with the Bureau of Indian Affairs for new
right-of-way grants across those tracts of allotted lands where a sufficient
number of consents from the Indian owners had been obtained. Also, a
condemnation action was filed in Federal Court in the District of Montana
concerning those remaining tracts of allotted land for which a majority of
consents were not timely received. An order in this proceeding was issued by the
Federal Court granting Northern Border Pipeline continued access and possession
during the pendency of the condemnation action on the tracts in question. A
stipulation has been entered into involving all but one tract involved in the
condemnation action in which the parties have agreed that the Court may enter an
order assessing compensation in the amount established in an agreed upon
appraisal. The condemnation of the one tract where a stipulation was not reached
has been set for trial in order to determine the value of the interest being
condemned. Amounts ordered by the Court as compensation should be included in
Northern Border Pipeline's cost of service. To date, the Bureau of Indian
Affairs has not issued a formal right-of-way grant for those tracts for which
sufficient landowners consents were obtained. It is anticipated that the
issuance of this grant will take place in conjunction with the resolution of the
condemnation action.
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LITIGATION
In addition to the condemnation actions and matters related to the FERC
regulation, various legal actions that have arisen in the ordinary course of
business are pending with respect to Northern Border Pipeline. In the general
partner's opinion, none of these proceedings would reasonably be expected to
have a material adverse impact on Northern Border Pipeline's results of
operations or financial position. See "Business of Northern Border
Pipeline--Properties".
TC PipeLines, exclusive of its interest in Northern Border Pipeline, is not
currently a party to any legal proceedings that, individually or combined, would
reasonably be expected to have a material adverse impact on TC PipeLines'
results of operations or financial position.
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TRANSCANADA PIPELINES LIMITED
TransCanada has extensive operations in four principal lines of business:
energy transmission, energy marketing, energy processing and international
energy services.
TransCanada is the largest carrier of natural gas in North America by volume
and operates the longest and most extensive pipeline network in Canada. As of
December 31, 1998, it transported approximately 80% of all Canadian natural gas
production, which represented 18% of all North American natural gas production.
Through the Canadian mainline and the Alberta system, TransCanada owns and
operates natural gas transmission systems with approximately 22,800 miles of
pipeline. TransCanada extends its reach in North America through various
ownership interests in approximately 6,840 miles of natural gas and crude oil
pipelines.
On the basis of market capitalization, TransCanada is one of the largest
energy services companies in North America. For the year ended December 31,
1998, TransCanada had revenues of Cdn.$17 billion and net income from continuing
operations of Cdn.$426 million. As of December 31, 1998, TransCanada had assets
of Cdn.$26 billion. TransCanada's common shares trade primarily on the Toronto,
Montreal and the New York stock exchanges under the symbol "TRP."
ENERGY TRANSMISSION
CANADIAN MAINLINE
TransCanada owns and operates a 9,175-mile natural gas transmission system
in Canada (the "Canadian mainline"). The Canadian mainline is a high pressure
pipeline which transports natural gas from western Canada to large, diverse
markets in eastern Canada and in the northeastern and midwestern United States.
Beginning at the Alberta-Saskatchewan border, the Canadian mainline crosses the
provinces of Saskatchewan, Manitoba and Ontario and ends at the Quebec-Vermont
border. The Canadian mainline also connects with other pipelines that deliver
natural gas to Canada and the United States.
ALBERTA SYSTEM
TransCanada owns and operates the Alberta system, which collects and
transports natural gas for use in Alberta and for delivery to connecting
pipelines (including the Canadian mainline) at the Alberta border for delivery
to eastern Canada and export to the United States.
NORTH AMERICAN PIPELINE INVESTMENTS
TransCanada has ownership interests in other North American pipeline
systems. These interests include:
- a 50% interest in the Great Lakes System beginning at the Canada-United
States border near Emerson, Manitoba and extending through the United
States to Sarnia, Ontario;
- a 35% interest in the Iroquois System beginning at the Canada-United
States border near Iroquois, Ontario, extending through the states of New
York and Connecticut and ending in Long Island, New York;
- a 50% interest in Tuscarora Pipeline extending from Malin, Oregon to Reno,
Nevada;
- a 21.4% interest in the Portland System, extending from the Canada-United
States border near Pittsburg, New Hampshire and ending near Dracut,
Massachusetts;
- a 50% interest in Trans Quebec & Maritimes Pipeline extending from
Montreal to Quebec City, in the province of Quebec;
- a 69.5% interest in the Foothills (Sask.) System beginning at the Alberta-
Saskatchewan border near Empress, Alberta and extending to the Northern
Border pipeline system;
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- a 74.5% interest in the Foothills (Alta.) System located within the
province of Alberta and connecting with the Foothills (Sask.) and the
Foothills (South B.C.) Systems;
- a 74.5% interest in the Foothills (South B.C.) System extending from the
Alberta-British Columbia border to the British Columbia-Idaho border;
- a 100% interest in the Alberta Natural Gas Pipeline System extending from
Alberta's western border through British Columbia to the United States
border; and
- a 50% interest in Express Pipeline, a crude oil pipeline extending from
Hardisty, Alberta and ending near Wood River, Illinois.
As discussed under "Business of the Partnership--Business Strategy and
Competitive Strengths of the Partnership", TransCanada's various United States
pipeline assets may provide opportunities for our growth through acquisitions.
OTHER BUSINESSES
TransCanada has a substantial energy commodity marketing business in North
America. Its diversified energy marketing business includes the marketing of
natural gas, natural gas liquids, crude oil and refined products. TransCanada
markets these energy commodities in both Canada and the United States and
provides a range of supply, storage and transportation services to its
customers.
TransCanada's energy processing operations consist of the processing of
hydrocarbons into other forms of energy and products in Canada and the United
States. The processing assets include natural gas gathering and processing
facilities and extraction plants, specialty chemicals operations and independent
power plants, including a 70.1% interest in the Ocean State Power generation
plant.
TransCanada also invests in energy transmission, processing and power
generation operations and investigates and develops energy services businesses
outside of Canada and the United States.
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MANAGEMENT
TC PIPELINES MANAGEMENT
The general partner will manage and operate the activities of TC PipeLines
under the partnership agreement. The unitholders will not directly or indirectly
participate in the management or operation of TC PipeLines or have actual or
apparent authority to enter into contracts on behalf of, or to otherwise bind,
TC PipeLines. Notwithstanding any limitation on its obligations or duties, the
general partner will be liable, as general partner of TC PipeLines, for all
debts of TC PipeLines, to the extent not paid, except to the extent that
indebtedness or other obligations incurred by TC PipeLines are made specifically
non-recourse to the general partner. Whenever possible, the general partner
intends to make any indebtedness or other obligations non-recourse to the
general partner.
At least two of the members of the board of directors of the general partner
who are neither officers or employees of the general partner nor directors,
officers or employees of any affiliate of the general partner (and have not been
for the past five years) will serve on the conflicts committee. The conflicts
committee will have the authority to review specific matters as to which the
board of directors believes there may be a conflict of interest in order to
determine if the resolution of the conflict proposed by the general partner is
fair and reasonable to TC PipeLines. Any matters approved by the conflicts
committee will be conclusively judged to be fair and reasonable to TC PipeLines,
approved by all partners of TC PipeLines and not a breach by the general partner
or its board of directors of any duties they may owe TC PipeLines or the
unitholders. See "Conflicts of Interest and Fiduciary
Responsibilities--Fiduciary and Other Duties". In addition, the members of the
conflicts committee will also constitute an audit committee which will review
the external financial reporting of TC PipeLines, recommend engagement of TC
PipeLines' independent public accountants and review TC PipeLines' procedures
for internal auditing and the adequacy of its internal accounting controls. The
members of the conflicts committee will also serve on the compensation
committee, which will oversee compensation decisions for the officers of the
general partner as well as the compensation plans described below.
As is commonly the case with publicly traded limited partnerships, TC
PipeLines will not directly employ any of the persons responsible for managing
or operating TC PipeLines. In general, the current TransCanada personnel
involved in managing TransCanada's interest in Northern Border Pipeline and
other United States pipeline investments are expected to manage and operate the
TC PipeLines' business as officers and employees of the general partner and its
affiliates.
Some officers of the general partner may spend a substantial amount of time
managing the business and affairs of TransCanada and its other affiliates and
may face a conflict regarding the allocation of their time between TC PipeLines
and TransCanada's other business interests. The general partner intends to cause
its officers to devote as much time to the management of TC PipeLines as is
necessary for the proper conduct of its business and affairs.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and member of the board of directors of the
general partner. Executive officers and directors are elected for one-year
terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
- ---------------------------------------------------- --------- ----------------------------------------------------
<S> <C> <C>
George W. Watson.................................... 51 Chairman
John W. Carruthers.................................. 45 Director, President, Chief Executive Officer
Paul F. MacGregor................................... 42 Vice President, Business Development
Bruce A. Westell.................................... 52 Vice President and Treasurer
Gary G. Penrose..................................... 56 Vice President, Taxation
Rhondda E.S. Grant.................................. 41 Corporate Secretary
Stephen J.J. Letwin................................. 43 Director, Chief Financial Officer
Karyn A. Brooks..................................... 45 Vice President
</TABLE>
GEORGE W. WATSON has been Chief
Executive Officer of TransCanada since 1994 and President since 1993. From 1990
to 1993, Mr. Watson was TransCanada's Chief Financial Officer, and, in 1993,
became a member of TransCanada's board of directors. Mr. Watson is a member of
the boards of several of TransCanada's subsidiaries and affiliates as well as
the Toronto-Dominion Bank, a publicly traded Canadian company which is not
affiliated with TransCanada. Mr. Watson holds an MBA, in finance and marketing,
and a BSc in electrical engineering, both from Queen's University. He also
completed the Advanced Management Program at Harvard University in 1988. Mr.
Watson was recently elected Vice-Chair of the Interstate Natural Gas Association
of America.
JOHN W. CARRUTHERS has been Vice-President of Business Development for
TransCanada's energy transmission business unit since July 1998 and, from 1997
to July 1998, he was Vice-President of Strategic Development of that business
unit. Mr. Carruthers was Vice-President, Business Development of TransCanada's
energy management group in 1996 and General Manager, international business
development in 1995. From 1992 to 1995, Mr. Carruthers was Amoco Canada's
Manager of Finance & Administration. Mr. Carruthers is Chairman of the Board of
Express Pipeline and has been TransCanada's, and is expected to be the
Partnership's, representative on the Northern Border Pipeline Management
Committee. Mr. Carruthers is also a member of the Management Committees of
several of TransCanada's North American pipeline investments including the
Iroquois System, the Trans Quebec and Maritimes System and the Portland System.
Mr. Carruthers holds a BComm from the University of Calgary.
PAUL F. MACGREGOR has been Vice-President, North American pipeline
investments for TransCanada's energy transmission business unit since July 1998.
Prior to that time and since 1997, Mr. MacGregor has been a Vice-President of
Alberta Natural Gas Company Ltd, a subsidiary of TransCanada. In 1996, Mr.
MacGregor was Director of Field Operations for TransCanada. From 1993 to 1995,
Mr. MacGregor was Regional Manager, Field Operations for TransCanada in North
Bay, Ontario. Mr. MacGregor has been with TransCanada since 1981 holding various
positions in the Facilities Planning and Evaluations, Finance and Operations
groups. Mr. MacGregor holds an MBA, with a major in accounting, from McMaster
University, and a BSc in civil engineering from the University of Waterloo.
BRUCE A. WESTELL has been Vice-President and Treasurer of TransCanada since
February 1997 and Treasurer since August 1990. Mr. Westell holds an MBA from the
University of Western Ontario and a BMath from the University of Waterloo.
GARY G. PENROSE has been Vice-President, Taxation of TransCanada since
February 1997.
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<PAGE>
Prior thereto he was General Manager, Taxation. Mr. Penrose has been with
TransCanada since 1972 and for the past 20 years has been a member of the
Taxation Group. Mr. Penrose is a Chartered Accountant and holds a BA from York
University.
RHONDDA E.S. GRANT has acted as Corporate Secretary and Associate General
Counsel, Corporate of TransCanada since July 1998. From 1994 to 1998, Ms. Grant
was Corporate Secretary and Associate General Counsel of NOVA Corporation. From
1989 to 1995, Ms. Grant was Senior Corporate Counsel at NOVA Corporation. Ms.
Grant holds a Bachelor of Laws and a BA (Honours) from the University of British
Columbia.
STEPHEN J.J. LETWIN has been a Senior Vice-President and the Chief Financial
Officer of TransCanada since March 1998. From 1996, when he joined TransCanada,
to 1998, Mr. Letwin was President of TransCanada Energy USA Inc., an energy
processing and marketing company. From 1992 to 1995, Mr. Letwin was Senior
Vice-President and Chief Financial Officer of Numac Energy Inc. (an oil and gas
company). Mr. Letwin holds a BSc (Honours) from McMaster University and obtained
an MBA (Finance) from Windsor University and he attended the Executive Program
at Queen's University. In addition, Mr. Letwin is a Certified General
Accountant.
KARYN A. BROOKS has been Vice President and Controller of TransCanada since
February 1997. Prior to February 1997, Ms. Brooks was Director of Corporate
Accounting and Budgets. Prior to January 1995, she was Manager, Financial
Accounting at TransCanada. Ms. Brooks is a Chartered Accountant and holds a
Bachelor of Commerce (Honours) from Queens University.
Shortly after completion of the Transactions, the general partner will add
two directors who have not been for five years and are not currently owners,
officers, employees of the general partner nor officers, directors or employees,
of any affiliate of the general partner. These two additional directors will be
appointed to the conflicts committee, audit committee and compensation
committee.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER AND ITS AFFILIATES
The general partner will not receive any management fee or other
compensation in connection with its management of TC PipeLines. The general
partner and its affiliates, including TransCanada, performing services for TC
PipeLines will be reimbursed for all expenses incurred on behalf of TC
PipeLines. These expenses include the costs of employee, officer and director
compensation and benefits properly allocable to TC PipeLines, and all other
expenses necessary or appropriate to the conduct of the business of, and
allocable to, TC PipeLines. The partner-
ship agreement provides that the general partner will determine the expenses
that are allocable to TC PipeLines in any reasonable manner determined by the
general partner in its sole discretion.
EXECUTIVE COMPENSATION
TC PipeLines and the general partner were formed in December 1998.
Accordingly, the general partner paid no compensation to its directors and
officers with respect to the 1998 fiscal year. No obligations accrued in respect
of management incentive or retirement benefits for the directors and officers
with respect to the 1998 fiscal year. Officers and employees of the general
partner may participate in employee benefit plans and arrangements sponsored by
the general partner or its affiliates, including plans which may be established
by the general partner or its affiliates in the future.
Shortly after the consummation of the Transactions, the general partner
expects that the compensation committee will consider and implement incentive
compensation arrangements for key officers of the general partner. The general
partner expects that these arrangements would provide additional compensation to
these key officers under circumstances where the general partner is receiving
distributions pursuant to the Incentive Distribution Rights. See "Cash
Distribution Policy-- Incentive Distribution Rights--Hypothetical
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Annualized Yield". This incentive compensation will be an expense of TC
PipeLines.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to officers or employees of the
general partner who also serve as directors. The general partner anticipates
that each independent director will receive a combination of cash and units for
attending meetings of the board of directors as well as committee meetings. In
addition, each independent director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the board of directors or
committees. Each director will be fully indemnified by TC PipeLines for his
actions associated with being a director to the extent permitted under Delaware
law.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units that will
be issued upon the consummation of the Transactions and held by beneficial
owners of 5% or more of the units, by directors of the general partner and by
all directors and executive officers of the general partner as a group.
TransCanada PipeLines Limited is the sole ultimate stockholder of TC PipeLines
GP, Inc. The address of TransCanada PipeLines Limited is 111 Fifth Avenue S.W.
Calgary, Alberta T2P 3Y6. The address of TC PipeLines GP, Inc. is Four
Greenspoint Plaza, 16945 Northchase Drive Houston, Texas 77060. If the
over-allotment option is exercised, the General Partner will own 1,614,000
subordinated units.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF OF
COMMON COMMON SUBORDINATED SUBORDINATED
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED
- ------------------------------------------------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
TransCanada PipeLines Limited.......................... 3,960,000 100%
TC PipeLines GP, Inc................................... 3,960,000 100
George W. Watson....................................... --
John W. Carruthers..................................... --
Paul F. MacGregor...................................... --
Bruce A. Westell....................................... --
Gary G. Penrose........................................ --
Rhondda E.S. Grant..................................... --
Stephen J. J. Letwin................................... --
Karyn A. Brooks........................................ --
All directors and executive officers as a group (8
persons)............................................. --
</TABLE>
The following table sets forth the beneficial ownership of TransCanada
common shares held by directors and executive officers of the general partner as
of December 17, 1998. The shares beneficially owned include both outstanding
TransCanada common shares and TransCanada common shares such person has the
right to acquire within 60 days after the date of this prospectus by exercise of
outstanding stock options. Shares subject to exercisable stock options include
372,132 for Mr. Watson; 30,222 for Mr. Carruthers; 14,372 for Mr. MacGregor;
70,650 for Mr. Westell; 35,388 for Mr. Penrose; 651 for Ms. Grant; and 71,582
for Mr. Letwin.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED CLASS
- ------------------------------------------------------------------------------------------ ------------ ---------------
<S> <C> <C>
George W. Watson.......................................................................... 411,574 *
John W. Carruthers........................................................................ 30,322 *
Paul F. MacGregor......................................................................... 14,629 *
Bruce A. Westell.......................................................................... 71,823 *
Gary G. Penrose........................................................................... 36,076 *
Rhondda E.S. Grant........................................................................ 651 *
Stephen J.J. Letwin....................................................................... 72,582 *
Karyn A. Brooks........................................................................... 25,280 *
All directors and executive officers as a group (8 persons)............................... 662,937 *
</TABLE>
- ------------------------
* Less than 1%.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between the general partner and TransCanada, its indirect ultimate
sole stockholder, and its other affiliates, on the one hand, and TC PipeLines
and its limited partners, on the other hand. The directors and officers of the
general partner have fiduciary duties to manage the general partner in a manner
beneficial to TransCanada. At the same time, the general partner has a fiduciary
duty to manage TC PipeLines in a manner beneficial to TC PipeLines and the
unitholders.
The partnership agreement contains provisions that allow the general partner
to take into account the interests of parties in addition to TC PipeLines in
resolving conflicts of interest. In effect, these provisions limit the general
partner's fiduciary duty to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions taken that might,
without those limitations, constitute breaches of fiduciary duty. A conflicts
committee of the board of directors of the general partner will, at the request
of the general partner, review conflicts of interest that may arise between the
general partner, TransCanada or its other affiliates, on the one hand, and TC
PipeLines, on the other. See "--Fiduciary and Other Duties Owed to Unitholders
by the General Partner as Prescribed by Law and the Partnership Agreement."
CONFLICTS OF INTEREST COULD ARISE IN THE SITUATIONS DESCRIBED BELOW, AMONG
OTHERS:
ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE FOR
DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE CONVERSION OF SUBORDINATED UNITS
The amount of cash that is available for distribution to unitholders is
affected by decisions of the general partner regarding various matters,
including:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
- issuances of additional units; and
- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by TC PipeLines do not constitute a breach of any
duty owed by the general partner to the unitholders, including borrowings that
have the purpose or effect of:
- enabling the general partner and its affiliates to receive distributions
on any subordinated units held by them or the incentive distribution
rights; or
- hastening the expiration of the subordination period.
The partnership agreement provides that TC PipeLines and the TC PipeLines
intermediate partnership may borrow funds from the general partner and its
affiliates. The general partner and its affiliates may not borrow funds from TC
PipeLines or the TC PipeLines intermediate partnership.
TC PIPELINES WILL NOT HAVE ANY EMPLOYEES AND WILL RELY ON THE EMPLOYEES OF THE
GENERAL PARTNER AND ITS AFFILIATES
We will not have any officers or employees and will rely solely on officers
and employees of the general partner and its affiliates. Affiliates of the
general partner will conduct business and activities of their own in which we
will have no economic interest. If these separate activities are significantly
greater than our activities, there could be material competition between TC
PipeLines, the general partner and affiliates of the general partner for the
time and effort of the officers and employees who provide services to the
general partner. Most of the officers of the general partner who will provide
services to TC PipeLines will not be required to work full time on our affairs.
These officers may
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<PAGE>
devote significant time to the affairs of the general partner's affiliates and
will be compensated by these affiliates for the services rendered to them. There
may be significant conflicts between TC PipeLines and affiliates of the general
partner regarding the availability of these officers of the general partner to
manage TC PipeLines.
TC PIPELINES WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR EXPENSES.
TC PipeLines will reimburse the general partner and its affiliates for costs
incurred in managing and operating TC PipeLines, including costs incurred in
rendering corporate staff and support services to TC PipeLines. The partnership
agreement provides that the general partner will determine the expenses that are
allocable to TC PipeLines in any reasonable manner determined by the general
partner in its sole discretion. See "Management-- Reimbursement of Expenses of
the General Partner and its Affiliates".
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING TC PIPELINES'
OBLIGATIONS
The general partner intends to limit our liability under contractual
arrangements so that the other party has recourse only as to all or particular
assets of TC PipeLines, and not against the general partner or its assets. The
partnership agreement provides that any action taken by the general partner to
limit its liability or that of TC PipeLines is not a breach of the general
partner's fiduciary duties, even if we could have obtained more favorable terms
without the limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH TC PIPELINES
Any agreements between TC PipeLines, on the one hand, and the general
partner and its affiliates, on the other, will not grant to the unitholders,
separate and apart from TC PipeLines, the right to enforce the obligations of
the general partner and those affiliates in favor of TC PipeLines.
CONTRACTS BETWEEN TC PIPELINES, ON THE ONE HAND, AND THE GENERAL PARTNER AND ITS
AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS
The partnership agreement allows the general partner to pay itself or its
affiliates for any services rendered, provided these services are on terms fair
and reasonable to us. The general partner may also enter into additional
contractual arrangements with any of its affiliates on our behalf. Neither the
partnership agreement nor any of the other agreements, contracts and
arrangements between TC PipeLines, on the one hand, and the general partner and
its affiliates, on the other, are or will be the result of arm's-length
negotiations. In addition, the general partner will negotiate the terms of any
acquisitions from TransCanada, subject to the approval of the conflicts
committee consisting of the directors of the general partner unaffiliated with
TransCanada.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms which are fair and reasonable to us,
provided that any transaction is treated as fair and reasonable if:
(1) the transaction is approved by the conflicts committee;
(2) its terms are no less favorable to us than those generally being
provided to or available from unrelated third parties; or
(3) the transaction is fair to us, taking into account the totality of the
relationships between the parties involved.
The general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of the general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. There will not be any obligation of the general partner and its
affiliates to enter into any contracts of this kind.
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<PAGE>
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT
The general partner may exercise its right to call and purchase common units
as provided in the partnership agreement or assign that right to one of its
affiliates or to us. The general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
consequence, a common unitholder may have his common units purchased from him at
an undesirable time or price. For a description of this right, see "The
Partnership Agreement--Limited Call Right".
TC PIPELINES MAY NOT RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS OF
COMMON UNITS
The attorneys, independent public accountants and others who have performed
services for us regarding the offering have been retained by the general
partner, its affiliates and us and may continue to be retained by the general
partner, its affiliates and us after the offering. Attorneys, independent public
accountants and others who will perform services for us in the future will be
selected by the general partner or the conflicts committee and may also perform
services for the general partner and its affiliates. TC PipeLines may retain
separate counsel for TC PipeLines or the holders of common units in the event of
a conflict of interest arising between the general partner and its affiliates,
on the one hand, and TC PipeLines or the holders of common units, on the other,
after the sale of the common units offered in this prospectus, depending on the
nature of that conflict. TC PipeLines does not intend to do so in most cases.
THE GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH TC PIPELINES
The partnership agreement provides that the general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in TC PipeLines. TransCanada and other affiliates
of the general partner will not be prohibited from engaging in other businesses
or activities, including those that might be in direct competition with TC
PipeLines. Accordingly, TransCanada and its affiliates, other than the general
partner, are free to engage in any type of business activity whatsoever,
including those that may be in direct competition with TC PipeLines.
FIDUCIARY AND OTHER DUTIES OWED TO
UNITHOLDERS BY THE GENERAL PARTNER AS
PRESCRIBED BY LAW AND THE
PARTNERSHIP AGREEMENT
The general partner will be accountable to us and the unitholders as a
fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling our assets and affairs. Neither the Delaware Revised
Uniform Limited Partnership Act nor case law defines with particularity the
fiduciary duties owed by a general partner 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.
Fiduciary duties are generally considered to include an obligation to act
with good faith, fairness and loyalty. This duty of loyalty, in the absence of a
provision in a partnership agreement providing otherwise, would generally
prohibit a general partner of a Delaware limited partnership from taking any
action or engaging in any transaction where a conflict of interest is present.
In order to induce the general partner to manage the business of TC PipeLines,
the partnership agreement contains various provisions restricting the fiduciary
duties that might otherwise be owed by the general partner. The partnership
agreement also contains provisions that waive or consent to conduct by the
general partner and its affiliates that might otherwise raise issues as to
compliance with fiduciary duties or applicable law.
In order to become a limited partner of TC PipeLines, a common unitholder is
required to agree to be bound by the provisions of the partnership agreement,
including the provisions discussed above. This is in accordance
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<PAGE>
with the policy of the Delaware Act favoring the principle of freedom of
contract and the enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does not render the
partnership agreement unenforceable against that person.
Whenever a conflict arises between the general partner or its affiliates, on
the one hand, and TC PipeLines or any other partner, on the other, the general
partner shall resolve that conflict. The general partner shall not be in breach
of its obligations under the partnership agreement or its duties to TC PipeLines
or the unitholders if the resolution of the conflict is treated as fair and
reasonable to TC PipeLines. Any resolution is fair and reasonable to TC
PipeLines if that resolution is:
(1) approved by the conflicts committee, although no party is obligated to
seek approval and the general partner may adopt a resolution or course
of action that has not received approval;
(2) on terms no less favorable to TC PipeLines than those generally being
provided to or available from unrelated third parties; or
(3) fair to TC PipeLines, taking into account the totality of the
relationships between the parties involved, including other transactions
that may be particularly favorable or advantageous to TC PipeLines.
In resolving a conflict, the general partner may, unless the resolution is
specifically provided for in the partnership agreement, consider:
- the relative interests of the parties involved in the conflict or affected
by the action;
- any customary or accepted industry practices or historical dealings with a
particular person or entity; and
- generally accepted accounting practices or principles and other factors as
it considers relevant, if applicable.
Thus, unlike the strict duty of a fiduciary who must act solely in the best
interests of his beneficiary, the partnership agreement permits the general
partner to consider the interests of all parties to a conflict of interest,
including the interests of the general partner. Unless the general partner has
acted in bad faith, the action taken by the general partner to resolve a
conflict of interest shall not constitute a breach of the partnership agreement,
any other agreement or any standard of care or duty imposed by the Delaware Act
or other applicable law. The partnership agreement also provides that in
specific circumstances the general partner may act in its sole discretion, in
good faith or consistent with other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on our behalf to recover damages from a third party where the general partner
has refused to institute the action or where an effort to cause the general
partner to do so is not likely to succeed. In addition, the statutory or case
law of some jurisdictions may permit a limited partner to institute legal action
on behalf of himself and all other similarly situated limited partners to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
Any standard of care and duty imposed by the partnership agreement or under
the Delaware Act or any applicable law, rule or regulation will be modified,
waived or limited, to the extent permitted by law, as required to permit the
general partner and its officers and directors to act under the partnership
agreement or any other agreement contemplated within it and to make any
decisions under the authority prescribed in the partnership agreement. This is
permitted as long as the action is reasonably believed by the general partner to
be in, or not inconsistent with, the best interests of TC PipeLines. The general
partner and its officers and directors will not be liable for monetary damages
to TC PipeLines, the limited partners or assignees for errors of judgment or for
any acts or omissions if the general partner and those other persons acted in
good faith.
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In addition, TC PipeLines is required to indemnify the general partner and
its officers, directors, employees, affiliates, partners, members, agents and
trustees, to the fullest extent permitted by law, against liabilities, costs and
expenses incurred by the general partner or these other persons. This
indemnification is required if the general partner or these persons acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of TC PipeLines. Indemnification is required for criminal
proceedings if the general partner or these other persons had no reasonable
cause to believe their conduct was unlawful. See "The Partnership Agreement--
Indemnification". Thus, the general partner could be indemnified for its
negligent acts if it met these requirements concerning good faith and the best
interests of TC PipeLines.
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DESCRIPTION OF THE COMMON UNITS
Upon consummation of the offering, the common units will be registered under
the Exchange Act, and TC PipeLines will be subject to the reporting and certain
other requirements of the Exchange Act. TC PipeLines will be required to file
periodic reports containing financial and other information with the SEC.
Purchasers of common units in the offering and subsequent transferees of
common units (or their brokers, agents or nominees on their behalf) who wish to
become unitholders of record will be required to execute transfer applications,
the form of which is included as Appendix B to this prospectus, before the
purchase or transfer of such common units will be registered on the records of
the transfer agent and before cash distributions or federal income tax
allocations can be made to the purchaser or transferee. TC PipeLines will be
entitled to treat the nominee holder of a common unit as the absolute owner of
the unit, and the beneficial owner's rights will be limited solely to those that
it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The common units and the subordinated units represent limited partner
interests in TC PipeLines, which entitle the holders thereof to participate in
partnership distributions and exercise the rights or privileges available to
limited partners under the TC PipeLines partnership agreement. For a description
of the relative rights and preferences of holders of common units and
subordinated units in and to partnership distributions, together with a
description of the circumstances under which subordinated units may convert into
common units, see "Cash Distribution Policy" and "Description of Subordinated
Units". For a description of the rights and privileges of limited partners under
the TC PipeLines partnership agreement, see "The Partnership Agreement".
TRANSFER AGENT AND REGISTRAR
DUTIES
ChaseMellon Shareholders Services will serve as registrar and transfer agent
for the common units and will receive a fee from TC PipeLines for serving in
such capacities. All fees charged by the transfer agent for transfers of common
units will be borne by TC PipeLines and not by the holders of common units,
except that fees similar to those customarily paid by stockholders for surety
bond premiums to replace lost or stolen certificates, taxes and other
governmental charges, special charges for services requested by a holder of a
common unit and other similar fees or charges will be borne by the affected
holder. There will be no charge to holders for disbursements of TC PipeLines
cash distributions. TC PipeLines will indemnify the transfer agent, its agents
and each of their respective shareholders, directors, officers and employees
against all claims and losses that may arise out of acts performed or omitted in
respect of its activities as such, except for any liability due to any
negligence, gross negligence, bad faith or intentional misconduct of the
indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may at any time resign, by notice to us, or be removed by
us, such resignation or removal to become effective upon the appointment by TC
PipeLines of a successor transfer agent and registrar and its acceptance of such
appointment. If no successor has been appointed and accepted such appointment
within 30 days after notice of such resignation or removal, the general partner
is authorized to act as the transfer agent and registrar until a successor is
appointed.
TRANSFER OF COMMON UNITS
Until a common unit has been transferred on the books of TC PipeLines, TC
PipeLines and the transfer agent, notwithstanding any notice to the contrary,
may treat the record holder of the unit as the absolute owner for all
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<PAGE>
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a transfer application by such investor in connection with such common units.
Any subsequent transfers of a common unit will not be recorded by the transfer
agent or recognized by the Partnership unless the transferee executes and
delivers a transfer application. By executing and delivering a transfer
application (the form of which is set forth as Appendix B to this prospectus and
which is also set forth on the reverse side of the certificates representing the
common units), the transferee of common units
(1) becomes the record holder of such common units and is an assignee until
admitted into TC PipeLines as a substitute limited partner,
(2) automatically requests admission as a substituted limited partner in TC
PipeLines,
(3) agrees to be bound by the terms and conditions of, and executes, the TC
PipeLines partnership agreement,
(4) represents that such transferee has the capacity, power and authority to
enter into the partnership agreement,
(5) grants powers of attorney to officers of the general partner and any
liquidator of TC PipeLines as specified in the partnership agreement and
(6) makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of TC PipeLines in
respect of the transferred common units upon the consent of the general partner
and the recordation of the name of the assignee on the books and records of TC
PipeLines. Such consent may be withheld in the sole discretion of the general
partner.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in TC PipeLines in respect of the transferred
common units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only (a) the right to assign the common
units to a purchaser or other transferee and (b) the right to transfer the right
to seek admission as a substituted limited partner in TC PipeLines with respect
to the transferred common units. Thus, a purchaser or transferee of common units
who does not execute and deliver a transfer application will not receive cash
distributions or federal income tax allocations unless the common units are held
in a nominee or "street name" account and the nominee or broker has executed and
delivered a transfer application with respect to such common units, and may not
receive certain federal income tax information or reports furnished to record
holders of common units. The transferor of common units will have a duty to
provide such transferee with all information that may be necessary to obtain
registration of the transfer of the common units, but a transferee agrees, by
acceptance of the certificate representing common units, that the transferor
will not have a duty to insure the execution of the transfer application by the
transferee and will have no liability or responsibility if such transferee
neglects to or chooses not to execute and forward the transfer application to
the transfer agent. See "The Partnership Agreement--Status as Limited Partner or
Assignee".
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of interests in TC PipeLines,
and the rights of holders of such interests to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units. For any given quarter, any Available Cash will first be
distributed to the general partner and to the holders of common units, and then
will be distributed to the holders of subordinated units depending upon the
amount of Available Cash for the quarter, the amount of arrearages, if any, in
the payment of the minimum quarterly distribution on the common units, and other
factors discussed in "Cash Distribution Policy".
CONVERSION OF SUBORDINATED UNITS
The subordination period will generally extend from the closing of the
offering until the first day of any quarter beginning after June 30, 2004 in
respect of which
(1) distributions of Available Cash from Operating Surplus on the common
units, the subordinated units and the related distributions on the general
partner interests with respect to each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
minimum quarterly distribution on all of the outstanding common units, the
subordinated units and the related distributions on the general partner
interests during such periods,
(2) the Adjusted Operating Surplus generated during each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the minimum quarterly distribution on all of the common
units and the subordinated units that were outstanding on a fully diluted
basis and the related distributions on the general partner interests during
such periods, and
(3) there are no outstanding arrearages in the payment of the minimum
quarterly distribution on the common units.
Prior to the end of the Subordination Period and to the extent the tests for
conversion described below are satisfied, a portion of the subordinated units
may be eligible to convert into common units prior to June 30, 2004.
Subordinated units will convert into common units on a one-for-one basis on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) June 30, 2002 with respect to one-third of
the subordinated units (1,320,000 subordinated units) and (b) June 30, 2003 with
respect to one-third of the subordinated units (1,320,000 subordinated units),
in respect of which each of the financial tests described in clauses (1), (2)
and (3) above have been satisfied; provided, however, that the early conversion
of the second one-third of subordinated units may not occur until at least one
year following the early conversion of the first one-third of subordinated
units.
Upon expiration of the subordination period, all remaining subordinated
units will convert into common units on a one-for-one basis and will thereafter
participate, pro rata, with the other common units in distributions of Available
Cash. In addition, if the general partner is removed as our general partner
under circumstances where Cause does not exist and units held by the general
partner and its affiliates are not voted in favor of such removal,
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis,
(2) any existing arrearages in the payment of the minimum quarterly
distribution on the common units will be extinguished and
(3) the general partner will have the right to convert its general
partner interests (and incentive distribution rights) into common units or
to receive cash in exchange for such interests.
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LIMITED VOTING RIGHTS
Holders of subordinated units will generally vote as a class separate from
the holders of common units and, as in the case of holders of common units, will
have very limited voting rights. During the subordination period, common units
and subordinated units each vote separately as a class on the following matters:
(1) a sale or exchange of all or substantially all of our assets,
(2) the election of a successor general partner,
(3) a dissolution or reconstitution of TC PipeLines,
(4) a merger of TC PipeLines,
(5) issuance of limited partner interests in certain circumstances and
(6) certain amendments to the partnership agreement, including any
amendment that would cause TC PipeLines to be treated as an association
taxable as a corporation.
The subordinated units are not entitled to vote on approval of the
withdrawal of the general partner or the transfer by the general partner of its
general partner interest or incentive distribution rights under certain
circumstances. Removal of the general partner requires a two-thirds vote of all
outstanding units. Under the partnership agreement, the general partner
generally will be permitted to effect amendments to the partnership agreement
that do not materially adversely affect unitholders without the approval of any
unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If TC PipeLines liquidates during the subordination period, in some
circumstances holders of outstanding common units will be entitled to receive
more per unit in liquidating distributions than holders of outstanding
subordinated units. The per unit difference will be dependent upon the amount of
gain or loss recognized by TC PipeLines in liquidating its assets. Following
conversion of the subordinated units into common units, all units will be
treated the same upon liquidation of TC PipeLines.
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THE PARTNERSHIP AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE TC PIPELINES
PARTNERSHIP AGREEMENT. THE FORM OF THE PARTNERSHIP AGREEMENT IS INCLUDED IN THIS
PROSPECTUS AS APPENDIX A. THE FORM OF PARTNERSHIP AGREEMENT FOR THE INTERMEDIATE
PARTNERSHIP IS INCLUDED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH
THIS PROSPECTUS CONSTITUTES A PART. TC PIPELINES WILL PROVIDE PROSPECTIVE
INVESTORS WITH A COPY OF THE FORM OF THE INTERMEDIATE PARTNERSHIP AGREEMENT UPON
REQUEST AT NO CHARGE. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN
TO THE "PARTNERSHIP AGREEMENT" CONSTITUTE REFERENCES TO THE TC PIPELINES
PARTNERSHIP AGREEMENT AND THE INTERMEDIATE PARTNERSHIP AGREEMENT, COLLECTIVELY.
THE FOLLOWING PROVISIONS OF THE PARTNERSHIP AGREEMENT ARE SUMMARIZED
ELSEWHERE IN THIS PROSPECTUS.
- WITH REGARD TO THE TRANSFER OF COMMON UNITS, SEE "DESCRIPTION OF THE
COMMON UNITS--TRANSFER OF COMMON UNITS".
- WITH REGARD TO DISTRIBUTIONS OF AVAILABLE CASH, SEE "CASH DISTRIBUTION
POLICY".
- WITH REGARD TO ALLOCATIONS OF TAXABLE INCOME AND TAXABLE LOSS, SEE "TAX
CONSIDERATIONS".
ORGANIZATION AND DURATION
TC PipeLines was organized in December 1998. TC PipeLines will dissolve on
December 31, 2097, unless sooner dissolved under the terms of the partnership
agreement.
PURPOSE
Our purpose under the partnership agreement is limited to serving as the
limited partner of the intermediate partnership and engaging in any business
activity that may be engaged in by the intermediate partnership or that is
approved by the general partner. The TC PipeLines intermediate partnership
agreement provides that TC PipeLines intermediate partnership may, directly or
indirectly, engage in:
(1) the operations as conducted immediately before the offering, including the
ownership of a general partner interest in Northern Border Pipeline;
(2) any other activity approved by the general partner but only to the extent
that the general partner reasonably determines that, as of the date of the
acquisition or commencement of the activity, the activity generates
"qualifying income" as such term is defined in Section 7704 of the Internal
Revenue Code; or
(3) any activity that enhances the operations of an activity that is described
in (1) or (2) above.
Although the general partner has the ability to cause TC PipeLines and the
TC PipeLines intermediate partnership to engage in activities other than the
transportation of natural gas, the general partner has no current plans to do
so. The general partner is authorized in general to perform all acts deemed
necessary to carry out the purposes and to conduct our business.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to the general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for the qualification, continuance or
dissolution of TC PipeLines. The power of attorney also grants the authority for
the amendment of, and to make consents and waivers under, the partnership
agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to us, see
"The Transactions." Unitholders are not obligated to
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make additional capital contributions, except as described below under
"--Limited Liability".
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business of within the meaning of the Delaware Revised Uniform Limited
Partnership Act and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act will be limited,
subject to possible exceptions, to the amount of capital he is obligated to
contribute to us for his common units plus his share of any undistributed
profits and assets. If it were determined, however, that the right or exercise
of the right by the limited partners as a group:
- to remove or replace the general partner;
- to approve some amendments to the partnership agreement; or
- to take other action under the partnership agreement
constituted "participation in control" of our business for purposes of the
Delaware Act, then the limited partners could be held personally liable for our
obligations under the laws of Delaware to the same extent as the general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner if after the distribution, all liabilities of the limited partnership,
other than liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and knew at the time
of the distribution that the distribution was in violation of the Delaware Act
shall be liable to the limited partnership for the amount of the distribution
for three years. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except the assignee is not
obligated for liabilities unknown to him at the time he became a limited partner
and which could not be ascertained from the partnership agreement.
As a general partner in Northern Border Pipeline, the TC PipeLines
intermediate partnership will be liable for the debts and obligations of
Northern Border Pipeline, although the partnership agreement of Northern Border
Pipeline provides that, unless agreed to by all partners, Northern Border
Pipeline may not enter into any contract or other obligation unless recourse by
the parties is limited to the assets of Northern Border Pipeline.
TC PipeLines intermediate partnership will initially conduct business in at
least seven states. Maintenance of limited liability for TC PipeLines, as the
limited partner in the TC PipeLines intermediate partnership, may require
compliance with legal requirements in the jurisdictions in which TC PipeLines
intermediate partnership conducts business, including qualifying TC PipeLines
intermediate partnership to do business there. Limitations on the liability of
limited partners for the obligations of a limited partner have not been clearly
established in many jurisdictions. If it were determined that we were, by virtue
of our limited partner interest in the intermediate partnership or otherwise,
conducting business in any state without compliance with the applicable limited
partnership statute, or that the right or exercise of the right by the limited
partners as a group to remove or replace the 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 our
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business for purposes of the statutes of any relevant jurisdiction, then the
limited partners could be held personally liable for our obligations under the
law of that jurisdiction to the same extent as the general partner under the
circumstances. We will operate in a manner as the general partner considers
reasonable and necessary or appropriate to preserve the limited liability of the
limited partners.
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities for the
consideration and on the terms and conditions established by the general partner
in its sole discretion without the approval of any limited partners;
During the subordination period, we may not issue an aggregate of more than
9,400,000 additional common units or units on a parity with common units,
without the approval of the holders of a unit majority.
During the subordination period or thereafter, we may issue an unlimited
number of common units as follows:
(1) upon exercise of the underwriters' overallotment option;
(2) upon conversion of subordinated units;
(3) issuance under employee benefit plans;
(4) upon conversion of the general partner interests and incentive distribution
rights as a result of a withdrawal of the general partner;
(5) in the event of a combination or subdivision of common units; or
(6) issuance for an acquisition or capital improvement that would have resulted,
on a pro forma basis, in an increase in Adjusted Operating Surplus on a per
unit basis pro forma for the preceding four-quarter period or within 365
days of, and the net proceeds from the issuance are used to repay debt
incurred with an acquisition or capital improvement.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of Available Cash. In addition, the
issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of the partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of the general partner, may have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, other than upon exercise
of the over-allotment option, the general partner will be required to make
additional capital contributions to the extent necessary to maintain its
combined 2% general partner interest in us and in the intermediate partnership.
Moreover, the general partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to purchase common
units, subordinated units or other equity securities whenever, and on the same
terms that, we issue those securities to persons other than the general partner
and its affiliates, to the extent necessary to maintain their percentage
interest, including their interest represented by common units and subordinated
units, that existed immediately prior to each issuance. The holders of common
units will not have preemptive rights to acquire additional common units or
other partnership interests.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, other than the
amendments discussed below, the general partner is required to seek written
approval of the holders of the number of units required to approve the amendment
or call a meeting of
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the limited partners to consider and vote upon the proposed amendment except as
described below.
PROHIBITED AMENDMENTS. No amendment may be made that would:
(1) enlarge the obligations of any limited partner without its consent, unless
approved by at least a majority of the type or class of limited partner
interests so affected;
(2) enlarge the obligations of, restrict in any way any action by or rights of,
or reduce in any way the amounts distributable, reimbursable or otherwise
payable by TC PipeLines to the general partner or any of its affiliates
without its consent, which may be given or withheld in its sole discretion;
(3) change the term of TC PipeLines;
(4) provide that TC PipeLines is not dissolved upon the expiration of its term
or upon an election to dissolve TC PipeLines by the general partner that is
approved by holders of a unit majority; or
(5) give any person the right to dissolve TC PipeLines other than the general
partner's right to dissolve TC PipeLines with the approval of holders of a
unit majority.
The provision of the partnership agreement preventing the amendments having
the effects described in clauses (1)-(5) above can be amended upon the approval
of the holders of at least 90% of the outstanding units voting together as a
single class.
NO UNITHOLDER APPROVAL. The general partner may generally make amendments
to the partnership agreement without the approval of any limited partner or
assignee to reflect:
(1) a change in the name of TC PipeLines, the location of the principal place of
business of TC PipeLines, the registered agent or the registered office of
TC PipeLines;
(2) the admission, substitution, withdrawal or removal of partners in accordance
with the partnership agreement;
(3) a change that, in the sole discretion of the general partner, is necessary
or advisable to qualify or continue the qualification of TC PipeLines as a
limited partnership or a partnership in which the limited partners have
limited liability under the laws of any state or to ensure that neither TC
PipeLines nor the intermediate partnership will be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal income
tax purposes;
(4) an amendment that is necessary, in the opinion of counsel to TC PipeLines to
prevent TC PipeLines or the general partner or its directors, officers,
agents or trustees, from in any manner being subjected to the provisions of
the Investment Company Act of 1940, the Investment Advisors Act of 1940, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, whether or not substantially similar to plan asset
regulations currently applied or proposed;
(5) subject to the limitations on the issuance of additional common units or
other limited or general partner interests described above, an amendment
that in the discretion of the general partner is necessary or advisable for
the authorization of additional limited or general partner interests;
(6) any amendment expressly permitted in the partnership agreement to be made by
the general partner acting alone;
(7) an amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of the partnership agreement;
(8) any amendment that, in the discretion of the general partner, is necessary
or advisable for the formation by TC PipeLines of, or its investment in, any
corporation, partnership or other entity, other than the intermediate
partnership, as otherwise permitted by the partnership agreement;
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(9) a change in the fiscal year or taxable year of TC PipeLines and related
changes; and
(10) any other amendments substantially similar to any of the matters described
in (1)-(9) above.
In addition, the general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of the general partner:
(1) do not adversely affect the limited partners in any material respect;
(2) are necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute;
(3) are necessary or advisable to facilitate the trading of limited partner
interests or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the limited partner interests are or
will be listed for trading, compliance with any of which the general partner
deems to be in the best interests of TC PipeLines and the limited partners;
(4) are necessary or advisable for any action taken by the general partner
relating to splits or combinations of units under the provisions of the
partnership agreement; or
(5) are required to effect the intent expressed in this prospectus or the intent
of the provisions of the partnership agreement or are otherwise contemplated
by the partnership agreement.
OPINION OF COUNSEL AND UNITHOLDER APPROVAL. The general partner will not be
required to obtain an opinion of counsel that an amendment will not result in a
loss of limited liability to the limited partners or result in TC PipeLines
being treated as an entity for federal income tax purposes if one of the
amendments described above under "-- No Unitholder Approval" should occur. No
other amendments to the partnership agreement will become effective without the
approval of holders of at least 90% of the units unless TC PipeLines obtains an
opinion of counsel to the effect that the amendment will not affect the limited
liability under applicable law of any limited partner in TC PipeLines or cause
TC PipeLines or the TC PipeLines intermediate partnership to be taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not previously taxed as such).
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The general partner is generally prohibited, without the prior approval of
holders of a unit majority, from causing TC PipeLines to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets in
a single transaction or a series of related transactions, including by way of
merger, consolidation or other combination, or approving on behalf of TC
PipeLines the sale, exchange or other disposition of all or substantially all of
the assets of the TC PipeLines intermediate partnership; provided that the
general partner may mortgage, pledge, hypothecate or grant a security interest
in all or substantially all of TC PipeLines' assets without that approval. The
general partner may also sell all or substantially all of TC PipeLines' assets
under a foreclosure or other realization upon the encumbrances above without
that approval. Furthermore, provided that conditions specified in the
partnership agreement are satisfied, the general partner may merge TC PipeLines
or any of its subsidiaries into, or convey some or all of their assets to, a
newly formed entity if the sole purpose of that merger or conveyance
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is to effect a mere change in the legal form of TC PipeLines into another
limited liability entity. The unitholders are not entitled to dissenters' rights
of appraisal under the partnership agreement or applicable Delaware law in the
event of a merger or consolidation, a sale of substantially all of TC PipeLines'
assets or any other transaction or event.
TERMINATION AND DISSOLUTION
We will continue until December 31, 2097, unless terminated sooner under the
partnership agreement. We will dissolve upon:
(1) the election of the general partner to dissolve us, if approved by the
holders of a unit majority;
(2) the sale, exchange or other disposition of all or substantially all of the
assets and properties of TC PipeLines and the intermediate partnership;
(3) the entry of a decree of judicial dissolution of TC PipeLines; or
(4) the withdrawal or removal of the general partner or any other event that
results in its ceasing to be the general partner other than by reason of a
transfer of its general partner interest in accordance with the partnership
agreement or withdrawal or removal following approval and admission of a
successor.
Upon a dissolution under clause (4), the holders of a unit majority may also
elect, within specific time limitations, to reconstitute TC PipeLines and
continue its business on the same terms and conditions described in the
partnership agreement by forming a new limited partnership on terms identical to
those in the partnership agreement and having as general partner an entity
approved by the holders of a unit majority subject to receipt by TC PipeLines of
an opinion of counsel to the effect that:
(1) the action would not result in the loss of limited liability of any limited
partner; and
(2) neither TC PipeLines, the reconstituted limited partnership, nor the
intermediate partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of that right to continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of the general partner that the liquidator deems
necessary or desirable in its good faith judgment, liquidate our assets and
apply the proceeds of the liquidation as provided in "Cash Distribution
Policy--Distributions of Cash Upon Liquidation". The liquidator may defer
liquidation or distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, TC PipeLines GP has agreed not to withdraw
voluntarily as the general partner of TC PipeLines and the intermediate
partnership prior to June 30, 2009, without obtaining the approval of the
holders of at least a majority of the outstanding common units, excluding common
units held by the general partner and its affiliates, and furnishing an opinion
of counsel regarding limited liability and tax matters. On or after June 30,
2009, TC PipeLines GP may withdraw as the general partner without first
obtaining approval from any unitholder by giving 90 days' written notice, and
that withdrawal will not constitute a violation of the partnership agreement.
Notwithstanding the information above, TC PipeLines GP may withdraw without
unitholder approval upon 90 days' notice to the limited partners if at least 50%
of the outstanding common units are held or controlled by one person and its
affiliates other than the general partner and its affiliates. In addition, the
partnership agreement permits the general partner in some instances to sell or
otherwise transfer all of its general partner interests in TC PipeLines without
the approval
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of the unitholders. See "--Transfer of General Partner Interest and Incentive
Distribution Rights".
Upon the withdrawal of the general partner under any circumstances, other
than as a result of a transfer by the general partner of all or a part of its
general partner interests in TC PipeLines, the holders of a unit majority may
select a successor to that withdrawing general partner. If a successor is not
elected, or is elected but an opinion of counsel regarding limited liability and
tax matters cannot be obtained, TC PipeLines will be dissolved, wound up and
liquidated, unless within 180 days after that withdrawal the holders of a unit
majority agree in writing to continue the business of TC PipeLines and to
appoint a successor general partner. See "--Termination and Dissolution".
The general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by the general partner and its affiliates, and TC PipeLines
receives an opinion of counsel regarding limited liability and tax matters. The
ownership of an aggregate of 20.2% of the outstanding units by the general
partner has the practical effect of making the general partner's removal quite
difficult. Any removal of this kind is also subject to the approval of a
successor general partner by the vote of the holders of a unit majority. The
partnership agreement also provides that if the general partner is removed as
general partner of TC PipeLines under circumstances where cause does not exist
and units held by the general partner and its affiliates are not voted in favor
of that removal:
(1) the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly distribution on
the common units will be extinguished; and
(3) the general partner will have the right to convert its general partner
interests and all the incentive distribution rights into common units or to
receive cash in exchange for those interests.
Withdrawal or removal of the general partner as a general partner of TC
PipeLines also constitutes withdrawal or removal, as the case may be, of the
general partner as a general partner of the TC PipeLines intermediate
partnership.
In the event of removal of the general partner under circumstances where
cause exists or withdrawal of the general partner where that withdrawal violates
the partnership agreement, a successor general partner will have the option to
purchase the general partner interests and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where the general partner
withdraws or is removed by the limited partners, the departing general partner
will have the option to require the successor general partner to purchase the
general partner interests of the departing general partner and its incentive
distribution rights for the fair market value. In each case, this fair market
value will be determined by agreement between the departing general partner and
the successor general partner. If no agreement is reached, an independent
investment banking firm or other independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. Or if the departing general partner and the successor general partner
cannot agree upon an expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value. In addition, TC
PipeLines will be required to reimburse the departing general partner for all
amounts due the departing general partner, including, without limitation, all
employee-related liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general partner for the
benefit of TC PipeLines.
If the above-described option is not exercised by either the departing
general
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partner or the successor general partner, the departing general partner's
general partner interests and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests, as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
TRANSFER OF GENERAL PARTNER INTEREST AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a general partner of all, but not less than all, of
its general partner interest in TC PipeLines and the intermediate partnership
to:
(a) an affiliate of the general partner; or
(b) another person as part of the merger or consolidation of the general partner
with or into another person or the transfer by the general partner of all or
substantially all of its assets to another person, the general partner may
not transfer all or any part of its general partner interest in TC PipeLines
and the intermediate partnership to another person prior to June 30, 2009,
without the approval of the holders of at least a majority of the
outstanding common units, excluding common units held by the general partner
and its affiliates. As a condition to this transfer, the transferee must
assume the rights and duties of the general partner to whose interest that
transferee has succeeded, agree to be bound by the provisions of the
partnership agreement, furnish an opinion of counsel regarding limited
liability and tax matters, agree to acquire all of the general partner's
interest in the intermediate partnership and agree to be bound by the
provisions of TC PipeLine's intermediate partnership agreement. The general
partner may at any time, however, to transfer its common units and
subordinated units to one or more persons, other than TC PipeLines, without
unitholder approval. At any time, the stockholder(s) of the general partner
may sell or transfer all or part of their interest in the general partner to
an affiliate without the approval of the unitholders. The general partner or
its affiliates or a later holder may transfer its incentive distribution
rights to an affiliate or another person as part of its merger or
consolidation with or into, or sale of all or substantially all of its
assets to, that person without the prior approval of the unitholders;
provided that, in each case, the transferee agrees to be bound by the
provisions of the partnership agreement. Prior to June 30, 2009, other
transfers of the incentive distribution rights will require the affirmative
vote of holders of a unit majority. On or after June 30, 2009, the incentive
distribution rights will be freely transferable.
TRANSCANADA OWNERSHIP OF GENERAL PARTNER
TransCanada has agreed with the underwriters of the offering that it will
retain beneficial ownership of our general partner until the later to occur of:
(1) the date when TransCanada, or an affiliate, is no longer providing the
revolving credit facility; and
(2) six months after the date when there are no officers of our general partner
who are also directors, officers or employees of TransCanada or its other
affiliates.
CHANGE OF MANAGEMENT PROVISIONS
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove TC PipeLines GP as
general partner of TC PipeLines or otherwise change management. If any person or
group other than the general partner and its affiliates acquires beneficial
ownership of 20% or more of any class of units, that person or group loses
voting rights on all of its units. The partnership agreement also provides that
if the general partner is removed under circumstances where cause does not exist
and units held by the general partner and its
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affiliates are not voted in favor of such removal:
(1) the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly distribution on
the common units will be extinguished; and
(3) the general partner will have the right to convert its general partner
interests and all of its incentive distribution rights into common units or
to receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the general
partner and its affiliates, the general partner will have the right, which it
may assign in whole or in part to any of its affiliates or to TC PipeLines, to
acquire all, but not less than all, of the remaining limited partner interests
of the class held by unaffiliated persons as of a record date to be selected by
the general partner, on at least 10 but not more than 60 days' notice. The
purchase price in the event of this purchase is the greater of:
(1) the highest price paid by the general partner or any of its affiliates for
any limited partner interests of the class purchased within the 90 days
preceding the date on which the general partner first mails notice of its
election to purchase those limited partner interests; and
(2) the Current Market Price as of the date three days before the date that
notice is mailed.
As a result of the general partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased at an undesireable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market. See "Tax
Considerations--Disposition of Common Units."
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or more of
all units, unitholders or assignees who are record holders of units on the
record date will be entitled to notice of, and to vote at, meetings of limited
partners of TC PipeLines and to act upon matters for which approvals may be
solicited. Common units that are owned by an assignee who is a record holder,
but who has not yet been admitted as a limited partner, shall be voted by the
general partner at the written direction of the record holder. Absent direction
of this kind, the common units will not be voted, except that, in the case of
common units held by the general partner on behalf of non-citizen assignees, the
general partner shall distribute the votes on those common units in the same
ratios as the votes of limited partners on other units are cast.
The general partner does not anticipate that any meeting of unitholders will
be called in the foreseeable future. Any action that is required or permitted to
be taken by the unitholders may be taken either at a meeting of the unitholders
or without a meeting if consents in writing describing the action so taken are
signed by holders of the number of units as would be necessary to authorize or
take that action at a meeting. Meetings of the unitholders may be called by the
general partner or by unitholders owning at least 20% of the outstanding units
of the class for which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the outstanding
units of the class or classes for which a meeting has been called represented in
person or by proxy shall constitute a quorum unless any action by the
unitholders requires approval by holders of a greater percentage of the units,
in which case the quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his percentage interest
in TC PipeLines, although additional limited
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partner interests having special voting rights could be issued. See "--Issuance
of Additional Securities". However, if at any time any person or group, other
than the general partner and its affiliates, or a direct transferee of the
general partner or its affiliates, acquires, in the aggregate, beneficial
ownership of 20% or more of any class of units then outstanding, the person or
group will lose voting rights on all of its units and the units may not be voted
on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the
presence of a quorum or for other similar purposes. Common units held in nominee
or street name account will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the partnership agreement, subordinated units will vote
together with common units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under the partnership
agreement will be delivered to the record holder by TC PipeLines or by the
transfer agent.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability", the common units will
be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right to
share in allocations and distributions from TC PipeLines, including liquidating
distributions. The general partner will vote and exercise other powers
attributable to common units owned by an assignee who has not become a
substitute limited partner at the written direction of the assignee. See
"--Meetings; Voting". Transferees who do not execute and deliver a transfer
application will be treated neither as assignees nor as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to record holders of common units. See "Description of the
Common Units--Transfer of Common Units".
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of the general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their Current Market Price. In order to avoid any
cancellation or forfeiture, the general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish information about this
nationality, citizenship or other related status within 30 days after a request
for the information or the general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee who is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions in kind upon
our liquidation.
INDEMNIFICATION
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims damages or similar events:
(1) the general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of a general partner or any departing
general partner;
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(4) any person who is or was a member, partner, officer, director, employee,
agent or trustee of a general partner or any departing general partner or
any affiliate of a general partner or any departing general partner; or
(5) any person who is or was serving at the request of a general partner or any
departing general partner or any affiliate of a general partner or any
departing general partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another person.
Any indemnification under these provisions will be only out of our assets.
The general partner shall not be personally liable for, or have any obligation
to contribute or loan funds or assets to us to enable us to effectuate
indemnification. We are authorized to purchase insurance against liabilities
asserted against and expenses incurred by persons for our activities, regardless
of whether we would have the power to indemnify the person against liabilities
under the partnership agreement.
BOOKS AND REPORTS
The general partner is required to keep appropriate books of our business at
our principal offices. The books will be maintained for both tax and financial
reporting purposes on an accrual basis. For tax and financial reporting
purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit information reasonably required
for tax reporting purposes within 90 days after the close of each calendar year.
This information is expected to be furnished in summary form so that some
complex calculations normally required of partners can be avoided. Our ability
to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT TC PIPELINES BOOKS
AND RECORDS
The partnership agreement provides that a limited partner can, for a purpose
reasonably related to his interest as a limited partner, upon reasonable demand
and at his own expense, have furnished to him:
(1) a current list of the name and last known address of each partner;
(2) a copy of our tax returns;
(3) information as to the amount of cash, and a description and statement of the
agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
(4) copies of the partnership agreement, the certificate of limited partnership
of the partnership, related amendments and powers of attorney under which
they have been executed;
(5) information regarding the status of our business and financial condition;
and
(6) other information regarding our affairs that is just and reasonable.
The general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which the general
partner believes in good faith is not in our best interests or which we are is
required by law or by agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Under the partnership agreement, we have agreed to register for resale under
the
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Securities Act and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to be sold by the
general partner or any of its affiliates if an exemption from the registration
requirements is not otherwise available. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts and
commissions. See "Units Eligible for Future Sale".
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, the general partner will
hold 3,960,000 (or 1,614,000 if the underwriters' over-allotment option is
exercised in full) subordinated units. All of these subordinated units will
convert into common units at the end of the subordination period and some may
convert earlier. The sale of these units could have an adverse impact on the
price of the common units or on any trading market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units owned by an "affiliate" of TC PipeLines may not be resold
publicly except in compliance with the registration requirements of the
Securities Act or under an exemption therefrom under Rule 144 or otherwise. Rule
144 permits securities acquired by an affiliate of the issuer to be sold into
the market in an amount that does not exceed, during any three-month period, the
greater of
(1) 1% of the total number of such securities outstanding or
(2) the average weekly reported trading volume of the common units for
the four calendar weeks prior to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about TC PipeLines. A person who
is not deemed to have been an affiliate of TC PipeLines at any time during
the three months preceding a sale, and who has beneficially owned his or her
common units for at least two years, would be entitled to sell such common
units under Rule 144 without regard to the public information requirements,
volume limitations, manner of sale provisions or notice requirements of Rule
144.
Prior to the end of the subordination period, TC PipeLines may not issue
equity securities of the partnership ranking prior or senior to the common units
or an aggregate of more than 9,400,000 additional common units or an equivalent
amount of securities ranking on a parity with the common units, without the
approval of the holders of a Unit Majority. The 9,400,000 number is subject to
adjustment in the event of a combination or subdivision of common units and
shall exclude common units issued upon exercise of the underwriters'
over-allotment option, upon conversion of subordinated units, upon conversion of
the general partner interest as a result of a withdrawal of the general partner,
pursuant to an employee benefit plan or in connection with certain acquisitions
or capital improvements. The partnership agreement provides that, after the
subordination period, TC PipeLines may issue an unlimited number of limited
partner interests of any type without a vote of the unitholders. The partnership
agreement does not restrict TC PipeLines' ability to issue equity securities
ranking junior to the common units at any time. Any issuance of additional
common units or certain other equity securities would result in a corresponding
decrease in the proportionate ownership interest in TC PipeLines represented by,
and could adversely affect the cash distributions to and market price of, common
units then outstanding. See "The Partnership Agreement--Issuance of Additional
Securities".
Pursuant to the partnership agreement, the general partner and its
affiliates will have the right to cause TC PipeLines to register under the
Securities Act and state laws the offer and sale of any units that they hold.
Subject to the terms and conditions of the partnership agreement, such
registration rights allow the general partner and its affiliates or their
assignees holding any units to require registration of any such units and to
include any such units in a registration by TC PipeLines of other units,
including units offered by TC PipeLines or by any unitholder. Such registration
rights will continue in effect for two years following any withdrawal or removal
of the general partner as a general partner of TC PipeLines. In connection with
any such
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registration, TC PipeLines will indemnify each unitholder participating in such
registration and its officers, directors and controlling persons from and
against any liabilities under the Securities Act or any state securities laws
arising from the registration statement or prospectus. TC PipeLines will bear
all costs and expenses of any such registration. Except as described below, the
general partner and its affiliates may sell their units in private transactions
at any time, subject to compliance with applicable laws.
TC PipeLines, the TC PipeLines intermediate partnership, the general
partner, TransCanada and certain of its affiliates and the officers and
directors of the general partner have agreed with the underwriters not to
dispose of or hedge any of their common units or subordinated units or
securities convertible into or exchangeable for, or that represent the right to
receive, common units or subordinated units or any securities that are senior to
or pari passu with common units during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives of the
underwriters (other than the redemption of the subordinated units in the event
the over-allotment option is exercised).
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NORTHERN BORDER PIPELINE PARTNERSHIP AGREEMENT
ON COMPLETION OF THE OFFERING, THE PRINCIPAL ASSET OF TC PIPELINES WILL
BE A 30% GENERAL PARTNER INTEREST IN NORTHERN BORDER PIPELINE. THE RIGHTS,
BENEFITS, PRIVILEGES AND OBLIGATIONS OF TC PIPELINES INTERMEDIATE PARTNERSHIP AS
A PARTNER IN NORTHERN BORDER PIPELINE ARE GOVERNED BY THE TERMS AND PROVISIONS
OF THE PARTNERSHIP AGREEMENT FOR NORTHERN BORDER PIPELINE. THE FOLLOWING
PARAGRAPHS ARE A SUMMARY OF SOME PROVISIONS OF THE NORTHERN BORDER PIPELINE
PARTNERSHIP AGREEMENT, A COPY OF WHICH IS INCLUDED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
ORGANIZATION AND PARTNERS
Northern Border Pipeline is a general partnership that was formed as of
March 9, 1978 under the Uniform Partnership Act as then in effect in the State
of Texas. On completion of the offering, the general partners of Northern Border
Pipeline will be TC PipeLines, through the TC PipeLines intermediate
partnership, which will own a 30% general partner interest, and Northern Border
Partners through a subsidiary limited partnership, which will own the remaining
70% general partner interest. The address of Northern Border Pipeline is 1111
South 103rd Street, Omaha, Nebraska 68124-1000, and its telephone number is
(402) 398-7700.
PURPOSE
The purpose of Northern Border Pipeline under the Northern Border Pipeline
partnership agreement is limited to the planning, design, financing,
construction, ownership and operation of the Pipeline System, together with all
related properties and facilities, and any extensions, expansions, additions or
other improvements thereto. Unless all of the partners in Northern Border
Pipeline agree otherwise, the purpose clause has the effect of restricting
Northern Border Pipeline from constructing or acquiring additional natural gas
transmission assets, other than those that constitute an expansion, extension,
addition or improvement of the Pipeline System, and from expanding the scope of
its activities beyond the natural gas transmission business.
MANAGEMENT AND VOTING
Except for the day to day management of the affairs of Northern Border
Pipeline and the operation of the Pipeline System, which are the responsibility
of the operator, management of Northern Border Pipeline will be overseen by the
Northern Border Pipeline management committee, composed of one representative of
TC PipeLines and three representatives of Northern Border Partners, one
designated by each general partner of Northern Border Partners. The
representative of TC PipeLines on the Northern Border Pipeline management
committee will receive no fee from TC PipeLines for serving in that capacity
other than reimbursement for expenses of being a representative. Voting power on
the Northern Border Pipeline management committee is based on the percentage
interest of the general partners, so that the representative of TC PipeLines
will control 30% of the total voting power and the representatives of Northern
Border Partners will control 70% of the total voting power. Under the Northern
Border Pipeline partnership agreement, voting power on the Northern Border
Pipeline management committee is allocated in accordance with the relative
interests of the general partners of Northern Border Partners. Accordingly, the
70% voting power of the Northern Border Partner's representatives on the
Northern Border Pipeline management committee is allocated as follows: 35% to
the representative designated by Northern Plains, 22.75% to the representative
designated by Pan Border, and 12.25% to the representative designated by
Northwest Border, an affiliate of Williams. Northern Plains and Pan Border are
subsidiaries of Enron. Enron, through Northern Plains and Pan Border, controls
57.75% of the voting power of the Northern Border Pipeline management committee
and has the right to designate two of its members.
Each member of the Northern Border Pipeline management committee is entitled
to
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vote its percentage of voting power without regard to the decision of the other
members. Thus, except as to any matters requiring unanimity, it is possible that
the Northern Border Pipeline management committee could approve a particular
project by majority vote. This would obligate TC PipeLines with respect to that
project to the full extent of its 30% interest, despite the fact that TC
PipeLines's representative on the Northern Border Pipeline management committee
voted against that project. TC PipeLines representative will generally be
obligated to vote the interest of TC PipeLines in Northern Border Pipeline in a
manner that is in the best interests of TC PipeLines. The TC PipeLines
partnership agreement currently modifies that duty, however, by providing that
the general partner of TC PipeLines or a person designated by it to serve on the
Northern Border Pipeline management committee will not be in breach of the terms
of the TC PipeLines partnership agreement or in breach of a fiduciary duty to TC
PipeLines or the unitholders with respect to the voting of TC PipeLines'
interest on the Northern Border Pipeline management committee if they acted in
good faith and in a manner they reasonably believed to be in, or not
inconsistent with, the best interests of TC PipeLines. See "Conflicts of
Interest and Fiduciary Responsibility--Fiduciary Duties of the general partners
and TC PipeLines policy committee".
Generally, the Northern Border Pipeline management committee will act by
majority vote. However, unanimity will be required with respect to the following
matters:
(1) expansions or extensions of the Northern Border pipeline system
requiring capital expenditures in an amount, currently $19.6 million or
more, requiring certification of those facilities by the FERC,
(2) settlement of cases brought under Section 4 or 5 of the Natural Gas
Act,
(3) some transfers of general partner interests in Northern Border
Pipeline and
(4) any change in, or suspension of, the cash distribution policy of
Northern Border Pipeline.
If, however, all but one of the members of the Northern Border Pipeline
management committee vote in favor of a matter requiring unanimous approval,
other than transfers of general partner interests, any one of the partners
voting in favor of the matter has the right to submit the matter to an
arbitration panel. The arbitration panel will be composed of three independent
natural gas industry experts, one appointed by the members voting in favor of
the matter, one appointed by the dissenting member and a third appointed by the
two experts. The arbitration panel will determine if Northern Border Pipeline
should proceed with the disputed matter, using the best interests of Northern
Border Pipeline as its sole criteria. If the panel concludes that approval of
the matter before it is in the best interests of Northern Border Pipeline, the
matter will be deemed to have received unanimous approval despite the
disapproving vote of the dissenting member. If the matter approved by the
arbitration panel involves a project the cost of which requires FERC
certification, however, the partner represented by the dissenting member will
not be required, but will have the option, to advance funds with respect to that
project. For example, if the representative of TC PipeLines votes against that
an extension of the Northern Border pipeline system requiring FERC
certification, the three representatives of Northern Border Partners vote in
favor of that extension and the arbitration panel concludes that the extension
is in the best interests of Northern Border Pipeline, then Northern Border
Pipeline would be allowed to proceed with the proposed extension. TC PipeLines
would have the right, but would not be obligated, to contribute its proportional
share of the equity contributions to fund that extension. If TC PipeLines
elected not to make the additional contributions, its interest in Northern
Border Pipeline would be diluted, and Northern Border Partners would be required
to fund 100% of the additional contributions, if it elected to go forward on
that basis.
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OPERATOR
The Northern Border Pipeline partnership agreement designates Northern
Plains as the operator of the Pipeline System. Northern Plains' rights and
obligations as operator are provided for in the Northern Border Pipeline
partnership agreement and in a separate operating agreement between Northern
Plains and Northern Border Pipeline. The initial term of the operating agreement
expires in 2007. The operating agreement will continue in effect thereafter on a
year-to-year basis unless terminated by Northern Border Pipeline or Northern
Plains. Substantially all of the services provided by the operator are provided
by employees of Northern Plains who devote their time to the day-to-day
operations of Northern Border Pipeline.
The Northern Border Pipeline partnership agreement states that Northern
Plains may be removed as operator by unanimous vote of the members of the of
Northern Border Pipeline management committee, other than the member appointed
by Northern Plains. If the total number of members on the Northern Border
Pipeline management committee has increased to five or more members Northern
Plains may be removed as operator by the vote of members representing 65% or
more of the total interest in Northern Border Pipeline, in support of a finding
that the operator has, through misfeasance, nonfeasance or gross negligence,
acted in a manner contrary to the best interests of Northern Border Pipeline.
The operator is entitled to reimbursement for all reasonable costs,
including overhead and administrative expenses, incurred by it and its
affiliates in connection with the performance of its responsibilities as
operator. In addition, Northern Border Pipeline has agreed to indemnify the
operator against any claims and liabilities arising out of the good faith
performance by the operator of its responsibilities under the Northern Border
Pipeline partnership agreement, to the extent the operator is acting within the
scope of its authority and in the course of Northern Border Pipeline's business.
CASH DISTRIBUTION POLICY
Because the principal asset of TC PipeLines will be its 30% general partner
interest in Northern Border Pipeline, the ability of TC PipeLines to generate
income and make distributions to the unitholders is dependent upon the receipt
of cash distributions by TC PipeLines from Northern Border Pipeline. In general,
the Northern Border Pipeline partnership agreement provides that distributions
to the partners in Northern Border Pipeline are to be made on a proportionate
basis according to each partner's capital account balance. The amount and timing
of distributions are determined by the Northern Border Pipeline management
committee. Any changes to, or suspension of, the cash distribution policy of
Northern Border Pipeline requires the unanimous approval of the Northern Border
Pipeline management committee, subject to arbitration in the event three of the
four members of the Northern Border Pipeline management committee vote in favor
of the change or suspension. See "Northern Border Pipeline Partnership
Agreement--Management and Voting".
The cash distribution policy of Northern Border Pipeline as currently
approved by the Northern Border Pipeline management committee, by unanimous
vote, provides that distributions are to be made by Northern Border Pipeline
quarterly in an amount equal to the previous quarter's sum, if positive, of:
(1) 100% of net income generated by Northern Border Pipeline during such
quarter, excluding certain noncash items, plus
(2) 100% of the current portion of any allowance for income taxes as
reflected in Northern Border Pipeline's tariff for that quarter, plus
(3) an amount equal to 35% of the sum of deferred tax expense,
depreciation expense, amortization of regulatory assets, or minus, in the
case of amortization of regulatory liabilities, for that quarter, minus
(4) an amount equal to 35% of maintenance capital expenditures for that
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quarter as computed under Northern Border Pipeline's tariff.
If an amount determined by this formula is negative, then the negative
amount is carried forward and subtracted in the calculation for the next
quarter. Decisions by Northern Border Pipeline regarding amounts to be placed in
or released from reserves consistent with the Northern Border Pipeline
partnership agreement will affect the amount of its net book income, and
therefore the amount of cash distributed to TC PipeLines. Cash distributions are
currently made by Northern Border Pipeline on a quarterly basis approximately
one month after the end of the quarter.
Under some circumstances, the application of Northern Border Pipeline's cash
distribution policy could result in a reduced distribution to its partners,
including us, in any particular quarter. For example, in the fourth quarter of
1997 Northern Border Pipeline made no cash distributions to its partners as a
result of a rate refund to shippers. This rate refund resulted from a FERC
mandated retroactive adjustment to Northern Border Pipeline's depreciation
schedule. See "Business of Northern Border Pipeline--FERC Regulation-- Cost of
Service Tariff" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Pro Forma Financial Condition and Results of
Operations of TC PipeLines".
AUDIT AND COMPENSATION COMMITTEE
The Northern Border Pipeline partnership agreement authorizes each
representative on the Northern Border Pipeline management committee other than
Northern Plains, if Northern Plains or its affiliate is the operator, to appoint
one member to serve on a three member Audit and compensation committee. No
member of the committee may also be an officer, director or employee of the
operator, which is currently Northern Plains, or of any affiliate thereof. The
audit and compensation committee is responsible for all matters relating to any
audits of Northern Border Pipeline and review of the compensation of the
operator's senior management and reimbursement of the operator for its costs and
expenses relating to personnel. The audit and compensation committee is
obligated to report to the Northern Border Pipeline management committee on an
annual basis with respect to these matters.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION
The Northern Border Pipeline partnership agreement provides that, if
Northern Border Pipeline has a net profit or a net loss, items of income, gain,
loss and deduction will be allocated to the respective capital accounts of the
partners in accordance with their respective interests in Northern Border
Pipeline, that is based on relative capital account balances. These allocations
are subject to retroactive adjustment resulting from any changes in a partner's
capital account under FERC or other governmental orders or regulations.
TRANSFER OF INTEREST
In general, the general partners in Northern Border Pipeline are not
permitted to transfer their respective general partner interests, or any
indebtedness owed to them by Northern Border Pipeline, without the unanimous
consent of the Northern Border Pipeline management committee. Each general
partner may, however, encumber its interests in the profits and surplus of
Northern Border Pipeline, and any indebtedness, and transfer its interest in
Northern Border Pipeline, or any indebtedness, to a corporation that is an
affiliate of the transferor in connection with a statutory merger with the
corporation or sale of all or substantially all of its assets to the
corporation.
ADDITIONAL CAPITAL REQUIREMENTS
The Northern Border Pipeline partnership agreement provides that the
Northern Border Pipeline management committee may request additional capital
contributions from the general partners of Northern Border Pipeline. Each
general partner has the right, but not the obligation, to contribute its pro
rata portion of
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the total amount of additional contributions requested. If TC PipeLines elected
not to make the additional contribution, its interest in Northern Border
Pipeline would be diluted, and Northern Border Partners would be required to
fund 100% of the additional contribution, if it elected to go forward on that
basis.
CHANGE TO CORPORATE FORM
The Northern Border Pipeline partnership agreement provides that, under some
circumstances, the business and assets of Northern Border Pipeline will be
transferred to a corporation in which each partner would receive shares of stock
sufficient to give it an ownership interest in the corporation that is equal to
its then existing ownership interest in Northern Border Pipeline. The transfer
will occur automatically if it becomes unlawful for Northern Border Pipeline to
carry on its business and Northern Border Pipeline holds an effective
certificate of public convenience and necessity from the FERC at that time. The
general partner believes it is unlikely that circumstances requiring an
automatic transfer will occur. The general partners in Northern Border Pipeline
may also cause a transfer to a corporation upon the approval of partners owning
at least a two-thirds interest of Northern Border Pipeline. Under the terms of
TC PipeLines partnership agreement, however, TC PipeLines's representative on
the Northern Border Pipeline management committee may not approve a voluntary
conversion to a corporation without first obtaining the approval of the holders
of at least 66 2/3% of the outstanding units during the Subordination Period and
a majority thereafter.
WITHDRAWAL OF GENERAL PARTNERS
The general partners in Northern Border Pipeline have the right to withdraw
from Northern Border Pipeline. If they do, the withdrawing partner's capital
account is treated as a contingent liability of Northern Border Pipeline to be
repaid on liquidation of Northern Border Pipeline or at any other time as the
Northern Border Pipeline management committee determines that the amount may be
repaid without undue hardship to Northern Border Pipeline.
INDEMNIFICATION
Under the terms of the Northern Border Pipeline partnership agreement,
Northern Border Pipeline has agreed to indemnify the operator and the members of
the Northern Border Pipeline management committee and any other committees
established by that committee against any claims and liabilities arising out of
the good faith performance by these persons of their responsibilities and
obligations within the scope of their authority in the course of Northern Border
Pipeline's business. This Indemnification includes the members of the audit and,
compensation committee.
TERMINATION AND DISSOLUTION
The Northern Border Pipeline partnership agreement provides that Northern
Border Pipeline will automatically dissolve upon (1) the transfer by Northern
Border Pipeline of all of its business and assets to a corporation, (2) the sale
or abandonment of all or substantially all of Northern Border Pipeline's
business and assets, provided that any such sale or abandonment may be made only
by unanimous written consent of all general partners; or (3) the occurrence of
any event that makes it unlawful for the business of Northern Border Pipeline to
be carried on. In addition to these automatic dissolution events, Northern
Border Pipeline may be dissolved by unanimous consent of all of its partners,
upon the occurrence of a bankruptcy or similar event with respect to a partner
or the dissolution of a partner.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
The Northern Border Pipeline partnership agreement provides that, following
the dissolution of Northern Border Pipeline, unless Northern Border Pipeline is
reconstituted and continued under the terms of the Northern Border Pipeline
partnership agreement, the business and affairs of Northern Border Pipeline will
be wound up and its assets liquidated in an orderly manner. Any amounts
remaining upon satisfaction of Northern Border Pipeline's obligations to its
creditors will be distributed to the partners in accordance with the positive
balances in their respective capital accounts.
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TAX CONSIDERATIONS
THIS SECTION IS A SUMMARY OF MATERIAL TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO PROSPECTIVE UNITHOLDERS WHO ARE INDIVIDUAL CITIZENS OR RESIDENTS OF
THE UNITED STATES AND, TO THE EXTENT SET FORTH BELOW UNDER "--LEGAL OPINIONS AND
ADVICE", EXPRESSES THE OPINION OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSON (A
PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS), SPECIAL COUNSEL TO THE GENERAL
PARTNER AND US, INSOFAR AS IT RELATES TO MATTERS OF UNITED STATES FEDERAL INCOME
TAX LAW AND LEGAL CONCLUSIONS WITH RESPECT THERETO. THIS SECTION IS BASED UPON
CURRENT PROVISIONS OF THE INTERNAL REVENUE CODE, EXISTING AND PROPOSED
REGULATIONS AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS, ALL OF WHICH
ARE SUBJECT TO CHANGE. SUBSEQUENT CHANGES IN SUCH AUTHORITIES MAY CAUSE THE TAX
CONSEQUENCES TO VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED BELOW. UNLESS
THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS SECTION TO US ARE REFERENCES
TO BOTH TC PIPELINES AND THE TC PIPELINES INTERMEDIATE PARTNERSHIP.
NO ATTEMPT HAS BEEN MADE IN THE FOLLOWING DISCUSSION TO COMMENT ON ALL
FEDERAL INCOME TAX MATTERS AFFECTING US OR THE UNITHOLDERS. MOREOVER, THE
DISCUSSION FOCUSES ON UNITHOLDERS WHO ARE INDIVIDUAL CITIZENS OR RESIDENTS OF
THE UNITED STATES AND HAS ONLY LIMITED APPLICATION TO CORPORATIONS, ESTATES,
TRUSTS, NON-RESIDENT ALIENS OR OTHER UNITHOLDERS SUBJECT TO SPECIALIZED TAX
TREATMENT, SUCH AS TAX-EXEMPT INSTITUTIONS, FOREIGN PERSONS, INDIVIDUAL
RETIREMENT ACCOUNTS, REITS OR MUTUAL FUNDS. ACCORDINGLY, EACH PROSPECTIVE
UNITHOLDER SHOULD CONSULT, AND SHOULD DEPEND ON, HIS OR HER OWN TAX ADVISOR IN
ANALYZING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO HIM OR HER
OF THE OWNERSHIP OR DISPOSITION OF COMMON UNITS.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and covenants and subject to the qualifications set forth in the detailed
discussion that follows, for federal income tax purposes:
(1) TC PipeLines and TC PipeLines intermediate partnership will each be
treated as a partnership, and
(2) owners of common units, with certain exceptions, as described in
"--Limited Partner Status" below, will be treated as partners of TC
PipeLines but not the TC PipeLines intermediate partnership.
In addition, all statements as to matters of law and legal conclusions with
respect thereto contained in this section, unless otherwise noted, are the
opinion of counsel.
No ruling has been or will be requested from the IRS regarding our
classification as a partnership for federal income tax purposes, whether our
operations generate "qualifying income" under Section 7704 of the Internal
Revenue Code or any other matter affecting us or prospective unitholders. An
opinion of counsel represents only that counsel's best legal judgment and does
not bind the IRS or the courts. Thus, no assurance can be provided that the
opinions and statements made here would be sustained by a court if contested by
the IRS. Any contest of this sort with the IRS may materially and adversely
impact the market for the common units and the prices at which common units
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by the unitholders and the general partner. Furthermore, no
assurance can be given that the treatment of TC PipeLines or an investment in TC
PipeLines will not be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may or may not be
retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (see "--Tax Consequences of
Unit Ownership--Treatment of Short Sales"),
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(2) whether a unitholder acquiring common units in separate transactions
must maintain a single aggregate adjusted tax basis in his or her common
units (see "--Disposition of Common Units--RECOGNITION OF GAIN OR
LOSS"),
(3) whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (see "--Disposition of
Common Units--ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES"), AND
(4) whether our method for depreciating Section 743 adjustments is
sustainable (see "--TAX CONSEQUENCES OF UNIT OWNERSHIP-- SECTION 754
ELECTION").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his or her allocable share of items of income, gain, loss and deduction
of the partnership in computing his or her federal income tax liability,
regardless of whether cash distributions are made. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in the partnership
interest.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to the status of TC PipeLines or the TC PipeLines intermediate
partnership as a partnership for federal income tax purposes. Instead we have
relied on the opinion of counsel that, based upon the Internal Revenue Code, its
regulations, published revenue rulings and court decisions and the
representations described below, TC PipeLines and the TC PipeLines intermediate
partnership will each be classified as a partnership for federal income tax
purposes.
In rendering its opinion, counsel has relied on factual representations and
covenants made by us and the general partner, and has assumed that Northern
Border Pipeline Company is organized and will be operated in accordance with the
Texas Uniform Partnership Act and the Northern Border Pipeline Partnership
Agreement as currently in effect. The representations and covenants made by us
and our general partner upon which counsel has relied are:
(a) Neither we nor the TC PipeLines intermediate partnership will elect
to be treated as an association or corporation;
(b) We will be operated in accordance with:
(1) all applicable partnership statutes,
(2) the partnership agreement, and
(3) the description of us in this prospectus;
(c) The TC PipeLines intermediate partnership will be operated in
accordance with
(1) all applicable partnership statutes,
(2) the TC PipeLines intermediate partnership agreement, and
(3) its description in this prospectus;
(d) For each taxable year, more than 90% of our gross income will be
derived from:
(1) the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource,
including oil, gas, its products and naturally occurring carbon
dioxide, or
(2) other items of income as to which counsel has or will opine are
"qualifying income" within the meaning of Section 7704(d) of the
Internal Revenue Code; and
(e) Neither we, the general partner, nor the TC PipeLines intermediate
partnership will approve any modification to the Northern Border Pipeline
partnership agreement, which modification would permit Northern Border
Pipeline to engage in any activity other than the
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transportation (within the meaning of Section 7704(d) of the Internal
Revenue Code) of natural gas without first receiving an opinion of counsel
to the effect that such modification will not cause Northern Border Pipeline
to have income that is not qualifying income (as described below).
Section 7704 of the Internal Revenue Code provides that publicly traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception (the "Qualifying Income Exception") exists with respect to publicly-
traded partnerships of which 90% or more of the gross income for every taxable
year consists of "qualifying income." Qualifying income includes income and
gains derived from the transportation and marketing of natural gas. Other types
of qualifying income include interest (from other than a financial business),
dividends, gains from the sale of real property and gains from the sale or other
disposition of capital assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less than % of our current
income is not qualifying income; however, this estimate could change from time
to time and may be affected by the activities of Northern Border Pipeline
Company. Based upon and subject to this estimate, the factual representations
made by us and the general partner and a review of the applicable legal
authorities, counsel is of the opinion that at least 90% of our gross income
constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and TC PipeLines, so long as we,
at that time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If TC PipeLines or the TC PipeLines intermediate partnership were treated as
an association taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the unitholders, and its net income would be
taxed to TC PipeLines or the TC PipeLines intermediate partnership at corporate
rates. In addition, any distribution made to a unitholder would be treated as
either taxable dividend income, to the extent of our current or accumulated
earnings and profits, or in the absence of earnings and profits, a nontaxable
return of capital, to the extent of the unitholder's tax basis in his or her
common units, or taxable capital gain, after the unitholder's tax basis in his
or her common units is reduced to zero. Accordingly, treatment of either us or
the TC PipeLines intermediate partnership as an association taxable as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of TC PipeLines will be treated
as partners of TC PipeLines for federal income tax purposes. Counsel is also of
the opinion that
(a) assignees who have executed and delivered transfer applications, and
are awaiting admission as limited partners, and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
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will be treated as partners of TC PipeLines for federal income tax purposes. As
there is no direct authority addressing assignees of common units who are
entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive certain federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose common units have been transferred
to a short seller to complete a short sale would appear to lose his or her
status as a partner with respect to those units for federal income tax purposes.
See "--Tax Consequences of Unit Ownership--TREATMENT OF SHORT SALES".
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in TC PipeLines for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by us. Instead, each unitholder will be
required to report on his or her income tax return his or her allocable share of
our income, gains, losses and deductions without regard to whether corresponding
cash distributions are received by such unitholder. Consequently, a unitholder
may be allocated income from us even if he or she has not received a cash
distribution. Each unitholder will be required to include in income his or her
allocable share of TC PipeLines income, gain, loss and deduction for the taxable
year of TC PipeLines ending with or within the taxable year of the unitholder.
TREATMENT OF DISTRIBUTIONS
Distributions by us to a unitholder generally will not be taxable to the
unitholder for federal income tax purposes to the extent of his or her tax basis
in his or her common units immediately before the distribution. Our cash
distributions in excess of a unitholder's tax basis generally will be considered
to be gain from the sale or exchange of the common units, taxable in accordance
with the rules described under "--Disposition of Common Units" below. Any
reduction in a unitholder's share of our liabilities for which no partner,
including the general partner, bears the economic risk of loss, known as
"nonrecourse liabilities", will be treated as a distribution of cash to that
unitholder. To the extent that our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he or she must
recapture any losses deducted in previous years. See "--LIMITATIONS ON
DEDUCTIBILITY OF LOSSES".
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his or her share of our
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his or her tax basis in
his or her common units, if such distribution reduces the unitholder's share of
our "unrealized receivables", including depreciation recapture, and/or
substantially appreciated "inventory items", both as defined in Section 751 of
the Internal Revenue Code, and collectively, "Section 751 Assets". To that
extent, he or she will be treated as having been distributed his or her
proportionate share of the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual distribution made
to him. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income under Section 751(b) of the Internal Revenue
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Code. That income will equal the excess of (1) the non-pro rata portion of that
distribution over (2) the unitholder's tax basis for the share of the Section
751 Assets deemed relinquished in the exchange.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
We estimate that a purchaser of common units in the offering who holds those
common units from the date of the closing of the offering through December 31,
2002 will be allocated an amount of federal taxable income for such period that
will be approximately % of the cash distributed with respect to that period.
We anticipate that after the taxable year ending December 31, 2002, the ratio of
taxable income to cash distributions to the unitholders will increase. These
estimates are based upon the assumption that gross income from operations will
approximate the amount required to make the minimum quarterly distribution on
all units and other assumptions with respect to capital expenditures, cash flow
and anticipated cash distributions. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, the estimates are based on
current tax law and certain tax reporting positions that we intend to adopt and
with which the IRS could disagree. Accordingly, no assurance can be given that
these estimates will prove to be correct. The actual percentage of distributions
that will constitute taxable income could be higher or lower, and any
differences could be material and could materially affect the value of the
common units.
BASIS OF COMMON UNITS
A unitholder's initial tax basis for his or her common units will be the
amount he paid for the common units plus his or her share of our nonrecourse
liabilities. That basis will be increased by his or her share of our income and
by any increases in his or her share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decrease in his or her share of our
nonrecourse liabilities and by his or her share of our expenditures that are not
deductible in computing its taxable income and are not required to be
capitalized. A limited partner will have no share of our debt which is recourse
to the general partner, but will have a share, generally based on his or her
share of profits, of our nonrecourse liabilities. See "--Disposition of Common
Units--RECOGNITION OF GAIN OR LOSS".
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
The deduction by a unitholder of his or her share of our losses will be
limited to the tax basis in his or her units and, in the case of an individual
unitholder or a corporate unitholder, if more than 50% of the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations, to the amount for which the unitholder is considered
to be "at risk" with respect to our activities, if that is less than his or her
tax basis. A unitholder must recapture losses deducted in previous years to the
extent that distributions cause his or her at risk amount to be less than zero
at the end of any taxable year. Losses disallowed to a unitholder or recaptured
as a result of these limitations will carry forward and will be allowable to the
extent that his or her tax basis or at risk amount, whichever is the limiting
factor, is subsequently increased. Upon the taxable disposition of a unit, any
gain recognized by a unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended by
the basis limitation. Any excess loss above such gain previously suspended by
the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his or her units, excluding any portion of that basis attributable to his or her
share of our nonrecourse liabilities, reduced by any amount of money he or she
borrows to acquire or hold his or her units if the lender of such borrowed funds
owns an interest in us, is related to the unitholder or can look only to units
for repayment. A unitholder's at risk amount will increase or decrease as the
tax basis of the
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unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his or her share of our
nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally, activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including other publicly
traded partnerships, or salary or active business income. Passive losses that
are not deductible because they exceed a unitholder's income generated by us may
be deducted in full when he disposes of his or her entire investment in us in a
fully taxable transaction to an unrelated party. The passive activity loss rules
are applied after other applicable limitations on deductions such as the at risk
rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships. The IRS has announced that Treasury Regulations
will be issued that characterize net passive income from a publicly-traded
partnership as investment income for purposes of the limitations on the
deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a unitholder's share of our net passive income will be
treated as investment income for this purpose. In addition, the unitholder's
share of our portfolio income will be treated as investment income. Investment
interest expense includes:
(1) interest on indebtedness properly allocable to property held for
investment,
(2) our interest expense attributed to portfolio income, and
(3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
ENTITY-LEVEL COLLECTIONS
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder or any general partner or any
former unitholder, we are authorized to pay those taxes from our funds. That
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as a
distribution to all current unitholders. We are authorized to amend the
partnership agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of units and to adjust later distributions, so
that after giving effect to these distributions, the priority and
characterization of distributions otherwise applicable under the partnership
agreement is maintained as nearly as is practicable. Payments by us as described
above could give rise to an overpayment of tax on behalf of an individual
partner in which
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event the partner could file a claim for credit or refund.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION
In general, if we have a net profit, our items of income, gain, loss and
deduction will be allocated among the general partner and the unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the common units and not to the subordinated units, or
that incentive distributions are made to the general partner, gross income will
be allocated to the recipients to the extent of these distributions. If we have
a net loss, our items of income, gain, loss and deduction will generally be
allocated first, to the general partner and the unitholders in accordance with
their respective percentage interests to the extent of their positive capital
accounts, as maintained under our partnership agreement, and, second, to the
general partner.
As required by Section 704(c) of the Internal Revenue Code and as permitted
by its Regulations, specified items of our income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair market
value of property contributed to us by the general partner. Such property is
referred to in this discussion as "Contributed Property". The effect of these
allocations to a unitholder will be essentially the same as if the tax basis of
the Contributed Property were equal to its fair market value at the time of
contribution. In addition, specified items of recapture income will be allocated
to the extent possible to the partner who was allocated the deduction giving
rise to the treatment of that gain as recapture income in order to minimize the
recognition of ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
Regulations provide that an allocation of items of our income, gain, loss or
deduction, other than an allocation required by Section 704(c) of the Internal
Revenue Code to eliminate the difference between a partner's "book" capital
account, credited with the fair market value of Contributed Property, and "tax"
capital account, credited with the tax basis of Contributed Property, (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in us, which will be determined by taking
into account all the facts and circumstances, including the partners' relative
contributions to us, the interests of the partners in economic profits and
losses, the interest of the partners in cash flow and other nonliquidating
distributions and rights of the partners to distributions of capital upon
liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "--Tax Consequences of Unit Ownership--SECTION 754 ELECTION" AND
"--DISPOSITION OF COMMON UNITS--ALLOCATIONS BETWEEN TRANSFERORS AND
TRANSFEREES", allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's distributive share of
an item of income, gain, loss or deduction.
TREATMENT OF SHORT SALES
A unitholder whose units are loaned to a "short seller" to cover a short
sale of units may be considered as having disposed of ownership of those units.
If so, he or she would no longer be a partner for those units during the period
of the loan and may recognize gain or loss from the disposition. As a result,
during this period:
- any of our income, gain, deduction or loss with respect to those units
would not be reportable by the unitholder;
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- any cash distributions received by the unitholder for those units would be
fully taxable; and
- all of these distributions would appear to be treated as ordinary income.
Unitholders desiring to assure their status as partners and avoid the risk
of gain recognition should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their units. The IRS has announced that it
is actively studying issues relating to the tax treatment of short sales of
partnership interests. See also "--Disposition of Common Units--RECOGNITION OF
GAIN OR LOSS".
ALTERNATIVE MINIMUM TAX
Although it is not expected that we will generate significant tax preference
items or adjustments, each unitholder will be required to take into account his
or her distributive share of any items of our income, gain, deduction or loss
for purposes of the alternative minimum tax. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders should consult with
their tax advisors as to the impact of an investment in units on their liability
for the alternative minimum tax.
TAX RATES
In general, the highest marginal United States federal income tax rate for
individuals for 1999 is 39.6% and the maximum United States federal income tax
rate for net capital gains of an individual is 20% if the asset was held for
more than 12 months at the time of disposition.
SECTION 754 ELECTION
We intend to make the election permitted by Section 754 of the Internal
Revenue Code. That election is irrevocable without the consent of the IRS. The
election will generally permit us to adjust a common unit purchaser's, other
than a common unit purchaser that purchases common units from us, tax basis in
our assets ("inside basis") pursuant to Section 743(b) of the Internal Revenue
Code to reflect his or her purchase price. The Section 743(b) adjustment belongs
to the purchaser and not to other partners. For purposes of this discussion, a
partner's inside basis in our assets will be considered to have two components:
(1) his or her share of our tax basis in such assets ("common basis") and (2)
his or her Section 743(b) adjustment to that basis.
Proposed Treasury regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted (which we intend to do), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Nevertheless, the proposed regulations under Section 197 indicate
that the Section 743(b) adjustment attributable to an amortizable Section 197
intangible should be treated as a newly-acquired asset placed in service in the
month when the purchaser acquires the unit. Under Treasury Regulation Section
1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Internal Revenue Code rather than cost
recovery deductions under Section 168 is generally required to be depreciated
using either the straight-line method or the 150% declining balance method.
Although the proposed regulations under Section 743 will likely eliminate many
of the problems if finalized in their current form, the depreciation and
amortization methods and useful lives associated with the Section 743(b)
adjustment may differ from the methods and useful lives generally used to
depreciate the common basis in these properties. Under our partnership
agreement, the general partner is authorized to adopt a convention to preserve
the uniformity of units even if that convention is not consistent with specified
Treasury Regulations. See "--UNIFORMITY OF UNITS".
Although counsel is unable to opine as to the validity of such an approach,
we intend to depreciate the portion of a Section 743(b)
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adjustment attributable to unrealized appreciation in the value of Contributed
Property, to the extent of any unamortized Book-Tax Disparity, using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of such property, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable. This method is consistent with the
proposed regulations under Section 743 but is arguably inconsistent with
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197-2(g)(3), neither of which is expected to directly apply to a
material portion of the Partnership's assets. To the extent this Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
Book-Tax Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation or amortization convention
under which all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common basis or Section
743(b) adjustment, based upon the same applicable rate as if they had purchased
a direct interest in our assets. Such an aggregate approach may result in lower
annual depreciation or amortization deductions than would otherwise be allowable
to specified unitholders. See "--UNIFORMITY OF UNITS".
The allocation of the Section 743(b) adjustment among our assets must be
made in accordance with the Internal Revenue Code. The IRS could seek to
reallocate some or all of any Section 743(b) adjustment to goodwill not so
allocated by us. Goodwill, as an intangible asset, is generally amortizable over
a longer period of time or under a less accelerated method than our tangible
assets.
A Section 754 election is advantageous if the transferee's tax basis in his
or her units is higher than such units' share of the aggregate tax basis of our
assets immediately prior to the transfer. In such a case, as a result of the
election, the transferee would have a higher tax basis in his or her share of
our assets for purposes of calculating, among other items, his or her
depreciation deductions and his or her share of any gain or loss on a sale of
our assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in his or her units is lower than those units' share of
the aggregate tax basis of our assets immediately prior to the transfer. Thus,
the fair market value of the units may be affected either favorably or adversely
by the election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of certain assumptions as to the value of our assets
and other matters. There is no assurance that the determinations made by us will
not be successfully challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If such permission is granted, a
subsequent purchaser of units may be allocated more income than he would have
been allocated had the election not been revoked.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
We will use the year ending December 31 as our taxable year and will adopt
the accrual method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his or her allocable share of
our income, gain, loss and deduction for our taxable year ending within or with
his or her taxable year. In addition, a unitholder who has a taxable year ending
on a date other than December 31 and who disposes of all of his or her units
following the close of our taxable year but before the close of his or her
taxable year must include his or her allocable share of our income, gain, loss
and deduction in income for his or her taxable year with the result that he will
be required to report in income for his or her taxable year his or her
distributive share of more than one year of
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income, gain, loss and deduction. See "--Disposition of Common
Units--ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES".
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of our assets will be used for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of these assets. A portion of our assets will initially have an
aggregate tax basis equal to the tax basis of those assets in the possession of
TransCanada Border PipeLine immediately prior to the closing of the offering;
the balance of our assets will have an initial tax basis equal to their fair
market value on the date of the closing of the offering. The federal income tax
burden associated with the difference between the fair market value of property
contributed by TransCanada Border PipeLine and the tax basis established for
such property will be borne by the general partner. See "--ALLOCATION OF INCOME,
GAIN, LOSS AND DEDUCTION".
To the extent allowable, we may elect to use the depletion, depreciation and
cost recovery methods that will result in the largest deductions being taken in
the early years after assets are placed in service. We will not be entitled to
any amortization deductions with respect to any goodwill conveyed to us on
formation. Property subsequently acquired or constructed by us may be
depreciated using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or otherwise, all
or a portion of any gain, determined by reference to the amount of depreciation
previously deducted and the nature of the property, may be subject to the
recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property owned by us may be required to recapture such deductions as
ordinary income upon a sale of his or her interest in us. See "--ALLOCATION OF
INCOME, GAIN, LOSS AND DEDUCTION" and "--Disposition of Common
Units--RECOGNITION OF GAIN OR LOSS".
Costs incurred in organizing TC PipeLines may be amortized over any period
selected by us not shorter than 60 months. The costs incurred in promoting the
issuance of units (i.e. syndication expenses) must be capitalized and cannot be
deducted currently, ratably or upon termination of TC PipeLines. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be amortized.
Under recently adopted regulations, the underwriting discounts and commissions
would be treated as a syndication cost.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, uniformity of
the economic and tax characteristics of the units to a purchaser of these units
must be maintained. In the absence of uniformity, compliance with a number of
federal income tax requirements, both statutory and regulatory, could be
substantially diminished. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could have a
negative impact on the value of the units. See "--Tax Consequences of Unit
Ownership--SECTION 754 ELECTION".
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property, to the extent of any unamortized Book-Tax Disparity, using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of such
property, or treat that portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable, consistent with the
proposed regulations under Section 743, but despite its inconsistency with
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197-2(g)(3), neither of which is expected to directly apply to a
material portion of our assets. See "--Tax Consequences of
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Unit Ownership--SECTION 754 ELECTION". To the extent such Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
Book-Tax Disparity, we will apply the rules described in the Regulations and
legislative history. If we determine that such a position cannot reasonably be
taken, we may adopt a depreciation and amortization convention under which all
purchasers acquiring units in the same month would receive depreciation and
amortization deductions, whether attributable to common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in our property. If such an aggregate approach is adopted, it
may result in lower annual depreciation and amortization deductions than would
otherwise be allowable to certain unitholders and risk the loss of depreciation
and amortization deductions not taken in the year that such deductions are
otherwise allowable. This convention will not be adopted if we determine that
the loss of depreciation and amortization deductions will have a material
adverse effect on the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and amortization convention
to preserve the uniformity of the intrinsic tax characteristics of any units
that would not have a material adverse effect on the unitholders. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If this type of challenge were sustained, the uniformity of
units might be affected, and the gain from the sale of units might be increased
without the benefit of additional deductions. See "--Disposition of Common
Units-- RECOGNITION OF GAIN OR LOSS".
VALUATION AND TAX BASIS OF OUR PROPERTIES
The federal income tax consequences of the ownership and disposition of
units will depend in part on our estimates of the relative fair market values,
and determinations of the initial tax bases, of our assets. Although we may from
time to time consult with professional appraisers regarding valuation matters,
we will make many of the relative fair market value estimates ourselves. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of units equal to the difference
between the amount realized and the unitholder's tax basis for the units sold. A
unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his or her share of our nonrecourse
liabilities. Because the amount realized includes a unitholder's share of our
nonrecourse liabilities, the gain recognized on the sale of units could result
in a tax liability in excess of any cash received from such sale.
Prior distributions from us in excess of cumulative net taxable income for a
common unit that decreased a unitholder's tax basis in that common unit will, in
effect, become taxable income if the common unit is sold at a price greater than
the unitholder's tax basis in that common unit, even if the price is less than
his or her original cost.
Should the IRS successfully contest our convention to amortize only a
portion of the Section 743(b) adjustment, described under "--Tax Consequences of
Unit Ownership-- SECTION 754 ELECTION", attributable to an amortizable Section
197 intangible after a sale by the general partner of units, a unitholder could
realize additional gain from the sale of units than had such convention been
respected. In that case, the unitholder may have been entitled to additional
deductions against income in prior years but may be unable to claim them, with
the result to him of greater overall taxable income than appropriate. Counsel is
unable to opine as to the validity of the convention but believes such a contest
by the IRS is unlikely because a
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successful contest could result in substantial additional deductions to other
unitholders.
Except as noted below, gain or loss recognized by a unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one year
will generally be taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held for more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" owned by us. The term
"unrealized receivables" includes potential recapture items, including
depreciation recapture. Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of the unit and may be recognized even if there is a net taxable
loss realized on the sale of the unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a disposition of units. Net capital loss
may offset no more than $3,000 of ordinary income in the case of individuals and
may only be used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of common units, a common unitholder will be
unable to select high or low basis common units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to us because,
similar to corporate stock, interests in us are evidenced by separate
certificates. Accordingly, counsel is unable to opine as to the effect this
ruling will have on the unitholders. A unitholder considering the purchase of
additional common units or a sale of common units purchased in separate
transactions should consult his or her tax advisor as to the possible
consequences of this ruling.
Specific provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests, by treating
a taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into:
(1) a short sale;
(2) an offsetting notional principal contract; or
(3) a futures or forward contract with respect to the partnership interest
or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an offsetting
notional principal contract or a futures or forward contract with respect to the
partnership interest, the taxpayer will be treated as having sold that position
if the taxpayer or related person then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also authorized
to issue regulations that treat a taxpayer that enters into transactions or
positions that have substantially the same effect as the preceding transactions
as having constructively sold the financial position.
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ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, our taxable income and losses will be determined annually, will
be prorated on a monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each of them as of the
opening of the NYSE on the first business day of the month (the "Allocation
Date"). However, gain or loss realized on a sale or other disposition of our
assets other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring common units in the open
market may be allocated income, gain, loss and deduction accrued after the date
of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests otherwise
vary during a taxable period, to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes of
these units prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to such quarter but will not be entitled to receive that cash
distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges units is required to notify us in
writing of that sale or exchange within 30 days after the sale or exchange and
in any event by no later than January 15 of the year following the calendar year
in which the sale or exchange occurred. We are required to notify the IRS of
that transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply to a sale by an
individual who is a citizen of the United States and who effects the sale or
exchange through a broker. Additionally, a transferor and a transferee of a unit
will be required to furnish statements to the IRS, filed with their income tax
returns for the taxable year in which the sale or exchange occurred, that
describe the amount of the consideration received for the unit that is allocated
to our goodwill or going concern value. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
We and the TC PipeLines intermediate partnership will be considered to have
been terminated for tax purposes if there is a sale or exchange of 50% or more
of the total interests in our capital and profits within a 12-month period. If
we elect to be treated as a large partnership, which we do not currently intend
to do, we will not terminate by reason of the sale or exchange of interests in
us. A termination of us will cause a termination of the TC PipeLines
intermediate partnership. A termination of us will result in the closing of our
taxable year for all unitholders. In the case of a unitholder reporting on a
taxable year other than a fiscal year ending December 31, the closing of our
taxable year may result in more than 12 months' of our taxable income or loss
being includable in his taxable income for the year of termination. New tax
elections required to be made by us, including a new election under Section 754
of the Internal Revenue Code, must be made after a termination, and a
termination would result in a deferral of our deductions for depreciation. A
termination could also result in penalties if we were unable to determine that
the termination had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation enacted prior to the
termination.
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TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable income. Virtually all of the
taxable income derived by that kind of organization from the ownership of a unit
will be unrelated business taxable income and thus will be taxable to that
unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of stocks
or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence they will be required to file
federal tax returns for their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on any net income or gain. Generally, a
partnership is required to pay a withholding tax on the portion of the
partnership's income that is effectively connected with the conduct of a United
States trade or business and which is allocable to the foreign partners,
regardless of whether any actual distributions have been made to such partners.
However, under rules applicable to publicly traded partnerships, we will
withhold (currently at the rate of 39.6%) on actual cash distributions made
quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
Because a foreign corporation that owns units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its share of our income and gain, as adjusted for changes in the
foreign corporation's "United States net equity", which are effectively
connected with the conduct of a United States trade or business. That tax may be
reduced or eliminated by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a "qualified resident." In
addition, such a unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
disposition of that unit to the extent that this gain is effectively connected
with a United States trade or business of the foreign unitholder. Apart from the
ruling, a foreign unitholder will not be taxed or subject to withholding upon
the disposition of a unit if he has owned less than 5% in value of the units
during the five-year period ending on the date of the disposition and if the
units are regularly traded on an established securities market at the time of
the disposition.
ADMINISTRATIVE MATTERS
INFORMATION RETURNS AND AUDIT PROCEDURES
We intend to furnish to each unitholder, within 90 days after the close of
each calendar year, specific tax information, including a Schedule K-1, which
describes each unitholder's share of our income, gain, loss and deduction for
our preceding taxable year. In preparing this information, which will generally
not be reviewed by counsel, we will use various accounting and reporting
conventions, some of which have been mentioned earlier, to determine the
unitholder's
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share of income, gain, loss and deduction. There is no assurance that any of
those conventions will yield a result that conforms to the requirements of the
Code, regulations or administrative interpretations of the IRS. Neither we nor
counsel can assure prospective unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of the
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "Tax Matters Partner" for these
purposes. The partnership agreement appoints the general partner as the Tax
Matters Partner of TC Pipelines.
The Tax Matters Partner will make certain elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any unitholder having at least a 1%
interest in profits and by the unitholders having in the aggregate at least a 5%
profits interest. However, only one action for judicial review will go forward,
and each unitholder with an interest in the outcome may participate. However, if
we elect to be treated as a large partnership, a unitholder will not have the
right to participate in settlement conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
However, if we elect to be treated as a large partnership, the unitholders would
be required to treat all partnership items in a manner consistent with the our
return.
If we elect to be treated as a large partnership, each partner would take
into account separately his share of the following items, determined at the
partnership level:
(1) taxable income or loss from passive loss limitation activities;
(2) taxable income or loss from other activities (such as portfolio income
or loss);
(3) net capital gains to the extent allocable to passive loss limitation
activities and other activities;
(4) tax exempt interest;
(5) a net alternative minimum tax adjustment separately computed for
passive loss limitation activities and other activities;
(6) general credits;
(7) low-income housing credit;
(8) rehabilitation credit;
(9) foreign income taxes;
(10) credit for producing fuel from a nonconventional source; and
(11) any other items the Secretary of Treasury deems appropriate.
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Moreover, miscellaneous itemized deductions would not be passed through to the
partners and 30% of such deductions would be used at the partnership level.
A number of other changes have been made to the tax compliance and
administrative rules relating to electing large partnerships. Adjustments
relating to partnership items for a previous taxable year are generally taken
into account by those persons who were partners in previous taxable years. Each
partner in an electing large partnership, however, must take into account his
share of any adjustments to partnership items in the year such adjustments are
made. Under prior law, adjustments relating to partnership items for a previous
taxable year were taken into account by those persons who were partners in the
previous taxable year. Alternatively, a partnership could elect to or, in some
circumstances, could be required to, directly pay the tax resulting from any
adjustments of this kind. In either case, therefore, unitholders could bear
significant costs associated with tax adjustments relating to periods predating
their acquisition of units. It is not expected that we will elect to have the
large partnership provisions apply to us because of the cost of their
application.
NOMINEE REPORTING
Persons who hold an interest in TC PipeLines as a nominee for another person
are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the
foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report such information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
REGISTRATION AS A TAX SHELTER
The Internal Revenue Code requires that "tax shelters" be registered with
the Secretary of the Treasury. The temporary Treasury Regulations interpreting
the tax shelter registration provisions of the Internal Revenue Code are
extremely broad. It is arguable that we are not subject to the registration
requirement on the basis that we will not constitute a tax shelter. However, the
general partner, as a principal organizer of us has applied to register us as a
tax shelter with the Secretary of the Treasury in the absence of assurance that
we will not be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is required and not
undertaken.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN
US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
We must furnish the registration number to the unitholders, and a unitholder
who sells or otherwise transfers a unit in a later transaction must furnish the
registration number to the transferee. The penalty for failure of the transferor
of a unit to furnish the registration number to the transferee is $100 for each
failure. The unitholders must disclose our tax shelter registration number on
Form 8271 to be attached to the tax return on which any deduction, loss or other
benefit generated by
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us is claimed or on which any of our income is included. A unitholder who fails
to disclose the tax shelter registration number on his return, without
reasonable cause for that failure, will be subject to a $250 penalty for each
failure. Any penalties discussed are not deductible for federal income tax
purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Internal Revenue Code. No penalty will be imposed, however, for
any portion of an underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority"; or
(2) as to which there is a reasonable basis and the pertinent facts of such
position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, we must
disclose the pertinent facts on its return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We will own property or
do business in Illinois, Iowa, Minnesota, Montana, Nebraska, North Dakota, South
Dakota and Texas. Of those, only Texas and South Dakota do not currently impose
a personal income tax. A unitholder will be required to file state income tax
returns and to pay state income taxes in some or all of the states in which we
do business or own property and may be subject to penalties for failure to
comply with those requirements. In some states, tax losses may not produce a tax
benefit in the year incurred and also may not be available to offset income in
later taxable years. Some of the states may require us, or we may elect, to
withhold a percentage of income from amounts to be distributed to a unitholder
who is not a resident of the state. Withholding, the amount of which may be
greater or less than a particular unitholder's income tax liability to the
state, generally does not relieve the non-resident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. See "--Tax Consequences of Unit Ownership--ENTITY-LEVEL COLLECTIONS".
119
<PAGE>
Based on current law and our estimate of our future operations, the general
partner anticipates that any amounts required to be withheld will not be
material.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND TAX
CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES, OF HIS OR HER
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OR HER OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO
THOSE MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL
STATE AND LOCAL, AS WELL AS UNITED STATES FEDERAL, TAX RETURNS THAT MAY BE
REQUIRED OF HIM OR HER. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR
LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN US.
INVESTMENT IN TC PIPELINES BY EMPLOYEE BENEFIT PLANS
An investment in TC PipeLines by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA, and restrictions imposed by Section 4975 of the Internal Revenue Code.
For these purposes the term "employee benefit plan" includes, but is not limited
to, qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or IRAs established
or maintained by an employer or employee organization. Among other things,
consideration should be given to:
(a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and
(c) whether such investment will result in recognition of unrelated
business taxable income by such plan and, if so, the potential after-tax
investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan (a "fiduciary") should determine whether an investment in
TC PipeLines is authorized by the appropriate governing instrument and is a
proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibits
employee benefit plans, and also IRAs that are not considered part of an
employee benefit plan, from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in TC PipeLines, be deemed to own an
undivided interest in the assets of TC PipeLines, with the result that the
general partner also would be a fiduciary of such plan and the operations of TC
PipeLines would be subject to the regulatory restrictions of ERISA, including
its prohibited transaction rules, as well as the prohibited transaction rules of
the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under certain circumstances. Pursuant to these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,
(a) the equity interest acquired by employee benefit plans are publicly
offered securities--i.e., the equity interests are widely held by 100 or
more investors independent of the issuer and each other, freely transferable
and registered pursuant to certain provisions of the federal securities
laws,
(b) the entity is an "operating company"--i.e., it is primarily engaged
in
120
<PAGE>
the production or sale of a product or service other than the investment of
capital either directly or through a majority owned subsidiary or
subsidiaries, or
(c) there is no significant investment by benefit plan investors, which
is defined to mean that less than 25% of the value of each class of equity
interest (disregarding certain interests held by the general partner, its
affiliates, and certain other persons) is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to
ERISA, such as governmental plans.
TC PipeLines' assets should not be considered "plan assets" under these
regulations because it is expected that the investment will satisfy the
requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for TC PipeLines by the
law firm of Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York. Certain legal matters in
connection with the common units offered by this prospectus are being passed
upon for the underwriters by Andrews & Kurth L.L.P., New York, New York, who
also acts as regulatory counsel for Northern Border Pipeline with respect to
FERC matters.
EXPERTS
The balance sheet of TC PipeLines, LP as of December 23, 1998 has been
included in this prospectus and in the registration statement in reliance upon
the report of KPMG LLP, independent chartered accountants, appearing elsewhere
in this prospectus, and upon the authority of said firm as experts in accounting
and auditing.
The balance sheet of TC PipeLines GP, Inc. as of December 23, 1998 has been
included in this prospectus and in the registration statement in reliance upon
the report of KPMG LLP, independent chartered accountants, appearing elsewhere
in this prospectus, and upon the authority of said firm as experts in accounting
and auditing.
The balance sheets of Northern Border Pipeline Company as of December 31,
1997, 1996 and 1995, and the related statements of income, changes in partners'
capital and cash flows for the years then ended, included in this prospectus and
in the registration statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in this prospectus in reliance upon the authority of
said firm as experts in giving said reports.
With respect to the unaudited balance sheet of Northern Border Pipeline
Company as of September 30, 1998, the related statements of income and cash
flows for the three-month and nine-month periods ended September 30, 1998 and
1997, and the related statements of changes in partners' capital for the three-
month and nine-month periods ended September 30, 1998, included in this
prospectus and in the Registration Statement, Arthur Andersen LLP has reported
that they have applied limited procedures in accordance with professional
standards for a review of that information. However, their separate report
thereon states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
report on that information should be restricted in light of the limited nature
of the review procedures applied. In
121
<PAGE>
addition, the accountants are not subject to the liability provisions of Section
11 of the Securities Act of 1933 for their report on the unaudited interim
financial information because the report is not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
HOW TO OBTAIN OTHER INFORMATION ABOUT TC PIPELINES
We have filed with the SEC a registration statement on Form S-1, regarding the
common units offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement. For further information
with respect to TC PipeLines and the common units offered hereby by this
prospectus, you may desire to review the registration statement, including its
exhibits and schedules. You may desire to review the full text of any contracts,
agreements or other documents filed as exhibits to the registration statement
for a more complete description of the matter involved, and each such statement
in this prospectus is qualified in its entirety by such reference. The
registration statement (including the exhibits and schedules) may be inspected
and copied at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New
York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained upon written request from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates or from the SEC's Web site on the Internet at
http://www.sec.gov. The SEC's telephone number is 1-800-SEC-0330.
As a result of the offering, we will file periodic reports and other
information with the SEC. These reports and other information may be inspected
and copied at the public reference facilities at the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates or from the SEC's Web site on
the Internet at http://www.sec.gov.
We intend to furnish our unitholders annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year of
TC PipeLines.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors and other factors noted
throughout this prospectus, including certain risks and uncertainties, could
cause our actual results to differ materially from those contained in any
forward-looking statement.
122
<PAGE>
UNDERWRITING
TC PipeLines and the underwriters named below have entered into an
underwriting agreement with respect to the common units being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of common units indicated in the following table. Goldman, Sachs & Co.,
Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated and PaineWebber Incorporated are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Common Units
- ----------------------------------------------------------------- --------------------------
<S> <C>
Goldman, Sachs & Co..............................................
Salomon Smith Barney Inc.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Morgan Stanley & Co. Incorporated................................
PaineWebber Incorporated.........................................
-----------
Total........................................................ 15,640,000
-----------
-----------
</TABLE>
------------------
If the underwriters sell more common units than the total number set forth
in the table above, the underwriters have an option to buy up to an additional
2,346,000 common units from TC PipeLines to cover such sales. They may exercise
that option for 30 days. If any common units are purchased pursuant to that
option, the underwriters will severally purchase common units in approximately
the same proportion as set forth in the table above.
The following tables show the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by TC PipeLines. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common units.
Paid by TC PipeLines
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per common unit............. $ $
Total....................... $ $
</TABLE>
Common units sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any common units sold by the underwriters to securities dealers may
be sold at a discount of up to $ per common unit from the initial public
offering price. Any such securities dealers may resell any common units
purchased from the underwriters to certain other brokers or dealers at a
discount of up to $ per common unit from the initial public offering price.
If all the common units are not sold at the initial offering price, the
representatives may change the offering price and the other selling terms.
TC PipeLines, the TC PipeLines intermediate partnership, the general
partner, TransCanada and certain of its affiliates and the officers and
directors of the general partner have agreed with the underwriters not to
dispose of or hedge any of their common units or subordinated units or
securities convertible into or exchangeable for, or that represent the right to
receive, common units or subordinated units or
U-1
<PAGE>
any securities that are senior to or pari passu with common units during the
period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of the
representatives (other than the redemption of subordinated units in the event
the overallotment option is exercised). See "Units Available for Future Sale"
for a discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the common units.
The initial public offering price will be negotiated among the general partner
and the representatives. Among the factors to be considered in determining the
initial public offering price of the common units, in addition to prevailing
market conditions, will be Northern Border Pipeline's historical performance,
the Partnership's pro forma historical performance, estimates of the business
potential and earnings prospects of TC PipeLines, an assessment of TC PipeLines'
management and the consideration of the above factors in relation to market
valuation of companies in related businesses, including Northern Border
Partners.
The common units will be listed on the NYSE under the symbol " ". In
order to meet one of the requirements for listing the common units on the NYSE,
the underwriters have undertaken to sell lots of 100 or more common units to a
minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
common units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
common units than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common units while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased common
units sold by or for the account of such underwriter in stabilizing or short
covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common units. As a result, the price of the
common units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
TC PipeLines estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $3 million.
Because the National Association for Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
Accordingly, the representatives have informed TC PipeLines that the
underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority without the prior written approval of the transaction by
the customer. Investor suitability with respect to the common units should be
judged similarly to the suitability with respect to other securities that are
listed for trading on a national securities exchange. The underwriters do not
expect sales to discretionary accounts to exceed five percent of the total
number of common units offered.
TC PipeLines, the TC PipeLines intermediate partnership, the general
partner, TransCanada and certain of its affiliates have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act.
Certain of the underwriters engage in transactions with, and, from time to
time, have performed services for, TransCanada and its subsidiaries in the
ordinary course of business and have received customary fees for performing such
services.
U-2
<PAGE>
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TC PipeLines, LP:
Pro Forma Balance Sheet--September 30, 1998.............................................................. F-2
Pro Forma Statements of Income--Nine Months Ended September 30, 1998 and Year Ended December 31, 1997.... F-3
Notes to Pro Forma Financial Statements.................................................................. F-4
Report of Independent Chartered Accountants.............................................................. F-6
Balance Sheet--December 23, 1998......................................................................... F-7
Note to Balance Sheet.................................................................................... F-7
Northern Border Pipeline Company:
Report of Independent Public Accountants dated January 22, 1997.......................................... F-8
Balance Sheets--December 31, 1996 and 1995............................................................... F-9
Statements of Income--Years Ended December 31, 1996 and 1995............................................. F-10
Statements of Cash Flows--Years Ended December 31, 1996 and 1995......................................... F-11
Statements of Changes in Partners' Capital--Years Ended December 31, 1996 and 1995....................... F-12
Notes to Financial Statements............................................................................ F-13
Report of Independent Public Accountants dated January 26, 1998.......................................... F-20
Balance Sheets--December 31, 1997 and 1996............................................................... F-21
Statements of Income--Years Ended December 31, 1997 and 1996............................................. F-22
Statements of Cash Flows--Years Ended December 31, 1997 and 1996......................................... F-23
Statements of Changes in Partners' Capital--Years Ended December 31, 1997 and 1996....................... F-24
Notes to Financial Statements............................................................................ F-25
Report of Independent Public Accountants dated October 13, 1998.......................................... F-32
Balance Sheet--September 30, 1998........................................................................ F-33
Statements of Income--Three Months Ended September 30, 1998 and 1997; Nine Months Ended September 30,
1998 and 1997.......................................................................................... F-34
Statements of Cash Flows--Three Months Ended September 30, 1998 and 1997; Nine Months Ended September 30,
1998 and 1997.......................................................................................... F-35
Statements of Changes in Partners' Capital--Three Months Ended September 30, 1998; Nine Months Ended
September 30, 1998..................................................................................... F-36
Selected Notes to Financial Statements................................................................... F-37
TC PipeLines GP, Inc. (General Partner):
Report of Independent Chartered Accountants.............................................................. F-39
Balance Sheet--December 23, 1998......................................................................... F-40
Note to Balance Sheet.................................................................................... F-40
</TABLE>
F-1
<PAGE>
TC PIPELINES, LP
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TC PIPELINES, LP ADJUSTMENTS TC PIPELINES, LP
---------------- ----------- ----------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
ASSETS
Cash.................................................................. -- 1(a) 1
282,156(e)
(282,156)(f)
Investment in Northern Border Pipeline................................ -- 236,777(c) 236,777
--- ----------- --------
-- 236,778 236,778
--- ----------- --------
--- ----------- --------
PARTNERS' CAPITAL
General Partner....................................................... -- 1(a) 4,737
4,736(c)
Common Units.......................................................... -- 185,159(c) 185,159
282,156(e)
(282,156)(f)
Subordinated Units.................................................... -- 46,882(c) 46,882
--- ----------- --------
-- 236,778 236,778
--- ----------- --------
--- ----------- --------
</TABLE>
The accompanying notes to the pro forma financial statements are an
integral part of these statements.
F-2
<PAGE>
TC PIPELINES, LP
PRO FORMA STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
NINE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------------------------
----------------------------------------------- PRO FORMA
PRO FORMA PRO FORMA TC PRO FORMA TC PIPELINES,
TC PIPELINES, LP ADJUSTMENTS PIPELINES, LP TC PIPELINES, LP ADJUSTMENTS LP
---------------- ----------- -------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Equity Income from
Investment in Northern
Border Pipeline......... -- 21,615(g) 21,615 -- 21,832(g) 21,832
General and Administrative
Expenses................ -- (900)(h) (900) (1,200)(h) (1,200)
---------------- ----------- ------- --- ----------- -------
Net Income to Partners.... -- 20,715 20,715 -- 20,632 20,632
---------------- ----------- ------- --- ----------- -------
---------------- ----------- ------- --- ----------- -------
Net Income Per Unit....... $ 1.04(i) $ 1.03(i)
------- -------
------- -------
</TABLE>
The accompanying notes to the pro forma financial statements are an
integral part of these statements.
F-3
<PAGE>
TC PIPELINES, LP
NOTES TO PRO FORMA FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
TC PipeLines, LP was formed on December 16, 1998 as a Delaware limited
partnership. The accompanying unaudited pro forma financial information has been
prepared by management in accordance with accounting principles generally
accepted in the United States. The pro forma financial statements of TC
PipeLines, LP have been prepared from information derived from the audited
financial statements of TC PipeLines, LP and the audited and unaudited financial
statements of Northern Border Pipeline Company ("Northern Border Pipeline")
appearing elsewhere in this registration statement, and the assumptions outlined
in Note 2 below. Northern Border Pipeline is currently owned by Northern Border
Partners, L.P. (70%), TransCan Northern Ltd. (24%) and TransCanada Border
PipeLine Ltd. (6%).
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma financial statements of TC PipeLines, LP have been prepared as
if the transactions to be effected at the consummation of an offering (the
"offering") as described in a prospectus (the "prospectus") included in this
registration statement had been completed on September 30, 1998, in the case of
the pro forma balance sheet and as of January 1,1997, in the case of the pro
forma statements of income for the year ended December 31, 1997 and the nine
months ended September 30, 1998. The financial statements are based on currently
available information and certain estimates and assumptions, and therefore the
actual financial statements will differ from the pro forma financial statements.
However, management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as contemplated in the
prospectus and that the pro forma financial statements give appropriate effect
to those assumptions.
The unaudited pro forma financial statements have been presented in response
to requirements of the United States Securities and Exchange Commission and do
not purport to be indicative of the financial position and results of operations
of TC PipeLines, LP as of such dates or for such periods, nor are they
indicative of future results. The unaudited pro forma financial information
should be read in conjunction with the historical audited financial statements
and notes thereto of TC PipeLines, LP and Northern Border Pipeline.
The significant assumptions are as follows.
(a) Upon formation, cash amounting to $1,000 is deposited into the
Partnership in exchange for an initial general partnership interest.
(b) TransCan Northern Ltd. and TransCanada Border PipeLine Ltd., both of
which are wholly-owned subsidiaries of TransCanada PipeLines Limited,
will convey their combined 30% equity interest in Northern Border
Pipeline to TC PipeLines, LP indirectly through a separate intermediate
partnership (collectively, the "Partnership"). TC PipeLines GP, Inc.
("General Partner") will serve as the general partner of the Partnership.
The drop-down of the equity interest in Northern Border Pipeline by
TransCanada PipeLines Limited's wholly-owned subsidiaries is accounted
for at the combined historical carrying amounts as recorded in these
subsidiaries.
F-4
<PAGE>
TC PIPELINES, LP
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
(c) The Partnership is in a position to exercise significant influence over
Northern Border Pipeline and the investment is accounted for using the
equity method of accounting. The pro forma investment balance as of
September 30,1998 represents the combined carrying values of the
investment in Northern Border Pipeline as reflected in the financial
records of TransCan Northern Ltd. and TransCanada Border PipeLine Ltd. as
of that date. The balance also equates to 30% of the net assets of
Northern Border Pipeline as of September 30, 1998.
As contemplated in the offering, the investment in Northern Border
Pipeline is conveyed to the Partnership in exchange for [ ] common
units (which will not be outstanding after the Transactions), 3,960,000
subordinated units (representing a 19.8% interest in TC PipeLines after
the Transactions), a 2% combined general partnership interest in the
Partnership and the Intermediate Partnership and the right to receive
incentive distributions.
(d) The underwriters' over-allotment option is not exercised.
(e) Net proceeds to the Partnership from the sale of common units are
expected to be approximately $282 million, after deducting underwriting
discounts and commissions and expenses of the offering totaling $23
million.
(f) As outlined in the prospectus, the net proceeds will be used to redeem
all of the common units issued to TransCan Northern Ltd. and TransCanada
Border PipeLine Ltd.
(g) Pro forma equity income represents 30% of the net income of Northern
Border Pipeline.
(h) Annual incremental general and administrative expenses of the
Partnership are estimated as follows:
<TABLE>
<CAPTION>
TransCanada human resource charges..................... 350,000
<S> <C>
Human resources of the Partnership..................... 150,000
Registration, reporting and listing fees............... 310,000
Legal and audit........................................ 200,000
Office and other administration........................ 190,000
----------
$1,200,000
----------
----------
</TABLE>
(i) The General Partner's allocation of net income is based on a 2%
interest in the Partnership, which has been deducted before calculating
net income per unit. The computation of net income per unit assumes that
15,640,000 common units and 3,960,000 subordinated units are outstanding
at all times during the periods presented.
F-5
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of TC PipeLines GP, Inc., general partner of TC
PipeLines, LP
We have audited the accompanying balance sheet of TC PipeLines, LP (the
"Partnership") as of December 23, 1998. This financial statement is the
responsibility of the management of the Partnership's general partner, TC
PipeLines GP, Inc. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of TC PipeLines, LP as of December 23,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Calgary, Canada
December 23, 1998
F-6
<PAGE>
TC PIPELINES, LP
BALANCE SHEET
DECEMBER 23, 1998
<TABLE>
<S> <C>
ASSETS
Cash............................................................................. $ 10
Investment in TC PipeLines Intermediate Limited Partnership...................... 990
---------
$ 1,000
---------
---------
PARTNERS' CAPITAL.................................................................. $ 1,000
---------
---------
</TABLE>
NOTE TO BALANCE SHEET
TC PipeLines, LP (the "Partnership") was formed on December 16, 1998 as a
Delaware limited partnership. The Partnership was formed to acquire a 30%
interest in the assets of Northern Border Pipeline Company. In order to simplify
the Partnership's obligations under the laws of selected jurisdictions in which
the Partnership will conduct business, the Partnership's activities will be
conducted through a separate intermediate partnership, TC PipeLines Intermediate
Limited Partnership (the "Intermediate Partnership"). The assets and liabilities
of the Partnership will be conveyed to and assumed by the Intermediate
Partnership.
The Partnership intends to offer 15,640,000 common units, representing
limited partner interests in the Partnership, pursuant to a public offering and
to concurrently issue 3,960,000 subordinated units, representing additional
limited partner interests in the Partnership, to TransCan Northern Ltd., as well
as an aggregate 2% general partner interest in the Partnership and the
Intermediate Partnership, on a combined basis.
TC PipeLines GP, Inc. as general partner contributed $10 and TransCan
Northern Ltd. as the organizational limited partner, contributed $990 to the
Partnership on December 23, 1998. The Partnership invested $990 in the
Intermediate Partnership. There have been no other transactions involving the
Partnership as of December 23, 1998.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of Northern Border Pipeline Company:
We have audited the accompanying balance sheets of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 1996 and 1995, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 22, 1997
F-8
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................... 1,493,525 1,494,837
Construction work in progress................................................... 19,591 5,056
-------------- --------------
Total property, plant and equipment........................................... 1,513,116 1,499,893
Less: Accumulated provision for depreciation and amortization................... 575,257 542,306
-------------- --------------
Net property, plant and equipment............................................... 937,859 957,587
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents....................................................... 4,294 11,428
Receivables..................................................................... 19,264 20,195
Materials and supplies, at cost................................................. 3,847 4,065
-------------- --------------
Total current assets.......................................................... 27,405 35,688
-------------- --------------
DEFERRED CHARGES.................................................................. 8,873 18,086
-------------- --------------
974,137 1,011,361
-------------- --------------
-------------- --------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................. 526,962 555,964
-------------- --------------
LONG-TERM DEBT, net of current maturities......................................... 360,000 395,000
-------------- --------------
CURRENT LIABILITIES
Current maturities of long-term debt............................................ 17,500 15,000
Note payable.................................................................... 10,000 --
Accounts payable................................................................ 2,846 1,173
Accrued taxes other than income................................................. 20,968 19,903
Accrued interest................................................................ 10,353 10,516
Over recovered cost of service.................................................. 4,236 2,508
Accumulated provision for billings subject to refund............................ 12,227 --
-------------- --------------
Total current liabilities..................................................... 78,130 49,100
-------------- --------------
RESERVES AND DEFERRED CREDITS..................................................... 9,045 11,297
-------------- --------------
974,137 1,011,361
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-9
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
OPERATING REVENUES......................................................................... 201,943 206,497
--------- ---------
OPERATING EXPENSES
Operations and maintenance............................................................... 26,974 25,573
Depreciation and amortization............................................................ 46,979 47,081
Taxes other than income.................................................................. 24,390 23,886
--------- ---------
Operating expenses..................................................................... 98,343 96,540
--------- ---------
OPERATING INCOME........................................................................... 103,600 109,957
--------- ---------
INTEREST EXPENSE........................................................................... 33,117 35,205
--------- ---------
OTHER INCOME (EXPENSE)
Other income (expense), net.............................................................. 2,964 (307)
Allowance for equity funds used during construction...................................... 396 90
--------- ---------
Other income (expense)................................................................. 3,360 (217)
--------- ---------
NET INCOME................................................................................. 73,843 74,535
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-10
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................................. 73,843 74,535
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 47,010 47,083
Amortization of debt expense......................................................... 924 1,066
Allowance for equity funds used during construction.................................. (396) (90)
Provision for billings subject to refund............................................. 12,227 --
Other reserves and deferred credits.................................................. (2,252) 5,714
Changes in current assets and liabilities:
Receivables........................................................................ 931 (2,045)
Materials and supplies............................................................. 218 (253)
Accounts payable................................................................... 1,673 (252)
Accrued taxes other than income.................................................... 1,065 (295)
Accrued interest................................................................... (163) (243)
Over recovered cost of service..................................................... 1,728 2,209
---------- ----------
Total adjustments................................................................ 62,965 52,894
---------- ----------
Net cash provided by operating activities........................................ 136,808 127,429
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net........................................ (18,597) (8,310)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners.............................................................. (102,845) (98,517)
Retirement of long-term debt........................................................... (32,500) (35,000)
Borrowings on note payable............................................................. 10,000 --
---------- ----------
Net cash used in financing activities.................................................. (125,345) (133,517)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................................. (7,134) (14,398)
Cash and cash equivalents--beginning of year............................................. 11,428 25,826
---------- ----------
Cash and cash equivalents--end of year................................................... 4,294 11,428
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-11
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NORTHERN
BORDER
TRANSCANADA INTERMEDIATE
BORDER TRANSCAN LIMITED
PIPELINE LTD. NORTHERN LTD. PARTNERSHIP TOTAL
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.............................. 92,792 81,193 405,961 579,946
Net income.............................................. 11,925 10,435 52,175 74,535
Distributions........................................... (15,763) (13,793) (68,961) (98,517)
------------- ------------- ------------ ----------
Balance, December 31, 1995.............................. 88,954 77,835 389,175 555,964
Net income.............................................. 11,237 10,916 51,690 73,843
Distributions........................................... (13,936) (16,917) (71,992) (102,845)
Ownership transfer...................................... (54,637) 54,637 -- --
------------- ------------- ------------ ----------
Balance, December 31, 1996.............................. 31,618 126,471 368,873 526,962
------------- ------------- ------------ ----------
------------- ------------- ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-12
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership, formed March 9, 1978, pursuant to the Texas Uniform Partnership
Act. The ownership percentages of the partners in Northern Border Pipeline
(Partners) at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
PARTNER 1996 1995
- --------------------------------------------------------------------------------------------------- ----- -----
<S> <C> <C>
Northern Border Intermediate Limited Partnership................................................... 70 70
TransCanada Border PipeLine Ltd.................................................................... 6 16
TransCan Northern Ltd.............................................................................. 24 14
</TABLE>
The pipeline system owned by Northern Border Pipeline is a 969-mile natural
gas transmission line extending from the United States-Canadian border near Port
of Morgan, Montana, to a terminus near Harper, Iowa, where it interconnects with
the system of Natural Gas Pipeline Company of America.
Northern Border Pipeline is managed by a Management Committee that includes
three representatives from Northern Border Intermediate Limited Partnership
(Partnership) and one representative from TransCanada Border PipeLine Ltd. and
TransCan Northern Ltd. (collectively TransCanada), both of which are
wholly-owned subsidiaries of TransCanada PipeLines Limited. The Partnership's
representatives selected by its general partners, Northern Plains Natural Gas
Company (Northern Plains), a wholly-owned subsidiary of Enron Corp. (Enron), Pan
Border Gas Company, a wholly-owned subsidiary of PanEnergy Corp. (PanEnergy),
and Northwest Border Pipeline Company, a wholly-owned subsidiary of The Williams
Companies, Inc., have 35%, 22.75% and 12.25%, respectively, of the voting
interest on the Management Committee. The representative designated by
TransCanada votes the remaining 30% interest. The day-to-day management of
Northern Border Pipeline's affairs is the responsibility of Northern Plains (the
Operator), as defined by the operating agreement between Northern Border
Pipeline and Northern Plains. Northern Border Pipeline is charged for the
salaries, benefits and expenses of the Operator. Substantially all of the
operations and maintenance expenses are paid to the Operator and other Enron
affiliates.
Net income and distributions are allocated based on ownership percentage.
Effective December 1, 1996, TransCan Northern Ltd. purchased a portion of the
TransCanada Border Pipeline Ltd. equity ownership in Northern Border Pipeline.
The net income and distributions are reflected in the capital account balances
at their new ownership interests from that date forward.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northern Border Pipeline is subject to regulation by the Federal Energy
Regulatory Commission (FERC). Northern Border Pipeline's accounting policies
conform to generally accepted accounting principles, as applied in the case of
regulated entities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-13
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property, plant and equipment is stated at original cost. Construction work
in progress shown on the accompanying balance sheet includes approximately $16.8
million and $4.6 million at December 31, 1996 and 1995, respectively, of
project-to-date expenditures on Northern Border Pipeline's proposed expansion
and extension of its pipeline from its current terminus near Harper, Iowa to a
point near Manhattan, Illinois (The Chicago Project) (see Note 5).
Expenditures for 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 Northern Border Pipeline's FERC tariff
and its levelized cost of service. The effective depreciation rate applied to
Northern Border Pipeline's gross transmission plant in both 1996 and 1995 was
3.1% (see Note 5).
Composite rates are applied to all other functional groups of property
having similar economic characteristics. The original cost of property retired
is charged to accumulated depreciation and amortization, net of salvage and cost
of removal. No retirement gain or loss is included in income except in the case
of extraordinary retirements or sales.
(B) INCOME TAXES
Income taxes are the responsibility of the Partners and are not reflected in
these financial statements. However, the Northern Border Pipeline FERC tariff
establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, Partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $306.7 million and $322.7 million as of December 31, 1996 and
1995, respectively, and are primarily related to accelerated depreciation and
other plant-related differences.
(C) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
(D) REVENUE RECOGNITION
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency resulting from the comparison of
the cost of service determined for that period in accordance with the FERC
tariff (incurred cost of service) to the estimated billing is accumulated,
including carrying charges thereon and is either billed to or credited back to
the shippers. Revenues reflect incurred cost of service. An amount equal to
differences between billing estimates and the incurred cost of service,
including carrying charges, is reflected in current assets or current
liabilities.
F-14
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) represents the
estimated costs, during the period of construction, of funds used for
construction purposes. Recognition of this allowance is appropriate because it
constitutes an actual cost of construction. For regulated activities, Northern
Border Pipeline is permitted to earn a return on and recover AFUDC through its
inclusion in rate base and the provision for depreciation. The rate employed for
the equity component of AFUDC is the equity rate of return stated in Northern
Border Pipeline's FERC tariff.
(F) RISK MANAGEMENT
Financial instruments are used by Northern Border Pipeline in the management
of its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions which hedge interest rate risk by effectively converting
certain of its floating rate debt to fixed rate debt. Northern Border Pipeline
does not use these agreements for trading purposes. The cost or benefit of the
interest rate swap agreements is recognized currently as a component of interest
expense.
3. SHIPPER SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff which directs
that Northern Border Pipeline collect its cost of service through the firm
transportation service agreements (firm service agreements). Northern Border
Pipeline's FERC tariff provides an opportunity to recover all operations and
maintenance costs of the pipeline, taxes other than income taxes, interest,
depreciation and amortization, an allowance for income taxes and a regulated
equity return. Billings for the firm service agreements are based on contracted
volumes to determine the allocable share of cost of service and are not
dependent on the volumes actually transported.
Northern Border Pipeline has firm service agreements for various terms
extending as long as October 2012. Based on existing contracts and capacity,
Northern Border Pipeline has contracts for its entire firm capacity through
October 2001. Northern Border Pipeline also has interruptible service contracts
with numerous other shippers as a result of its self-implementing blanket
transportation authority. Revenues received from the interruptible service
contracts are credited to the cost of service reducing the billings for the firm
service agreements.
Northern Border Pipeline's largest shipper, Pan-Alberta Gas (U.S.) Inc.
(PAG-US), is obligated for approximately 49.0% of the cost of service through
its firm service agreements which expire in October 2001. Operating revenues
from the PAG-US firm service agreements and interruptible service contracts for
the years ended December 31, 1996 and 1995 were $101.7 million and $99.9
million, respectively. Northern Natural Gas Company, a wholly-owned subsidiary
of Enron, and Panhandle Eastern Pipe Line Company, a wholly-owned subsidiary of
PanEnergy, have executed financial guarantees representing 17.2% and 10.7%,
respectively, of the total cost of service related to the contracted capacity of
PAG-US. The remaining 21.1% of the cost of service obligation of PAG-US is
supported by various credit support arrangements, including among others, a
letter of credit, an escrow account and an upstream capacity transfer agreement.
F-15
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS (CONTINUED)
Shippers affiliated with the Partners of Northern Border Pipeline have firm
service agreements representing approximately 10.4% of the cost of service
through October 2001. These firm service agreements extend for various terms
which range from October 2005 to December 2008. Operating revenues from the
affiliated firm service agreements and interruptible service contracts for the
years ended December 31, 1996 and 1995 were $22.7 million and $18.8 million,
respectively.
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
In October 1996, Northern Border Pipeline entered into a one-year $50
million revolving credit agreement with a financial institution. The credit
agreement permits Northern Border Pipeline to choose among various interest rate
options, to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period, subject to
certain parameters. The interest rate options available under the credit
agreement are based upon the London Interbank Offered Rate (LIBOR), certificate
of deposit rates or other short-term interest rates. Compensating balances are
not required, but Northern Border Pipeline is required to pay a commitment fee
on unborrowed funds. In late December 1996, $10 million was borrowed under the
credit agreement at an interest rate of 5.94% and is shown as a note payable in
the accompanying balance sheet.
Northern Border Pipeline has senior notes in the aggregate principal amount
of $250 million at both December 31, 1996 and 1995, pursuant to note purchase
agreements, which combined have an average fixed interest rate of 8.43%. Annual
principal payments on the senior notes begin August 2000, with the final
principal payment due August 2003.
As of December 31, 1996 and 1995, Northern Border Pipeline had outstanding
$127.5 million and $160 million, respectively, under an amended bank loan
agreement. The amended bank loan agreement provides for fixed, semi-annual
repayments and has a final maturity of December 31, 1999. The amended bank loan
agreement permits Northern Border Pipeline to choose among various interest rate
options, to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period, subject to
certain parameters. The interest rate options available to Northern Border
Pipeline under the amended bank loan agreement are based upon LIBOR, CD Advances
rate or U.S. prime rate.
At both December 31, 1996 and 1995, Northern Border Pipeline had outstanding
interest rate swap agreements with notional amounts of $90 million and $115
million, respectively. Under the agreements, which have a remaining average
maturity of approximately three years as of December 31, 1996, Northern Border
Pipeline makes payments to counterparties at fixed rates and in return receives
payments at variable rates based on LIBOR. At both December 31, 1996 and 1995,
Northern Border Pipeline was in a payable position relative to its
counterparties. The average effective interest rate of Northern Border
Pipeline's amended bank loan agreement, taking into consideration the interest
rate swap agreements, was 7.32% and 7.39% at December 31, 1996 and 1995,
respectively.
F-16
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
The average interest rates and interest paid, net of amounts capitalized, on
the total outstanding debt, including the interest rate swap agreements, were as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Average interest rate during the year........................................................ 8.37% 8.34%
Average interest rate at December 31......................................................... 8.21% 8.38%
Interest paid, net of amounts capitalized, during the year (in millions of dollars).......... $ 31.9 $ 34.3
</TABLE>
Aggregate repayments of long-term debt required for the next five years are
as follows: $17.5 million, $50 million, $60 million, $66 million and $41 million
for 1997, 1998, 1999, 2000 and 2001, respectively.
The credit agreement, senior notes and amended bank loan agreement restrict
the incurrence of other indebtedness by Northern Border Pipeline and also place
certain restrictions on distributions to the partners of Northern Border
Pipeline. Under the most restrictive of the covenants, as of December 31, 1996
and 1995, respectively, $27 million and $29 million of Partners' capital of
Northern Border Pipeline could be distributed.
The following estimated fair values of financial instruments represent the
amount at which each instrument could be exchanged in a current transaction
between willing parties. Based on quoted market prices for similar issues with
similar terms and remaining maturities, the estimated fair value of the senior
notes was approximately $271 million and $282 million at December 31, 1996 and
1995, respectively. At December 31, 1996 and 1995, the estimated fair value
which would be payable to terminate the interest rate swap agreements, taking
into account current interest rates, was approximately $4 million and $7
million, respectively. Northern Border Pipeline presently intends to maintain
the current schedule of maturities for the senior notes and the interest rate
swap agreements which will result in no gains or losses on their respective
repayment. The carrying value of the credit agreement and the amended bank loan
agreement approximates the fair value since the interest rates are periodically
adjusted to current market conditions.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY PROCEEDINGS
In November 1995, Northern Border Pipeline filed a rate case in compliance
with its FERC tariff for the determination of its allowed equity rate of return.
In December 1995, the FERC issued an order that permitted Northern Border
Pipeline to begin collecting the requested increase in the equity rate of return
effective June 1, 1996, subject to refund. Northern Border Pipeline filed for
FERC approval of a Stipulation and Agreement (Stipulation) on October 15, 1996,
to settle its rate case. On November 19, 1996, the Stipulation was certified by
an Administrative Law Judge (ALJ) to the FERC for review and approval. In
accordance with the terms of the Stipulation, Northern Border Pipeline's allowed
equity rate of return would be reduced from a requested 14.25% to 12.75% for the
period June 1, 1996 to October 1, 1996 and to 12% thereafter. Additionally, the
Stipulation would reduce the depreciation rate applied to Northern Border
Pipeline's gross transmission plant from 3.6% to 2.7% for the period June 1,
1996 to December 31, 1996, resulting in an average effective depreciation rate
of 3.1% for the year ended December 31, 1996. Beginning January 1, 1997, the
depreciation rate would be reduced to 2.5%. Northern Border Pipeline has reduced
its
F-17
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating revenues by approximately $12.2 million for the year ended December
31, 1996, which includes $7.4 million attributable to the reduction in
depreciation and amortization expense for 1996, to reflect the terms of the
Stipulation. Northern Border Pipeline must receive FERC approval of the
Stipulation before it can implement all of the filed for terms and any
associated refunds. Northern Border Pipeline is unable to predict if or when the
Stipulation will be approved as filed and thus actual results could differ from
amounts recorded.
In August 1996, the FERC issued an order which contained a preliminary
determination favorable to Northern Border Pipeline's October 1995 amended
application with the FERC for The Chicago Project. The preliminary determination
found that The Chicago Project is required by the public convenience and
necessity and authorizes the project facility costs to be included with existing
facility costs in the determination of rates. The preliminary determination
contemplates issuance of a final order by the FERC, subject to completion of the
environmental review. In September 1996, Northern Border Pipeline filed an
amendment to its October 1995 application to reflect limited facility
modifications which among other things, reduced environmental impacts and
project costs. In December 1996, the FERC issued a draft Environmental Impact
Statement (EIS) which concluded The Chicago Project would have a limited adverse
environmental impact and would be environmentally acceptable after adoption of
certain recommended mitigation measures. Northern Border Pipeline's September
1996 application with the FERC for The Chicago Project facilities proposes
construction and operation of 243 miles of pipeline, 147 miles of pipeline loop
and a total of 228,500 compressor horsepower at eight compressor stations. The
application also requests approval to remove from service 100,000 compressor
horsepower at five existing compressor stations to be replaced with 175,000
compressor horsepower. The project is expected to cost, using certain
construction cost escalation assumptions, approximately $837 million and,
subject to timely regulatory approvals, be ready for service in November 1998. A
final EIS and FERC order approving construction and operation of The Chicago
Project is anticipated in 1997.
In May 1996, the FERC granted rehearing of its May 1994 order on Northern
Border Pipeline's methodology for recording in its books and reflecting in its
rates amounts related to alternative minimum tax (AMT). The FERC Audit Staff
(Staff), in December 1991 after an examination of Northern Border Pipeline's
records for the period January 1, 1987 through December 31, 1989, took exception
to Northern Border Pipeline's established method of accounting for AMT for
ratemaking purposes. Northern Border Pipeline did not agree with the exception
noted by the Staff and proceeded with a hearing before an ALJ who concluded
Northern Border Pipeline had properly accounted for AMT. Ultimately, in the May
1996 order, the FERC accepted the ALJ's conclusions and vacated its May 1994
order which had held that the AMT component of Northern Border Pipeline's rate
base should reflect the particular tax circumstances of each Northern Border
Pipeline partner. There were no accounting adjustments or rate refunds required
in resolution of this issue.
In May 1996, the Staff issued its audit report on its examination of
Northern Border Pipeline's records for the three year period subsequent to
January 1, 1990. The audit report required Northern Border Pipeline to record
certain adjustments to its accounts including the reclassification of $3.9
million of costs from utility plant in service to a regulatory asset. In
accordance with Northern Border Pipeline's FERC tariff, the regulatory asset is
includable in rate base, however Northern Border Pipeline must file with the
FERC for the future recovery of this asset through amortization in cost of
service. The adjustments made to Northern Border Pipeline's accounts as a result
of the
F-18
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
audit report did not materially affect Northern Border Pipeline's financial
position or results of operations.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent liabilities
with respect to compliance with applicable environmental laws and regulations.
OTHER
Various legal actions which have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues, including the FERC proceedings discussed above, will not have a material
adverse impact on Northern Border Pipeline's results of operations or financial
position.
6. CAPITAL EXPENDITURE PROGRAM
Total capital expenditures for 1997 are estimated to be $210 million for The
Chicago Project and $14 million for renewals and replacements for the existing
facilities. Funds required to meet the 1997 capital expenditures are anticipated
to be provided primarily from debt borrowings and equity contributions.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of Northern Border Pipeline Company:
We have audited the accompanying balance sheets of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 1997 and 1996, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 26, 1998
F-20
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................... 1,497,743 1,493,525
Construction work in progress................................................... 211,378 19,591
-------------- --------------
Total property, plant and equipment........................................... 1,709,121 1,513,116
Less: Accumulated provision for depreciation and amortization................... 608,231 575,257
-------------- --------------
Net property, plant and equipment............................................. 1,100,890 937,859
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents....................................................... 19,986 4,294
Receivables..................................................................... 17,337 19,264
Materials and supplies, at cost................................................. 3,677 3,847
-------------- --------------
Total current assets.......................................................... 41,000 27,405
-------------- --------------
DEFERRED CHARGES.................................................................. 5,230 8,873
-------------- --------------
1,147,120 974,137
-------------- --------------
-------------- --------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................. 581,412 526,962
-------------- --------------
LONG-TERM DEBT, net of current maturities......................................... 459,000 360,000
-------------- --------------
CURRENT LIABILITIES
Current maturities of long-term debt............................................ -- 17,500
Note payable.................................................................... -- 10,000
Accounts payable................................................................ 61,618 2,846
Accrued taxes other than income................................................. 20,294 20,968
Accrued interest................................................................ 10,367 10,353
Over recovered cost of service.................................................. 4,601 4,236
Accumulated provision for rate refunds.......................................... -- 12,227
-------------- --------------
Total current liabilities..................................................... 96,880 78,130
-------------- --------------
RESERVES AND DEFERRED CREDITS..................................................... 9,828 9,045
-------------- --------------
1,147,120 974,137
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING REVENUES
Operating revenues....................................................................... 226,019 214,103
Provision for rate refunds............................................................... (39,969) (12,160)
--------- ---------
Operating revenues, net................................................................ 186,050 201,943
--------- ---------
OPERATING EXPENSES
Operations and maintenance............................................................... 28,522 26,974
Depreciation and amortization............................................................ 38,708 46,979
Taxes other than income.................................................................. 22,393 24,390
--------- ---------
Operating expenses..................................................................... 89,623 98,343
--------- ---------
OPERATING INCOME........................................................................... 96,427 103,600
--------- ---------
INTEREST EXPENSE........................................................................... 33,020 33,117
--------- ---------
OTHER INCOME
Other income, net........................................................................ 4,305 2,517
Allowance for borrowed funds used during construction.................................... 3,660 447
Allowance for equity funds used during construction...................................... 1,400 396
--------- ---------
Other income........................................................................... 9,365 3,360
--------- ---------
NET INCOME................................................................................. 72,772 73,843
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-22
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. 72,772 73,843
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 38,715 47,010
Amortization of debt expense....................................................... 296 924
Allowance for equity funds used during construction................................ (1,400) (396)
Provision for rate refunds......................................................... 40,403 12,227
Rate refunds paid.................................................................. (52,630) --
Other reserves and deferred credits................................................ 783 (2,252)
Changes in current assets and liabilities:
Receivables...................................................................... 1,927 931
Materials and supplies........................................................... 170 218
Accounts payable................................................................. 14,587 1,673
Accrued taxes other than income.................................................. (674) 1,065
Accrued interest................................................................. 14 (163)
Over recovered cost of service................................................... 365 1,728
---------- ----------
Total adjustments.............................................................. 42,556 62,965
---------- ----------
Net cash provided by operating activities...................................... 115,328 136,808
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net.................................... (152,070) (18,597)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners.......................................................... 81,000 --
Distributions to Partners............................................................ (99,322) (102,845)
Issuance of long-term debt........................................................... 209,000 --
Retirement of long-term debt......................................................... (127,500) (32,500)
(Repayment of) borrowings on note payable............................................ (10,000) 10,000
Long-term debt issuance costs........................................................ (744) --
---------- ----------
Net cash provided by (used in) financing activities................................ 52,434 (125,345)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................................. 15,692 (7,134)
Cash and cash equivalents--beginning of period........................................... 4,294 11,428
---------- ----------
Cash and cash equivalents--end of period................................................. 19,986 4,294
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-23
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NORTHERN
BORDER
TRANSCANADA INTERMEDIATE
BORDER TRANSCAN LIMITED
PIPELINE LTD. NORTHERN LTD. PARTNERSHIP TOTAL
-------------------- ------------- -------------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............... 88,954 77,835 389,175 555,964
Net Income............................... 11,237 10,916 51,690 73,843
Distributions............................ (13,936) (16,917) (71,992) (102,845)
Ownership transfer....................... (54,637) 54,637 -- --
------- ------------- -------- ----------
Balance, December 31, 1996............... 31,618 126,471 368,873 526,962
Net Income............................... 4,366 17,466 50,940 72,772
Contributions............................ 4,860 19,440 56,700 81,000
Distributions............................ (5,959) (23,838) (69,525) (99,322)
------- ------------- -------- ----------
Balance, December 31, 1997............... 34,885 139,539 406,988 581,412
------- ------------- -------- ----------
------- ------------- -------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-24
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership, formed March 9, 1978, pursuant to the Texas Uniform Partnership
Act. The ownership percentages of the partners in Northern Border Pipeline
(Partners) at both December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
OWNERSHIP
PARTNER PERCENTAGE
- --------------------------------------------------------------------------------- -----------------
<S> <C>
Northern Border Intermediate Limited Partnership................................. 70
TransCan Northern Ltd............................................................ 24
TransCanada Border PipeLine Ltd.................................................. 6
</TABLE>
The pipeline system owned by Northern Border Pipeline is a 969-mile natural
gas transmission line extending from the United States-Canadian border near Port
of Morgan, Montana, to a terminus near Harper, Iowa, where it interconnects with
the pipeline system of Natural Gas Pipeline Company of America (NGPL).
Northern Border Pipeline is managed by a Management Committee that includes
three representatives from Northern Border Intermediate Limited Partnership
(Partnership) and one representative from TransCanada Border PipeLine Ltd. and
TransCan Northern Ltd. (collectively TransCanada), both of which are
wholly-owned subsidiaries of TransCanada PipeLines Limited. The Partnership's
representatives selected by its general partners, Northern Plains Natural Gas
Company (Northern Plains), a wholly-owned subsidiary of Enron Corp. (Enron), Pan
Border Gas Company, a wholly-owned subsidiary of Duke Energy Corporation (Duke
Energy), and Northwest Border Pipeline Company, a wholly-owned subsidiary of The
Williams Companies, Inc., have 35%, 22.75% and 12.25%, respectively, of the
voting interest on the Management Committee. The representative designated by
TransCanada votes the remaining 30% interest. The day-to-day management of
Northern Border Pipeline's affairs is the responsibility of Northern Plains (the
Operator), as defined by the operating agreement between Northern Border
Pipeline and Northern Plains. Northern Border Pipeline is charged for the
salaries, benefits and expenses of the Operator. Substantially all of the
operations and maintenance expenses are paid to the Operator and other Enron
affiliates.
Net income and distributions are allocated based on ownership percentage.
Effective December 1, 1996, TransCan Northern Ltd. purchased a portion of the
TransCanada Border PipeLine Ltd. equity ownership in Northern Border Pipeline.
The net income and distributions are reflected in the capital account balances
at their new ownership interests from that date forward.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northern Border Pipeline is subject to regulation by the Federal Energy
Regulatory Commission (FERC). Northern Border Pipeline's accounting policies
conform to generally accepted accounting principles, as applied in the case of
regulated entities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-25
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property, plant and equipment is stated at original cost. Construction work
in progress shown on the accompanying balance sheet includes approximately
$197.9 million and $16.8 million at December 31, 1997 and 1996, respectively, of
project-to-date costs on Northern Border Pipeline's expansion and extension of
its pipeline from its current terminus near Harper, Iowa to a point near
Manhattan, Illinois (The Chicago Project) (see Note 5). At December 31, 1997,
approximately $44.2 million of project costs incurred but not paid for The
Chicago Project were recorded in accounts payable and construction work in
progress on the balance sheet and were excluded from the change in accounts
payable and expenditures for property, plant and equipment, net on the
statements of cash flows.
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 Northern Border Pipeline's FERC tariff and its levelized cost
of service. The effective depreciation rate applied to Northern Border
Pipeline's gross transmission plant in 1997 and 1996 was 2.5% and 3.1%,
respectively (see Note 5). Composite rates are applied to all other functional
groups of property having similar economic characteristics.
The original cost of property retired is charged to accumulated depreciation
and amortization, net of salvage and cost of removal. No retirement gain or loss
is included in income except in the case of extraordinary retirements or sales.
(B) INCOME TAXES
Income taxes are the responsibility of the Partners and are not reflected in
these financial statements. However, the Northern Border Pipeline FERC tariff
establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, Partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $300.0 million and $306.7 million as of December 31, 1997 and
1996, respectively, and are primarily related to accelerated depreciation and
other plant-related differences.
(C) REVENUE RECOGNITION
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency resulting from the comparison of
the cost of service determined for that period in accordance with the FERC
tariff (incurred cost of service) to the estimated billing is accumulated,
including carrying charges thereon and is either billed to or credited back to
the shippers. Revenues reflect incurred cost of service. An amount equal to
differences between billing estimates and the incurred cost of service,
including carrying charges, is reflected in current assets or current
liabilities.
F-26
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) represents the
estimated costs, during the period of construction, of funds used for
construction purposes. Recognition of this allowance is appropriate because it
constitutes an actual cost of construction. For regulated activities, Northern
Border Pipeline is permitted to earn a return on and recover AFUDC through its
inclusion in rate base and the provision for depreciation. The rate employed for
the equity component of AFUDC is the equity rate of return stated in Northern
Border Pipeline's FERC tariff.
(E) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
(F) RISK MANAGEMENT
Financial instruments are used by Northern Border Pipeline in the management
of its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions which hedge interest rate risk by effectively converting
certain of its floating rate debt to fixed rate debt. Northern Border Pipeline
does not use these agreements for trading purposes. The cost or benefit of the
interest rate swap agreements is recognized currently as a component of interest
expense.
3. SHIPPER SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff which directs
that Northern Border Pipeline collect its cost of service through firm
transportation service agreements (firm service agreements). Northern Border
Pipeline's FERC tariff provides an opportunity to recover all operations and
maintenance costs of the pipeline, taxes other than income taxes, interest,
depreciation and amortization, an allowance for income taxes and a regulated
equity return. Billings for the firm service agreements are based on contracted
volumes to determine the allocable share of cost of service and are not
dependent upon the percentage of available capacity actually used.
Northern Border Pipeline's firm service agreements, including firm service
agreements applicable to The Chicago Project, extend for various terms with
termination dates that range from October 2001 to October 2013. Northern Border
Pipeline also has interruptible service contracts with numerous other shippers
as a result of its self-implementing blanket transportation authority. Revenues
received from the interruptible service contracts are credited to the cost of
service reducing the billings for the firm service agreements.
At December 31, 1997, Northern Border Pipeline's largest shipper,
Pan-Alberta Gas (U.S.) Inc. (PAGUS), was obligated for approximately 49.0% of
the cost of service through its firm service agreements which expire in October
2001. Operating revenues from the PAGUS firm service agreements and
interruptible service contracts for the years ended December 31, 1997 and 1996
were $86.8 million and $95.7 million, respectively. Northern Natural Gas Company
(Northern), a wholly-
F-27
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS (CONTINUED)
owned subsidiary of Enron, and Panhandle Eastern Pipe Line Company (Panhandle),
a wholly-owned subsidiary of Duke Energy, have executed financial guarantees
representing 17.2% and 10.7%, respectively, of the total cost of service related
to the contracted capacity of PAGUS. The remaining cost of service obligation of
PAGUS is supported by various credit support arrangements, including among
others, a letter of credit, an escrow account and an upstream capacity transfer
agreement. After The Chicago Project is placed in service, PAGUS is obligated
for approximately 29.9% of the cost of service and the financial guarantees
related to the PAGUS contracted capacity by Northern and Panhandle will
represent 10.5% and 6.5%, respectively, of the total cost of service.
Shippers affiliated with the Partners of Northern Border Pipeline have firm
service agreements representing approximately 12.6% of the cost of service at
December 31, 1997. These firm service agreements extend for various terms with
termination dates that range from October 2003 to December 2008. Operating
revenues from the affiliated firm service agreements and interruptible service
contracts for the years ended December 31, 1997 and 1996 were $20.2 million and
$21.4 million, respectively.
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Detailed information on short-term borrowings and long-term debt is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
(THOUSANDS OF DOLLARS) 1997 1996
- ----------------------------------------------------------------------- --------- ---------
Senior notes--average 8.43% due from 2000 to 2003...................... 250,000 250,000
1996 one-year revolving credit facility--average 5.95% and 5.94% in
1997 and 1996, respectively.......................................... -- 10,000
Pipeline Credit Agreement
Five-year revolving credit facility.................................. 127,500 --
Three-year revolving credit facility................................. 81,500 --
Amended bank loan agreement due 1999................................... -- 127,500
--------- ---------
Total.................................................................. 459,000 387,500
Less: Current maturities of long-term debt............................. -- 17,500
Amount classified as note payable...................................... -- 10,000
--------- ---------
Long-term debt......................................................... 459,000 360,000
--------- ---------
--------- ---------
</TABLE>
In June 1997, Northern Border Pipeline entered into a credit agreement
(Pipeline Credit Agreement) with certain financial institutions to borrow up to
an aggregate principal amount of $750 million. The Pipeline Credit Agreement is
comprised of a $200 million five-year revolving credit facility to be used for
the retirement of Northern Border Pipeline's existing bank loan agreement and
for general business purposes, and a $550 million three-year revolving credit
facility to be used for the construction of The Chicago Project. The three-year
revolving credit facility may be converted to a term loan maturing in June 2002
once The Chicago Project has been placed in service and certain other conditions
are met. The Pipeline Credit Agreement permits Northern Border Pipeline to
choose among various interest rate options, to specify the portion of the
borrowings to be covered
F-28
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
by specific interest rate options and to specify the interest rate period,
subject to certain parameters. Northern Border Pipeline is required to pay a
facility fee on the aggregate principal amount of $750 million.
At both December 31, 1997 and 1996, Northern Border Pipeline had outstanding
interest rate swap agreements with notional amounts of $90 million. Under the
agreements, which have a remaining average maturity of approximately two years
as of December 31, 1997, Northern Border Pipeline makes payments to
counterparties at fixed rates and in return receives payments at variable rates
based on the London Interbank Offered Rate. At both December 31, 1997 and 1996,
Northern Border Pipeline was in a payable position relative to its
counterparties. The average effective interest rate of Northern Border
Pipeline's variable rate debt, taking into consideration the interest rate swap
agreements, was 7.09% and 7.32% at December 31, 1997 and 1996, respectively.
Interest paid, net of amounts capitalized, during the years ended December
31, 1997 and 1996 was $29.0 million and $31.9 million, respectively.
Aggregate required repayments of long-term debt are as follows: $148
million, $41 million and $206 million for 2000, 2001 and 2002, respectively.
There are no required repayment obligations for 1998 and 1999.
Certain of Northern Border Pipeline's long-term debt and credit arrangements
contain requirements as to the maintenance of minimum partners' capital and debt
to capitalization ratios which restrict the incurrence of other indebtedness by
Northern Border Pipeline and also place certain restrictions on distributions to
the partners of Northern Border Pipeline. Under the most restrictive of the
covenants, as of December 31, 1997 and 1996, respectively, $81 million and $27
million of partners' capital of Northern Border Pipeline could be distributed.
The following estimated fair values of financial instruments represent the
amount at which each instrument could be exchanged in a current transaction
between willing parties. Based on quoted market prices for similar issues with
similar terms and remaining maturities, the estimated fair value of the senior
notes was approximately $276 million and $271 million at December 31, 1997 and
1996, respectively. At December 31, 1997 and 1996, the estimated fair value
which would be payable to terminate the interest rate swap agreements, taking
into account current interest rates, was approximately $3 million and $4
million, respectively. Northern Border Pipeline presently intends to maintain
the current schedule of maturities for the senior notes and the interest rate
swap agreements which will result in no gains or losses on their respective
repayment. The carrying value of Northern Border Pipeline's variable rate debt
approximates the fair value since the interest rates are periodically adjusted
to current market conditions.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY PROCEEDINGS
In January 1998, Northern Border Pipeline filed an application with the FERC
to acquire the linepack gas required to operate the pipeline from the shippers
and to provide the linepack gas in the future for its operations. The estimated
value of the linepack gas, including the linepack gas attributable to the
pipeline extension for The Chicago Project, is $12.5 million. Northern Border
Pipeline has proposed that the cost of the linepack gas be included in its rate
base.
F-29
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In August 1997, Northern Border Pipeline received FERC approval of the
Stipulation and Agreement (Stipulation) filed on October 15, 1996 to settle its
November 1995 rate case. Northern Border Pipeline filed the rate case, in
compliance with its FERC tariff, for the determination of its allowed equity
rate of return and was permitted, pursuant to a December 1995 FERC order, to
begin collecting the requested increase in the equity rate of return effective
June 1, 1996, subject to refund. In accordance with the terms of the
Stipulation, Northern Border Pipeline's allowed equity rate of return was
reduced from the requested 14.25% to 12.75% for the period June 1, 1996 to
September 30, 1996 and to 12% thereafter. Additionally, the Stipulation reduced
the effective depreciation rate applied to Northern Border Pipeline's gross
transmission plant from 3.6% to 2.7% for the period June 1, 1996 to December 31,
1996, which resulted in an average effective depreciation rate of 3.1% for the
year ended December 31, 1996. Beginning January 1, 1997, the depreciation rate
was reduced to 2.5%. In October 1997, Northern Border Pipeline used a
combination of cash on hand and borrowings on a revolving credit facility to pay
refunds to its shippers of approximately $52.6 million.
In August 1997, the FERC issued a certificate of public convenience and
necessity authorizing Northern Border Pipeline to construct and operate
facilities, as filed for in a September 1996 application with the FERC for The
Chicago Project. Northern Border Pipeline has accepted the certificate and
construction is proceeding. NGPL had filed in the United States Court of Appeals
for the District of Columbia a petition for review of the August order issued by
the FERC that has been dismissed. The Chicago Project pipeline facilities
consist of 243 miles of pipeline and 147 miles of pipeline loop. Compression
facilities for The Chicago Project involve the installation of 228,500
compressor horsepower at eight new compressor stations and upgrades at five
existing compressor stations by the removal from service of units producing
100,000 compressor horsepower with the installation of replacement units
producing 175,000 compressor horsepower. The project's estimated cost, as filed
with the FERC, is approximately $839 million and it is expected to be ready for
service in the fourth quarter of 1998.
In May 1996, the FERC granted rehearing of its May 1994 order on Northern
Border Pipeline's methodology for recording in its books and reflecting in its
rates amounts related to alternative minimum tax (AMT). The FERC Audit Staff
(Staff), in December 1991 after an examination of Northern Border Pipeline's
records for the period January 1, 1987 through December 31, 1989, took exception
to Northern Border Pipeline's established method of accounting for AMT for
ratemaking purposes.
Northern Border Pipeline did not agree with the exception noted by the Staff
and proceeded with a hearing before an Administrative Law Judge (ALJ) who
concluded Northern Border Pipeline had properly accounted for AMT. Ultimately,
in the May 1996 order, the FERC accepted the ALJ's conclusions and vacated its
May 1994 order which had held that the AMT component of Northern Border
Pipeline's rate base should reflect the particular tax circumstances of each
Northern Border Pipeline partner. There were no accounting adjustments or rate
refunds required in resolution of this issue.
In May 1996, the Staff issued its audit report on its examination of
Northern Border Pipeline's records for the three year period subsequent to
January 1, 1990. The audit report required Northern Border Pipeline to record
certain adjustments to its accounts including the reclassification of $3.9
million of costs from utility plant in service to a regulatory asset. In
accordance with Northern
F-30
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Border Pipeline's FERC tariff, the regulatory asset is includable in rate base,
however, Northern Border Pipeline must file with the FERC for the future
recovery of this asset through amortization in cost of service. The adjustments
made to Northern Border Pipeline's accounts as a result of the audit report did
not materially affect Northern Border Pipeline's financial position or results
of operations.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent liabilities
with respect to compliance with applicable environmental laws and regulations.
OTHER
Various legal actions that have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues will not have a material adverse impact on Northern Border Pipeline's
results of operations or financial position.
6. CAPITAL EXPENDITURE PROGRAM
Total capital expenditures for 1998 are estimated to be $637 million for The
Chicago Project and $8 million for renewals and replacements of the existing
facilities. Capital expenditures for linepack gas, if the filing to acquire the
linepack is approved by the FERC, would be approximately $12.5 million (see Note
5). Funds required to meet the 1998 capital expenditures are anticipated to be
provided primarily from debt borrowings and capital contributions.
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of
Northern Border Pipeline Company:
We have reviewed the accompanying balance sheet of Northern Border Pipeline
Company (a Texas partnership) as of September 30,1998, the related statements of
income and cash flows for the three-month and nine-month periods ended September
30, 1998 and 1997, and the related statements of changes in partners' capital
for the three-month and nine-month periods ended September 30, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 13, 1998
F-32
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
<S> <C>
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................................... 1,538,092
Construction work in progress................................................................... 649,167
--------------
Total property, plant and equipment........................................................... 2,187,259
Less: Accumulated provision for depreciation and amortization................................... 584,397
--------------
Net property, plant and equipment............................................................. 1,602,862
--------------
CURRENT ASSETS
Cash and cash equivalents....................................................................... 19,952
Receivables..................................................................................... 16,021
Materials and supplies, at cost................................................................. 3,824
Under recovered cost of service................................................................. 1,381
--------------
Total current assets.......................................................................... 41,178
--------------
DEFERRED CHARGES.................................................................................. 9,764
--------------
1,653,804
--------------
--------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................................. 789,258
--------------
LONG-TERM DEBT.................................................................................... 724,000
--------------
CURRENT LIABILITIES
Accounts payable................................................................................ 103,009
Accrued taxes other than income................................................................. 21,449
Accrued interest................................................................................ 6,270
Over recovered cost of service.................................................................. --
--------------
Total current liabilities..................................................................... 130,728
--------------
RESERVES AND DEFERRED CREDITS..................................................................... 9,818
--------------
1,653,804
--------------
--------------
</TABLE>
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-33
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Operating revenues.................................................. 49,121 46,586 145,476 180,338
Provision for rate refunds.......................................... -- 893 -- (39,969)
--------- --------- --------- ---------
Operating revenues, net........................................... 49,121 47,479 145,476 140,369
--------- --------- --------- ---------
OPERATING EXPENSES
Operations and maintenance.......................................... 7,137 7,086 21,581 21,027
Depreciation and amortization....................................... 10,272 9,737 30,060 28,988
Taxes other than income............................................. 5,362 5,818 17,267 17,793
Regulatory credit................................................... (2,479) -- (4,709) --
--------- --------- --------- ---------
Operating expenses................................................ 20,292 22,641 64,199 67,808
--------- --------- --------- ---------
OPERATING INCOME...................................................... 28,829 24,838 81,277 72,561
--------- --------- --------- ---------
INTEREST EXPENSE...................................................... 11,742 8,324 30,422 24,162
--------- --------- --------- ---------
OTHER INCOME
Allowance for funds used during construction
Debt.............................................................. 5,811 1,023 12,022 1,874
Equity............................................................ 3,408 369 7,921 801
Other income (expenses), net........................................ 639 (527) 1,253 2,280
--------- --------- --------- ---------
Other income...................................................... 9,858 865 21,196 4,955
--------- --------- --------- ---------
NET INCOME............................................................ 26,945 17,379 72,051 53,354
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-34
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ 26,945 17,379 72,051 53,354
--------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 10,274 9,707 30,071 28,991
Amortization of debt expense...................................... 91 88 273 201
Allowance for equity funds used during construction............... (3,408) (369) (7,921) (801)
Provision for rate refunds........................................ -- (709) -- 40,403
Regulatory credit................................................. (2,549) -- (4,807) --
Other reserves and deferred credits............................... (40) 773 (10) 773
Changes in current assets and liabilities:
Receivables..................................................... (385) 6,762 1,316 3,497
Materials and supplies.......................................... (343) (601) (147) (216)
Accounts payable................................................ (397) 1,414 1,488 (376)
Accrued taxes other than income................................. 3,085 4,683 1,155 381
Accrued interest................................................ (4,255) (4,320) (4,097) (5,430)
Over/under recovered cost of service............................ (352) 1,988 (5,982) 827
--------- --------- --------- ---------
Total adjustments............................................. 1,721 19,416 11,339 68,250
--------- --------- --------- ---------
Net cash provided by operating activities..................... 28,666 36,795 83,390 121,604
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net................... (185,284) (36,776) (484,219) (69,773)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners........................................... -- 40,000 197,000 40,000
Distributions to Partners............................................. (28,290) (32,870) (61,205) (99,322)
Issuance of long-term debt............................................ 175,000 -- 265,000 160,000
Retirement of long-term debt.......................................... -- -- -- (127,500)
Repayment of note payable............................................. -- -- -- (10,000)
Long-term debt issuance costs......................................... -- (7) -- (682)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities................. 146,710 7,123 400,795 (37,504)
--------- --------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................. (9,908) 7,142 (34) 14,327
Cash and cash equivalents--beginning of period.......................... 29,860 11,479 19,986 4,294
--------- --------- --------- ---------
Cash and cash equivalents--end of period................................ 19,952 18,621 19,952 18,621
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).................................. 10,095 11,533 22,224 27,517
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-35
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NORTHERN
TRANSCANADA BORDER
BORDER TRANSCAN INTERMEDIATE
PIPELINE NORTHERN LIMITED
LTD. LTD. PARTNERSHIP TOTAL
------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Balance, June 30, 1998...................................... 47,436 189,745 553,422 790,603
Net income.................................................. 1,617 6,467 18,861 26,945
Distributions............................................... (1,698) (6,790) (19,802) (28,290)
------------- ----------- ------------ ---------
Balance, September 30, 1998................................. 47,355 189,422 552,481 789,258
------------- ----------- ------------ ---------
------------- ----------- ------------ ---------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Balance, December 31, 1997.................................. 34,885 139,539 406,988 581,412
Net income.................................................. 4,323 17,292 50,436 72,051
Contributions............................................... 11,820 47,280 137,900 197,000
Distributions............................................... (3,673) (14,689) (42,843) (61,205)
------------- ----------- ------------ ---------
Balance, September 30, 1998................................. 47,355 189,422 552,481 789,258
------------- ----------- ------------ ---------
------------- ----------- ------------ ---------
</TABLE>
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-36
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
SELECTED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership and is subject to regulation by the Federal Energy Regulatory
Commission (FERC). The financial statements included herein have been prepared
by Northern Border Pipeline without audit in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted, although
Northern Border Pipeline believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements as of December
31, 1997, together with the report of independent public accountants thereon. In
the opinion of management, these statements reflect all adjustments which are
necessary for a fair statement of results for the interim periods.
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Income taxes are the responsibility of the partners and are not
reflected in these financial statements. However, the Northern Border Pipeline
tariff establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $296.0 million and $300.0 million as of September 30,1998 and
December 31, 1997, respectively, and are primarily related to accelerated
depreciation and other plant-related differences.
3. Construction work in progress shown on the accompanying balance sheets
includes approximately $648.1 million and $197.9 million at September 30, 1998
and December 31, 1997, respectively, of project-to-date costs on Northern Border
Pipeline's expansion and extension of its pipeline system from its current
terminus near Harper, Iowa to a point near Manhattan, Illinois (The Chicago
Project). At September 30, 1998 and December 31, 1997, respectively,
approximately $84.1 million and $44.2 million of project costs incurred but not
paid for The Chicago Project were recorded in accounts payable and construction
work in progress on the balance sheet and were excluded from the change in
accounts payable and expenditures for property, plant and equipment, net on the
statements of cash flows. The project's budgeted cost, as filed with the FERC,
is $839 million and it is expected to be ready for service in December 1998.
4. In September 1998, Pan-Alberta Gas (U.S.) Inc. (PAGUS), Northern Border
Pipeline's largest shipper, signed amendments to its transportation contracts
covering 741 million cubic feet per day of capacity. The amendments extend the
contracts for two years through October 2003.
PAGUS became a related party to Northern Border Pipeline after the merger of
NOVA Corporation and TransCanada PipeLines Limited (TransCanada) effective July
2, 1998. Two of Northern Border Pipeline's partners, TransCanada Border PipeLine
Ltd. and TransCan Northern Ltd., are wholly-owned subsidiaries of TransCanada.
At the time of the merger, the parent company of PAGUS was a subsidiary of NOVA
Corporation. On August 6, 1998, Pan-Alberta Gas Ltd., the parent company of
PAGUS, announced the pending sale of its business, once certain conditions are
met.
F-37
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
SELECTED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
5. During September 1998, Northern Border Pipeline executed anticipatory
hedge transactions with an aggregate notional amount of $150 million to lock in
the interest rate for a planned issuance of fixed rate debt during 1999. The
average effective interest rate on the transactions, based on ten-year U.S.
Treasury Notes, is 4.90%. At September 30, 1998, the estimated fair value which
would be payable to terminate the anticipatory hedge transactions, taking into
account current interest rates, was approximately $5 million.
6. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133--"Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which establishes accounting
and reporting standards requiring that every derivative instrument be recorded
on the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999, but may be
implemented as of the beginning of any fiscal quarter after issuance. Adoption
of the statement is not expected to have a material effect on Northern Border
Pipeline's financial position or results of operation.
7. Certain balances in the 1997 financial statements have been reclassified
to be consistent with current presentation.
F-38
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of TC PipeLines GP, Inc.
We have audited the accompanying balance sheet of TC PipeLines GP, Inc. as
of December 23, 1998. This financial statement is the responsibility of the
management of the company. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of TC PipeLines GP, Inc. as of
December 23, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Calgary, Canada
December 23, 1998
F-39
<PAGE>
TC PIPELINES GP, INC.
BALANCE SHEET
DECEMBER 23, 1998
<TABLE>
<S> <C>
ASSETS
Cash............................................................................. $ 980
Investment in TC PipeLines, LP................................................... 10
Investment in TC PipeLines Intermediate Limited Partnership...................... 10
---------
$ 1,000
---------
---------
SHARE CAPITAL...................................................................... $ 1,000
---------
---------
</TABLE>
NOTE TO BALANCE SHEET
TC PipeLines GP, Inc. (the "General Partner") is a wholly-owned subsidiary
of TransCanada Border PipeLine Ltd. ("TransCanada Border PipeLine"). TransCanada
Border PipeLine is a wholly-owned subsidiary of TransCanada PipeLine USA Ltd.,
which is a wholly-owned subsidiary of TransCanada PipeLines Limited. The General
Partner was formed on December 16, 1998 as a Delaware corporation. The General
Partner owns a 1.0% general partner interest in TC PipeLines, LP (the
"Partnership") and a 1.0101% general partner interest in TC PipeLines
Intermediate Limited Partnership (the "Intermediate Partnership").
The General Partner has invested $10 in the Partnership and $10 in the
Intermediate Partnership. There have been no other transactions involving the
General Partner as of December 23, 1998.
F-40
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
TC PIPELINES, LP
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<S> <C> <C>
Section 1.1 Definitions............................................................ 1
Section 1.2 Construction........................................................... 16
ARTICLE II
ORGANIZATION
Section 2.1 Formation.............................................................. 16
Section 2.2 Name................................................................... 17
Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices... 17
Section 2.4 Purpose and Business................................................... 17
Section 2.5 Powers................................................................. 18
Section 2.6 Power of Attorney...................................................... 18
Section 2.7 Term................................................................... 19
Section 2.8 Title to Partnership Assets............................................ 19
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability................................................ 19
Section 3.2 Management of Business................................................. 20
Section 3.3 Outside Activities of the Limited Partners............................. 20
Section 3.4 Rights of Limited Partners............................................. 20
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 Certificates........................................................... 21
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates...................... 21
Section 4.3 Record Holders......................................................... 22
Section 4.4 Transfer Generally..................................................... 22
Section 4.5 Registration and Transfer of Limited Partner Interests................. 22
Section 4.6 Transfer of the General Partner's General Partner Interest............. 23
Section 4.7 Transfer of Incentive Distribution Rights.............................. 24
Section 4.8 Restrictions on Transfers.............................................. 24
Section 4.9 Citizenship Certificates; Non-citizen Assignees........................ 25
Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees........... 26
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions........................................... 27
Section 5.2 Contributions to the Partnership....................................... 27
Section 5.3 Contributions by Initial Limited Partners and Reimbursement of the
General Partner........................................................ 27
Section 5.4 Interest and Withdrawal................................................ 28
Section 5.5 Capital Accounts....................................................... 28
Section 5.6 Issuances of Additional Partnership Securities......................... 31
Section 5.7 Limitations on Issuance of Additional Partnership Securities........... 31
Section 5.8 Conversion of Subordinated Units....................................... 33
Section 5.9 Limited Preemptive Right............................................... 34
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.10 Splits and Combination................................................. 34
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests...... 35
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes............................... 35
Section 6.2 Allocations for Tax Purposes........................................... 41
Section 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders......................................................... 43
Section 6.4 Distributions of Available Cash from Operating Surplus................. 44
Section 6.5 Distributions of Available Cash from Capital Surplus................... 45
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................. 45
Section 6.7 Special Provisions Relating to the Holders of Subordinated Units....... 46
Section 6.8 Special Provisions Relating to the Holders of Incentive Distribution
Rights................................................................. 46
Section 6.9 Entity-Level Taxation.................................................. 46
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management............................................................. 47
Section 7.2 Certificate of Limited Partnership..................................... 49
Section 7.3 Restrictions on General Partner's Authority............................ 49
Section 7.4 Reimbursement of the General Partner................................... 50
Section 7.5 Outside Activities..................................................... 51
Section 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner........................................................ 52
Section 7.7 Indemnification........................................................ 53
Section 7.8 Liability of Indemnitees............................................... 54
Section 7.9 Resolution of Conflicts of Interest.................................... 55
Section 7.10 Other Matters Concerning the General Partner........................... 56
Section 7.11 Purchase or Sale of Partnership Securities............................. 57
Section 7.12 Registration Rights of the General Partner and its Affiliates.......... 57
Section 7.13 Reliance by Third Parties.............................................. 59
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting................................................. 59
Section 8.2 Fiscal Year............................................................ 60
Section 8.3 Reports................................................................ 60
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information............................................ 60
Section 9.2 Tax Elections.......................................................... 60
Section 9.3 Tax Controversies...................................................... 61
Section 9.4 Withholding............................................................ 61
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners.................................. 61
Section 10.2 Admission of Substituted Limited Partner............................... 61
</TABLE>
A-ii
<PAGE>
<TABLE>
<S> <C> <C>
Section 10.3 Admission of Successor General Partner................................. 62
Section 10.4 Admission of Additional Limited Partners............................... 62
Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.......... 62
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner...................................... 62
Section 11.2 Removal of the General Partner......................................... 64
Section 11.3 Interest of Departing Partner and Successor General Partner............ 64
Section 11.4 Termination of Subordination Period, Conversion of Subordinated Units
and Extinguishment of Cumulative Common Unit Arrearages................ 65
Section 11.5 Withdrawal of Limited Partners......................................... 66
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution............................................................ 66
Section 12.2 Continuation of the Business of the Partnership After Dissolution...... 66
Section 12.3 Liquidator............................................................. 67
Section 12.4 Liquidation............................................................ 67
Section 12.5 Cancellation of Certificate of Limited Partnership..................... 68
Section 12.6 Return of Contributions................................................ 68
Section 12.7 Waiver of Partition.................................................... 68
Section 12.8 Capital Account Restoration............................................ 68
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner.................. 69
Section 13.2 Amendment Procedures................................................... 70
Section 13.3 Amendment Requirements................................................. 70
Section 13.4 Special Meetings....................................................... 71
Section 13.5 Notice of a Meeting.................................................... 71
Section 13.6 Record Date............................................................ 71
Section 13.7 Adjournment............................................................ 72
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes............. 72
Section 13.9 Quorum................................................................. 72
Section 13.10 Conduct of a Meeting................................................... 73
Section 13.11 Action Without a Meeting............................................... 73
Section 13.12 Voting and Other Rights................................................ 73
ARTICLE XIV
MERGER
Section 14.1 Authority.............................................................. 74
Section 14.2 Procedure for Merger or Consolidation.................................. 74
Section 14.3 Approval by Limited Partners of Merger or Consolidation................ 75
Section 14.4 Certificate of Merger.................................................. 75
Section 14.5 Effect of Merger....................................................... 76
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right to Acquire Limited Partner Interests............................. 76
</TABLE>
A-iii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices.................................................. 78
Section 16.2 Further Action......................................................... 78
Section 16.3 Binding Effect......................................................... 78
Section 16.4 Integration............................................................ 78
Section 16.5 Creditors.............................................................. 78
Section 16.6 Waiver................................................................. 78
Section 16.7 Counterparts........................................................... 79
Section 16.8 Applicable Law......................................................... 79
Section 16.9 Invalidity of Provisions............................................... 79
Section 16.10 Consent of Partners.................................................... 79
</TABLE>
A-iv
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF TC PIPELINES, LP
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TC PIPELINES,
LP dated as of , 1999, is entered into by and among TC PipeLines
GP, Inc., a Delaware corporation, as the General Partner, and TransCan Northern
Ltd., a Delaware corporation, as the Organizational Limited Partner, together
with any other Persons who become Partners in the Partnership or parties hereto
as provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACQUISITION" means (a) any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or substantially all of the assets, properties or
business of another Person (or a division or line of business of such Person)
for the purpose of increasing the operating capacityor revenues of the
Partnership Group from the operating capacity or revenues of the Partnership
Group existing immediately prior to such transaction, (b) any similar
transaction entered into by a JV Entity as a result of which a Group Member
becomes obligated to make a capital contribution or similar payment to such JV
Entity; and (c) any similar transaction entered into by a JV Entity as a result
of which a Group Member is requested, but not obligated, to make a capital
contribution or similar payment to such JV Entity and such Group Member
reasonably believes such capital contribution or similar payment to be necessary
to protect or enhance its investment in the JV Entity.
"ADDITIONAL BOOK BASIS" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event
shall first be deemed to offset or decrease that portion of the
Carrying Value of such Adjusted Property that is attributable to any
prior positive adjustments made thereto pursuant to a Book-Up Event or
Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced as
a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion
of any such increase in Carrying Value shall be treated as Additional
Book Basis; provided that the amount treated as Additional Book Basis
pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments
after such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period
A-1
<PAGE>
exceeds the Aggregate Remaining Net Positive Adjustments as of the beginning of
such period (the "EXCESS ADDITIONAL BOOK BASIS"), the Additional Book Basis
Derivative Items for such period shall be reduced by the amount that bears the
same ratio to the amount of Additional Book Basis Derivative Items determined
without regard to this sentence as the Excess Additional Book Basis bears to the
Additional Book Basis as of the beginning of such period.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each
Partner as of the end of each taxable period of the Partnership, (a) increased
by any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such period, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such period, are reasonably expected to be made to such
Partner in subsequent years in accordance with the terms of this Agreement or
otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by a Partner from and
after the date on which such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest was first issued.
"ADJUSTED OPERATING SURPLUS" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net decrease
in Working Capital Borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
"ADJUSTED PROPERTY" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "CONTROL" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"AGGREGATE REMAINING NET POSITIVE ADJUSTMENTS" means, as of the end of any
taxable period of the Partnership, the sum of the Remaining Net Positive
Adjustments of all the Partners.
"AGREED ALLOCATION" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without
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limitation, a Curative Allocation (if appropriate to the context in which the
term "AGREED ALLOCATION" is used).
"AGREED VALUE" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to the fair market value of
each Contributed Property.
"AGREEMENT" means this Amended and Restated Agreement of Limited Partnership
of TC PipeLines, LP, as it may be amended, supplemented or restated from time to
time.
"ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"ASSOCIATE" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"AVAILABLE CASH" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership on hand
at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership on hand on the date of determination of
Available Cash with respect to such Quarter resulting from Working
Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership (including reserves for
future capital expenditures and for anticipated future credit needs of
the Partnership Group or any JV Entity) subsequent to such Quarter, (ii)
comply with applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which any
Group Member is a party or by which it is bound or its assets are subject
or (iii) provide funds for distributions under Section 6.4 or 6.5 in
respect of any one or more of the next four Quarters; provided, however,
that the General Partner may not establish cash reserves pursuant to
(iii) above if the effect of such reserves would be that the Partnership
is unable to distribute the Minimum Quarterly Distribution on all Common
Units, plus any Cumulative Common Unit Arrearage on all Common Units,
with respect to such Quarter; and, provided further, that disbursements
made by the Partnership or cash reserves established, increased or
reduced after the end of such Quarter but on or before the date of
determination of Available Cash with respect to such Quarter shall be
deemed to have been made, established, increased or reduced, for purposes
of determining Available Cash, within such Quarter if the General Partner
so determines.
Notwithstanding the foregoing, "AVAILABLE CASH" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
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"BOOK BASIS DERIVATIVE ITEMS" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, gain or loss with respect to an Adjusted Property).
"BOOK-DOWN EVENT" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BOOK-TAX DISPARITY" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"BOOK-UP EVENT" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BUSINESS DAY" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America,
the State of New York, Canada or the Province of Alberta shall not be regarded
as a Business Day.
"CAPITAL ACCOUNT" means the capital account maintained for a Partner
pursuant to Section 5.5. The "CAPITAL ACCOUNT" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution and Conveyance Agreement.
"CAPITAL IMPROVEMENT" means any (a) addition or improvement to the capital
assets owned by any Group Member, (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, pipeline
systems, terminalling and storage facilities and related assets), in each case
made to increase the operating capacity or revenues of the Partnership Group
from the operating capacity or revenues of the Partnership Group existing
immediately prior to such addition, improvement, acquisition or construction,
(c) any similar addition, improvement, acquisition or construction by a JV
Entity as a result of which a Group Member becomes obligated to make a capital
contribution or similar payment to such JV Entity; and (d) any similar addition,
improvement, acquisition or construction by a JV Entity as a result of which a
Group Member is requested, but not obligated, to make a capital contribution or
similar payment to such JV Entity and such Group Member reasonably believes such
capital contribution or similar payment to be necessary to protect or enhance
its investment in the JV Entity.
"CAPITAL SURPLUS" has the meaning assigned to such term in Section 6.3(a).
"CARRYING VALUE" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' Capital
Accounts in respect of such Contributed Property, and
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(b) with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"CAUSE" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
"CERTIFICATE" means a certificate (i) substantially in the form of Exhibit A
to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
"CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"CITIZENSHIP CERTIFICATION" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"CLAIM" has the meaning assigned to such term in Section 7.12(c).
"CLOSING DATE" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"CLOSING PRICE" has the meaning assigned to such term in Section 15.1(a).
"CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
successor law.
"COMBINED INTEREST" has the meaning assigned to such term in Section
11.3(a).
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON UNIT" means a Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees other than holders of Incentive
Distribution Rights) and having the rights and obligations specified with
respect to Common Units in this Agreement. The term "COMMON UNIT" does not refer
to a Subordinated Unit prior to its conversion into a Common Unit pursuant to
the terms hereof.
"COMMON UNIT ARREARAGE" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"CONFLICTS COMMITTEE" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
security holders, officers nor employees of the General Partner nor officers,
directors or employees of any Affiliate of the General Partner.
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"CONTRIBUTED PROPERTY" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to a new partnership on termination of the
Partnership pursuant to Section 708 of the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to Section 5.5(d), such property shall
no longer constitute a Contributed Property, but shall be deemed an Adjusted
Property.
"CONTRIBUTION AND CONVEYANCE AGREEMENT" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partner, the Partnership, the Intermediate Partnership, TransCan
Northern, TransCanada Border Pipeline and certain other parties, together with
the additional conveyance documents and instruments contemplated or referenced
thereunder.
"CUMULATIVE COMMON UNIT ARREARAGE" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"CURATIVE ALLOCATION" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"CURRENT MARKET PRICE" has the meaning assigned to such term in Section
15.1(a).
"DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section 17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"DEPARTING PARTNER" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"DEPOSITARY" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"ELIGIBLE CITIZEN" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member or JV Entity does business
or proposes to do business from time to time, and whose status as a Limited
Partner or Assignee does not or would not subject such Group Member or JV Entity
to a significant risk of cancellation or forfeiture of any of its properties or
any interest therein.
"EVENT OF WITHDRAWAL" has the meaning assigned to such term in Section
11.1(a).
"FINAL SUBORDINATED UNITS" has the meaning assigned to such term in Section
6.1(d)(x).
"FIRST LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"FIRST TARGET DISTRIBUTION" means $ per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $ multiplied by a fraction of
which the numerator is the number of days in such period, and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"GENERAL PARTNER" means TC PipeLines GP, Inc., a Delaware corporation, and
its successors and permitted assigns as general partner of the Partnership.
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"GENERAL PARTNER INTEREST" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it), and includes any and all
benefits to which the General Partner is entitled as provided in this Agreement,
together with all obligations of the General Partner to comply with the terms
and provisions of this Agreement.
"GROUP" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"GROUP MEMBER" means a member of the Partnership Group.
"HOLDER" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"INCENTIVE DISTRIBUTION RIGHT" means a non-voting Limited Partner Interest
initially held by the General Partner, which Partnership Interest will confer
upon the holder thereof only the rights and obligations specifically provided in
this Agreement with respect to Incentive Distribution Rights (and no other
rights otherwise available to or other obligations of a holder of a Partnership
Interest). Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution Right shall not be entitled to vote such
Incentive Distribution Right on any Partnership matter except as may otherwise
be required by law.
"INCENTIVE DISTRIBUTIONS" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"INDEMNIFIED PERSONS" has the meaning assigned to such term in Section
7.12(c).
"INDEMNITEE" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, or trustee of another Person; provided, that a Person shall not
be an Indemnitee by reason of providing, on a fee-for-services basis, trustee,
fiduciary or custodial services.
"INITIAL COMMON UNITS" means the Common Units sold in the Initial Offering.
"INITIAL LIMITED PARTNERS" means TC PipeLines GP, Inc. (with respect to the
Common Units, Subordinated Units and the Incentive Distribution Rights received
by it pursuant to Section 5.2) and the Underwriters, in each case upon being
admitted to the Partnership in accordance with Section 10.1.
"INITIAL OFFERING" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
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"INITIAL UNIT PRICE" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"INTERIM CAPITAL TRANSACTIONS" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member or JV Entity; (b) sales of equity
interests by any Group Member or JV Entity (other than the Common Units sold to
the Underwriters pursuant to the exercise of their over-allotment option); and
(c) sales, exchanges or other voluntary or involuntary dispositions of any
assets of any Group Member or JV Entity other than (i) sales, exchanges or other
dispositions of inventory, accounts receivable and other assets in the ordinary
course of business, and (ii) sales, exchanges or other dispositions of assets as
part of normal retirements or replacements.
"INTERMEDIATE PARTNERSHIP" means TC PipeLines Intermediate Limited
Partnership, a Delaware limited partnership, and any successors thereto.
"INTERMEDIATE PARTNERSHIP AGREEMENT" means the Agreement of Limited
Partnership of TC PipeLines Intermediate Limited Partnership, as it may be
amended, supplemented or restated from time to time.
"ISSUE PRICE" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"JV ENTITY" means a Person other than an individual in which a Group Member
holds a interest but which does not constitute a Subsidiary, including, without
limitation, Northern Border Pipeline.
"LIMITED PARTNER" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3 or (b) solely for purposes
of Articles V, VI, VII and IX and Sections 12.3 and 12.4, each Assignee;
provided, however, that when the term "LIMITED PARTNER" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"LIMITED PARTNER INTEREST" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "LIMITED PARTNER INTEREST" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"LIQUIDATION DATE" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the
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right to elect to reconstitute the Partnership and continue its business has
expired without such an election being made, and (b) in the case of any other
event giving rise to the dissolution of the Partnership, the date on which such
event occurs.
"LIQUIDATOR" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"MERGER AGREEMENT" has the meaning assigned to such term in Section 14.1.
"MINIMUM QUARTERLY DISTRIBUTION" means $0. per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $0. multiplied by a fraction of
which the numerator is the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"NATIONAL SECURITIES EXCHANGE" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"NET AGREED VALUE" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any liabilities either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"NET INCOME" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable period. The items included in the
calculation of Net Income shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under Section 6.1(d);
provided that the determination of the items that have been specially allocated
under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"NET LOSS" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable period. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"NET POSITIVE ADJUSTMENTS" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"NET TERMINATION GAIN" means, for any taxable period, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with
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Section 5.5(b) and shall not include any items of income, gain, loss or
deduction specially allocated under Section 6.1(d).
"NET TERMINATION LOSS" means, for any taxable period, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain, loss or deduction specially allocated
under Section 6.1(d).
"NON-CITIZEN ASSIGNEE" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage, pledge or other lien
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"NORTHERN BORDER PIPELINE" means Northern Border Pipeline Company, a Texas
general partnership.
"NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in
Section 15.1(b).
"OPERATING EXPENDITURES" means all Partnership expenditures, including, but
not limited to, operating expenses, taxes, reimbursements of the General
Partner, debt service payments, and capital expenditures, subject to the
following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or
(ii) made in connection with the refinancing or refunding of indebtedness
with the proceeds from new indebtedness or from the sale of equity
interests. For purposes of the foregoing, at the election and in the
reasonable discretion of the General Partner, any payment of principal or
premium shall be deemed to be refunded or refinanced by any indebtedness
incurred or to be incurred by the Partnership within 180 days before or
after such payment to the extent of the principal amount of such
indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures made
for Acquisitions or for Capital Improvements, (ii) payment of transaction
expenses relating to Interim Capital Transactions or (iii) distributions
to Partners. Where capital expenditures are made in part for Acquisitions
or for Capital Improvements and in part for other purposes, the General
Partner's good faith allocation between the amounts paid for each shall
be conclusive.
"OPERATING SURPLUS" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $ million plus all cash and cash equivalents of the
Partnership on hand as of the close of business on the Closing Date, (ii)
all cash receipts of the Partnership Group for the period beginning on
the Closing Date and ending with the last day of such period, other than
cash receipts from Interim Capital Transactions (except to the extent
specified in
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Section 6.5) and (iii) all cash receipts of the Partnership after the end
of such period but on or before the date of determination of Operating
Surplus with respect to such period resulting from Working Capital
Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end
of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining Operating
Surplus, within such period if the General Partner so determines.
Notwithstanding the foregoing, "OPERATING SURPLUS" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"OPINION OF COUNSEL" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"ORGANIZATIONAL LIMITED PARTNER" means TransCan Northern in its capacity as
the organizational limited partner of the Partnership pursuant to this
Agreement.
"OUTSTANDING" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General Partner
or its Affiliates) beneficially owns 20% or more of any Outstanding Partnership
Securities of any class then Outstanding, all Partnership Securities owned by
such Person or Group shall not be voted on any matter and shall not be
considered to be Outstanding when sending notices of a meeting of Limited
Partners to vote on any matter (unless otherwise required by law), calculating
required votes, determining the presence of a quorum or for other similar
purposes under this Agreement, except that Common Units so owned shall be
considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Common
Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates or (ii) to any Person or
Group who acquired 20% or more of any Outstanding Partnership Securities of any
class then Outstanding directly or indirectly from a Person or Group described
in clause (i) provided that the General Partner shall have notified such Person
or Group in writing that such limitation shall not apply.
"OVER-ALLOTMENT OPTION" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"PARITY UNITS" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in
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accordance with the principles of Treasury Regulation Section 1.704-2(i), are
attributable to a Partner Nonrecourse Debt.
"PARTNERS" means the General Partner and the Limited Partners.
"PARTNERSHIP" means TC PipeLines, LP, a Delaware limited partnership, and
any successors thereto.
"PARTNERSHIP GROUP" means the Partnership, the Intermediate Partnership and
any Subsidiary of any such entity, treated as a single consolidated entity.
"PARTNERSHIP INTEREST" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"PARTNERSHIP SECURITY" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"PERCENTAGE INTEREST" means as of any date of determination (a) as to the
General Partner (with respect to its General Partner Interest), an aggregate
1.0%, (b) as to any Unitholder or Assignee holding Units, the product obtained
by multiplying (i) 99% less the percentage applicable to paragraph (c) by (ii)
the quotient obtained by dividing (A) the number of Units held by such
Unitholder or Assignee by (B) the total number of all Outstanding Units, and (c)
as to the holders of additional Partnership Securities issued by the Partnership
in accordance with Section 5.6, the percentage established as a part of such
issuance. The Percentage Interest with respect to an Incentive Distribution
Right shall at all times be zero.
"PERSON" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"PER UNIT CAPITAL AMOUNT" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"PRO RATA" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"PURCHASE DATE" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units held
by the General Partner and its Affiliates) pursuant to Article XV.
"QUARTER" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"RECAPTURE INCOME" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
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"RECORD DATE" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"RECORD HOLDER" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"REDEEMABLE INTERESTS" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-1
(Registration No. 333-69947) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"REMAINING NET POSITIVE ADJUSTMENTS" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Unitholders' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over (b) the sum of the General
Partner's Share of Additional Book Basis Derivative Items with respect to the
General Partner Interest for each prior taxable period, and (iii) with respect
to the holders of Incentive Distribution Rights, the excess of (a) the Net
Positive Adjustments of the holders of Incentive Distribution Rights as of the
end of such period over (b) the sum of the Share of Additional Book Basis
Derivative Items of the holders of the Incentive Distribution Rights for each
prior taxable period.
"REQUIRED ALLOCATIONS" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b)
any allocation of an item of income, gain, loss or deduction pursuant to Section
6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"RESIDUAL GAIN" or "RESIDUAL LOSS" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"SECOND LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"SECOND TARGET DISTRIBUTION" means $0. per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $0. multiplied by a fraction of
which the numerator is equal to the number of days in such period and of which
the denominator is 91), subject to adjustment in accordance with Sections 6.6
and 6.9.
"SECURITIES ACT" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"SHARE OF ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders
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holding Common Units or Subordinated Units, the amount that bears the same ratio
to such Additional Book Basis Derivative Items as the Unitholders' Remaining Net
Positive Adjustments as of the end of such period bears to the Aggregate
Remaining Net Positive Adjustments as of that time, (ii) with respect to the
General Partner (as holder of the General Partner Interest), the amount that
bears the same ratio to such additional Book Basis Derivative Items as the
General Partner's Remaining Net Positive Adjustments as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustment as of that time,
and (iii) with respect to the Partners holding Incentive Distribution Rights,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Remaining Net Positive Adjustments of the Partners holding the
Incentive Distribution Rights as of the end of such period bears to the
Aggregate Remaining Net Positive Adjustments as of that time.
"SPECIAL APPROVAL" means approval by a majority of the members of the
Conflicts Committee.
"SUBORDINATED UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "SUBORDINATED UNIT" as used herein does not include a Common Unit.
"SUBORDINATION PERIOD" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after , 2004 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Outstanding
Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all
Common Units and Subordinated Units that were Outstanding during such
periods and (B) the Adjusted Operating Surplus generated during each of
the three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully diluted basis (i.e., taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter with
respect to which such determination is made, and all Common Units and
Subordinated Units that have as of the date of determination, been earned
by but not yet issued to management of the Partnership in respect of
incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and on the general partner interest
in the Intermediate Partnership, during such periods and (ii) there are
no Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of such
removal.
"SUBSIDIARY" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering
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all of the partnership interests of the partnership as a single class) is owned,
directly or indirectly, at the date of determination, by such Person, by one or
more Subsidiaries of such Person, or a combination thereof, or (c) any other
Person (other than a corporation or a partnership) in which such Person, one or
more Subsidiaries of such Person, or a combination thereof, directly or
indirectly, at the date of determination, has (i) at least a majority ownership
interest or (ii) the power to elect or direct the election of a majority of the
directors or other governing body of such Person. The foregoing definition shall
not include any JV Entity, including, without limitation, Northern Border
Pipeline.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in Section
14.2(b).
"THIRD TARGET DISTRIBUTION" means $0. per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $0. multiplied by a fraction of
which the numerator is equal to the number of days in such period and of which
the denominator is 91), subject to adjustment in accordance with Sections 6.6
and 6.9.
"TRADING DAY" has the meaning assigned to such term in Section 15.1(a).
"TRANSCANADA" means TransCanada PipeLines Limited, a Canadian corporation.
"TRANSCANADA BORDER PIPELINE" means TransCanada Border Pipeline Ltd., a
Nevada corporation and a wholly-owned subsidiary of TransCanada.
"TRANSCAN NORTHERN" means TransCan Northern Ltd., a Delaware corporation and
a wholly-owned subsidiary of TransCanada.
"TRANSFER" has the meaning assigned to such term in Section 4.4(a).
"TRANSFER AGENT" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"TRANSFER APPLICATION" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"TREASURY REGULATIONS" means the permanent, temporary or proposed
regulations of the United States Department of the Treasury promulgated under
the Code, as such regulations may be amended and in effect from time to time.
Any reference herein to a specific section or sections of the Treasury
Regulations shall be deemed to include a reference to any corresponding
provision of successor law.
"UNDERWRITER" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement dated
, 1999 among the Underwriters, the Partnership, the Intermediate
Partnership, the General Partner, TransCanada and others, providing for the
purchase of Common Units by such Underwriters.
"UNIT" means a Partnership Security that is designated as a "UNIT" and shall
include Common Units and Subordinated Units but shall not include (i) a General
Partner Interest or (ii) Incentive Distribution Rights.
"UNITHOLDERS" means the holders of Common Units and Subordinated Units.
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"UNIT MAJORITY" means, during the Subordination Period, at least a majority
of the Outstanding Common Units voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"UNPAID MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"UNREALIZED GAIN" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 5.5(d) as of such date).
"UNREALIZED LOSS" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"UNRECOVERED CAPITAL" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"WITHDRAWAL OPINION OF COUNSEL" has the meaning assigned to such term in
Section 11.1(b).
"WORKING CAPITAL BORROWINGS" means borrowings exclusively for working
capital purposes made pursuant to a credit facility or other arrangement
requiring all such borrowings thereunder to be reduced to a relatively small
amount each year for an economically meaningful period of time. Amounts drawn
from a credit facility to pay distributions to partners of the Partnership when
there has been a temporary interruption in distributions from Northern Border
Pipeline shall also constitute Working Capital Borrowings.
Section 1.2 CONSTRUCTION.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "INCLUDE" or "INCLUDES" means
includes, without limitation, and "INCLUDING" means including, without
limitation.
ARTICLE II
ORGANIZATION
Section 2.1 FORMATION.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of TC Pipelines, LP in its entirety. This amendment and restatement
shall become effective on the date of this Agreement. Except as expressly
provided to the contrary in this Agreement, the rights, duties (including
fiduciary duties), liabilities and obligations of the Partners and the
administration, dissolution and termination of the Partnership shall be governed
by the Delaware Act. All Partnership Interests shall constitute personal
property of the owner thereof for all purposes and a Partner has no interest in
specific Partnership property.
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Section 2.2 NAME.
The name of the Partnership shall be "TC PipeLines, LP" The Partnership's
business may be conducted under any other name or names deemed necessary or
appropriate by the General Partner in its sole discretion, including the name of
the General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary for
the purpose of complying with the laws of any jurisdiction that so requires. The
General Partner in its discretion may change the name of the Partnership at any
time and from time to time and shall notify the Limited Partners of such change
in the next regular communication to the Limited Partners.
Section 2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE; OTHER
OFFICES.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at Corporation Trust
Center, 1209 Orange Street, Wilmington, DE 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, DE 19801. The principal office of the
Partnership shall be located at Four Greenspoint Plaza, 16945 Northchase Drive,
Houston, TX 77060 or such other place as the General Partner may from time to
time designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems necessary or appropriate. The address of the General
Partner shall be or such other place as the General Partner may
from time to time designate by notice to the Limited Partners.
Section 2.4 PURPOSE AND BUSINESS.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a partner of the Intermediate Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a partner of the Intermediate Partnership pursuant to the
Intermediate Partnership Agreement or otherwise, (b) engage directly in, or
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Intermediate Partnership is permitted to engage in by the
Intermediate Partnership Agreement and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, (c) engage directly in, or enter
into or form any corporation, partnership, joint venture, limited liability
company or other arrangement to engage indirectly in, any business activity that
is approved by the General Partner and which lawfully may be conducted by a
limited partnership organized pursuant to the Delaware Act and, in connection
therewith, to exercise all of the rights and powers conferred upon the
Partnership pursuant to the agreements relating to such business activity;
provided, however, that the General Partner reasonably determines, as of the
date of the acquisition or commencement of such activity, that such activity (i)
generates "QUALIFYING INCOME" (as such term is defined pursuant to Section 7704
of the Code) or (ii) enhances the operations of an activity of the Intermediate
Partnership or a Partnership activity that generates qualifying income, and (d)
do anything necessary or appropriate to the foregoing, including the making of
capital contributions or loans to a Group Member or JV Entity. The General
Partner has no obligation or duty to the Partnership, the Limited Partners or
the Assignees to propose or approve, and in its discretion may decline to
propose or approve, the conduct by the Partnership of any business.
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Section 2.5 POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4.
Section 2.6 POWER OF ATTORNEY.
(a) Each Limited Partner and each Assignee hereby constitutes and
appoints the General Partner and, if a Liquidator shall have been selected
pursuant to Section 12.3, the Liquidator, (and any successor to the
Liquidator by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, as the case may be, with
full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and
stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that
the General Partner or the Liquidator deems necessary or appropriate to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other instruments that
the General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change,
modification or restatement of this Agreement; (C) all certificates,
documents and other instruments (including conveyances and a certificate
of cancellation) that the General Partner or the Liquidator deems
necessary or appropriate to reflect the dissolution and liquidation of
the Partnership pursuant to the terms of this Agreement; (D) all
certificates, documents and other instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to, or other
events described in, Article IV, X, XI or XII; (E) all certificates,
documents and other instruments relating to the determination of the
preferences, rights, powers, privileges and duties of any class or series
of Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given
by the Partners hereunder or is consistent with the terms of this
Agreement or is necessary or appropriate, in the discretion of the
General Partner or the Liquidator, to effectuate the terms or intent of
this Agreement; provided, that when required by Section 13.3 or any other
provision of this Agreement that establishes a percentage of the Limited
Partners or of the Limited Partners of any class or series required to
take any action, the General Partner and the Liquidator may exercise the
power of attorney made in this Section 2.6(a)(ii) only after the
necessary vote, consent or approval of the Limited Partners or of the
Limited Partners of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
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(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the
maximum extent permitted by law, not be affected by the subsequent death,
incompetency, disability, incapacity, dissolution, bankruptcy or termination
of any Limited Partner or Assignee and the transfer of all or any portion of
such Limited Partner's or Assignee's Partnership Interest and shall extend
to such Limited Partner's or Assignee's heirs, successors, assigns and
personal representatives. Each such Limited Partner or Assignee hereby
agrees to be bound by any representation made by the General Partner or the
Liquidator acting in good faith pursuant to such power of attorney; and each
such Limited Partner or Assignee, to the maximum extent permitted by law,
hereby waives any and all defenses that may be available to contest, negate
or disaffirm the action of the General Partner or the Liquidator taken in
good faith under such power of attorney. Each Limited Partner or Assignee
shall execute and deliver to the General Partner or the Liquidator, within
15 days after receipt of the request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 2.7 TERM.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2097 or until
the earlier dissolution of the Partnership in accordance with the provisions of
Article XII. The existence of the Partnership as a separate legal entity shall
continue until the cancellation of the Certificate of Limited Partnership as
provided in the Delaware Act.
Section 2.8 TITLE TO PARTNERSHIP ASSETS.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 LIMITATION OF LIABILITY.
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The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
Section 3.2 MANAGEMENT OF BUSINESS.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, member, general partner, agent or trustee of the General Partner or
any of its Affiliates, or any officer, director, employee, member, general
partner, agent or trustee of a Group Member, in its capacity as such, shall not
be deemed to be participation in the control of the business of the Partnership
by a limited partner of the Partnership (within the meaning of Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate the limitations
on the liability of the Limited Partners or Assignees under this Agreement.
Section 3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS.
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with any Group Member or
JV Entity. Neither the Partnership nor any of the other Partners or Assignees
shall have any rights by virtue of this Agreement in any business ventures of
any Limited Partner or Assignee.
Section 3.4 RIGHTS OF LIMITED PARTNERS.
(a) In addition to other rights provided by this Agreement or by
applicable law, and except as limited by Section 3.4(b), each Limited
Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership, upon
reasonable written demand and at such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner;
and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners
and Assignees, for such period of time as the General Partner deems
reasonable, (i) any information that the
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General Partner reasonably believes to be in the nature of trade secrets or
(ii) other information the disclosure of which the General Partner in good
faith believes (A) is not in the best interests of any Group Member or JV
Entity, (B) could damage any Group Member or JV Entity or (C) that any Group
Member or JV Entity is required by law or by agreement with any third party
to keep confidential (other than agreements with Affiliates of the
Partnership the primary purpose of which is to circumvent the obligations
set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 CERTIFICATES.
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of such
Person evidencing the number of such Units being so issued. In addition, (a)
upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the name of the General Partner evidencing its interests in
the Partnership and (b) upon the request of any Person holding Incentive
Distribution Rights or any other Partnership Securities other than Common Units
or Subordinated Units, the Partnership shall issue to such Person one or more
certificates evidencing such Incentive Distribution Rights or other Partnership
Securities other than Common Units or Subordinated Units. Certificates shall be
executed on behalf of the Partnership by the Chairman, President or any
Executive Vice President or Vice President and the Secretary or any Assistant
Secretary of the General Partner. No Common Unit Certificate shall be valid for
any purpose until it has been countersigned by the Transfer Agent; provided,
however, that if the General Partner elects to issue Common Units in global
form, the Common Unit Certificates shall be valid upon receipt of a certificate
from the Transfer Agent certifying that the Common Units have been duly
registered in accordance with the directions of the Partnership and the
Underwriters. Subject to the requirements of Section 6.7(b), the Partners
holding Certificates evidencing Subordinated Units may exchange such
Certificates for Certificates evidencing Common Units on or after the date on
which such Subordinated Units are converted into Common Units pursuant to the
terms of Section 5.8.
Section 4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES.
(a) If any mutilated Certificate is surrendered to the Transfer Agent,
the appropriate officers of the General Partner on behalf of the Partnership
shall execute, and the Transfer Agent shall countersign and deliver in
exchange therefor, a new Certificate evidencing the same number and type of
Partnership Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall
countersign a new Certificate in place of any Certificate previously issued
if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
Partnership has notice that the Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety
or sureties and with fixed or open penalty as the Partnership may
reasonably direct, in its sole discretion, to indemnify the Partnership,
the Partners, the General Partner and the Transfer Agent against any
claim
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that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
Section 4.3 RECORD HOLDERS.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative
capacityfor another Person in acquiring and/or holding Partnership Interests, as
between the Partnership on the one hand, and such other Persons on the other,
such representative Person (a) shall be the Partner or Assignee (as the case may
be) of record and beneficially, (b) must execute and deliver a Transfer
Application and (c) shall be bound by this Agreement and shall have the rights
and obligations of a Partner or Assignee (as the case may be) hereunder and as,
and to the extent, provided for herein.
Section 4.4 TRANSFER GENERALLY.
(a) The term "TRANSFER," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the General Partner, by which the holder of a Limited Partner
Interest assigns such Limited Partner Interest to another Person who is or
becomes a Limited Partner or an Assignee, and includes a sale, assignment,
gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
IV. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any stockholder of the General Partner of any or all of the
issued and outstanding stock of the General Partner.
Section 4.5 REGISTRATION AND TRANSFER OF LIMITED PARTNER INTERESTS.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as
it may prescribe and subject to the
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provisions of Section 4.5(b), the Partnership will provide for the
registration and transfer of Limited Partner Interests. The Transfer Agent
is hereby appointed registrar and transfer agent for the purpose of
registering Common Units and transfers of such Common Units as herein
provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in
the manner described in this Section 4.5. Upon surrender of a Certificate
for registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the
appropriate officers of the General Partner on behalf of the Partnership
shall execute and deliver, and in the case of Common Units, the Transfer
Agent shall countersign and deliver, in the name of the holder or the
designated transferee or transferees, as required pursuant to the holder's
instructions, one or more new Certificates evidencing the same aggregate
number and type of Limited Partner Interests as was evidenced by the
Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall
not recognize any transfer of Limited Partner Interests until the
Certificates evidencing such Limited Partner Interests are surrendered for
registration of transfer and such Certificates are accompanied by a Transfer
Application duly executed by the transferee (or the transferee's
attorney-in-fact duly authorized in writing). No charge shall be imposed by
the Partnership for such transfer; provided, that as a condition to the
issuance of any new Certificate under this Section 4.5, the Partnership may
require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an
amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee
in respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and
be bound by and to have executed this Agreement, (iii) represented and
warranted that such transferee has the right, power and authority and, if an
individual, the capacity to enter into this Agreement, (iv) granted the
powers of attorney set forth in this Agreement and (v) given the consents
and approvals and made the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any
time to transfer their Subordinated Units and Common Units (whether issued
upon conversion of the Subordinated Units or otherwise) to one or more
Persons.
Section 4.6 TRANSFER OF THE GENERAL PARTNER'S GENERAL PARTNER INTEREST.
(a) Subject to Section 4.6(c) below, prior to , 2009, the
General Partner shall not transfer all or any part of its General Partner
Interest to a Person unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner
and its Affiliates) or (ii) is of all, but not less than all, of its General
Partner Interest to (A) an Affiliate of the General Partner or (B) another
Person in connection with the merger or consolidation of the General Partner
with or into another Person or the transfer by the General Partner of all or
substantially all of its assets to another Person.
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(b) Subject to Section 4.6(c) below, on or after , 2009,
the General Partner may transfer all or any of its General Partner Interest
without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to
another Person shall be permitted unless (i) the transferee agrees to assume
the rights and duties of the General Partner under this Agreement and of the
general partner under the Intermediate Partnership Agreement and to be bound
by the provisions of this Agreement and the Intermediate Partnership
Agreement, (ii) the Partnership receives an Opinion of Counsel that such
transfer would not result in the loss of limited liability of any Limited
Partner or of any limited partner of the Intermediate Partnership or cause
the Partnership or the Intermediate Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not already so treated or
taxed) and (iii) such transferee also agrees to purchase all (or the
appropriate portion thereof, if applicable) of the interest of the General
Partner as the general partner or managing member of each other Group
Member. In the case of a transfer pursuant to and in compliance with this
Section 4.6, the transferee or successor (as the case may be) shall, subject
to compliance with the terms of Section 10.3, be admitted to the Partnership
as a General Partner immediately prior to the transfer of the Partnership
Interest, and the business of the Partnership shall continue without
dissolution.
Section 4.7 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS.
Prior to , 2009, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to
, 2009, shall require the prior approval of holders at least a
majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates). On or after , 2009, the
General Partner or any other holder of Incentive Distribution Rights may
transfer any or all of its Incentive Distribution Rights without Unitholder
approval. Notwithstanding anything herein to the contrary, no transfer of
Incentive Distribution Rights to another Person shall be permitted unless the
transferee agrees to be bound by the provisions of this Agreement. The General
Partner shall have the authority (but shall not be required) to adopt such
reasonable restrictions on the transfer of Incentive Distribution Rights and
requirements for registering the transfer of Incentive Distribution Rights as
the General Partner, in its sole discretion, shall determine are necessary or
appropriate.
Section 4.8 RESTRICTIONS ON TRANSFERS.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership
Interests shall be made if such transfer would (i) violate the then
applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authority with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or the Intermediate Partnership under
the laws of the jurisdiction of its formation, or (iii) cause the
Partnership or the Intermediate Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if it determines based upon a subsequent Opinion of
Counsel that such restrictions are necessary to avoid a significant risk of
the Partnership or the Intermediate Partnership being treated as an
association taxable as a corporation or otherwise being taxed as an entity
for federal income
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tax purposes. The restrictions may be imposed by making such amendments to
this Agreement as the General Partner may determine to be necessary or
appropriate to impose such restrictions; provided, however, that any
amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of
trading of any class of Limited Partner Interests on the principal National
Securities Exchange on which such class of Limited Partner Interests is then
traded must be approved, prior to such amendment being effected, by the
holders of at least a majority of the Outstanding Limited Partner Interests
of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
Section 4.9 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES.
(a) If any Group Member or JV Entity is or becomes subject to any
federal, state or local law or regulation that, in the reasonable
determination of the General Partner, creates a substantial risk of
cancellation or forfeiture of any property in which the Group Member or JV
Entity has an interest based on the nationality, citizenship or other
related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or Assignee
is a nominee holding for the account of another Person, the nationality,
citizenship or other related status of such Person) as the General Partner
may request. If a Limited Partner or Assignee fails to furnish to the
General Partner within the aforementioned 30-day period such Citizenship
Certification or other requested information or if upon receipt of such
Citizenship Certification or other requested information the General Partner
determines, with the advice of counsel, that a Limited Partner or Assignee
is not an Eligible Citizen, the Partnership Interests owned by such Limited
Partner or Assignee shall be subject to redemption in accordance with the
provisions of Section 4.10. In addition, the General Partner may require
that the status of any such Partner or Assignee be changed to that of a
Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect
of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner
Interests other than those of Non-citizen Assignees are cast, either for,
against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall
have no right to receive a distribution in kind pursuant to Section 12.4 but
shall be entitled to the cash equivalent thereof, and the Partnership shall
provide cash in exchange for an assignment of the Non-citizen Assignee's
share of the distribution in kind. Such payment and assignment shall be
treated for Partnership purposes as a purchase by the Partnership from the
Non-citizen Assignee of his Limited Partner Interest (representing his right
to receive his share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the
General Partner, request admission as a
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Substituted Limited Partner with respect to any Limited Partner Interests of
such Non-citizen Assignee not redeemed pursuant to Section 4.10, and upon
his admission pursuant to Section 10.2, the General Partner shall cease to
be deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Limited Partner Interests.
Section 4.10 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his
Partnership Interests to a Person who is an Eligible Citizen and who
furnishes a Citizenship Certification to the General Partner prior to the
date fixed for redemption as provided below, redeem the Partnership Interest
of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited
Partner or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail,
postage prepaid. The notice shall be deemed to have been given when so
mailed. The notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the redemption
price will be made upon surrender of the Certificate evidencing the
Redeemable Interests and that on and after the date fixed for redemption
no further allocations or distributions to which the Limited Partner or
Assignee would otherwise be entitled in respect of the Redeemable
Interests will accrue or be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner
Interests of the class to be so redeemed multiplied by the number of
Limited Partner Interests of each such class included among the
Redeemable Interests. The redemption price shall be paid, in the
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank
or accompanied by an assignment duly executed in blank, the Limited
Partner or Assignee or his duly authorized representative shall be
entitled to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to
Limited Partner Interests held by a Limited Partner or Assignee as nominee
of a Person determined to be other than an Eligible Citizen.
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(c) Nothing in this Section 4.10 shall prevent the recipient of a notice
of redemption from transferring his Limited Partner Interest before the
redemption date if such transfer is otherwise permitted under this
Agreement. Upon receipt of notice of such a transfer, the General Partner
shall withdraw the notice of redemption, provided the transferee of such
Limited Partner Interest certifies to the satisfaction of the General
Partner in a Citizenship Certification delivered in connection with the
Transfer Application that he is an Eligible Citizen. If the transferee fails
to make such certification, such redemption shall be effected from the
transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 ORGANIZATIONAL CONTRIBUTIONS.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00, for a certain interest in the Partnership and has been
admitted as the General Partner and as a Limited Partner of the Partnership, and
the Organizational Limited Partner made an initial Capital Contribution to the
Partnership in the amount of $990.00 for an interest in the Partnership and has
been admitted as a Limited Partner of the Partnership. As of the Closing Date,
the interest of the Organizational Limited Partner shall be redeemed as provided
in the Contribution and Conveyance Agreement; the initial Capital Contributions
of each Partner shall thereupon be refunded; and the Organizational Limited
Partner shall cease to be a Limited Partner of the Partnership. Ninety-nine
percent of any interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions shall be allocated
and distributed to the Organizational Limited Partner, and the balance thereof
shall be allocated and distributed to the General Partner.
Section 5.2 CONTRIBUTIONS TO THE PARTNERSHIP.
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, (i) TransCanada Border PipeLine contributed to the Partnership,
as a Capital Contribution, all of its limited partner interest in the
Intermediate Partnership in exchange for (A) a 1% general partner interest,
(B) ________ Subordinated Units, (C) ________ Common Units, and (D) the
Incentive Distribution Rights, (ii) TransCan Northern contributed to the
Partnership, as a Capital Contribution, all of its limited partner interest
in the Intermediate Partnership in exchange for (A) _____________ Common
Units, and (B) _____________ Subordinated Units, (iii) the Partnership
redeemed all of the Common Units issued to TransCanada Border PipeLine and
TransCan Northern for cash, and (iv) TransCanada Border Pipeline transferred
all of its interests in the Partnership to the General Partner.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the
Initial Offering or pursuant to the Over-Allotment Option), the General
Partner shall be required to make additional Capital Contributions equal to
1/99th of any amount contributed to the Partnership by the Limited Partners
in exchange for such additional Limited Partner Interests. Except as set
forth in the immediately preceding sentence and Article XII, the General
Partner shall not be obligated to make any additional Capital Contributions
to the Partnership.
Section 5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS AND REIMBURSEMENT OF THE
GENERAL PARTNER.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to
the Issue Price per Initial Common Unit, multiplied by the number of Common
Units specified in the Underwriting Agreement to be purchased by such
Underwriter at the Closing Date. In exchange for such Capital Contributions
by the Underwriters, the Partnership shall issue Common Units to each
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Underwriter on whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) the cash contribution to the
Partnership by or on behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter
shall contribute to the Partnership cash in an amount equal to the Issue
Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter
at the Option Closing Date. In exchange for such Capital Contributions by
the Underwriters, the Partnership shall issue Common Units to each
Underwriter on whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) the cash contributions to the
Partnership by or on behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit. [Upon receipt by the Partnership of the Capital
Contributions from the Underwriters as provided in this Section 5.3(b), the
Partnership shall use such cash to redeem from the General Partner or its
Affiliates that number of Subordinated Units held by the General Partner or
its Affiliates equal to the number of Common Units issued to the
Underwriters as provided in this Section 5.3(b).]
(c) No Limited Partner Interests will be issued or issuable as of or at
the Closing Date other than (i) the Common Units issuable pursuant to
Section 5.3(a) in an aggregate number equal to , (ii) the
"OPTIONAL UNITS" as such term is used in the Underwriting Agreement in an
aggregate number up to issuable upon exercise of the
Over-Allotment Option pursuant to Section 5.3(b), (iii) the
Subordinated Units issuable pursuant to Section 5.2, and (iv) the Incentive
Distribution Rights.
Section 5.4 INTEREST AND WITHDRAWAL.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
Section 17-502(b) of the Delaware Act.
Section 5.5 CAPITAL ACCOUNTS.
(a) The Partnership shall maintain for each Partner (or a beneficial
owner of Partnership Interests held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion) holding a Partnership
Interest a separate Capital Account with respect to such Partnership
Interest in accordance with the rules of Treasury Regulation Section
1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount
of all Capital Contributions made to the Partnership with respect to such
Partnership Interest pursuant to this Agreement and (ii) all items of
Partnership income and gain (including, without limitation, income and gain
exempt from tax) computed in accordance with Section 5.5(b) and allocated
with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and
deemed distributions of cash or property made with respect to such
Partnership Interest pursuant to this Agreement and (y) all items of
Partnership deduction and loss computed in accordance with Section 5.5(b)
and allocated with respect to such Partnership Interest pursuant to Section
6.1.
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(b) For purposes of computing the amount of any item of income, gain,
loss or deduction which is to be allocated pursuant to Article VI and is to
be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Intermediate Partnership
Agreement) of all property owned by the Intermediate Partnership or any
other Subsidiary that is classified as a partnership for federal income
tax purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither
be deducted nor amortized under Section 709 of the Code, if any, shall,
for purposes of Capital Account maintenance, be treated as an item of
deduction at the time such fees and other expenses are incurred and shall
be allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those
items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code,
without regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalized for federal
income tax purposes. To the extent an adjustment to the adjusted tax
basis of any Partnership asset pursuant to Section 734(b) or 743(b) of
the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment in the Capital Accounts shall be
treated as an item of gain or loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount to
the Partnership's Carrying Value with respect to such property as of such
date.
(v) In accordance with the requirements of Section 704(b) of the
Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property. Upon an
adjustment pursuant to Section 5.5(d) to the Carrying Value of any
Partnership property subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
or amortization attributable to such property shall be determined (A) as
if the adjusted basis of such property were equal to the Carrying Value
of such property immediately following such adjustment and (B) using a
rate of depreciation, cost recovery or amortization derived from the same
method and useful life (or, if applicable, the remaining useful life) as
is applied for federal income tax purposes; provided, however, that, if
the asset has a zero adjusted basis for federal income tax purposes,
depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the General Partner may
adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an
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additional depreciation or cost recovery deduction in the year such
property is placed in service and shall be allocated among the Partners
pursuant to Section 6.1. Any restoration of such basis pursuant to
Section 48(q)(2) of the Code shall, to the extent possible, be allocated
in the same manner to the Partners to whom such deemed deduction was
allocated.
(c) (i)A transferee of a Partnership Interest shall succeed to a pro
rata portion of the Capital Account of the transferor relating to the
Partnership Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to
Section 5.8 by a holder thereof (other than a transfer to an Affiliate
unless the General Partner elects to have this subparagraph 5.5(c)(ii)
apply), the Capital Account maintained for such Person with respect to
its Subordinated Units or converted Subordinated Units will (A) first, be
allocated to the Subordinated Units or converted Subordinated Units to be
transferred in an amount equal to the product of (x) the number of such
Subordinated Units or converted Subordinated Units to be transferred and
(y) the Per Unit Capital Amount for a Common Unit, and (B) second, any
remaining balance in such Capital Account will be retained by the
transferor, regardless of whether it has retained any Subordinated Units
or converted Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the
retained Subordinated Units or converted Subordinated Units, if any, will
have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with
respect to the transferred Subordinated Units or converted Subordinated
Units will have a balance equal to the amount allocated under clause (A)
hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partner's
Combined Interest to Common Units pursuant to Section 11.3(b), the Capital
Account of all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as if such Unrealized Gain or Unrealized Loss had been
recognized on an actual sale of each such property immediately prior to such
issuance and had been allocated to the Partners at such time pursuant to
Section 6.1 in the same manner as any item of gain or loss actually
recognized during such period would have been allocated. In determining such
Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair
market value of all Partnership assets (including, without limitation, cash
or cash equivalents) immediately prior to the issuance of additional
Partnership Interests shall be determined by the General Partner using such
reasonable method of valuation as it may adopt; provided, however, that the
General Partner, in arriving at such valuation, must take fully into account
the fair market value of the Partnership Interests of all Partners at such
time. The General Partner shall allocate such aggregate value among the
assets of the Partnership (in such manner as it determines in its discretion
to be reasonable) to arrive at a fair market value for individual
properties.
(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable
to such Partnership property, as if such Unrealized Gain or Unrealized
Loss had been recognized in a sale of such property immediately prior to
such distribution for an amount equal to its fair market value, and had
been allocated to the Partners, at such
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time, pursuant to Section 6.1 in the same manner as any item of gain or
loss actually recognized during such period would have been allocated. In
determining such Unrealized Gain or Unrealized Loss the aggregate cash
amount and fair market value of all Partnership assets (including,
without limitation, cash or cash equivalents) immediately prior to a
distribution shall (A) in the case of an actual distribution which is not
made pursuant to Section 12.4 or in the case of a deemed distribution, be
determined and allocated in the same manner as that provided in Section
5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to
Section 12.4, be determined and allocated by the Liquidator using such
reasonable method of valuation as it may adopt.
Section 5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any
time and from time to time to such Persons for such consideration and on
such terms and conditions as shall be established by the General Partner in
its sole discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes,
or one or more series of any such classes, with such designations,
preferences, rights, powers, privileges and duties (which may be senior to
existing classes and series of Partnership Securities), as shall be fixed by
the General Partner in the exercise of its sole discretion, including (i)
the right to share Partnership profits and losses or items thereof; (ii) the
right to share in Partnership distributions; (iii) the rights upon
dissolution and liquidation of the Partnership; (iv) whether, and the terms
and conditions upon which, the Partnership may redeem the Partnership
Security; (v) whether such Partnership Security is issued with the privilege
of conversion or exchange and, if so, the terms and conditions of such
conversion or exchange; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned
or transferred; and (vii) the right, if any, of each such Partnership
Security to vote on Partnership matters, including matters relating to the
relative rights, preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this
Section 5.6, (ii) the conversion of the General Partner Interest and
Incentive Distribution Rights into Units pursuant to the terms of this
Agreement, (iii) the admission of Additional Limited Partners and (iv) all
additional issuances of Partnership Securities. The General Partner is
further authorized and directed to specify the relative preferences, rights,
powers, privileges and duties of the holders of the Units or other
Partnership Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is authorized and
directed to do all things it deems to be necessary or advisable in
connection with any future issuance of Partnership Securities or in
connection with the conversion of the General Partner Interest and Incentive
Distribution Rights into Units pursuant to the terms of this Agreement,
including compliance with any statute, rule, regulation or guideline of any
federal, state or other governmental agency or any National Securities
Exchange on which the Units or other Partnership Securities are listed for
trading.
Section 5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES.
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The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity Units
issued (A) in connection with the exercise of the Over-Allotment Option, (B)
in accordance with Sections 5.7(b) and 5.7(c), (C) upon conversion of
Subordinated Units pursuant to Section 5.8, (D) upon conversion of the
General Partner Interest and Incentive Distribution Rights pursuant to
Section 11.3(b), (E) pursuant to the employee benefit plans of the General
Partner, the Partnership or any other Group Member and (F) in the event of a
combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval
of the Unitholders, if such issuance occurs (i) in connection with an
Acquisition or a Capital Improvement or (ii) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection
with, an Acquisition or a Capital Improvement, in each case where such
Acquisition or Capital Improvement involves assets that, if such assets had
been acquired by the Partnership as of the date that is one year prior to
the first day of the Quarter in which such Acquisition is to be consummated
or such Capital Improvement is to be completed, would have resulted, on a
pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect
to each of the four most recently completed Quarters (on a pro forma
basis as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Parity Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing Date,
then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter, if
any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such Quarter, and (ii) for each other
Quarter, on a pro forma basis consistent with the procedures, as applicable, set
forth in Appendix D to the Registration Statement. Furthermore, the amount in
clause (A) shall be determined on a pro forma basis assuming that (1) all of the
Parity Units to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness that
is to be repaid with the proceeds of such issuance of Parity Units) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (3) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the acquired
assets, and (4) the non-personnel costs and expenses are computed on the same
basis as those incurred by the Partnership in the operation of the Partnership's
business at similarly situated Partnership facilities.
(c) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) additional Partnership Securities
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having rights to distributions or in liquidation ranking prior or senior to
the Common Units, without the prior approval of the holders of a Unit
Majority.
(d) No fractional Units shall be issued by the Partnership.
Section 5.8 CONVERSION OF SUBORDINATED UNITS.
(a) A total of of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after
, 2002, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Outstanding Subordinated Units with respect to each of
the three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully-diluted basis (i.e. taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter with
respect to which such determination is made, and all Common Units and
Subordinated Units that have, as of the date of determination, been
earned by but not yet issued to management of the Partnership in respect
of incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and the general partner interest in
the Intermediate Partnership, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional of the Outstanding Subordinated Units
will convert into Common Units on a one-for-one basis on the first day after
the Record Date for distribution in respect of any Quarter ending on or
after , 2003, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Outstanding Subordinated Units with respect to each of
the three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully-diluted basis (i.e. taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter with
respect to which such determination is made, and all Common Units and
Subordinated Units that have, as of the date of determination, been
earned by but not yet issued to management of the Partnership in respect
of incentive compensation), plus the
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related distribution on the General Partner Interest in the Partnership
and the general partner interest in the Intermediate Partnership, during
such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated
Units shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b)
at a time when there shall be more than one holder of Subordinated Units,
then, unless all of the holders of Subordinated Units shall agree to a
different allocation, the Subordinated Units that are to be converted into
Common Units shall be allocated among the holders of Subordinated Units pro
rata based on the number of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Sections 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis on the first day following the Record Date for
distributions in respect of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units
on a one-for-one basis as set forth in, and pursuant to the terms of,
Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
Section 5.9 LIMITED PREEMPTIVE RIGHT.
Except as provided in this Section 5.9 and in Section 5.2(b), no Person
shall have any preemptive, preferential or other similar right with respect to
the issuance of any Partnership Security, whether unissued, held in the treasury
or hereafter created. The General Partner shall have the right (but not
obligation), which it may from time to time assign in whole or in part to any of
its Affiliates, to purchase Partnership Securities from the Partnership
whenever, and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its Affiliates, to the
extent necessary to maintain the Percentage Interests of the General Partner and
its Affiliates equal to that which existed immediately prior to the issuance of
such Partnership Securities.
Section 5.10 SPLITS AND COMBINATION.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments
of distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
(b) Whenever such a distribution, subdivision or combination of
Partnership Securities is declared, the General Partner shall select a
Record Date as of which the distribution, subdivision or combination shall
be effective and shall send notice thereof at least 20 days
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prior to such Record Date to each Record Holder as of a date not less than
10 days prior to the date of such notice. The General Partner also may cause
a firm of independent public accountants selected by it to calculate the
number of Partnership Securities to be held by each Record Holder after
giving effect to such distribution, subdivision or combination. The General
Partner shall be entitled to rely on any certificate provided by such firm
as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or
combination, the Partnership may issue Certificates to the Record Holders of
Partnership Securities as of the applicable Record Date representing the new
number of Partnership Securities held by such Record Holders, or the General
Partner may adopt such other procedures as it may deem appropriate to
reflect such changes. If any such combination results in a smaller total
number of Partnership Securities Outstanding, the Partnership shall require,
as a condition to the delivery to a Record Holder of such new Certificate,
the surrender of any Certificate held by such Record Holder immediately
prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any
distribution, subdivision or combination of Units. If a distribution,
subdivision or combination of Units would result in the issuance of
fractional Units but for the provisions of Section 5.7(d) and this Section
5.10(d), each fractional Unit shall be rounded to the nearest whole Unit
(and a 0.5 Unit shall be rounded to the next higher Unit).
Section 5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER INTERESTS.
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) NET INCOME. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Income
for such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable periods until the aggregate Net
Income allocated to the General Partner pursuant to this Section
6.1(a)(i) for the current taxable period and all previous taxable periods
is equal to the aggregate Net Losses allocated to the General Partner
pursuant to Section 6.1(b)(iii) for all previous taxable periods;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable periods and 99% to the Unitholders,
in accordance with their respective Percentage Interests, until the
aggregate Net Income allocated to such Partners pursuant to this Section
6.1(a)(ii) for the current taxable period and all previous taxable
periods is equal to the aggregate Net Losses allocated to such Partners
pursuant to Section 6.1(b)(ii) for all previous taxable periods; and
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(iii) Third, the balance, if any, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage Interests.
(b) NET LOSSES. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 6.1(b)(i) for the
current taxable period and all previous taxable periods is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
6.1(a)(iii) for all previous taxable periods, provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable period
(or increase any existing deficit balance in its Adjusted Capital
Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable period
(or increase any existing deficit balance in its Adjusted Capital
Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) NET TERMINATION GAINS AND LOSSES. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for each taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 6.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations
provided under this Section 6.1 and after all distributions of Available
Cash provided under Sections 6.4 and 6.5 have been made; provided, however,
that solely for purposes of this Section 6.1(c), Capital Accounts shall not
be adjusted for distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of
the Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each such
Partner has been allocated Net Termination Gain equal to any such deficit
balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to such
Common Unit for such Quarter (the amount determined pursuant to this
clause (2) is hereinafter defined as the "UNPAID MQD") plus (3) any then
existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding
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Subordinated Units, Pro Rata, and 1% to the General Partner until the
Capital Account in respect of each Subordinated Unit then Outstanding
equals the sum of (1) its Unrecovered Capital, plus (2) the Minimum
Quarterly Distribution for the Quarter during which the Liquidation Date
occurs, reduced by any distribution pursuant to Section 6.4(a)(iii) with
respect to such Subordinated Unit for such Quarter;
(D) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to the
sum of (1) its Unrecovered Capital, plus (2) the Unpaid MQD, plus (3) any
then existing Cumulative Common Unit Arrearage, plus (4) the excess of
(aa) the First Target Distribution less the Minimum Quarterly
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating Surplus
that was distributed pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the
sum of (1) plus (2) plus (3) plus (4) is hereinafter defined as the
"FIRST LIQUIDATION TARGET AMOUNT");
(E) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections 6.4(a)(v)
and 6.4(b)(iii) (the sum of (1) plus (2) is hereinafter defined as the
"SECOND LIQUIDATION TARGET AMOUNT");
(F) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections 6.4(a)(vi)
and 6.4(b)(iv);
(G) Finally, any remaining amount 50.5102% to all Unitholders, Pro
Rata, 48.4898% to the holders of the Incentive Distribution Rights, Pro
Rata, and 1% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner (and the Capital Accounts of
the Partners shall be decreased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until the Capital Account in respect
of each Subordinated Unit then Outstanding has been reduced to zero;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
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(d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such
taxable period:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i). For purposes of this Section 6.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation
of income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 6.1(d) with
respect to such taxable period (other than an allocation pursuant to
Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section 6.1(d)(i) is intended
to comply with the Partnership Minimum Gain chargeback requirement in
Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM GAIN.
Notwithstanding any other provision of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain
for such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii). For purposes of this Section 6.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation
of income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 6.1(d),
other than Section 6.1(d)(i) and other than an allocation pursuant to
Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to such taxable period.
This Section 6.1(d)(ii) is intended to comply with the chargeback of
items of income and gain requirement in Treasury Regulation Section
1.704-2(i)(4) and shall be interpreted consistently therewith.
(III) PRIORITY ALLOCATIONS. (A) If the amount of cash or the Net
Agreed Value of any property distributed (except cash or property
distributed pursuant to Section 12.4) to any Unitholder with respect to
its Units for any taxable period is greater (on a per Unit basis) than
the amount of cash or the Net Agreed Value of property distributed to the
other Unitholders with respect to their Units (on a per Unit basis), then
(1) each Unitholder receiving such greater cash or property distribution
shall be allocated gross income in an amount equal to the product of (aa)
the amount by which the distribution (on a per Unit basis) to such
Unitholder exceeds the distribution (on a per Unit basis) to the
Unitholders receiving the smallest distribution and (bb) the number of
Units held by the Unitholder receiving the greater distribution; and (2)
the General Partner shall be allocated gross income in an aggregate
amount equal to 1/99th of the sum of the amounts allocated in clause (1)
above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable period
and all previous taxable periods is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable period.
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(iv) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the
Treasury Regulations promulgated under Section 704(b) of the Code, the
deficit balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section
6.1(d)(i) or (ii).
(v) GROSS INCOME ALLOCATIONS. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable
period in excess of the sum of (A) the amount such Partner is required to
restore pursuant to the provisions of this Agreement and (B) the amount
such Partner is deemed obligated to restore pursuant to Treasury
Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be
specially allocated items of Partnership gross income and gain in the
amount of such excess as quickly as possible; provided, that an
allocation pursuant to this Section 6.1(d)(v) shall be made only if and
to the extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if this Section 6.1(d)(v)
were not in this Agreement.
(vi) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must
be allocated in a different ratio to satisfy the safe harbor requirements
of the Treasury Regulations promulgated under Section 704(b) of the Code,
the General Partner is authorized, upon notice to the other Partners, to
revise the prescribed ratio to the numerically closest ratio that does
satisfy such requirements.
(vii) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner
bears the Economic Risk of Loss with respect to a Partner Nonrecourse
Debt, such Partner Nonrecourse Deductions attributable thereto shall be
allocated between or among such Partners in accordance with the ratios in
which they share such Economic Risk of Loss.
(viii) NONRECOURSE LIABILITIES. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall
be allocated among the Partners in accordance with their respective
Percentage Interests.
(ix) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required
to be adjusted pursuant to such Section of the Treasury Regulations.
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(x) ECONOMIC UNIFORMITY. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of
the Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking
into account allocations pursuant to Section 6.1(d)(iii), shall be
allocated 100% to each Partner holding Subordinated Units that are
Outstanding as of the termination of the Subordination Period ("FINAL
SUBORDINATED UNITS") in the proportion of the number of Final
Subordinated Units held by such Partner to the total number of Final
Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital
Account maintained with respect to such Final Subordinated Units to an
amount equal to the product of (A) the number of Final Subordinated Units
held by such Partner and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity between
the Capital Accounts underlying Final Subordinated Units and the Capital
Accounts underlying Common Units held by Persons other than the General
Partner and its Affiliates immediately prior to the conversion of such
Final Subordinated Units into Common Units. This allocation method for
establishing such economic uniformity will only be available to the
General Partner if the method for allocating the Capital Account
maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 5.5(c)(ii) does not
otherwise provide such economic uniformity to the Final Subordinated
Units.
(XI) CURATIVE ALLOCATION.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and (2)
Partner Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partner Nonrecourse Debt
Minimum Gain. Allocations pursuant to this Section 6.1(d)(xi)(A) shall
only be made with respect to Required Allocations to the extent the
General Partner reasonably determines that such allocations will
otherwise be inconsistent with the economic agreement among the Partners.
Further, allocations pursuant to this Section 6.1(d)(xi)(A) shall be
deferred with respect to allocations pursuant to Sections 6.1(d)(xi)(A)
(1) and (2) to the extent the General Partner reasonably determines that
such allocations are likely to be offset by subsequent Required
Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
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(xii) CORRECTIVE ALLOCATIONS. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized Loss
under Section 5.5(d)), the General Partner shall allocate additional
items of gross income and gain away from the holders of Incentive
Distribution Rights to the Unitholders and the General Partner, or
additional items of deduction and loss away from the Unitholders and the
General Partner to the holders of Incentive Distribution Rights, to the
extent that the Additional Book Basis Derivative Items allocated to the
Unitholders or the General Partner exceed their Share of Additional Book
Basis Derivative Items. For this purpose, the Unitholders and the General
Partner shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis Derivative
Items have reduced the amount of income that would otherwise have been
allocated to the Unitholders or the General Partner under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken into
account in computing cost of goods sold would reduce the amount of book
income otherwise available for allocation among the Partners). Any
allocation made pursuant to this Section 6.1(d)(xii)(A) shall be made
after all of the other Agreed Allocations have been made as if this
Section 6.1(d)(xii) were not in this Agreement and, to the extent
necessary, shall require the reallocation of items that have been
allocated pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c).
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
Section 6.2 ALLOCATIONS FOR TAX PURPOSES.
(a) Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as its correlative item of "BOOK"
income, gain, loss or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated
for federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the manner
provided under Section 704(c) of the Code that takes into account the
variation between the Agreed Value of such property and its adjusted
basis at the time of contribution; and (B) any item of Residual Gain or
Residual Loss attributable to a Contributed Property shall be allocated
among the Partners in the
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same manner as its correlative item of "BOOK" gain or loss is allocated
pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the
Partners in the same manner as its correlative item of "BOOK" gain or
loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i)
adopt such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of
this Agreement as appropriate (x) to reflect the proposal or promulgation of
Treasury Regulations under Section 704(b) or Section 704(c) of the Code or
(y) otherwise to preserve or achieve uniformity of the Limited Partner
Interests (or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 6.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Limited Partner Interests
issued and Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite any
inconsistency of such approach with Treasury Regulation Section
1.167(c)-l(a)(6), Proposed Treasury Regulation Section 1.197-2(g)(3), or any
successor regulations thereto. If the General Partner determines that such
reporting position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers
acquiring Limited Partner Interests in the same month would receive
depreciation and amortization deductions, based upon the same applicable
rate as if they had purchased a direct interest in the Partnership's
property. If the General Partner chooses not to utilize such aggregate
method, the General Partner may use any other reasonable depreciation and
amortization conventions to preserve the uniformity of the intrinsic tax
characteristics of any Limited Partner Interests that would not have a
material adverse effect on the Limited Partners or the Record Holders of any
class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 6.2, be characterized as Recapture Income in the same proportions
and to the same extent as such Partners (or their predecessors in interest)
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have been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by
the Partnership for federal income tax purposes and allocated to the
Partners in accordance with the provisions hereof shall be determined
without regard to any election under Section 754 of the Code which may be
made by the Partnership; provided, however, that such allocations, once
made, shall be adjusted as necessary or appropriate to take into account
those adjustments permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction
attributable to a transferred Partnership Interest, shall for federal income
tax purposes, be determined on an annual basis and prorated on a monthly
basis and shall be allocated to the Partners as of the opening of the New
York Stock Exchange on the first Business Day of each month; provided,
however, that (i) such items for the period beginning on the Closing Date
and ending on the last day of the month in which the Option Closing Date or
the expiration of the Over-allotment Option occurs shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first
Business Day of the next succeeding month; and provided, further, that gain
or loss on a sale or other disposition of any assets of the Partnership
other than in the ordinary course of business shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first
Business Day of the month in which such gain or loss is recognized for
federal income tax purposes. The General Partner may revise, alter or
otherwise modify such methods of allocation as it determines necessary, to
the extent permitted or required by Section 706 of the Code and the
regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under
the provisions of this Article VI shall instead be made to the beneficial
owner of Limited Partner Interests held by a nominee in any case in which
the nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion.
Section 6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS; DISTRIBUTIONS TO
RECORD HOLDERS.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on , 1999, an amount equal to 100% of Available
Cash with respect to such Quarter shall, subject to Section 17-607 of the
Delaware Act, be distributed in accordance with this Article VI by the
Partnership to the Partners as of the Record Date selected by the General
Partner in its reasonable discretion. All amounts of Available Cash
distributed by the Partnership on any date from any source shall be deemed
to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to
Section 6.4 equals the Operating Surplus from the Closing Date through the
close of the immediately preceding Quarter. Any remaining amounts of
Available Cash distributed by the Partnership on such date shall, except as
otherwise provided in Section 6.5, be deemed to be "CAPITAL SURPLUS." All
distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
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(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied
and distributed solely in accordance with, and subject to the terms and
conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or
less than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid
by the Partnership, directly or through the Transfer Agent or through any
other Person or agent, only to the Record Holder of such Partnership
Interest as of the Record Date set for such distribution. Such payment shall
constitute full payment and satisfaction of the Partnership's liability in
respect of such payment, regardless of any claim of any Person who may have
an interest in such payment by reason of an assignment or otherwise.
Section 6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS.
(a) DURING SUBORDINATION PERIOD. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5 shall, subject to
Section 17-607 of the Delaware Act, be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, Pro Rata, 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the
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second sentence of Section 6.6(a), the distribution of Available Cash that is
deemed to be Operating Surplus with respect to any Quarter will be made solely
in accordance with Section 6.4(a)(vii).
(b) AFTER SUBORDINATION PERIOD. Available Cash with respect to any
Quarter after the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5, subject to Section
17-607 of the Delaware Act, shall be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for
such Quarter;
(ii) Second, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, Pro Rata, and 13.1327% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, Pro Rata, and 23.2347% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 48.4898%
to the holders of the Incentive Distribution Rights, Pro Rata, and 1% to
the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
Section 6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 99%
to all Unitholders, Pro Rata, and 1% to the General Partner until a hypothetical
holder of a Common Unit acquired on the Closing Date has received with respect
to such Common Unit, during the period since the Closing Date through such date,
distributions of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash that is deemed
to be Capital Surplus shall then be distributed 99% to all Unitholders holding
Common Units, Pro Rata, and 1% to the General Partner until there has been
distributed in respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
Section 6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS.
(a) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution, Third Target Distribution, Common Unit
Arrearages and Cumulative Common Unit Arrearages shall be proportionately
adjusted in the event of any distribution, combination or subdivision
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(whether effected by a distribution payable in Units or otherwise) of Units
or other Partnership Securities in accordance with Section 5.10. In the
event of a distribution of Available Cash that is deemed to be from Capital
Surplus, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution shall
be adjusted proportionately downward to equal the product obtained by
multiplying the otherwise applicable Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution and Third Target
Distribution, as the case may be, by a fraction of which the numerator is
the Unrecovered Capital of the Common Units immediately after giving effect
to such distribution and of which the denominator is the Unrecovered Capital
of the Common Units immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution shall also be
subject to adjustment pursuant to Section 6.9.
Section 6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED UNITS.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain,
loss and deduction and distributions made with respect to Common Units, the
holder of a Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided, however, that
immediately upon the conversion of Subordinated Units into Common Units
pursuant to Section 5.8, the Unitholder holding a Subordinated Unit shall
possess all of the rights and obligations of a Unitholder holding Common
Units hereunder, including the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units; provided, however, that
such converted Subordinated Units shall remain subject to the provisions of
Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into
a Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer
its converted Subordinated Units to a Person which is not an Affiliate of
the holder until such time as the General Partner determines, based on
advice of counsel, that a converted Subordinated Unit should have, as a
substantive matter, like intrinsic economic and federal income tax
characteristics, in all material respects, to the intrinsic economic and
federal income tax characteristics of an Initial Common Unit. In connection
with the condition imposed by this Section 6.7(b), the General Partner may
take whatever reasonable steps are required to provide economic uniformity
to the converted Subordinated Units in preparation for a transfer of such
converted Subordinated Units, including the application of Sections
5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may be taken
that would have a material adverse effect on the Unitholders holding Common
Units represented by Common Unit Certificates.
Section 6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION
RIGHTS.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
Section 6.9 ENTITY-LEVEL TAXATION.
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If legislation is enacted or the interpretation of existing legislation is
modified by the relevant governmental authority which causes the Partnership,
the Intermediate Partnership or Northern Border Pipeline to be treated as an
association taxable as a corporation or otherwise subjects the Partnership, the
Intermediate Partnership or Northern Border Pipeline to entity-level taxation
for federal income tax purposes, the then applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and Third
Target Distribution Date shall be adjusted to equal the product obtained by
multiplying (a) the amount thereof by (b) one minus the sum of (i) the highest
marginal federal corporate (or other entity, as applicable) income tax rate that
could apply to the Partnership, the Intermediate Partnership or Northern Border
Pipeline for the taxable year of the Partnership, the Intermediate Partnership
or Northern Border Pipeline in which such Quarter occurs (expressed as a
decimal) plus (ii) the effective overall state and local income tax rate
(expressed as a decimal) that would have been applicable to the Partnership, the
Intermediate Partnership or Northern Border Pipeline for the calendar year next
preceding the calendar year in which such Quarter occurs (after taking into
account the benefit of any deduction allowable for federal income tax purposes
with respect to the payment of state and local income taxes), but only to the
extent of the increase in such rates resulting from such legislation or
interpretation. Such effective overall state and local income tax rate shall be
determined for the taxable year next preceding the first taxable year during
which the Partnership, the Intermediate Partnership or Northern Border Pipeline
is taxable for federal income tax purposes as an association taxable as a
corporation or is otherwise subject to entity-level taxation by determining such
rate as if the Partnership, the Intermediate Partnership or Northern Border
Pipeline had been subject to such state and local taxes during such preceding
taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 MANAGEMENT.
(a) The General Partner shall conduct, direct and manage all activities
of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the General Partner, and no
Limited Partner or Assignee shall have any management power over the
business and affairs of the Partnership. In addition to the powers now or
hereafter granted a general partner of a limited partnership under
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to Section 7.3,
shall have full power and authority to do all things and on such terms as
it, in its sole discretion, may deem necessary or appropriate to conduct the
business of the Partnership, to exercise all powers set forth in Section 2.5
and to effectuate the purposes set forth in Section 2.4, including the
following:
(i) the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of, or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into Partnership
Securities, and the incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership
or the merger or other combination of the Partnership with or into
another Person (the matters described in this clause (iii) being subject,
however, to any prior approval that may be required by Section 7.3);
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(iv) the use of the assets of the Partnership (including cash on
hand) for any purpose consistent with the terms of this Agreement,
including the financing of the conduct of the operations of the
Partnership Group or making investments in or loans to JV Entities;
subject to Section 7.6(a), the lending of funds to other Persons
(including the Intermediate Partnership); the repayment of obligations of
the Partnership Group or any JV Entity and the making of capital
contributions to any Group Member or JV Entity;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the
contract to have no recourse against the General Partner or its assets
other than its interest in the Partnership, even if these arrangements
result in the terms of the transaction being less favorable to the
Partnership than would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms
of employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited
or general partnerships, joint ventures, corporations or other
relationships (including the acquisition of interests in, and the
contributions of property to, the Intermediate Partnership from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations
of the Partnership, including the bringing and defending of actions at
law or in equity and otherwise engaging in the conduct of litigation and
the incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited
Partner Interests from, or requesting that trading be suspended on, any
such exchange (subject to any prior approval that may be required under
Section 4.8);
(xiii) unless restricted or prohibited by Section 5.7, the issuance,
purchase, sale or other acquisition or disposition of Partnership
Securities or options, rights, warrants and appreciation rights relating
to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Intermediate Partnership as a partner.
(b) Notwithstanding any other provision of this Agreement, the
Intermediate Partnership Agreement, the Delaware Act or any applicable law,
rule or regulation, each of the Partners and the Assignees and each other
Person who may acquire an interest in Partnership Securities hereby (i)
approves, ratifies and confirms the execution, delivery and performance by
the parties thereto of the Intermediate Partnership Agreement, the
Underwriting Agreement, the Contribution and Conveyance Agreement and the
other agreements, documents and instruments described in or filed as
exhibits to the Registration Statement that are related to the
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transactions contemplated by the Registration Statement; (ii) agrees that
the General Partner (on its own or through any officer or attorney-in-fact
of the Partnership) is authorized to execute, deliver and perform the
agreements referred to in clause (i) of this sentence and the other
agreements, acts, transactions and matters described in or contemplated by
the Registration Statement on behalf of the Partnership without any further
act, approval or vote of the Partners or the Assignees or the other Persons
who may acquire an interest in Partnership Securities; and (iii) agrees that
the execution, delivery or performance by the General Partner, any Group
Member or any Affiliate of any of them, of this Agreement or any agreement
authorized or permitted under this Agreement (including the exercise by the
General Partner or any Affiliate of the General Partner of the rights
accorded pursuant to Article XV), shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the Partnership
or the Limited Partners or any other Persons under this Agreement (or any
other agreements) or of any duty stated or implied by law or equity.
Section 7.2 CERTIFICATE OF LIMITED PARTNERSHIP.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of the State of
Delaware or of any other state in which the Partnership may elect to do business
or own property. Subject to the terms of Section 3.4(a), the General Partner
shall not be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any amendment
thereto to any Limited Partner.
Section 7.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY.
(a) The General Partner may not, without written approval of the
specific act by holders of all of the Outstanding Limited Partner Interests
or by other written instrument executed and delivered by holders of all of
the Outstanding Limited Partner Interests subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the
Partnership; (ii) possessing Partnership property, or assigning any rights
in specific Partnership property, for other than a Partnership purpose;
(iii) admitting a Person as a Partner; (iv) amending this Agreement in any
manner; or (v) transferring its interest as general partner of the
Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may
not sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions (including by way of merger, consolidation or other
combination) or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the
Intermediate Partnership, taken as a whole, without the approval of holders
of a Unit Majority; provided however that this provision shall not preclude
or limit the General Partner's ability to mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the assets of the
Partnership or Intermediate Partnership and shall not apply to any sale of
any or all of the assets of the Partnership or Intermediate Partnership
pursuant to the foreclosure of, or other realization upon, any such
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encumbrance. Without the approval of holders of a Unit Majority, the General
Partner shall not, on behalf of the Partnership, (i) consent to any
amendment to the Intermediate Partnership Agreement or, except as expressly
permitted by Section 7.9(d), take any action permitted to be taken by a
partner of the Intermediate Partnership, in either case, that would have a
material adverse effect on the Partnership as a partner of the Intermediate
Partnership or (ii) except as permitted under Sections 4.6, 11.1 or 11.2,
elect or cause the Partnership to elect a successor general partner of the
Partnership or the Intermediate Partnership.
(c) The General Partner may not approve or consent to the conversion of
Northern Border Pipeline or any other JV Entity that is not then taxable as
an entity for federal income tax purposes to corporate form without first
obtaining the approval of the holders of at least 66 2/3% of the Outstanding
Units during the Subordination Period and at least a majority of the
Outstanding Units thereafter.
Section 7.4 REIMBURSEMENT OF THE GENERAL PARTNER.
(a) Except as provided in this Section 7.4 and elsewhere in this
Agreement or in the Intermediate Partnership Agreement, the General Partner
shall not be compensated for its services as general partner or managing
member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of
the General Partner to perform services for the Partnership or for the
General Partner in the discharge of its duties to the Partnership), and (ii)
all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operating the Partnership's business (including expenses allocated to the
General Partner by its Affiliates). The General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion. Reimbursements
pursuant to this Section 7.4 shall be in addition to any reimbursement to
the General Partner as a result of indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion
and without the approval of the Limited Partners (who shall have no right to
vote in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership
Securities or options to purchase Partnership Securities), or cause the
Partnership to issue Partnership Securities in connection with, or pursuant
to, any employee benefit plan, employee program or employee practice
maintained or sponsored by the General Partner or any of its Affiliates, in
each case for the benefit of employees of the General Partner, any Group
Member or any Affiliate, or any of them, in respect of services performed,
directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Partnership Securities that the General Partner or such
Affiliate is obligated to provide to any employees pursuant to any such
employee benefit plans, employee programs or employee practices. Expenses
incurred by the General Partner in connection with any such plans, programs
and practices (including the net cost to the General Partner or such
Affiliate of Partnership Securities purchased by the General Partner or such
Affiliate from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with
Section 7.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by
the General Partner as permitted by this Section 7.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's General Partner
Interest pursuant to Section 4.6.
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Section 7.5 OUTSIDE ACTIVITIES.
(a) After the Closing Date, the General Partner, for so long as it is
the General Partner of the Partnership (i) agrees that its sole business
will be to act as the general partner (or managing member) of the
Partnership, the Intermediate Partnership, and any other partnership or
limited liability company of which the Partnership or the Intermediate
Partnership is, directly or indirectly, a partner or member and to undertake
activities that are ancillary or related thereto (including being a limited
partner in the Partnership) and (ii) shall not engage in any business or
activity or incur any debts or liabilities except in connection with or
incidental to (A) its performance as general partner (or managing member) of
one or more Group Members or as described in or contemplated by the
Registration Statement or (B) the acquiring, owning or disposing of debt or
equity securities or interests in any Group Member.
(b) Except as specifically restricted by Section 7.5(a), each Indemnitee
(other than the General Partner) shall have the right to engage in
businesses of any and every type and description and other activities for
profit and to engage in and possess an interest in other business ventures
of any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member or JV Entity, independently
or with others, including business interests and activities in direct
competition with the business and activities of any Group Member or JV
Entity, and none of the same shall constitute a breach of this Agreement or
any duty express or implied by law to any Group Member or JV Entity or any
Partner or Assignee. Neither any Group Member, any JV Entity, any Limited
Partner nor any other Person shall have any rights by virtue of this
Agreement, the Intermediate Partnership Agreement or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(c) Subject to the terms of Section 7.5(a) and Section 7.5(b), but
otherwise notwithstanding anything to the contrary in this Agreement, (i)
the engaging in competitive activities by any Indemnitees (other than the
General Partner) in accordance with the provisions of this Section 7.5 is
hereby approved by the Partnership and all Partners, (ii) it shall be deemed
not to be a breach of the General Partner's fiduciary duty or any other
obligation of any type whatsoever of the General Partner for the Indemnitees
(other than the General Partner) to engage in such business interests and
activities in preference to or to the exclusion of the Partnership and (iii)
the General Partner and the Indemnities shall have no obligation to present
business opportunities to the Partnership.
(d) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing
Date and, except as otherwise provided in this Agreement, shall be entitled
to exercise all rights, powers and privileges (as General Partner, Limited
Partner or Assignee, as applicable) relating to such Units or Partnership
Securities.
(e) The term "AFFILIATES" when used in Section 7.5(a) and Section 7.5(d)
with respect to the General Partner shall not include any Group Member or
any Subsidiary of a Group Member.
(f) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of
this Agreement purport or are interpreted to have the effect of restricting
the fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited
Partners to any such restriction, such provisions shall be inapplicable and
have no effect in determining whether the General Partner has complied with
its fiduciary duties in connection with determinations made by it under
Section 7.5(a).
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Section 7.6 LOANS FROM THE GENERAL PARTNER; LOANS OR CONTRIBUTIONS FROM THE
PARTNERSHIP; CONTRACTS WITH AFFILIATES; CERTAIN RESTRICTIONS ON THE
GENERAL PARTNER.
(a) The General Partner or its Affiliates may lend to any Group Member
or JV Entity, and any Group Member or JV Entity may borrow from the General
Partner or any of its Affiliates, funds needed or desired by the Group
Member or JV Entity for such periods of time and in such amounts as the
General Partner may determine; provided, however, that in any such case the
lending party may not charge the borrowing party interest at a rate greater
than the rate that would be charged the borrowing party or impose terms less
favorable to the borrowing party than would be charged or imposed on the
borrowing party by unrelated lenders on comparable loans made on an
arm's-length basis (without reference to the lending party's financial
abilities or guarantees). The borrowing party shall reimburse the lending
party for any costs (other than any additional interest costs) incurred by
the lending party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and Section 7.6(b), the term "GROUP MEMBER"
shall include any Affiliate of a Group Member that is controlled by the
Group Member. No Group Member may lend funds to the General Partner or any
of its Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member or JV
Entity, and any Group Member or JV Entity may borrow from the Partnership,
funds on terms and conditions established in the sole discretion of the
General Partner; provided, however, that the Partnership may not charge the
Group Member or JV Entity interest at a rate less than the rate that would
be charged to the Group Member or JV Entity (without reference to the
General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member, JV Entity or any other Person.
(c) The General Partner may itself, or may enter into an agreement with
any of its Affiliates to, render services to a Group Member or JV Entity or
to the General Partner in the discharge of its duties as general partner of
the Partnership. Any services rendered to a Group Member or JV Entity by the
General Partner or any of its Affiliates shall be on terms that are fair and
reasonable to the Partnership; provided, however, that the requirements of
this Section 7.6(c) shall be deemed satisfied as to (i) any transaction
approved by Special Approval, (ii) any transaction, the terms of which are
no less favorable to such Group Member or JV Entity than those generally
being provided to or available from unrelated third parties or (iii) any
transaction that, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to such Group Member or JV Entity),
is equitable to such Group Member or JV Entity . The provisions of Section
7.4 shall apply to the rendering of services described in this Section
7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, any other Group Member or any JV Entity directly or indirectly,
except pursuant to transactions that are fair and reasonable to the
Partnership; provided, however, that the requirements of this Section 7.6(e)
shall be deemed to be satisfied as to (i) the transactions effected pursuant
to Sections 5.2 and 5.3, the Contribution and Conveyance Agreement and any
other transactions described in or contemplated by the Registration
Statement, (ii) any transaction approved by Special Approval, (iii) any
transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties, or (iv) any transaction that,
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taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership), is equitable to the Partnership. With
respect to any contribution of assets to the Partnership in exchange for
Partnership Securities, the Conflicts Committee, in determining whether the
appropriate number of Partnership Securities are being issued, may take into
account, among other things, the fair market value of the assets, the
liquidated and contingent liabilities assumed, the tax basis in the assets,
the extent to which tax-only allocations to the transferor will protect the
existing partners of the Partnership against a low tax basis, and such other
factors as the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member or JV Entity to use any facilities or assets of the
General Partner and its Affiliates, except as may be provided in contracts
entered into from time to time specifically dealing with such use, nor shall
there be any obligation on the part of the General Partner or its Affiliates
to enter into such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement (including
Sections 7.6(a) through 7.6(f), (i) the existence of the conflicts of
interest described in the Registration Statement and (ii) the Revolving
Credit Facility described in the Registration Statement and any extension,
refunding or replacement on substantially similar terms, including interest
rate, are hereby approved by all Partners.
Section 7.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law but subject to the
limitations expressly provided in this Agreement, all Indemnitees shall be
indemnified and held harmless by the Partnership from and against any and
all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnitee may be involved, or is threatened to
be involved, as a party or otherwise, by reason of its status as an
Indemnitee; provided, that in each case the Indemnitee acted in good faith
and in a manner that such Indemnitee 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 and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful;
provided, further, no indemnification pursuant to this Section 7.7 shall be
available to the General Partner with respect to its obligations incurred
pursuant to the Underwriting Agreement or the Contribution and Conveyance
Agreement (other than obligations incurred by the General Partner on behalf
of the Partnership or the Intermediate Partnership). The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere, or its equivalent, shall not create a
presumption that the Indemnitee acted in a manner contrary to that specified
above. Any indemnification pursuant to this Section 7.7 shall be made only
out of the assets of the Partnership, it being agreed that the General
Partner shall not be personally liable for such indemnification and shall
have no obligation to contribute or loan any monies or property to the
Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal
fees and expenses) incurred by an Indemnitee who is indemnified pursuant to
Section 7.7(a) in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by the Partnership prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt
by the Partnership of any undertaking by or on behalf of the Indemnitee to
repay such amount if it shall be determined that the Indemnitee is not
entitled to be indemnified as authorized in this Section 7.7.
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(c) The indemnification provided by this Section 7.7 shall be in
addition to any other rights to which an Indemnitee may be entitled under
any agreement, pursuant to any vote of the holders of Outstanding Limited
Partner Interests, as a matter of law or otherwise, both as to actions in
the Indemnitee's capacity as an Indemnitee and as to actions in any other
capacity(including any capacity under the Underwriting Agreement), and shall
continue as to an Indemnitee who has ceased to serve in such capacity and
shall inure to the benefit of the heirs, successors, assigns and
administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the
General Partner, its Affiliates and such other Persons as the General
Partner shall determine, against any liability that may be asserted against
or expense that may be incurred by such Person in connection with the
Partnership's activities or such Person's activities on behalf of the
Partnership, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute "FINES" within the meaning of Section 7.7(a); and
action taken or omitted by it with respect to any employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be
in the interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose which is in, or not opposed to, the best
interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to
personal liability by reason of the indemnification provisions set forth in
this Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right
of any past, present or future Indemnitee to be indemnified by the
Partnership, nor the obligations of the Partnership to indemnify any such
Indemnitee under and in accordance with the provisions of this Section 7.7
as in effect immediately prior to such amendment, modification or repeal
with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
Section 7.8 LIABILITY OF INDEMNITEES.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, no Indemnitee shall be liable for monetary damages to the
Partnership, the Limited Partners, the Assignees or any other Persons who
have acquired interests in the Partnership Securities, for losses sustained
or liabilities incurred as a result of any act or omission if such
Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth
in Section 7.1(a), the General Partner may exercise any of the powers
granted to it by this Agreement and perform
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any of the duties imposed upon it hereunder either directly or by or through
its agents, and the General Partner shall not be responsible for any
misconduct or negligence on the part of any such agent appointed by the
General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not be
liable to the Partnership or to any Partner for its good faith reliance on
the provisions of this Agreement. The provisions of this Agreement, to the
extent that they restrict or otherwise modify the duties and liabilities of
an Indemnitee otherwise existing at law or in equity, are agreed by the
Partners to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect
the limitations on the liability to the Partnership, the Limited Partners,
the General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise
or be asserted.
Section 7.9 RESOLUTION OF CONFLICTS OF INTEREST.
(a) Unless otherwise expressly provided in this Agreement or the
Intermediate Partnership Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of its
Affiliates, on the one hand, and the Partnership, the Intermediate
Partnership, any Partner or any Assignee, on the other, any resolution or
course of action by the General Partner or its Affiliates in respect of such
conflict of interest shall be permitted and deemed approved by all Partners,
and shall not constitute a breach of this Agreement, of the Intermediate
Partnership Agreement, of any agreement contemplated herein or therein, or
of any duty stated or implied by law or equity, if the resolution or course
of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but
not required in connection with its resolution of such conflict of interest
to seek Special Approval of such resolution. Any conflict of interest and
any resolution of such conflict of interest shall be conclusively deemed
fair and reasonable to the Partnership if such conflict of interest or
resolution is (i) approved by Special Approval (as long as the material
facts known to the General Partner or any of its Affiliates regarding any
proposed transaction were disclosed to the Conflicts Committee at the time
it gave its approval), (ii) on terms no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties or (iii) fair to the Partnership, taking into account the totality
of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). The General Partner may also adopt a resolution or course of
action that has not received Special Approval. The General Partner
(including the Conflicts Committee in connection with Special Approval)
shall be authorized in connection with its determination of what is "fair
and reasonable" to the Partnership and in connection with its resolution of
any conflict of interest to consider (A) the relative interests of any party
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person;
(C) any applicable generally accepted accounting practices or principles;
and (D) such additional factors as the General Partner (including the
Conflicts Committee) determines in its sole discretion to be relevant,
reasonable or appropriate under the circumstances. Nothing contained in this
Agreement, however, is intended to nor shall it be construed to require the
General Partner (including the Conflicts Committee) to consider the
interests of any Person other than the
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Partnership. In the absence of bad faith by the General Partner, the
resolution, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any
standard of care or duty imposed herein or therein or, to the extent
permitted by law, under the Delaware Act or any other law, rule or
regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or "necessary or advisable" or
under a grant of similar authority or latitude, except as otherwise provided
herein, the General Partner or such Affiliate shall be entitled to consider
only such interests and factors as it desires and shall have no duty or
obligation to give any consideration to any interest of, or factors
affecting, the Partnership, any other Group Member or JV Entity, any Limited
Partner or any Assignee, (ii) it may make such decision in its sole
discretion (regardless of whether there is a reference to "sole discretion"
or "discretion") unless another express standard is provided for, or (iii)
in "good faith" or under another express standard, the General Partner or
such Affiliate shall act under such express standard and shall not be
subject to any other or different standards imposed by this Agreement, the
Intermediate Partnership Agreement, any other agreement contemplated hereby
or under the Delaware Act or any other law, rule or regulation. In addition,
any actions taken by the General Partner or such Affiliate consistent with
the standards of "reasonable discretion" set forth in the definitions of
Available Cash or Operating Surplus shall not constitute a breach of any
duty of the General Partner to the Partnership or the Limited Partners. The
General Partner shall have no duty, express or implied, to sell or otherwise
dispose of any asset of the Partnership Group other than in the ordinary
course of business. No borrowing by any Group Member or the approval thereof
by the General Partner shall be deemed to constitute a breach of any duty of
the General Partner to the Partnership or the Limited Partners by reason of
the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable distributions to the General Partner or its
Affiliates (including in their capacities as Limited Partners) to exceed 1%
of the total amount distributed to all Partners or (B) hasten the expiration
of the Subordination Period or the conversion of any Subordinated Units into
Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such
transaction, arrangement or resolution shall be considered in the context of
all similar or related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of
the Partnership as a partner or member of a Group Member, to approve of
actions by the general partner or managing member of such Group Member
similar to those actions permitted to be taken by the General Partner
pursuant to this Section 7.9.
Section 7.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons
as to matters that the General Partner reasonably believes to be
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within such Person's professional or expert competence and in accordance
with such opinion shall be conclusively presumed to have been done or
omitted in good faith.
(c) The General Partner shall have the right, in respect of any of its
rights, powers or obligations hereunder, to act through any of its duly
authorized officers, a duly appointed attorney or attorneys-in-fact or the
duly authorized officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the best
interests of the Partnership.
Section 7.11 PURCHASE OR SALE OF PARTNERSHIP SECURITIES.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
Section 7.12 REGISTRATION RIGHTS OF THE GENERAL PARTNER AND ITS AFFILIATES.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an
Affiliate of the General Partner at the date hereof notwithstanding that it
may later cease to be an Affiliate of the General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act
(or any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership
Securities (the "HOLDER") to dispose of the number of Partnership Securities
it desires to sell at the time it desires to do so without registration
under the Securities Act, then upon the request of the General Partner or
any of its Affiliates, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use all reasonable
efforts to cause to become effective and remain effective for a period of
not less than six months following its effective date or such shorter period
as shall terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement under the
Securities Act registering the offering and sale of the number of
Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in
the best interests of the Partnership and its Partners due to a pending
transaction, investigation or other event, the filing of such registration
statement or the effectiveness thereof may be deferred for up to six months,
but not thereafter. In connection with any registration pursuant to the
immediately preceding sentence, the Partnership shall promptly prepare and
file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no
such qualification shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service of process
or to taxation or qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction solely as a result of such
registration, and (y) such documents as
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may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the
Holder shall reasonably request, and do any and all other acts and things
that may reasonably be necessary or advisable to enable the Holder to
consummate a public sale of such Partnership Securities in such states.
Except as set forth in Section 7.12(c), all costs and expenses of any such
registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of
the Partnership for cash (other than an offering relating solely to an
employee benefit plan), the Partnership shall use all reasonable efforts to
include such number or amount of securities held by the Holder in such
registration statement as the Holder shall request. If the proposed offering
pursuant to this Section 7.12(b) shall be an underwritten offering, then, in
the event that the managing underwriter or managing underwriters of such
offering advise the Partnership and the Holder in writing that in their
opinion the inclusion of all or some of the Holder's Partnership Securities
would adversely and materially affect the success of the offering, the
Partnership shall include in such offering only that number or amount, if
any, of securities held by the Holder which, in the opinion of the managing
underwriter or managing underwriters, will not so adversely and materially
affect the offering. Except as set forth in Section 7.12(c), all costs and
expenses of any such registration and offering (other than the underwriting
discounts and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 7.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder and
each Person who controls the Holder (within the meaning of the Securities
Act) and their respective directors, officers, employees, members, partners
or agents (collectively, "INDEMNIFIED PERSONS") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint
or several), costs and expenses (including interest, penalties and
reasonable attorneys' fees and disbursements), resulting to, imposed upon,
or incurred by the Indemnified Persons, directly or indirectly, under the
Securities Act or otherwise (hereinafter referred to in this Section 7.12(c)
as a "CLAIM" and in the plural as "CLAIMS") based upon, arising out of or
resulting from any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which any
Partnership Securities were registered under the Securities Act or any state
securities or Blue Sky laws, in any preliminary prospectus (if used prior to
the effective date of such registration statement), or in any summary or
final prospectus or in any amendment or supplement thereto (if used during
the period the Partnership is required to keep the registration statement
current), or arising out of, based upon or resulting from the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be liable to any
Indemnified Person to the extent that any such claim arises out of, is based
upon or results from an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, such
preliminary, summary or final prospectus or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Partnership by or on behalf of such Indemnified Person specifically for use
in the preparation thereof.
(d) The provisions of Section 7.12(a) and Section 7.12(b) shall continue
to be applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases
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to be a Partner of the Partnership, during a period of two years subsequent
to the effective date of such cessation and for so long thereafter as is
required for the Holder to sell all of the Partnership Securities with
respect to which it has requested during such two-year period inclusion in a
registration statement otherwise filed or that a registration statement be
filed; provided, however, that the Partnership shall not be required to file
successive registration statements covering the same Partnership Securities
for which registration was demanded during such two-year period. The
provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this
Section 7.12 shall (i) specify the Partnership Securities intended to be
offered and sold by the Person making the request, (ii) express such
Person's present intent to offer such shares for distribution, (iii)
describe the nature or method of the proposed offer and sale of Partnership
Securities, and (iv) contain the undertaking of such Person to provide all
such information and materials and take all action as may be required in
order to permit the Partnership to comply with all applicable requirements
in connection with the registration of such Partnership Securities.
Section 7.13 RELIANCE BY THIRD PARTIES.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that (i) the General
Partner and (ii) any officer or attorney-in-fact of the General Partner
authorized by the General Partner to act on behalf of and in the name of the
Partnership, has full power and authority to encumber, sell or otherwise use in
any manner any and all assets of the Partnership and to enter into any
authorized contracts on behalf of the Partnership, and such Person shall be
entitled to deal with the General Partner or any such officer or
attorney-in-fact as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to contest,
negate or disaffirm any action of the General Partner or any such officer or
attorney-in-fact in connection with any such dealing. In no event shall any
Person dealing with the General Partner or any such officer or attorney-in-fact
be obligated to ascertain that the terms of the Agreement have been complied
with or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or attorney-in-fact. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or any such officer or attorney-in-fact shall be
conclusive evidence in favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 RECORDS AND ACCOUNTING.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape,
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photographs, micrographics or any other information storage device; provided,
that the books and records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of the Partnership
shall be maintained, for financial reporting purposes, on an accrual basis in
accordance with U.S. GAAP.
Section 8.2 FISCAL YEAR.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
Section 8.3 REPORTS.
(a) As soon as practicable, but in no event later than 120 days after
the close of each fiscal year of the Partnership, the General Partner shall
cause to be mailed or furnished to each Record Holder of a Unit, as of a
date selected by the General Partner in its discretion, an annual report
containing financial statements of the Partnership for such fiscal year of
the Partnership, presented in accordance with U.S. GAAP, including a balance
sheet and statements of operations, Partnership equity and cash flows, such
statements to be audited by a firm of independent public accountants
selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the
General Partner shall cause to be mailed or furnished to each Record Holder
of a Unit, as of a date selected by the General Partner in its discretion, a
report containing unaudited financial statements of the Partnership and such
other information as may be required by applicable law, regulation or rule
of any National Securities Exchange on which the Units are listed for
trading, or as the General Partner determines to be necessary or
appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 TAX RETURNS AND INFORMATION.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
Section 9.2 TAX ELECTIONS.
(a) The Partnership shall make the election under Section 754 of the
Code in accordance with applicable regulations thereunder, subject to the
reservation of the right to seek to revoke any such election upon the
General Partner's determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other provision
herein contained, for the purposes of computing the adjustments under
Section 743(b) of the Code, the General Partner shall be authorized (but not
required) to adopt a convention whereby the price paid by a transferee of a
Limited Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National Securities Exchange
on which such Limited Partner Interests are traded during the calendar month
in which such transfer is deemed to occur pursuant to Section 6.2(g) without
regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted
by the Code.
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Section 9.3 TAX CONTROVERSIES.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
Section 9.4 WITHHOLDING.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Intermediate
Partnership to comply with any withholding requirements established under the
Code or any other federal, state or local law including, without limitation,
pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that
the Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 ADMISSION OF INITIAL LIMITED PARTNERS.
Upon the transfer of Common Units, Subordinated Units and Incentive
Distribution Rights to the General Partner as described in Section 5.2, the
General Partner shall be deemed to have been admitted to the Partnership as a
Limited Partner in respect of the Common Units, Subordinated Units and Incentive
Distribution Rights transferred to it. Upon the issuance by the Partnership of
Common Units to the Underwriters as described in Section 5.3 in connection with
the Initial Offering and the execution by each Underwriter of a Transfer
Application, the General Partner shall admit the Underwriters to the Partnership
as Initial Limited Partners in respect of the Common Units purchased by them.
Section 10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER.
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
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Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership. With
respect to voting rights attributable to Limited Partner Interests that are held
by Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the voting rights in respect of such
Limited Partner Interests on any matter, vote such Limited Partner Interests at
the written direction of the Assignee who is the holder of such Limited Partner
Interests. If no such written direction is received, such Limited Partner
Interests will not be voted. An Assignee shall have no other rights of a Limited
Partner.
Section 10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner Interest pursuant to
Section 4.6 who is proposed to be admitted as a successor General Partner shall
be admitted to the Partnership as the General Partner, effective immediately
prior to the withdrawal or removal of the predecessor or transferring General
Partner pursuant to Section 11.1 or 11.2 or the transfer of the General Partner
Interest pursuant to Section 4.6, provided, however, that no such successor
shall be admitted to the Partnership until compliance with the terms of Section
4.6 has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
members of the Partnership Group without dissolution.
Section 10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) A Person (other than the General Partner, an Initial Limited Partner
or a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner (i) evidence of acceptance in form satisfactory to the
General Partner of all of the terms and conditions of this Agreement,
including the power of attorney granted in Section 2.6, and (ii) such other
documents or instruments as may be required in the discretion of the General
Partner to effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in
the General Partner's discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded as such in the books and records of the
Partnership, following the consent of the General Partner to such admission.
Section 10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 WITHDRAWAL OF THE GENERAL PARTNER.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each
such event herein referred to as an "EVENT OF WITHDRAWAL");
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(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Intermediate Partnership);
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for
relief under Chapter 7 of the United States Bankruptcy Code; (C) files a
petition or answer seeking for itself a liquidation, dissolution or
similar relief (but not a reorganization) under any law; (D) files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the General Partner in a
proceeding of the type described in clauses (A)-(C) of this Section
11.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment
of a trustee (but not a debtor-in-possession), receiver or liquidator of
the General Partner or of all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or
against the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation; (B) in the event
the General Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General Partner; (C) in
the event the General Partner is acting in such capacity by virtue of
being a trustee of a trust, the termination of the trust; (D) in the
event the General Partner is a natural person, his death or adjudication
of incompetency; and (E) otherwise in the event of the termination of the
General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the
period beginning on the Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on , 2009, the General Partner voluntarily
withdraws by giving at least 90 days' advance notice of its intention to
withdraw to the Limited Partners; provided that prior to the effective date
of such withdrawal, the withdrawal is approved by Unitholders holding at
least a majority of the Outstanding Common Units (excluding Common Units
held by the General Partner and its Affiliates) and the General Partner
delivers to the Partnership an Opinion of Counsel ("WITHDRAWAL OPINION OF
COUNSEL") that such withdrawal (following the selection of the successor
General Partner) would not result in the loss of the limited liability of
any Limited Partner or of a limited partner of the Intermediate Partnership
or cause the Partnership or the Intermediate Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously treated as
such); (ii) at any time after 12:00 midnight, Eastern Standard Time, on
, 2009, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice to the Unitholders, such withdrawal to take
effect on the date specified in such notice; (iii) at any time that the
General Partner ceases
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to be the General Partner pursuant to Section 11.1(a)(ii) or is removed
pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this
sentence, at any time that the General Partner voluntarily withdraws by
giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners, such withdrawal to take effect on the date specified in
the notice, if at the time such notice is given one Person and its
Affiliates (other than the General Partner and its Affiliates) own
beneficially or of record or control at least 50% of the Outstanding Units.
The withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall also constitute the withdrawal of
the General Partner as general partner or managing member, as the case may
be, of the other Group Members. If the General Partner gives a notice of
withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit Majority,
may, prior to the effective date of such withdrawal, elect a successor
General Partner. The Person so elected as successor General Partner shall
automatically become the successor general partner or managing member, as
the case may be, of the other Group Members of which the General Partner is
a general partner or a managing member. If, prior to the effective date of
the General Partner's withdrawal, a successor is not selected by the
Unitholders as provided herein or the Partnership does not receive a
Withdrawal Opinion of Counsel, the Partnership shall be dissolved in
accordance with Section 12.1. Any successor General Partner elected in
accordance with the terms of this Section 11.1 shall be subject to the
provisions of Section 10.3.
Section 11.2 REMOVAL OF THE GENERAL PARTNER.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a Unit Majority (including
Units held by the General Partner and its Affiliates). Such removal shall be
effective immediately following the admission of a successor General Partner
pursuant to Section 10.3. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as general partner
or managing member, as the case may be, of the other Group Members of which the
General Partner is a general partner or a managing member. If a Person is
elected as a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing member, as the case
may be, of the other Group Members of which the General Partner is a general
partner or a managing member. The right of the holders of Outstanding Units to
remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
Section 11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option exercisable prior to the effective date of the
departure of such Departing Partner to require its successor to purchase its
General Partner Interest and its general partner interest (or equivalent
interest) in the other Group Members and all of its Incentive Distribution
Rights (collectively, the "COMBINED INTEREST") in exchange for an amount in
cash equal to the fair market value of such Combined Interest, such amount
to be determined and payable as of the effective date of its departure. If
the General Partner is removed by the Unitholders under circumstances where
Cause exists or if the General Partner withdraws under circumstances where
such withdrawal violates this Agreement or the Intermediate Partnership
Agreement, and
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if a successor General Partner is elected in accordance with the terms of
Section 11.1 or 11.2, such successor shall have the option, exercisable
prior to the effective date of the departure of such Departing Partner, to
purchase the Combined Interest for such fair market value of such Combined
Interest. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section
7.4, including any employee-related liabilities (including severance
liabilities), incurred in connection with the termination of any employees
employed by the General Partner for the benefit of the Partnership or the
other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Combined
Interest shall be determined by agreement between the Departing Partner and its
successor or, failing agreement within 30 days after the effective date of such
Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts, and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then the Departing Partner shall
designate an independent investment banking firm or other independent expert,
the Departing Partner's successor shall designate an independent investment
banking firm or other independent expert, and such firms or experts shall
mutually select a third independent investment banking firm or independent
expert, which third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined Interest. In making
its determination, such third independent investment banking firm or other
independent expert may consider the then current trading price of Units on any
National Securities Exchange on which Units are then listed, the value of the
Partnership's assets, the rights and obligations of the Departing Partner and
other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common
Units pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a), without reduction
in such Partnership Interest (but subject to proportionate dilution by
reason of the admission of its successor). Any successor General Partner
shall indemnify the Departing Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date on which the
Departing Partner (or its transferee) becomes a Limited Partner. For
purposes of this Agreement, conversion of the Combined Interest to Common
Units will be characterized as if the General Partner (or its transferee)
contributed its Combined Interest to the Partnership in exchange for the
newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the
terms of Section 11.1 or 11.2 and the option described in Section 11.3(a) is
not exercised by the party entitled to do so, the successor General Partner
shall, at the effective date of its admission to the Partnership, contribute
to the Partnership cash in the amount equal to 1/99th of the Net Agreed
Value of the Partnership's assets on such date. In such event, such
successor General Partner shall, subject to the following sentence, be
entitled to 1% of all Partnership allocations and distributions. The
successor General Partner shall cause this Agreement to be amended to
reflect that, from and after the date of such successor General Partner's
admission, the successor General Partner's interest in all Partnership
distributions and allocations shall be 1%.
Section 11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF SUBORDINATED
UNITS AND EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period
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will end and all Outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis and (ii) all
Cumulative Common Unit Arrearages on the Common Units will be extinguished.
Section 11.5 WITHDRAWAL OF LIMITED PARTNERS.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 DISSOLUTION.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and
such successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders of a Unit Majority (subject to the proviso in the last
sentence of this Section 12.25). Unless such an election is made within the
applicable time period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election is so made,
then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
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(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as
necessary, to file a new partnership agreement and certificate of limited
partnership, and the successor general partner may for this purpose
exercise the powers of attorney granted the General Partner pursuant to
Section 2.6;
provided, that the right of the holders of a Unit Majority to approve a
successor General Partner and to reconstitute and to continue the business of
the Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would not
result in the loss of limited liability of any Limited Partner and (y) neither
the Partnership, the reconstituted limited partnership nor the Intermediate
Partnership would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue.
Section 12.3 LIQUIDATOR.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Outstanding Subordinated
Units voting as a single class. The Liquidator (if other than the General
Partner) shall agree not to resign at any time without 15 days' prior notice and
may be removed at any time, with or without cause, by notice of removal approved
by holders of at least a majority of the Outstanding Common Units and
Outstanding Subordinated Units voting as a single class. Upon dissolution,
removal or resignation of the Liquidator, a successor and substitute Liquidator
(who shall have and succeed to all rights, powers and duties of the original
Liquidator) shall within 30 days thereafter be approved by holders of at least a
majority of the Outstanding Common Units and Outstanding Subordinated Units
voting as a single class who shall also approve the compensation payable to such
Liquidator. The right to approve a successor or substitute Liquidator in the
manner provided herein shall be deemed to refer also to any such successor or
substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XII, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
General Partner under the terms of this Agreement (but subject to all of the
applicable limitations, contractual and otherwise, upon the exercise of such
powers, other than the limitation on sale or other disposition set forth in
Section 7.3(b)) to the extent necessary or desirable in the good faith judgment
of the Liquidator to carry out the duties and functions of the Liquidator
hereunder for and during such period of time as shall be reasonably required in
the good faith judgment of the Liquidator to complete the winding up and
liquidation of the Partnership as provided for herein.
Section 12.4 LIQUIDATION.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) DISPOSITION OF ASSETS. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall be
deemed for purposes of Section 12.4(c) to have received cash equal to its
fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in its
absolute discretion, defer liquidation or distribution of the Partnership's
assets for a reasonable time if it determines that an immediate sale or
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distribution of all or some of the Partnership's assets would be impractical
or would cause undue loss to the Partners. The Liquidator may, in its
absolute discretion, distribute the Partnership's assets, in whole or in
part, in kind if it determines that a sale would be impractical or would
cause undue loss to the Partners.
(b) DISCHARGE OF LIABILITIES. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution
rights under Article VI. With respect to any liability that is contingent,
conditional or unmatured or is otherwise not yet due and payable, the
Liquidator shall either settle such claim for such amount as it thinks
appropriate or establish a reserve of cash or other assets to provide for
its payment. When paid, any unused portion of the reserve shall be
distributed as additional liquidation proceeds.
(c) LIQUIDATION DISTRIBUTIONS. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made
by reason of distributions pursuant to this Section 12.4(c)) for the taxable
period during which the liquidation of the Partnership occurs (with such
date of occurrence being determined pursuant to Treasury Regulation Section
1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of
such taxable period (or, if later, within 90 days after said date of such
occurrence).
Section 12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 12.6 RETURN OF CONTRIBUTIONS.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
Section 12.7 WAIVER OF PARTITION.
To the maximum extent permitted by law, each Partner hereby waives any right
to partition of the Partnership property.
Section 12.8 CAPITAL ACCOUNT RESTORATION.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable period
during which such liquidation occurs, or, if later, within 90 days after the
date of such liquidation.
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ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 AMENDMENT TO BE ADOPTED SOLELY BY THE GENERAL PARTNER.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Partnership and the Intermediate Partnership will not be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does
not adversely affect the Limited Partners in any material respect, (ii) is
necessary or advisable to (A) satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute (including the Delaware Act) or (B) facilitate the
trading of the Limited Partner Interests (including the division of any
class or classes of Outstanding Limited Partner Interests into different
classes to facilitate uniformity of tax consequences within such classes of
Limited Partner Interests) or comply with any rule, regulation, guideline or
requirement of any National Securities Exchange on which the Limited Partner
Interests are or will be listed for trading, compliance with any of which
the General Partner determines in its discretion to be in the best interests
of the Partnership and the Limited Partners, (iii) is necessary or advisable
in connection with action taken by the General Partner pursuant to Section
5.10 or (iv) is required to effect the intent expressed in the Registration
Statement or the intent of the provisions of this Agreement or is otherwise
contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary or
advisable as a result of a change in the fiscal year or taxable year of the
Partnership including, if the General Partner shall so determine, a change
in the definition of "QUARTER" and the dates on which distributions are to
be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization or issuance of any class or series of Partnership
Securities (or options, rights, warrants and appreciation rights relating to
such Partnership Securities) pursuant to Section 5.6;
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(h) any amendment expressly permitted in this Agreement to be made by
the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
Section 13.2 AMENDMENT PROCEDURES.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion. A
proposed amendment shall be effective upon its approval by the holders of a Unit
Majority, unless a greater or different percentage is required under this
Agreement or by Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units shall be set forth
in a writing that contains the text of the proposed amendment. If such an
amendment is proposed, the General Partner shall seek the written approval of
the requisite percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The General Partner
shall notify all Record Holders upon final adoption of any such proposed
amendments.
Section 13.3 AMENDMENT REQUIREMENTS.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no
provision of this Agreement that establishes a percentage of Outstanding
Units (including Units held, or deemed held, by the General Partner or its
Affiliates) required to take any action shall be amended, altered, changed,
repealed or rescinded in any respect that would have the effect of reducing
such voting percentage unless such amendment is approved by the written
consent or the affirmative vote of holders of Outstanding Units whose
aggregate Outstanding Units constitute not less than the voting requirement
sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no
amendment to this Agreement may (i) enlarge the obligations of any Limited
Partner without its consent, unless such shall be deemed to have occurred as
a result of an amendment approved pursuant to Section 13.3(c), (ii) enlarge
the obligations of, restrict in any way any action by or rights of, or
reduce in any way the amounts distributable, reimbursable or otherwise
payable to, the General Partner or any of its Affiliates without its
consent, which consent may be given or withheld in its sole discretion,
(iii) change Section 12.1(a) or 12.1(c), or (iv) change the term of the
Partnership or, except as set forth in Section 12.1(c), give any Person the
right to dissolve the Partnership.
(c) Except as provided in Section 14.3 or otherwise as may be provided
in this Agreement and without limitation of the General Partner's authority
to adopt amendments to this Agreement as contemplated in Section 13.1, any
amendment that would have a material adverse effect on the rights or
preferences of any class of Partnership Interests in relation to other
classes of Partnership Interests must be approved by the holders of not less
than a majority of the Outstanding Partnership Interests of the class
affected.
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(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval
of the holders of at least 90% of the Outstanding Common Units and
Outstanding Subordinated Units voting as a single class unless the
Partnership obtains an Opinion of Counsel to the effect that such amendment
will not (i) adversely affect the limited liability of any Limited Partner
under the Delaware Act or the law of any other state in which the
Partnership is registered as a foreign limited partnership or is otherwise
qualified to do busines or (ii) cause the Partnership or the Intermediate
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not previously treated as such).
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
Section 13.4 SPECIAL MEETINGS.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
holding 20% or more of the Outstanding Limited Partner Interests of the class or
classes for which a meeting is proposed. Limited Partners shall call a special
meeting by delivering to the General Partner one or more requests in writing
stating that the signing Limited Partners wish to call a special meeting and
indicating the general or specific purposes for which the special meeting is to
be called. Within 60 days after receipt of such a call from Limited Partners or
within such greater time as may be reasonably necessary for the Partnership to
comply with any statutes, rules, regulations, listing agreements or similar
requirements governing the holding of a meeting or the solicitation of proxies
for use at such a meeting, the General Partner shall send a notice of the
meeting to the Limited Partners either directly or indirectly through the
Transfer Agent. A meeting shall be held at a time and place determined by the
General Partner on a date not less than 10 days nor more than 60 days after the
mailing of notice of the meeting. Limited Partners shall not vote on matters
that would cause the Limited Partners to be deemed to be taking part in the
management and control of the business and affairs of the Partnership so as to
jeopardize the Limited Partners' limited liability under the Delaware Act or the
law of any other state in which the Partnership is registered as a foreign
limited partnership or is otherwise qualified to do business.
Section 13.5 NOTICE OF A MEETING.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Limited Partner Interests for which a
meeting is proposed in writing by mail or other means of written communication
in accordance with Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of written
communication.
Section 13.6 RECORD DATE.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a meeting
as provided in Section 13.11 the General Partner may set a Record Date, which
shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Limited Partner
Interests are listed for trading, in which case the rule, regulation, guideline
or requirement of such exchange shall govern) or (b) in the event that approvals
are sought without a meeting, the date by which Limited Partners are requested
in writing by the General Partner to give such approvals.
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Section 13.7 ADJOURNMENT.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
Section 13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 13.9 QUORUM.
The holders of a majority of the Outstanding Limited Partner Interests of
the class or classes for which a meeting has been called (including Limited
Partner Interests held or deemed held by the General Partner or its Affiliates)
represented in person or by proxy shall constitute a quorum at a meeting of
Limited Partners of such class or classes unless any such action by the Limited
Partners requires approval by holders of a greater percentage of such Limited
Partner Interests, in which case the quorum shall be such greater percentage. At
any meeting of the Limited Partners duly called and held in accordance with this
Agreement at which a quorum is present, the act of Limited Partners holding
Outstanding Limited Partner Interests that in the aggregate represent a majority
of the Outstanding Limited Partner Interests entitled to vote and present in
person or by proxy at such meeting shall be deemed to constitute the act of all
Limited Partners, unless a greater or different percentage is required with
respect to such action under the provisions of this Agreement, in which case the
act of the Limited Partners holding Outstanding Limited Partner Interests that
in the aggregate represent at least such greater or different percentage shall
be required. The Limited Partners present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough Limited Partners to leave less than a
quorum, if any action taken (other than adjournment) is approved by the required
percentage of Outstanding Limited Partner Interests specified in this Agreement
(including Limited Partner Interests deemed owned by the General Partner). In
the absence of a quorum any meeting of Limited Partners may be adjourned from
time to time by the affirmative vote of holders of at least a majority of the
Outstanding Limited Partner Interests entitled to vote at such meeting
(including Limited Partner Interests held or deemed held by the General Partner
or its Affiliates) represented either in person or by proxy, but no other
business may be transacted, except as provided in Section 13.7.
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Section 13.10 CONDUCT OF A MEETING.
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with applicable law and this Agreement as
it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals in writing.
Section 13.11 ACTION WITHOUT A MEETING.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Limited Partners holding
not less than the minimum percentage of the Outstanding Limited Partner
Interests (including Limited Partner Interests held or deemed held by the
General Partner or its Affiliates) that would be necessary to authorize or take
such action at a meeting at which all the Limited Partners were present and
voted (unless such provision conflicts with any rule, regulation, guideline or
requirement of any National Securities Exchange on which the Limited Partner
Interests are listed for trading, in which case the rule, regulation, guideline
or requirement of such exchange shall govern). Prompt notice of the taking of
action without a meeting shall be given to the Limited Partners who have not
approved in writing. The General Partner may specify that any written ballot
submitted to Limited Partners for the purpose of taking any action without a
meeting shall be returned to the Partnership within the time period, which shall
be not less than 20 days, specified by the General Partner. If a ballot returned
to the Partnership does not vote all of the Limited Partner Interests held by a
Limited Partner, the Partnership shall be deemed to have failed to receive a
ballot for the Limited Partner Interests that were not voted. If approval of the
taking of any action by the Limited Partners is solicited by any Person other
than by or on behalf of the General Partner, the written approvals shall have no
force and effect unless and until (a) they are deposited with the Partnership in
care of the General Partner, (b) approvals sufficient to take the action
proposed are dated as of a date not more than 90 days prior to the date
sufficient approvals are deposited with the Partnership and (c) an Opinion of
Counsel is delivered to the General Partner to the effect that the exercise of
such right and the action proposed to be taken with respect to any particular
matter (i) will not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the Partnership so as
to jeopardize the Limited Partners' limited liability, and (ii) is otherwise
permissible under the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners.
Section 13.12 VOTING AND OTHER RIGHTS.
(a) Only those Record Holders of the Limited Partner Interests on the
Record Date set pursuant to Section 13.6 (and also subject to the
limitations contained in the definition of "OUTSTANDING") shall be entitled
to notice of, and to vote at, a meeting of Limited Partners or to act with
respect to matters as to which the holders of the Outstanding Limited
Partner Interests have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding
Limited Partner Interests shall be deemed to be references to the votes or
acts of the Record Holders of such Outstanding Limited Partner Interests.
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(b) With respect to Limited Partner Interests that are held for a
Person's account by another Person (such as a broker, dealer, bank, trust
company or clearing corporation, or an agent of any of the foregoing), in
whose name such Limited Partner Interests are registered, such other Person
shall, in exercising the voting rights in respect of such Limited Partner
Interests on any matter, and unless the arrangement between such Persons
provides otherwise, vote such Limited Partner Interests in favor of, and at
the direction of, the Person who is the beneficial owner, and the
Partnership shall be entitled to assume it is so acting without further
inquiry. The provisions of this Section 13.12(b) (as well as all other
provisions of this Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
MERGER
Section 14.1 AUTHORITY.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("MERGER AGREEMENT") in accordance
with this Article XIV.
Section 14.2 PROCEDURE FOR MERGER OR CONSOLIDATION.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to the merger or
consolidation, the General Partner shall approve the Merger Agreement, which
shall set forth:
(a) The names and jurisdictions of formation or organization of each of the
business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the business
entity that is to survive the proposed merger or consolidation (the "SURVIVING
BUSINESS ENTITY");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity securities
of each constituent business entity for, or into, cash, property or general or
limited partner interests, rights, securities or obligations of the Surviving
Business Entity; and (i) if any general or limited partner interests, securities
or rights of any constituent business entity are not to be exchanged or
converted solely for, or into, cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business Entity,
the cash, property or general or limited partner interests, rights, securities
or obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive in exchange for,
or upon conversion of their general or limited partner interests, securities or
rights, and (ii) in the case of securities represented by certificates, upon the
surrender of such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity), or evidences thereof, are to be
delivered;
(e) A statement of any changes in the constituent documents or the adoption
of new constituent documents (the articles or certificate of incorporation,
articles of trust, declaration of
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trust, certificate or agreement of limited partnership or other similar charter
or governing document) of the Surviving Business Entity to be effected by such
merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date specified
in or determinable in accordance with the Merger Agreement (provided, that if
the effective time of the merger is to be later than the date of the filing of
the certificate of merger, the effective time shall be fixed no later than the
time of the filing of the certificate of merger and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General Partner.
SECTION 14.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement contains any provision that, if contained
in an amendment to this Agreement, the provisions of this Agreement or the
Delaware Act would require for its approval the vote or consent of a greater
percentage of the Outstanding Limited Partner Interests or of any class of
Limited Partners, in which case such greater percentage vote or consent shall be
required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without Limited
Partner approval, to merge the Partnership or any Group Member into, or convey
all of the Partnership's assets to, another limited liability entity which shall
be newly formed and shall have no assets, liabilities or operations at the time
of such Merger other than those it receives from the Partnership or other Group
Member if (i) the General Partner has received an Opinion of Counsel that the
merger or conveyance, as the case may be, would not result in the loss of the
limited liability of any Limited Partner or any limited partner in the
Intermediate Partnership or cause the Partnership or the Intermediate
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not previously treated as such), (ii) the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Partnership into
another limited liability entity and (iii) the governing instruments of the new
entity provide the Limited Partners and the General Partner with the same rights
and obligations as are herein contained.
SECTION 14.4 CERTIFICATE OF MERGER.
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
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SECTION 14.5 EFFECT OF MERGER.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all other
things and causes of action belonging to each of those business entities,
shall be vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business Entity to the
extent they were property of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and shall not in any
way be impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another.
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS.
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15.1(b) is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "CURRENT MARKET PRICE" as of any date of any class
of Limited Partner Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "CLOSING PRICE" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading on
any National Securities Exchange (other than the Nasdaq Stock Market), the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or, if on any such day
such Limited Partner Interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a
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professional market maker making a market in such Limited Partner Interests of
such class selected by the General Partner, or if on any such day no market
maker is making a market in such Limited Partner Interests of such class, the
fair value of such Limited Partner Interests on such day as determined
reasonably and in good faith by the General Partner; and (iii) "TRADING DAY"
means a day on which the principal National Securities Exchange on which such
Limited Partner Interests of any class are listed or admitted to trading is open
for the transaction of business or, if Limited Partner Interests of a class are
not listed or admitted to trading on any National Securities Exchange, a day on
which banking institutions in New York City generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "NOTICE OF ELECTION TO
PURCHASE") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of such
class (as of a Record Date selected by the General Partner) at least 10, but not
more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive days
in at least two daily newspapers of general circulation printed in the English
language and published in the Borough of Manhattan, New York. The Notice of
Election to Purchase shall specify the Purchase Date and the price (determined
in accordance with Section 15.1(a)) at which Limited Partner Interests will be
purchased and state that the General Partner, its Affiliate or the Partnership,
as the case may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner Interests in
exchange for payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any National Securities
Exchange on which such Limited Partner Interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a Record Holder of
Limited Partner Interests at his address as reflected in the records of the
Transfer Agent shall be conclusively presumed to have been given regardless of
whether the owner receives such notice. On or prior to the Purchase Date, the
General Partner, its Affiliate or the Partnership, as the case may be, shall
deposit with the Transfer Agent cash in an amount sufficient to pay the
aggregate purchase price of all of such Limited Partner Interests to be
purchased in accordance with this Section 15.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least 10 days prior to the
Purchase Date, and if on or prior to the Purchase Date the deposit described in
the preceding sentence has been made for the benefit of the holders of Limited
Partner Interests subject to purchase as provided herein, then from and after
the Purchase Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such Limited Partner
Interests (including any rights pursuant to Articles IV, V, VI, and XII) shall
thereupon cease, except the right to receive the purchase price (determined in
accordance with Section 15.1(a)) for Limited Partner Interests therefor, without
interest, upon surrender to the
Transfer Agent of the Certificates representing such Limited Partner Interests,
and such Limited Partner Interests shall thereupon be deemed to be transferred
to the General Partner, its Affiliate or the Partnership, as the case may be, on
the record books of the Transfer Agent and the Partnership, and the General
Partner or any Affiliate of the General Partner, or the Partnership, as the case
may be, shall be deemed to be the holder of all such Limited Partner Interests
from and after the Purchase Date and shall have all rights as the holder of such
Limited Partner Interests (including all rights as holder of such Limited
Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Limited Partner Interest subject to purchase as provided in this Section 15.1
may surrender his Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described in Section
15.1(a), therefor, without interest thereon.
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ARTICLE XVI
GENERAL PROVISIONS
SECTION 16.1 ADDRESSES AND NOTICES.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Partnership Securities at his address as shown on the records of
the Transfer Agent or as otherwise shown on the records of the Partnership,
regardless of any claim of any Person who may have an interest in such
Partnership Securities by reason of any assignment or otherwise. An affidavit or
certificate of making of any notice, payment or report in accordance with the
provisions of this Section 16.1 executed by the General Partner, the Transfer
Agent or the mailing organization shall be prima facie evidence of the giving or
making of such notice, payment or report. If any notice, payment or report
addressed to a Record Holder at the address of such Record Holder appearing on
the books and records of the Transfer Agent or the Partnership is returned by
the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver it, such notice, payment or report and any
subsequent notices, payments and reports shall be deemed to have been duly given
or made without further mailing (until such time as such Record Holder or
another Person notifies the Transfer Agent or the Partnership of a change in his
address) if they are available for the Partner or Assignee at the principal
office of the Partnership for a period of one year from the date of the giving
or making of such notice, payment or report to the other Partners and Assignees.
Any notice to the Partnership shall be deemed given if received by the General
Partner at the principal office of the Partnership designated pursuant to
Section 2.3. The General Partner may rely and shall be protected in relying on
any notice or other document from a Partner, Assignee or other Person if
believed by it to be genuine.
SECTION 16.2 FURTHER ACTION.
The parties hereto shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
SECTION 16.3 BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
SECTION 16.4 INTEGRATION.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
SECTION 16.5 CREDITORS.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
SECTION 16.6 WAIVER.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach
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thereof shall constitute a waiver of any subsequent breach or any breach of any
other covenant, duty, agreement or condition.
SECTION 16.7 COUNTERPARTS.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
SECTION 16.8 APPLICABLE LAW.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
SECTION 16.9 INVALIDITY OF PROVISIONS.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
SECTION 16.10 CONSENT OF PARTNERS.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
TC PIPELINES GP, INC.
By:
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
TRANSCAN NORTHERN LTD.
By:
Name:
Title:
LIMITED PARTNERS:
All Limited Partners now and hereafter
admitted as Limited Partners of the
Partnership, pursuant to powers of
attorney now and hereafter executed
in favor of, and granted and
delivered to the General Partner.
TC PIPELINES GP, INC.
By:
Name:
Title:
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EXHIBIT A
TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
TC PIPELINES, LP
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
TC PIPELINES, LP
No. Common Units
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of TC PipeLines, LP, as amended, supplemented or restated
from time to time (the "PARTNERSHIP AGREEMENT"), TC PipeLines, LP, a Delaware
limited partnership (the "PARTNERSHIP"), hereby certifies that
- ------------------- (the "HOLDER") is the registered owner of
- ------------ Common Units representing limited partner interests in the
Partnership (the "COMMON UNITS") transferable on the books of the Partnership,
in person or by duly authorized attorney, upon surrender of this Certificate
properly endorsed and accompanied by a properly executed application for
transfer of the Common Units represented by this Certificate. The rights,
preferences and limitations of the Common Units are set forth in, and this
Certificate and the Common Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Partnership Agreement.
Copies of the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership at, the
principal office of the Partnership located at
- -------------------. Capitalized terms used herein but not defined shall have
the meanings given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
Except as otherwise provided in the Partnership Agreement, this Certificate
shall not be valid for any purpose unless it has been countersigned and
registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: ------------------------ TC PIPELINES, LP
Countersigned and Registered by: By: TC PipeLines GP, Inc., its General
Partner
By: ----------------------------
as Transfer Agent and Registrar Name: ------------------------
By: ---------------------------- By: ----------------------------
Authorized Signature Secretary
</TABLE>
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[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT/TRANSFERS MIN ACT
TEN ENT -- as tenants by the entireties ------------ Custodian
(Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts/Transfers
survivorship and not as tenants in common to
Minors Act --------------------
(State)
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
TC PIPELINES, LP
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF TC PIPELINES, LP
You have acquired an interest in TC PipeLines, L.P., a Delaware limited
partnership, whose taxpayer identification number is 52-2135448. The Internal
Revenue Service has issued TC PipeLines, LP the following tax shelter
registration number:
- ------------.
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN TC PIPELINES, LP
You must report the registration number as well as the name and taxpayer
identification number of TC PipeLines, LP on Form 8271. FORM 8271 MUST BE
ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT OR OTHER
TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN TC PIPELINES,
LP.
If you transfer your interest in TC PipeLines, LP to another person, you are
required by the Internal Revenue Service to keep a list containing (a) that
person's name, address and taxpayer identification number, (b) the date on which
you transferred the interest and (c) the name, address and tax shelter
registration number of TC PipeLines, LP. If you do not want to keep such a list,
you must (1) send the information specified above to the Partnership, which will
keep the list for this tax shelter, and (2) give a copy of this notice to the
person to whom you transfer your interest. Your failure to comply with any of
the above-described responsibilities could result in the imposition of a penalty
under Section 6707(b) or 6708(a) of the Internal Revenue Code of 1986, as
amended, unless such failure is shown to be due to reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED,
- ------------------ HEREBY ASSIGNS, CONVEYS, SELLS AND TRANSFERS UNTO
<TABLE>
<S> <C>
(Please print or typewrite name (Please insert Social Security or
and address of Assignee) other
identifying number of Assignee)
</TABLE>
A-82
<PAGE>
- ------------ Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does hereby
irrevocably constitute and appoint
- ------------------- as its attorney-in-fact with full power of substitution to
transfer the same on the books of TC PipeLines, LP
<TABLE>
<S> <C> <C>
Date: NOTE: The signature to any endorsement hereon
must correspond with the name as written
upon the face of this Certificate in
every particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL ASSOCIATION (Signature)
OF SECURITIES DEALERS, INC. OR BY A (Signature)
COMMERCIAL BANK OR TRUST COMPANY
</TABLE>
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-83
<PAGE>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("ASSIGNEE") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of TC PipeLines, LP (the
"PARTNERSHIP"), as amended, supplemented or restated to the date hereof (the
"PARTNERSHIP AGREEMENT"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
Date:
- -------------------
<TABLE>
<S> <C>
Social Security or other identifying number Signature of Assignee
of Assignee
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<S> <C> <C>
o Individual o Partnership o Corporation
o Trust o Other (specify) ----------------------------
</TABLE>
Nationality (check one):
<TABLE>
<S> <C> <C>
o U.S. Citizen, Resident or Domestic Entity
o Foreign Corporation o Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"CODE"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
-----------------------.
A-84
<PAGE>
3. My home address is
-----------------------.
B. Partnership, Corporation or Other Interestholder
1.
----------------------- is not a foreign corporation, foreign partnership,
foreign trust (Name of Interestholder) or foreign estate (as those terms
are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
-----------------------.
3. The interestholder's office address and place of incorporation (if
applicable) is
--------------------------.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
Name of Interestholder
Signature and Date
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-85
<PAGE>
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as an Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of TC PipeLines, LP (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner and, if a
Liquidator shall be appointed, the Liquidator of the Partnership as the
Assignee's attorney-in-fact, to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's admission
as a Substituted Limited Partner and as a party to the Partnership Agreement,
(d) gives the power of attorney provided for in the Partnership Agreement, and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date:
By:
Social Security or other Signature of Assignee
identifying number
of Assignee
Purchase Price including Name and Address of Assignee
commissions, if any
Type of Entity (check one):
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
Nationality (check one):
/ / U.S. Citizen, Resident or
Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
B-1
<PAGE>
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is __
3. My home address is __________________________________________________
B. Partnership, Corporation or Other Interestholder
1. ____________________________ is not a foreign corporation, foreign
partnership,
(Name of
Interestholder)
foreign trust or foreign estate (as those terms are defined in the Code
and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ________.
3. The interestholder's office address and place of incorporation (if
applicable) is _____________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
Name of Interestholder
Dated:
Signature and Date
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the signee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
B-2
<PAGE>
APPENDIX C
GLOSSARY OF TERMS
ADJUSTED OPERATING SURPLUS: For any period, Operating Surplus generated
during that period as adjusted to:
(a) decrease Operating Surplus by;
(1) any net increase in Working Capital Borrowings during that period, and
(2) any net reduction in cash reserves for Operating Expenditures during
that period not relating to an Operating Expenditure made during that
period and
(b) increase Operating Surplus by;
(1) any net decrease in Working Capital Borrowings during that period, and
(2) any net increase in cash reserves for Operating Expenditures during that
period required by any debt instrument for the repayment of principal,
interest or premium.
Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(1) of the definition of Operating Surplus.
AVAILABLE CASH: For any quarter before liquidation:
(a) the sum of;
(1) all cash and cash equivalents of TC PipeLines on hand at the end of that
quarter, and
(2) all additional cash and cash equivalents of TC PipeLines on hand on the
date of determination of Available Cash for that quarter resulting from
Working Capital Borrowings after the end of that quarter, LESS
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the general partner to;
(1) provide for the proper conduct of the business of TC PipeLines,
including reserves for future capital expenditures and future credit
needs, after that quarter,
(2) comply with applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which TC
PipeLines is a party or by which it is bound or its assets are subject,
or
(3) provide funds for minimum quarterly distributions and cumulative
arrearages in payment of the minimum quarterly distributions on the
common units for any one or more of the next four quarters.
PROVIDED, HOWEVER, that the general partner may not establish cash reserves
for distributions under (3) above if the effect of those reserves would be that
TC PipeLines is unable to distribute the minimum quarterly distribution on all
common units, plus any cumulative arrearages in payment of the minimum quarterly
distributions on the common units, for that quarter.
PROVIDED FURTHER, that disbursements made by TC PipeLines or cash reserves
established, increased or reduced after the end of that quarter but on or before
the date of determination of Available Cash for that quarter shall be deemed to
have been made, established, increased or reduced, for purposes of determining
Available Cash, within that quarter if the general partner so determines.
Notwithstanding the information above, "Available Cash" for the quarter in which
the liquidation of TC PipeLines occurs and any later quarter shall be zero.
C-1
<PAGE>
CAPITAL ACCOUNT: The capital account maintained for a partner under the
partnership agreement. The Capital Account of a partner for a general partner
interest, a common unit, a subordinated unit, an incentive distribution right or
any other interest in TC PipeLines shall be the amount which that Capital
Account would be if that general partner interest, common unit, subordinated
unit, incentive distribution right or other interest in TC PipeLines were the
only interest in TC PipeLines held by a partner from and after the date on which
that general partner interest, common unit, subordinated unit, incentive
distribution right or other interest in TC PipeLines was first issued.
CAPITAL SURPLUS: All Available Cash distributed by TC PipeLines from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the closing of the initial public offering
equals the Operating Surplus as of the end of the quarter before that
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
CLOSING PRICE: The last sale price on a day, regular way, or in case no
sale takes place on that day, the average of the closing bid and asked prices on
that day, regular way, in either case, as reported in the principal consolidated
transaction reporting system for securities listed or admitted to trading on the
principal national securities exchange, other than Nasdaq Stock Market, on which
the units of that class are listed or admitted to trading. If the units of that
class are not listed or admitted to trading on any national securities exchange,
the last quoted price on that day. If no quoted price exists, the average of the
high bid and low asked prices on that day in the over-the-counter market, as
reported by the Nasdaq Stock Market or any other system then in use. If on any
day the units of that class are not quoted by any organization of that type, the
average of the closing bid and asked prices on that day as furnished by a
professional market maker making a market in the units of the class selected by
the general partner. If on that day no market maker is making a market in the
units of that class, the fair value of such units on that day as determined
reasonably and in good faith by the general partner.
CURRENT MARKET PRICE: For any class of units listed or admitted to trading
on any national securities exchange as of any date, the average of the daily
Closing Prices for the 20 consecutive trading days immediately before that date.
INTERIM CAPITAL TRANSACTIONS:
(a) borrowings, refinancings or refundings of indebtedness and sales of debt
securities, other than Working Capital Borrowings and other than for
items purchased on open account in the ordinary course of business, by TC
PipeLines;
(b) sales of equity interests by TC PipeLines other than the common units
sold to the underwriters in the exercise of their over-allotment option;
and
(c) sales or other voluntary or involuntary dispositions of any assets of TC
PipeLines other than sales or other dispositions of inventory in the
ordinary course of business, sales or other dispositions of other current
assets, including, without limitation, receivables and accounts, in the
ordinary course of business and sales or other dispositions of assets as
a part of normal retirements or replacements, in each case before the
dissolution and liquidation of TC PipeLines.
OPERATING EXPENDITURES: All expenditures of TC PipeLines and its
subsidiaries including, but not limited to, taxes, reimbursements of the general
partner, debt service payments, and capital expenditures, subject to the
following:
C-2
<PAGE>
(a) payments, including prepayments, of principal and premium on indebtedness
shall not be an Operating Expenditure if the payment is;
(1) required for the sale or other disposition of assets, or
(2) made for the refinancing or refunding of indebtedness with the proceeds
from new indebtedness or from the sale of equity interests. For purposes
of the information above, at the election and in the reasonable
discretion of the general partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by TC PipeLines and its subsidiaries within 180 days
before or after that payment to the extent of the principal amount of
that indebtedness.
(b) Operating Expenditures shall not include;
(1) capital expenditures made for acquisitions or for capital improvements,
as opposed to capital expenditures made to maintain assets,
(2) payment of transaction expenses relating to Interim Capital
Transactions, or
(3) distributions to partners.
Where capital expenditures are made in part for acquisitions or capital
improvements and in part for other purposes, the general partner's good faith
allocation between the amounts paid for each shall be conclusive.
OPERATING SURPLUS: As to any period before liquidation on a cumulative
basis and without duplication:
(a) the sum of;
(1) $ plus all cash of TC PipeLines and its subsidiaries on hand
as of the close of business on the closing date of the initial public
offering,
(2) all the cash receipts of TC PipeLines and its subsidiaries for the
period beginning on the closing date of the initial public offering and
ending with the last day of that period, other than cash receipts from
Interim Capital Transactions, and
(3) all cash receipts of TC PipeLines and its subsidiaries after the end of
that period but on or before the date of determination of Operating
Surplus for the period resulting from Working Capital Borrowings, less
(b) the sum of;
(1) Operating Expenditures for the period beginning on the date of the
closing of the initial public offering and ending with the last day of
that period, and
(2) the amount of cash reserves that is necessary or advisable in the
reasonable discretion of the general partner to provide funds for future
Operating Expenditures; PROVIDED, HOWEVER, that disbursements made,
including contributions to TC PipeLines or any of its subsidiaries or
disbursements on behalf of TC PipeLines or any of its subsidiaries, or
cash reserves established, increased or reduced after the end of that
period but on or before the date of determination of Available Cash for
that period shall be deemed to have been made, established, increased or
reduced, for purposes of determining Operating Surplus, within that
period if the general partner so determines.
Notwithstanding the information above, "Operating Surplus" for the quarter
in which the liquidation date occurs and any later quarter shall equal zero.
C-3
<PAGE>
SUBORDINATION PERIOD: The subordination period will extend from the date of
the closing of the initial public offering until the first to occur of the
following:
(a) the first day of any quarter beginning on or after 1, 2004 for
which;
(1) distributions of Available Cash from Operating Surplus on each of the
outstanding common units and the subordinated units for each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distribution on all of the outstanding common units during those periods,
(2) the Adjusted Operating Surplus, generated during each of the three
consecutive, non-overlapping four quarter periods immediately preceding
that date equaled or exceeded the sum of minimum quarterly distribution
on all of the common units and subordinated units that were outstanding
during those periods on a fully diluted basis, plus the related
distribution on the general partner interest in TC PipeLines and the
general partner interest in TC PipeLines intermediate partnership, and
(3) there are no arrearages in payment of the minimum quarterly distribution
on the common units.
(b) the date on which the general partner is removed as general partner of TC
PipeLines upon the requisite vote by limited partners under circumstances
where cause does not exist and units held by the general partner and its
affiliates are not voted in favor of that removal.
WORKING CAPITAL BORROWINGS: Borrowings exclusively for working capital
purposes made under a credit facility or other arrangement requiring all
borrowings under that facility to be reduced to a relatively small amount each
year for an economically meaningful period of time. Amounts drawn from a credit
facility to pay distributions when there is a temporary interruption in
distributions from Norther Border Pipeline Company shall also constitute Working
Capital Borrowings.
C-4
<PAGE>
APPENDIX D
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of Pro Forma Available Cash from
Operating Surplus and should be read in conjunction with "Cash Available for
Distribution", the Northern Border Pipeline Financial Statements and the TC
PipeLines' unaudited Pro Forma Financial Statements.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
(thousands of dollars)
<S> <C> <C>
Pro forma net income of TC PipeLines............................................. 20,715 20,632
Add: Pro forma distributions from Northern Border Pipeline....................... 18,362 29,797
Less: Pro forma equity income from investment.................................... (21,615) (21,832)
Less: Maintenance capital expenditures of TC PipeLines........................... -- --
-------------- --------------
Pro forma Available Cash from Operating Surplus(a)(b)(c)......................... 17,462 28,597
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(a) The pro forma adjustments in the unaudited pro forma financial statements
are based upon currently available information and certain estimates and
assumptions. The unaudited pro forma financial statements do not purport to
present the financial position or results of operations of TC PipeLines had
the Transactions to be effected at the closing of this offering actually
been completed as of the date indicated. Furthermore, the unaudited pro
forma financial statements are based on accrual accounting concepts whereas
Available Cash and Operating Surplus are defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amount of Pro
Forma Available Cash from Operating Surplus shown above should only be
viewed as a general indication of the amounts of Available Cash from
Operating Surplus that may have been generated by TC PipeLines had it been
formed in earlier periods.
(b) The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the common units and
subordinated units to be outstanding immediately after the offering and on
the combined 2% general partner interest will be $30.0 million
(approximately $23.5 million for the common units, approximately $5.9
million for the subordinated units and approximately $0.6 million for the
combined general partner interest). These amounts for three quarters will be
$22.5 million in total (approximately $17.6 million for the common units,
approximately $4.4 million for the subordinated units and approximately $0.5
for the combined general partner interest). The pro forma amounts reflected
above would not have been sufficient to cover the Minimum Quarterly
Distribution during 1997 and the nine months ended September 30, 1998 on all
of the common units and the subordinated units and the related distribution
on the general partner interest.
(c) For the periods presented in this Appendix D, the Chicago project was not in
service and therefore not generating cash flow other than returns on
Northern Border Pipeline partners' investment in the Chicago project. Pro
Forma Available Cash from Operating Surplus for the periods presented in
this Appendix D does not include operating cash flows associated with the
Chicago project, which was recently completed and placed in service in
December 1998.
D-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the common units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 16
The Transactions............................... 28
Use of Proceeds................................ 30
Pro Forma Capitalization....................... 31
Dilution....................................... 32
Cash Distribution Policy....................... 33
Cash Available for Distribution................ 41
Selected Pro Forma Financial Data of TC
PipeLines.................................... 43
Selected Historical Financial and Operating
Data of Northern Border Pipeline............. 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 45
Market Overview................................ 55
Business of TC PipeLines....................... 57
Business of Northern Border Pipeline........... 59
TransCanada PipeLines Limited.................. 68
Management..................................... 70
Security Ownership of Certain Beneficial Owners
and Management............................... 74
Conflicts of Interest and Fiduciary
Responsibilities............................. 75
Description of the Common Units................ 80
Description of the Subordinated Units.......... 82
The Partnership Agreement...................... 84
Units Eligible for Future Sale................. 96
Northern Border Pipeline Partnership
Agreement.................................... 98
Tax Considerations............................. 103
Investment in the Partnership by Employee
Benefit Plans................................ 120
Validity of the Common Units................... 121
Experts........................................ 121
Forward-Looking Statements..................... 122
Underwriting................................... U-1
Index to Financial Statements.................. F-1
Appendix A--Amended and Restated Agreement of
Limited Partnership.......................... A-1
Appendix B--Application for Transfer of Common
Units........................................ B-1
Appendix C--Glossary of Certain Terms.......... C-1
Appendix D--Pro Forma Available Cash from
Operating Surplus............................ D-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
15,640,000 Common Units
TC PIPELINES, LP
Representing Limited
Partner Interests
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................ $ 101,253
NASD filing fee................................................................ 30,500
NYSE listing fee............................................................... 200,000
Printing and engraving expenses................................................ *
Legal fees and expenses........................................................ *
Accounting fees and expenses................................................... *
Transfer agent and registrar fees.............................................. *
Miscellaneous.................................................................. *
----------
TOTAL.................................................................. *
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the prospectus entitled "The Partnership
Agreement--Indemnification" is incorporated herein by this reference. Reference
is made to Section __ of the Underwriting Agreement filed as Exhibit 1.1 to the
Registration Statement. Subject to any terms, conditions or restrictions set
forth in the Partnership Agreement, Section 17-108 of the Delaware Revised
Uniform Limited Partnership Act empowers a Delaware limited partnership to
indemnify and hold harmless any partner or other person from and against all
claims and demands whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the consummation of the offering, TC PipeLines issued to
TransCan Northern Ltd. and TransCanada Border PipeLine Ltd. (the "TransCanada
Subsidiaries") a number of Common Units, 3,960,000 subordinated units and the
Incentive Distribution Rights as partial consideration for their combined 30%
general partner interests in Northern Border Pipeline in offerings exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended. TC
PipeLines will use a portion of the net proceeds of the offering to redeem all
of the Common Units issued to the TransCanada Subsidiaries. There have been no
other sales of unregistered securities of the Partnership within the past three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S>
*1.1-- Form of Underwriting Agreement.
3.1-- Form of Amended and Restated Agreement of Limited Partnership of TC PipeLines,
LP (included as Appendix A to the prospectus).
***3.2-- Certificate of Limited Partnership of TC PipeLines, LP.
***3.3-- Certificate of Limited Partnership of TC PipeLines Intermediate Limited
Partnership.
*5.1-- Opinion of Fried, Frank, Harris, Shriver & Jacobson as to the legality of the
securities being registered.
*8.1-- Opinion of Fried, Frank, Harris, Shriver & Jacobson relating to tax matters.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
*10.1-- Form of Contribution, Conveyance and Assumption Agreement among TC PipeLines, LP
and certain other parties.
**10.2.1-- Northern Border Pipeline Company General Partnership Agreement between Northern
Border Intermediate Limited Partnership, TransCanada Border PipeLine Ltd., and
TransCan Northern Ltd., effective March 9, 1978 as amended (Exhibit 3.2 to
Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158).
***10.2.2 Seventh Supplement Amending Northern Border Pipeline Company General Partnership
Agreement dated as of September 23, 1993.
**10.3-- Note Purchase Agreement between Northern Border Pipeline Company and the parties
listed therein, dated July 15, 1992 (Exhibit 10.6 to Northern Border Partners
L.P. Form S-1 Registration Statement No. 33-66158).
**10.4-- Supplemental Agreement to the Note Purchase Agreement dated as of June 1, 1995
(Exhibit 10.6.1 to Northern Border Partners L.P. Form S-1 Registration Statement
No. 33-66158).
**10.5-- Credit Agreement among Northern Border Pipeline Company, The First National Bank
of Chicago, as Administrative Agent, The First National Bank of Chicago, Royal
Bank of Canada, and Bank of America National Trust and Savings Association, as
Syndication Agents, First Chicago Capital Markets, Inc., Royal Bank of Canada,
and BancAmerica Securities, Inc. as Joint Arrangers and Lenders (as defined
therein) dated as of June 16, 1997 (Exhibit 10(c) to Northern Border Partners
L.P. Form S-3 Registration Statement No. 33-40601).
**10.6-- Operating Agreement between Northern Border Pipeline Company and Northern Plains
Natural Gas Company, dated February 28, 1980. (Exhibit 10.3 to Northern Border
Partners L.P. Form S-1 Registration Statement No. 33-66158).
**10.7 Guaranty made by Panhandle Eastern Pipeline Company, dated October 31, 1992
(Exhibit 10.9 to Northern Border Partners L.P. Form S-1 Registration Statement
No. 33-66158).
**10.8 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Gas Marketing, Inc., dated June 22,
1990 (Exhibit 10.10 to Northern Border Partners L.P. Form S-1 Registration
Statement No. 33-66158).
**10.9.1 Amended Exhibit A to Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and Enron Gas Marketing, Inc.
(Exhibit 10.10.1 to Northern Border Partners L.P. 1993 Form 10-K SEC File No.
001-12202).
**10.9.2 Amended Exhibit A to Northern Border Pipeline U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Gas Marketing, Inc.,
effective November 1, 1994 (Exhibit 10.10.2 to Northern Border Partners L.P.
1994 Form 10-K SEC File No. 001-12202).
**10.9.3 Amended Exhibit A's to Northern Border Pipeline Company U.S. Shipper Service
Agreement effective, August 1, 1995 and November 1, 1995 (Exhibit 10.10.3 to
Northern Border Partners L.P. 1995 Form 10-K SEC File No. 001-12202).
**10.9.4 Amended Exhibit A to Northern Border Pipeline Company U.S. Shipper Service
Agreement effective April 1, 1998. (Exhibit 10.10.3 to Northern Border Partners
L.P. 1995 Form 10-K SEC File No. 001-12202).
**10.10.1 Guaranty made by Northern Natural Gas Company, dated October 7, 1993 (Exhibit
10.11.1 to Northern Border Partners L.P. 1993 Form 10-K SEC File No. 001-12202).
**10.10.2 Guaranty made by Northern Natural Gas Company, dated October 7, 1993 (Exhibit
10.11.2 to Northern Border Partners L.P. 1993 Form 10-K SEC File No. 001-12202).
**10.11 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Northern Natural Gas Company, dated August
25, 1988 (Exhibit 10.12 to Northern Border Partners L.P. Form S-1 Registration
Statement No. 33-66158).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
**10.11.1 Amendment to Northern Border Pipeline Company U.S. Shippers Service Agreement
effective October 1, 1993 (Exhibit 10.12.1 to Northern Border Partners L.P. 1993
Form 10-K SEC File No. 001-12202).
**10.11.2 Amendment to Northern Border Pipeline Company U.S. Shippers Service Agreement
terminating the Agreement as of November 1, 1994 (Exhibit 10.12.2 to Northern
Border Partners L.P. 1994 Form 10-K SEC File No. 001-12202).
**10.12 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Western Gas Marketing Limited, as agent for
TransCanada Pipeline Limited, dated December 15, 1980 (Exhibit 10.13 to Northern
border Partners L.P. Form S-1 Registration Statement No. 33-66158).
**10.12.1 Amendment to Northern Border Pipeline Company Service Agreement extending the
term effective November 1, 1995 (Exhibit 10.13.1 to Northern Border Partners
L.P. 1995 Form 10-K SEC File No. 001-12202).
**10.13 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Transcontinental Gas Pipe Line Corporation,
dated July 14, 1983, with Amended Exhibit A effective February 11, 1994 (Exhibit
10.17 to Northern Border Partners L.P. 1995 Form 10-K SEC File No. 001-12202).
**10.14 Northern Border Pipeline Company U.S. Shippers Service Agreement dated August
30, 1991 between Northern Border Pipeline Company and Mobil Natural Gas, Inc.,
with Amended Exhibit A effective April 29, 1994 and designation of agent
effective August 1, 1996 (Exhibit 10-18 to Northern Border Partners L.P. 1996
Form 10-K SEC File No. 001-12202).
**10.15 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Capital & Trade Resources Corp. dated
October 15, 1997 (Exhibit 10.21 to Northern Border Partners L.P. 1997 Form 10-K
SEC File No. 001-12202).
**10.16 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Capital & Trade Resources Corp. dated
October 15, 1997 (Exhibit 10.22 to Northern Border Partners L.P. 1997 Form 10-K
SEC File No. 001-12202).
**10.17 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and PanEnergy Trading and Market Services,
L.L.C., now known as Duke Trading and Market Services L.L.C., dated August 14,
1997 (Exhibit 10.23 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
001-12202).
**10.18 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and PanEnergy Trading and Market Services,
L.L.C., now known as Duke Trading and Market Services L.L.C., dated August 14,
1997 (Exhibit 10.24 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
001-12202).
**10.19 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Capital & Trade Resources Corp. dated
August 5, 1997 with Amendment dated September 25, 1997 (Exhibit 10.25 to
Northern Border Partners L.P. 1997 Form 10-K SEC File No. 001-12202).
**10.20 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Capital & Trade Resources Corp. dated
August 5, 1997 (Exhibit 10.26 to Northern Border Partners L.P. 1997 Form 10-K
SEC File No. 001-12202).
**10.21 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and TransCanada Gas Services Inc., as agent for
TransCanada PipeLines Limited, dated August 5, 1997 (Exhibit 10.27 to Northern
Border Partners L.P. 1997 Form 10-K SEC File No. 001-12202).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
**10.22 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and TransCanada Gas Services Inc., as agent for
TransCanada PipeLines Limited, dated August 14, 1997 (Exhibit 10.28 to Northern
Border Partners L.P. 1997 Form 10-K SEC File No. 001-12202).
***15.1-- Letter of acknowledgment regarding unaudited interim financial information of
Northern Border Pipeline Company by Arthur Andersen LLP
23.1-- Consent of Arthur Andersen LLP (relating to audited financial statements of
Northern Border Pipeline Company)
23.2-- Consent of KPMG LLP
*23.3-- Consent of Fried, Frank, Harris, Shriver & Jacobson (contained in Exhibits 5.1
and 8.1)
24.1-- Powers of Attorney (included on the signature page)
***27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Indicates exhibits incorporated by reference.
*** Previously filed.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Calgary, Province of Alberta, Canada, on March 12, 1999.
<TABLE>
<S> <C> <C>
TC PipeLines, LP
By: TC PipeLines GP, Inc.
its general partner
By: /s/ JOHN W. CARRUTHERS
--------------------------------
Name: John W. Carruthers
Title: President, Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ JOHN W. CARRUTHERS Officer
-------------------------- (principal executive March 12, 1999
John W. Carruthers officer)
Director, Chief Financial
/s/ STEPHEN J.J. LETWIN Officer
-------------------------- (principal financial and March 12, 1999
Stephen J.J. Letwin accounting officer)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
*1.1-- Form of Underwriting Agreement.
3.1-- Form of Amended and Restated Agreement of Limited Partnership of TC PipeLines, LP
(included as Appendix A to the prospectus)............................................
***3.2-- Certificate of Limited Partnership of TC PipeLines, LP..................................
***3.3-- Certificate of Limited Partnership of TC PipeLines Intermediate Limited Partnership.....
*5.1-- Opinion of Fried, Frank, Harris, Shriver & Jacobson as to the legality of the securities
being registered......................................................................
*8.1-- Opinion of Fried, Frank, Harris, Shriver & Jacobson relating to tax matters.............
*10.1-- Form of Contribution, Conveyance and Assumption Agreement among TC PipeLines, LP and
certain other parties.................................................................
**10.2.1-- Northern Border Pipeline Company General Partnership Agreement between Northern Border
Intermediate Limited Partnership, TransCanada Border PipeLine Ltd., and TransCan
Northern Ltd., effective March 9, 1978 as amended (Exhibit 3.2 to Northern Border
Partners L.P. Form S-1 Registration Statement No. 33-66158)...........................
***10.2.2 Seventh Supplement Amending Northern Border Pipeline Company General Partnership
Agreement dated as of September 23, 1993..............................................
**10.3-- Note Purchase Agreement between Northern Border Pipeline Company and the parties listed
therein, dated July 15, 1992 (Exhibit 10.6 to Northern Border Partners L.P. Form S-1
Registration Statement No. 33-66158)..................................................
**10.4-- Supplemental Agreement to the Note Purchase Agreement dated as of June 1, 1995 (Exhibit
10.6.1 to Northern Border Partners L.P. Form S-1 Registration Statement No.
33-66158).............................................................................
**10.5-- Credit Agreement among Northern Border Pipeline Company, The First National Bank of
Chicago, as Administrative Agent, The First National Bank of Chicago, Royal Bank of
Canada, and Bank of America National Trust and Savings Association, as Syndication
Agents, First Chicago Capital Markets, Inc., Royal Bank of Canada, and BancAmerica
Securities, Inc. as Joint Arrangers and Lenders (as defined therein) dated as of June
16, 1997 (Exhibit 10(c) to Northern Border Partners L.P. Form S-3 Registration
Statement No. 33-40601)...............................................................
**10.6-- Operating Agreement between Northern Border Pipeline Company and Northern Plains Natural
Gas Company, dated February 28, 1980. (Exhibit 10.3 to Northern Border Partners L.P.
Form S-1 Registration Statement No. 33-66158).........................................
**10.7 Guaranty made by Panhandle Eastern Pipeline Company, dated October 31, 1992 (Exhibit
10.9 to Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158)...
**10.8 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Gas Marketing, Inc., dated June 22, 1990 (Exhibit 10.10 to
Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**10.9.1 Amended Exhibit A to Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Gas Marketing, Inc. (Exhibit
10.10.1 to Northern Border Partners L.P. 1993 Form 10-K SEC File No. 001-12202).......
**10.9.2 Amended Exhibit A to Northern Border Pipeline U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Gas Marketing, Inc., effective November 1,
1994 (Exhibit 10.10.2 to Northern Border Partners L.P. 1994 Form 10-K SEC File No.
001-12202)............................................................................
**10.9.3 Amended Exhibit A's to Northern Border Pipeline Company U.S. Shipper Service Agreement
effective, August 1, 1995 and November 1, 1995 (Exhibit 10.10.3 to Northern Border
Partners L.P. 1995 Form 10-K SEC File No. 001-12202)..................................
**10.9.4 Amended Exhibit A to Northern Border Pipeline Company U.S. Shipper Service Agreement
effective April 1, 1998. (Exhibit 10.10.3 to Northern Border Partners L.P. 1995 Form
10-K SEC File No. 001-12202)..........................................................
**10.10.1 Guaranty made by Northern Natural Gas Company, dated October 7, 1993 (Exhibit 10.11.1 to
Northern Border Partners L.P. 1993 Form 10-K SEC File No. 001-12202)..................
**10.10.2 Guaranty made by Northern Natural Gas Company, dated October 7, 1993 (Exhibit 10.11.2 to
Northern Border Partners L.P. 1993 Form 10-K SEC File No. 001-12202)..................
**10.11 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Northern Natural Gas Company, dated August 25, 1988 (Exhibit
10.12 to Northern Border Partners L.P. Form S-1 Registration Statement No.
33-66158).............................................................................
**10.11.1 Amendment to Northern Border Pipeline Company U.S. Shippers Service Agreement effective
October 1, 1993 (Exhibit 10.12.1 to Northern Border Partners L.P. 1993 Form 10-K SEC
File No. 001-12202)...................................................................
**10.11.2 Amendment to Northern Border Pipeline Company U.S. Shippers Service Agreement
terminating the Agreement as of November 1, 1994 (Exhibit 10.12.2 to Northern Border
Partners L.P. 1994 Form 10-K SEC File No. 001-12202)..................................
**10.12 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Western Gas Marketing Limited, as agent for TransCanada Pipeline
Limited, dated December 15, 1980 (Exhibit 10.13 to Northern border Partners L.P. Form
S-1 Registration Statement No. 33-66158)..............................................
**10.12.1 Amendment to Northern Border Pipeline Company Service Agreement extending the term
effective November 1, 1995 (Exhibit 10.13.1 to Northern Border Partners L.P. 1995 Form
10-K SEC File No. 001-12202)..........................................................
**10.13 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Transcontinental Gas Pipe Line Corporation, dated July 14, 1983,
with Amended Exhibit A effective February 11, 1994 (Exhibit 10.17 to Northern Border
Partners L.P. 1995 Form 10-K SEC File No. 001-12202)..................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**10.14 Northern Border Pipeline Company U.S. Shippers Service Agreement dated August 30, 1991
between Northern Border Pipeline Company and Mobil Natural Gas, Inc., with Amended
Exhibit A effective April 29, 1994 and designation of agent effective August 1, 1996
(Exhibit 10-18 to Northern Border Partners L.P. 1996 Form 10-K SEC File No.
001-12202)............................................................................
**10.15 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Capital & Trade Resources Corp. dated October 15, 1997
(Exhibit 10.21 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
001-12202)............................................................................
**10.16 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Capital & Trade Resources Corp. dated October 15, 1997
(Exhibit 10.22 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
001-12202)............................................................................
**10.17 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and PanEnergy Trading and Market Services, L.L.C., now known as Duke
Trading and Market Services L.L.C., dated August 14, 1997 (Exhibit 10.23 to Northern
Border Partners L.P. 1997 Form 10-K SEC File No. 001-12202)...........................
**10.18 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and PanEnergy Trading and Market Services, L.L.C., now known as Duke
Trading and Market Services L.L.C., dated August 14, 1997 (Exhibit 10.24 to Northern
Border Partners L.P. 1997 Form 10-K SEC File No. 001-12202)...........................
**10.19 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Capital & Trade Resources Corp. dated August 5, 1997 with
Amendment dated September 25, 1997 (Exhibit 10.25 to Northern Border Partners L.P.
1997 Form 10-K SEC File No. 001-12202)................................................
**10.20 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Capital & Trade Resources Corp. dated August 5, 1997
(Exhibit 10.26 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
001-12202)............................................................................
**10.21 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and TransCanada Gas Services Inc., as agent for TransCanada PipeLines
Limited, dated August 5, 1997 (Exhibit 10.27 to Northern Border Partners L.P. 1997
Form 10-K SEC File No. 001-12202).....................................................
**10.22 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and TransCanada Gas Services Inc., as agent for TransCanada PipeLines
Limited, dated August 14, 1997 (Exhibit 10.28 to Northern Border Partners L.P. 1997
Form 10-K SEC File No. 001-12202).....................................................
***15.1-- Letter of acknowledgment regarding unaudited interim financial information of Northern
Border Pipeline Company by Arthur Andersen LLP........................................
23.1-- Consent of Arthur Andersen LLP (relating to audited financial statements of Northern
Border Pipeline Company)..............................................................
23.2-- Consent of KPMG LLP.....................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
*23.3-- Consent of Fried, Frank, Harris, Shriver & Jacobson (contained in Exhibits 5.1 and
8.1)..................................................................................
24.1-- Powers of Attorney (included on the signature page).....................................
***27 Financial Data Schedule.................................................................
</TABLE>
- ------------------------
* To be filed by amendment.
** Indicates exhibits incorporated by reference.
*** Previously filed.
<PAGE>
[Arthur Andersen Letterhead]
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our reports dated January 26, 1998, and January 22,
1997, included herein and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
March 11, 1999
<PAGE>
[KPMG LETTERHEAD]
EXHIBIT 23.2
To: The Board of Directors
TC PipeLines GP, Inc.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ KPMG LLP
Calgary, Canada
March 12, 1999
