<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 1999
REGISTRATION NO. 333-69947
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
FOUR GREENSPOINT PLAZA
16945 NORTHCHASE DRIVE
HOUSTON, TEXAS 77060
(281) 873-7774
(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 MAY 3, 1999.
[LOGO]
14,300,000 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
$0.45 per quarter or $1.80 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 $20.50 and $22.50. The common units will be quoted on the Nasdaq
National Market under the symbol "TCLPZ".
Affiliates of the general partner will receive all of the net proceeds of
this offering after payment of expenses. TC PipeLines will not retain any of the
proceeds from this offering.
SEE "RISK FACTORS" ON PAGE 17 TO READ ABOUT IMPORTANT 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 purchase up to an additional 2,145,000 common units
from TC PipeLines at the initial public offering price less the underwriting
discount to cover over-allotments.
----------------
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>
INSIDE FRONT COVER
[Map of Northern Border Pipeline System]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.................................................................... 1
TC PipeLines, LP.................................................................... 1
Business Strategy................................................................... 2
TC PipeLines Structure and Management............................................... 3
Ownership Chart..................................................................... 4
The Offering........................................................................ 5
Summary Pro Forma Financial Data of TC PipeLines.................................... 7
Summary Historical Financial and Operating Data of Northern Border Pipeline......... 8
Summary of Risk Factors............................................................. 9
The Transactions.................................................................... 11
Summary of Conflicts of Interest and Fiduciary Responsibilities..................... 12
Distributions and Payments to the General Partner and Its Affiliates................ 13
Summary of Tax Considerations....................................................... 15
RISK FACTORS.......................................................................... 17
Risks Inherent in TC PipeLines' Business............................................ 17
Risks Inherent in an Investment in TC PipeLines..................................... 23
Tax Risks........................................................................... 27
THE TRANSACTIONS...................................................................... 30
USE OF PROCEEDS....................................................................... 32
PRO FORMA CAPITALIZATION.............................................................. 33
DILUTION.............................................................................. 34
CASH DISTRIBUTION POLICY.............................................................. 35
Quarterly Distributions of Available Cash........................................... 35
Subordination Period; Conversion of Subordinated Units.............................. 37
Incentive Distribution Rights....................................................... 38
Distributions from Capital Surplus.................................................. 40
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels......... 40
Distributions of Cash Upon Liquidation.............................................. 41
CASH AVAILABLE FOR DISTRIBUTION....................................................... 44
SELECTED PRO FORMA FINANCIAL DATA OF TC PIPELINES..................................... 47
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF NORTHERN BORDER PIPELINE.......... 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 49
Pro Forma Financial Condition and Results of Operations of TC PipeLines............. 49
Results of Operations of Northern Border Pipeline................................... 49
Liquidity and Capital Resources of Northern Border Pipeline......................... 52
Description of Indebtedness of Northern Border Pipeline............................. 53
Settlement of 1995 FERC Rate Case and Project Cost Containment Mechanism............ 55
Amortization of Incentive Rate of Return............................................ 56
Quantitative and Qualitative Disclosures About Market Risk.......................... 56
Year 2000........................................................................... 57
MARKET OVERVIEW....................................................................... 60
BUSINESS OF TC PIPELINES.............................................................. 62
Business Strategy and Competitive Strengths of TC PipeLines......................... 62
BUSINESS OF NORTHERN BORDER PIPELINE.................................................. 64
Structure........................................................................... 64
General............................................................................. 64
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
The Northern Border Pipeline System................................................. 65
Interconnects....................................................................... 65
Project 2000........................................................................ 66
Competition......................................................................... 66
Shippers............................................................................ 67
FERC Regulation..................................................................... 68
Environmental and Safety Matters.................................................... 71
Properties.......................................................................... 71
Litigation.......................................................................... 72
TRANSCANADA PIPELINES LIMITED......................................................... 73
Energy Transmission................................................................. 73
Other Businesses.................................................................... 74
MANAGEMENT............................................................................ 75
TC PipeLines Management............................................................. 75
Directors and Executive Officers of the General Partner............................. 76
Reimbursement of Expenses of the General Partner and Its Affiliates................. 77
Executive Compensation.............................................................. 78
Compensation of Directors........................................................... 78
SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND MANAGEMENT...................... 79
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES.................................. 81
Conflicts of Interest............................................................... 81
Fiduciary and Other Duties Owed to Unitholders by the General Partner as Prescribed
by Law and the Partnership Agreement.............................................. 84
DESCRIPTION OF THE COMMON UNITS....................................................... 87
The Units........................................................................... 87
Transfer Agent and Registrar........................................................ 87
Transfer of Common Units............................................................ 87
DESCRIPTION OF THE SUBORDINATED UNITS................................................. 89
Conversion of Subordinated Units.................................................... 89
Limited Voting Rights............................................................... 89
Distributions Upon Liquidation...................................................... 90
THE PARTNERSHIP AGREEMENT............................................................. 91
Organization and Duration........................................................... 91
Purpose............................................................................. 91
Power of Attorney................................................................... 91
Capital Contributions............................................................... 91
Limited Liability................................................................... 92
Issuance of Additional Securities................................................... 93
Amendment of Partnership Agreement.................................................. 93
Merger, Sale or Other Disposition of Assets......................................... 95
Termination and Dissolution......................................................... 96
Liquidation and Distribution of Proceeds............................................ 96
Withdrawal or Removal of the General Partner........................................ 96
Transfer of General Partner Interest and Incentive Distribution Rights.............. 98
TransCanada Ownership of General Partner............................................ 98
Change of Management Provisions..................................................... 99
Limited Call Right.................................................................. 99
Meetings; Voting.................................................................... 99
Status as Limited Partner or Assignee............................................... 100
Non-Citizen Assignees; Redemption................................................... 100
Indemnification..................................................................... 101
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Books and Reports................................................................... 101
Right to Inspect TC PipeLines Books and Records..................................... 101
Registration Rights................................................................. 102
UNITS ELIGIBLE FOR FUTURE SALE........................................................ 103
NORTHERN BORDER PIPELINE PARTNERSHIP AGREEMENT........................................ 105
Organization and Partners........................................................... 105
Purpose............................................................................. 105
Management and Voting............................................................... 105
Operator............................................................................ 107
Cash Distribution Policy............................................................ 107
Audit and Compensation Committee.................................................... 108
Allocation of Income, Gain, Loss and Deduction...................................... 108
Transfer of Interest................................................................ 108
Additional Capital Requirements..................................................... 108
Change to Corporate Form............................................................ 108
Withdrawal of General Partners...................................................... 109
Indemnification..................................................................... 109
Business Opportunities.............................................................. 109
Termination and Dissolution......................................................... 109
Liquidation and Distribution of Proceeds............................................ 109
TAX CONSIDERATIONS.................................................................... 110
Legal Opinions and Advice........................................................... 110
Partnership Status.................................................................. 111
Limited Partner Status.............................................................. 112
Tax Consequences of Unit Ownership.................................................. 113
Tax Treatment of Operations......................................................... 118
Disposition of Common Units......................................................... 120
Tax-Exempt Organizations and Other Investors........................................ 123
Administrative Matters.............................................................. 123
State, Local and Other Tax Considerations........................................... 126
INVESTMENT IN TC PIPELINES BY EMPLOYEE BENEFIT PLANS.................................. 127
VALIDITY OF THE COMMON UNITS.......................................................... 128
EXPERTS............................................................................... 128
HOW TO OBTAIN OTHER INFORMATION ABOUT TC PIPELINES.................................... 129
FORWARD-LOOKING STATEMENTS............................................................ 129
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:
- 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. Northern Border
Pipeline connects with multiple pipelines which allow its shippers to access the
various natural gas markets served by those pipelines.
The Northern Border pipeline system was initially constructed in 1982 and
was expanded or extended in 1991, 1992 and 1998. A recent expansion and
extension, called the Chicago project, was completed in late 1998, and 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. The amount of natural
gas that can be transported in the pipeline is referred to as "capacity" and is
measured in cubic feet per day. In the first quarter of 1999, the first full
quarter of operations that included the Chicago project, we estimate that
Northern Border Pipeline transported 23% of the total amount of natural gas
imported from Canada to the United States. 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, 1998, all of the capacity of the Northern Border pipeline
system was contractually committed through October 2001 and the weighted average
contract life, based upon annual cost of service obligations, was slightly under
eight years, with at least 97% of capacity contracted through mid-September
2003.
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the Federal Energy Regulatory Commission. The tariff allows
Northern Border Pipeline an opportunity to recover from its shippers its costs
of service, including a return on equity, operations and maintenance costs,
taxes other than income taxes, interest, depreciation and amortization and an
allowance for income taxes. Shippers contract to pay for a proportionate share
of those costs by way of a uniform mileage-based charge for the amount of
capacity contracted. The shippers are obligated to pay the charge regardless of
the amount of natural gas they transport. Northern Border Pipeline does not own
the natural gas that it transports and therefore 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 partnership that is not affiliated with us,
select the other three representatives, which have a combined 70% voting power.
We are managed by our general partner, TC PipeLines GP, Inc., 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.
1
<PAGE>
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, TransCanada 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.
BUSINESS STRATEGY
Our business strategy combines the acquisition of high quality pipeline
transmission and related assets with further development of our existing asset
base. 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. We believe that
TransCanada's United States based pipeline assets will provide us with
acquisition opportunities because TransCanada views TC PipeLines as its
preferred acquisition and growth vehicle in the United States for these types of
assets.
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. Northern Border Pipeline is part of a pathway between pipeline systems
accessing supply in western Canada and pipeline systems serving the market areas
in the northeastern United States. We believe we can capitalize on the growth
opportunities inherent in the northeastern United States 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.
Industry conditions, competition and the possible need for substantial
additional financing that might not be available on acceptable terms or at all
may impact our ability to implement our business strategy.
2
<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;
- our general partner will own a 1% general partner interest in TC
PipeLines; and
- our general partner will own 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 a revolving
credit facility to us 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) 873-7774.
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.
3
<PAGE>
[LOGO]
- ------------------------
(1) Northern Border Intermediate Limited Partnership, a subsidiary of Northern
Border Partners, L.P., is not affiliated with us.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 14,300,000 common units.
16,445,000 common units if the underwriters'
over-allotment option is exercised in full.
Units outstanding after the
offering........................ 14,300,000 common units and 3,200,000 subordinated
units, representing 80.1% and 17.9% limited partner
interests in TC PipeLines.
If the underwriters' over-allotment option is exercised
in full:
- 2,145,000 additional common units will be issued
and 2,145,000 subordinated units will be redeemed;
and
- 16,445,000 common units and 1,055,000 subordinated
units, representing 92.1% and 5.9% limited partner
interests in TC PipeLines, will be outstanding.
Cash distributions................ We intend to make minimum quarterly distributions of
$0.45 per common unit per quarter. This minimum
quarterly distribution is not assured. We are required
to make quarterly distributions of all of our cash from
operations, if any, whether less than or greater than
this minimum quarterly distribution.
Prior to making quarterly distributions, our general
partner will establish reserves for our operations. Our
general partner has broad discretion in establishing
reserves.
In general, cash distributions will be based on the
following priorities:
- First, 98% to the common units and 2% to the
general partner until each common unit has
received a minimum quarterly distribution of
$0.45, plus any arrearages in the payment of the
minimum quarterly distribution from prior
quarters.
- Second, 98% to the subordinated units and 2% to
the general partner until each subordinated unit has
received a minimum quarterly distribution of
$0.45.
If cash distributions per unit exceed target levels
greater than $0.45 in a quarter, the general partner
will receive incentive distributions.
Cash distributions will generally be made 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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
June 30, 1999 will be adjusted downward based on the
actual length of that period.
Although we can provide no assurances, based on the
assumptions listed on page 44 of this prospectus, we
believe that we will generate sufficient cash to enable
us to make a minimum quarterly distribution of $0.45 per
quarter on the common units and the subordinated units
for each quarter through June 30, 2002. However, pro
forma cash available for distribution generated during
1998 would not have been sufficient to pay the minimum
quarterly distributions on the common units and
subordinated units and the related distribution on the
general partner interest during 1998. See "Cash
Available for Distribution" for an explanation of this
shortfall.
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.
Issuance of additional units...... In general, during the subordination period we can issue
up to 8,580,000 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.
Nasdaq National Market listing.... The common units will be quoted on the Nasdaq National
Market under the symbol "TCLPZ".
</TABLE>
6
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA OF TC PIPELINES
The following unaudited Summary Pro Forma Financial Data as of and for the
three months ended March 31, 1999 and for the year ended December 31, 1998 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 14,300,000 common units and
3,200,000 subordinated units are outstanding at all times during the periods
presented. The pro forma investment balance as of March 31, 1999 represents the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCanada Border PipeLine and TransCan
Northern, wholly owned subsidiaries of TransCanada, as of that date. The pro
forma investment balance also equates to 30% of the net assets of Northern
Border Pipeline as of March 31, 1999. Pro forma partners' capital is allocated
2% to our general partner, 80.1% to common unitholders and 17.9% 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>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------------------- ------------------------
(UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C>
INCOME STATEMENT DATA:
Equity income from investment in Northern Border
Pipeline................................................ 9,094 30,069
General and administrative expenses....................... (300) (1,200)
---------- ----------
Net income to partners.................................... 8,794 28,869
---------- ----------
---------- ----------
Net income per unit....................................... $ 0.49 $ 1.62
---------- ----------
---------- ----------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline.................... 250,721
Total assets.............................................. 250,722
Partners' capital
General partner......................................... 5,015
Common units............................................ 200,828
Subordinated units...................................... 44,879
----------
250,722
----------
----------
</TABLE>
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF
NORTHERN BORDER PIPELINE
Some reclassifications have been made to the prior years' financial data to
conform with the presentation used in the audited financial statements of
Northern Border Pipeline for the year ended December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- ---------- ---------- ---------- ---------- ----------
<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............ 73,635 47,504 196,600 186,050 201,943 206,497 211,580
Operations and maintenance......... 9,102 7,127 29,447 28,522 26,974 25,573 27,682
Depreciation and amortization...... 12,785 9,782 40,989 38,708 46,979 47,081 41,959
Taxes other than income............ 7,477 6,009 21,381 22,393 24,390 23,886 24,438
Regulatory credit.................. -- (353) (8,878) -- -- -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Operating income................. 44,271 24,939 113,661 96,427 103,600 109,957 117,501
Interest expense, net.............. (14,399) (6,411) (25,541) (29,360) (32,670) (35,106) (38,375)
Other income (expense)............. 443 1,734 12,111 5,705 2,913 (316) (1,968)
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income....................... 30,315 20,262 100,231 72,772 73,843 74,535 77,158
--------- --------- ---------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating
activities....................... 37,284 28,314 103,777 115,328 136,808 127,429 121,679
Capital expenditures............... 57,261 103,836 651,169 152,070 18,597 8,310 3,086
Distributions to partners.......... 38,015 9,509 61,205 99,322 102,845 98,517 87,509
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and
equipment........................ 1,742,517 1,168,380 1,714,523 1,100,890 937,859 957,587 983,843
Total assets....................... 1,830,500 1,208,252 1,790,889 1,147,120 974,137 1,011,361 1,063,210
Long-term debt, including current
maturities....................... 927,000 469,000 862,000 459,000 377,500 410,000 445,000
Partners' capital.................. 835,738 662,165 843,438 581,412 526,962 555,964 579,946
OPERATING DATA (UNAUDITED):
Natural gas delivered (millions of
cubic feet)...................... 202,851 156,233 619,669 633,280 633,908 615,133 597,898
Average throughput (millions of
cubic feet per day).............. 2,327 1,774 1,737 1,770 1,764 1,720 1,663
</TABLE>
8
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SUMMARY OF RISK FACTORS
RISKS INHERENT IN TC PIPELINES' BUSINESS
- - Cash distributions are not assured and may fluctuate with our performance
- - If the FERC requires that Northern Border Pipeline's tariff be changed,
Northern Border Pipeline's ability to recover its cost of service from its
shippers could be limited
- - If any shipper fails to perform its contractual obligations, Northern Border
Pipeline's cash flows and financial condition could be adversely impacted
- - If Northern Border Pipeline does not maintain or increase its rate base by
successfully completing FERC-approved projects, the amount of revenue
attributable to the return on the rate base Northern Border Pipeline collects
from its shippers will decrease over time
- - A decline in the availability of western Canadian natural gas may reduce the
need for shippers to contract for capacity on Northern Border Pipeline
- - If demand for western Canadian natural gas decreases, shippers may not enter
into or renew contracts with Northern Border Pipeline
- - Because of the highly competitive nature of the natural gas transmission
business, Northern Border Pipeline may not be able to maintain existing
customers when the current shipper contracts expire
- - Northern Border Pipeline's indebtedness may limit its ability to borrow
additional funds, make distributions to us, or capitalize on business
opportunities
- - Litigation or governmental regulation relating to environmental protection and
operational safety may result in substantial costs and liabilities
- - 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
would not be able to recover those costs from its shippers
- - If we are unable to make acquisitions on economically and operationally
acceptable terms, our future financial performance will be limited to our
participation in Northern Border Pipeline
- - 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 without your approval, which would dilute
existing unitholders' interests
- - Issuance of additional common units, including upon conversion of subordinated
units or exercise of the underwriters' over-allotment option, 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
- - 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
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<PAGE>
into a corporation, which would result in Northern Border Pipeline being
subject to corporate income taxes
- - If we were found to be an "investment company" under the Investment Company
Act of 1940, our contracts may be voidable and our offers of securities may be
subject to rescission
- - If we were to lose TransCanada's management expertise, we would not have
sufficient stand-alone resources to operate
TAX RISKS
- - The IRS could treat us as a corporation, which would substantially reduce the
cash available for distribution to unitholders
- - We have not requested an IRS ruling with respect to tax consequences
- - You may be required to pay taxes on income from us even if you receive no cash
distributions
- - Tax gain or loss on disposition of common units could be different than
expected
- - Investors other than individuals that are U.S. residents may have adverse tax
consequences from owning units
- - Tax shelter registration could increase risk of IRS audit of TC PipeLines or a
unitholder
- - 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
- - You will likely be subject to state and local taxes simply as a result of an
investment in units
10
<PAGE>
THE TRANSACTIONS
We estimate that the net proceeds from the sale of common units offered
through this prospectus will be approximately $287 million (assuming an initial
public offering price of $21.50 per common unit and after deducting underwriting
discounts and commissions but before deducting expenses incurred in connection
with the offering). We will not retain any of the proceeds from this offering.
The substantive result of the transactions that will occur at the closing of
the offering are as follows:
- TransCan Northern Ltd. and TransCanada Border PipeLine Ltd., wholly owned
subsidiaries of TransCanada, will contribute their combined 30% general
partner interest in Northern Border Pipeline to the TC PipeLines
intermediate partnership.
- TC PipeLines will use a portion of the net proceeds of the offering to pay
expenses incurred in connection with the offering.
- TC PipeLines will pay the remainder of the net proceeds to the
subsidiaries of TransCanada to redeem common units issued to the
subsidiaries of TransCanada.
- Our general partner will receive 3,200,000 subordinated units, the
incentive distribution rights and the combined 2% general partner
interests in TC PipeLines and the TC PipeLines intermediate partnership.
After giving effect to these transactions, the TransCanada subsidiaries will
not own any direct interests in TC PipeLines or the TC PipeLines intermediate
partnership, and our general partner will not own any common units but will own
3,200,000 subordinated units, the incentive distribution rights and the general
partner interests.
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 the number of common units issued upon the exercise
of such option.
Concurrently with the closing of the offering, TC PipeLines, as borrower,
will enter into a $40 million unsecured two year revolving credit facility with
TransCanada PipeLine USA Ltd., a wholly owned subsidiary of TransCanada, as
lender. We may borrow under this 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 if there has been a temporary
interruption or delay in the receipt of cash distributions from Northern Border
Pipeline.
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<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 our 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;
-- some of the 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 three
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.
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<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 formation,
the ongoing operation and the liquidation 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>
FORMATION STAGE
The consideration paid to our
general partner, TransCanada and
their affiliates for the transfer of
the 30% interest in Northern Border
Pipeline to TC PipeLines............
- 3,200,000 subordinated units,
- an aggregate 2% general partner interest in TC
PipeLines and the TC PipeLines intermediate
partnership on a combined basis,
- the incentive distribution rights, and
- all of the net proceeds of the offering, expected
to be approximately $284 million, after payment of
the estimated expenses of the offering. These net
proceeds will be used to redeem common units issued
to subsidiaries of TransCanada at the closing. Net
proceeds from any exercise of the underwriters'
over-allotment 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 exercise of that option.
Accordingly, we will not retain any of the net
proceeds of the offering.
OPERATIONAL STAGE
Cash distributions to our general
partner............................. Cash distributions will generally be made 98% to the
unitholders, including to our general partner as
holder of the subordinated units, and 2% to the
general partner. If distributions exceed the target
levels, our general partner will receive a percentage
of the excess distributions that will increase its
distributions to up to 50% of the excess
distributions above the target levels.
On a pro forma basis for 1998, our general partner
would have received distributions of approximately
$0.3 million on the general partner interest and
would have received no distribution on the
subordinated units.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Payments to our general partner and
its affiliates...................... Our general partner will not receive any management
fee or other compensation for its management of TC
PipeLines. Our general partner will be reimbursed for
all direct and indirect expenses incurred on behalf
of TC PipeLines. On a pro forma basis for 1998, we
estimate that expense reimbursement to the general
partner and its affiliates would have been
approximately $1.2 million.
Withdrawal or removal of our general
partner............................. If our general partner withdraws in violation of the
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 our 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 according to their
particular capital account balances.
</TABLE>
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<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. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US
OR THAT WE CURRENTLY BELIEVE TO BE IMMATERIAL MIGHT ADVERSELY AFFECT US.
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 ASSURED AND MAY FLUCTUATE WITH OUR PERFORMANCE
Although we will distribute all of our cash, less reserves, we can give no
assurance regarding the amounts of 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 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 primarily from a
retroactive adjustment to Northern Border Pipeline's depreciation schedule that
was agreed to in its most recent rate case. 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
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<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 cash that we will need to pay the minimum quarterly
distribution for four quarters on the common units and the subordinated units
and the related distribution on the general partner interest to be outstanding
upon the closing of the offering is approximately:
<TABLE>
<S> <C>
$25.7
Common units.................. million
Subordinated units............ 5.8 million
General partner interest...... 0.6 million
------------
$32.1
Total....................... million
</TABLE>
If the transactions contemplated in this prospectus had been completed on
January 1, 1998, the pro forma amount of cash available for distribution during
1998 would have been approximately $17.2 million. This amount 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 1998 by approximately $14.9 million.
In December 1998, the Northern Border Pipeline management committee changed
its policy regarding the timing of cash distributions to its partners, as
described under "Cash Available for Distribution". The change in the timing of
distributions to the partners of Northern Border Pipeline resulted in a one-time
shift in the payment of distributable cash from the fourth quarter of 1998 to
the first quarter of 1999. If this change in the timing of distributions had not
occurred, then TC PipeLines' pro forma amount of cash available for distribution
during 1998 would have been approximately $26.3 million rather than
approximately $17.2 million.
IF THE FERC REQUIRES THAT NORTHERN BORDER PIPELINE'S TARIFF BE CHANGED, NORTHERN
BORDER PIPELINE'S ABILITY TO RECOVER ITS COST OF SERVICE FROM ITS SHIPPERS COULD
BE LIMITED
Northern Border Pipeline is subject to extensive regulation by the FERC.
FERC's regulatory authority extends to matters including:
- Northern Border Pipeline's tariff structure;
- 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 reduced by:
- a reduction in the current FERC-allowed rate of return on equity,
- 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;
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<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, NORTHERN BORDER
PIPELINE'S CASH FLOWS AND FINANCIAL CONDITION COULD BE ADVERSELY IMPACTED
Northern Border Pipeline has a limited number of major shippers. If any
shipper fails to perform its contractual obligations, Northern Border Pipeline's
cash flows and financial condition could be adversely impacted. As a result, the
cash available for distribution by us to you could be reduced.
Two shippers each contributed more than 5% of revenue to Northern Border
Pipeline in 1998: Pan-Alberta Gas U.S. Inc. (44.4%) and TransCanada PipeLines
Limited, an affiliate of our general partner (7.2%). The 20 largest shippers in
1998, in total, were responsible for 95.9% of Northern Border Pipeline's
revenue.
IF NORTHERN BORDER PIPELINE DOES NOT MAINTAIN OR INCREASE ITS RATE BASE BY
SUCCESSFULLY COMPLETING FERC-APPROVED PROJECTS, THE AMOUNT OF REVENUE
ATTRIBUTABLE TO THE RETURN ON THE RATE BASE NORTHERN BORDER PIPELINE COLLECTS
FROM ITS SHIPPERS WILL DECREASE OVER TIME
Northern Border Pipeline reflects the Northern Border pipeline system in its
financial records in various accounts collectively referred to as "rate base".
Northern Border Pipeline is generally allowed to collect from its customers a
return on the rate base as reflected in Northern Border Pipeline's financial
records as well as recover that rate base through depreciation. The amount
Northern Border Pipeline may collect from customers decreases as the rate base
declines as a result of, among other things, monthly depreciation and
amortization. In order to avoid a reduction in the level of cash available for
distributions to its partners, based on its current FERC-approved tariff,
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 pipelines that connect with Northern Border
Pipeline;
- 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.
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 these projects
will be completed.
A DECLINE IN THE AVAILABILITY OF WESTERN CANADIAN NATURAL GAS MAY REDUCE THE
NEED FOR SHIPPERS TO CONTRACT FOR CAPACITY ON NORTHERN BORDER PIPELINE
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. 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
19
<PAGE>
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. As of December 31,
1998, all of the capacity of Northern Border Pipeline was contractually
committed through October 2001. If the availability of western Canadian natural
gas were to decline over this period, existing shippers may be unlikely to
extend their contracts or Northern Border Pipeline may be unable to find
replacement shippers for that capacity. 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, SHIPPERS MAY NOT ENTER
INTO OR RENEW CONTRACTS WITH NORTHERN BORDER PIPELINE
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 WHEN THE CURRENT SHIPPER CONTRACTS EXPIRE
As of December 31, 1998, all of the capacity of the Northern Border pipeline
system was contractually committed through October 2001 and the weighted average
contract life, based upon annual cost of service obligations, was slightly under
eight years, with at least 97% of capacity contracted 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.
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.
20
<PAGE>
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.
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 BORROW
ADDITIONAL FUNDS, MAKE DISTRIBUTIONS TO US OR CAPITALIZE ON BUSINESS
OPPORTUNITIES
Northern Border Pipeline is prohibited from making cash distributions during
an event of default under its indebtedness. Provisions in Northern Border
Pipeline's indebtedness limit its ability to incur indebtedness and engage in
specific transactions which could reduce its ability to capitalize on business
opportunities that arise in the course of its business. 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--Description of Indebtedness of Northern
Border Pipeline".
LITIGATION OR GOVERNMENTAL REGULATION RELATING TO ENVIRONMENTAL PROTECTION AND
OPERATIONAL SAFETY MAY RESULT IN SUBSTANTIAL COSTS AND LIABILITIES
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 WOULD
NOT BE ABLE TO RECOVER THOSE COSTS FROM ITS SHIPPERS
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 implemented to limit Northern
Border Pipeline's ability to include cost overruns on the Chicago project and to
provide incentives to Northern Border Pipeline for cost underruns. 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
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<PAGE>
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 December 22, 1998
in-service date to be $889 million with the final construction cost estimated to
be $892 million. Northern Border Pipeline's notification to the FERC and its
shippers in late December 1998 reflects the conclusion that, based on the
information as of that date, once the budgeted 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--Settlement of 1995 FERC Rate Case and Project Cost Containment
Mechanism".
IF WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, OUR FUTURE FINANCIAL PERFORMANCE WILL BE LIMITED TO OUR
PARTICIPATION IN NORTHERN BORDER PIPELINE
There can be no assurance that:
- we will identify attractive acquisition candidates in the future,
- we will be able to acquire assets on economically acceptable terms,
- any acquisitions will not be dilutive to earnings and operating surplus,
or
- any additional debt incurred to finance an acquisition will not affect our
ability to make distributions to you.
If we are unable to make acquisitions on economically and operationally
acceptable terms, our future financial performance will be limited to our
participation in Northern Border Pipeline.
Our acquisition strategy involves many risks, including:
- difficulties inherent in the integration of operations and systems,
- the diversion of management's attention from other business concerns, and
- the potential loss of key employees of acquired businesses.
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.
In addition, substantially all of TransCanada's United States pipeline
assets are subject to restrictions on sale, such as rights of first refusal.
Under a right of first refusal another party, usually a partner, has a right to
acquire the particular asset at the price offered. Only if the other party
declines to purchase the asset at the price offered could TransCanada sell it to
us.
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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, L.P., 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 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 the 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. Our general partner may not be
removed except by 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 common units and subordinated units,
voting as separate classes. These required votes would include the votes of
units owned by our general partner and its affiliates. The ownership of an
aggregate of 18.3% (6.0% upon exercise of the underwriters' over-allotment
option in full) of the outstanding units and all of the subordinated units by
our general partner has the practical effect of making removal of our general
partner difficult.
In addition, the partnership agreement contains some provisions that may
have the effect of discouraging a person or group from attempting to remove our
general partner or otherwise change the management of TC PipeLines. If our
general partner is removed as
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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 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 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 those interests.
These provisions may diminish the price at which the common units will trade
under some circumstances.
The partnership agreement also contains provisions limiting the ability of
unitholders to call meetings of unitholders or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability to
influence the manner or direction of management. 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 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 various 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 amount of cash available for distributions 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 $21.50 per unit exceeds pro
forma tangible net book value of $14.04 per unit. You will incur immediate and
substantial dilution of $7.46 per common unit. See "Dilution".
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, 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 acquisitions or capital
improvements
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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 8,580,000 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 OR EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, 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.
Additional common units would be issued as a result of:
- the conversion of subordinated units,
- the exercise of the underwriters' over-allotment option, in which case
2,145,000 additional common units will be issued and 2,145,000
subordinated units will be redeemed,
- upon the conversion of the general partner interests and the incentive
distribution rights 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 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.
The common units will be quoted on the Nasdaq National Market. 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".
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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 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 of your units. 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 some 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 some circumstances for TC PipeLines'
obligations to the same extent as a general partner. In addition, under some
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 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 RESULT IN NORTHERN BORDER PIPELINE
BEING SUBJECT TO CORPORATE INCOME TAXES
If it becomes unlawful to conduct the business of Northern Border Pipeline
and some 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 that transaction. However, we
believe that it is unlikely that circumstances requiring an automatic transfer
will occur. A transfer to corporate form would result in 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
that 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 a transaction of this kind 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
transaction of this kind.
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IF WE WERE TO BE FOUND TO BE AN "INVESTMENT COMPANY" UNDER THE INVESTMENT
COMPANY ACT OF 1940, OUR CONTRACTS MAY BE VOIDABLE AND OUR OFFERS OF SECURITIES
MAY BE SUBJECT TO RESCISSION
If TC PipeLines were deemed to be an unregistered "investment company" under
the Investment Company Act, our contracts may be voidable and our offers of
securities may be subject to rescission, and we may also be subject to other
materially adverse consequences.
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.
Since neither the SEC nor any court have passed upon the issue, there is a risk
that either the SEC or a court could reach a contrary conclusion and find TC
PipeLines to be an "investment company".
IF WE WERE TO LOSE TRANSCANADA'S MANAGEMENT EXPERTISE, WE WOULD NOT HAVE
SUFFICIENT STAND-ALONE RESOURCES TO OPERATE
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 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. Our treatment 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.
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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 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 regarding the computation
of depreciation and amortization deductions, 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
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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 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, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. 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) an 18.9899% limited partner interest in
the TC PipeLines intermediate partnership.
-- TransCan Northern will contribute its 24% general partner interest in
Northern Border Pipeline to TC PipeLines intermediate partnership in
exchange for a 80% 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 18.9899% limited partner
interest in the TC PipeLines intermediate partnership to TC PipeLines in
exchange for (1) a 1.0% general partner interest in TC PipeLines, (2) a
limited partner interest in TC PipeLines consisting of 14,286 common
units and 3,200,000 subordinated units, and (3) the incentive
distribution rights.
-- TransCan Northern will transfer its 80% limited partner interest in the
TC PipeLines intermediate partnership to TC PipeLines in exchange for
14,285,714 common units.
- 3rd,
-- TC PipeLines will use the proceeds of the offering, after underwriting
discounts and commissions and payment of expenses, to redeem all of the
common units issued to TransCanada Border PipeLine and TransCan Northern.
-- TransCanada Border PipeLine will transfer to the general partner its (1)
1.0% general partner interest in TC PipeLines, (2) 1.0101% general
partner interest in the intermediate partnership, (3) limited partner
interest in TC PipeLines consisting of 3,200,000 subordinated units, and
(4) the incentive distribution rights.
- 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.
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 at the closing
of the sale of the common units offered through this prospectus. Northern Border
Pipeline will pay the distribution to its partners for the quarter ending June
30, 1999 proportionately as between TransCanada Border PipeLine and TransCan
Northern, on the one hand, and the TC PipeLines intermediate partnership, on the
other hand, based on the number of days these entities are actually partners of
Northern Border Pipeline during that quarter. In addition, the TC PipeLines
intermediate partnership will indemnify TransCanada, TransCanada Border PipeLine
and TransCan Northern against liabilities and expenses which primarily arise
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out of or relate to the 30% general partner interest in Northern Border
Pipeline. TransCanada Border PipeLine, TransCan Northern and TransCanada will
indemnify TC PipeLines and the TC PipeLines intermediate partnership against (1)
any income or corporate franchise taxes attributable to ownership of the 30%
general partner interest in Northern Border Pipelines prior to the closing,
including any such income taxes of the transferors resulting from the
consummation of the transactions contemplated by this prospectus and (2)
liabilities which primarily arise out of or relate to any property, business or
operations of TransCanada Border PipeLine, TransCan Northern or TransCanada
other than with respect to the 30% 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.
UNDERWRITERS' OVER-ALLOTMENT 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 the number of common units issued upon the exercise
of that option.
TWO YEAR REVOLVING CREDIT FACILITY
Also at the closing of the offering, TC PipeLines, as borrower, and
TransCanada PipeLine USA Ltd., as lender, will enter into a two year $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 if there has
been a temporary interruption or delay in the receipt of cash distributions from
Northern Border Pipeline. The other principal terms of this revolving credit
facility are:
- Interest rate--the London Interbank Offered Rate plus 1.25%.
- Maturity--The earlier of:
(1) two years after closing of the sale of common units offered through
this prospectus, or
(2) the date on which the borrower obtains economically comparable
replacement credit facilities.
- 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.
31
<PAGE>
USE OF PROCEEDS
The following table shows the estimated proceeds from this offering of
common units assuming an initial public offering price of $21.50 per unit. The
gross offering proceeds assume no exercise of the underwriters' over-allotment
option. Any proceeds from the exercise of the underwriters' over-allotment
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 that option.
<TABLE>
<CAPTION>
MAXIMUM DOLLAR AMOUNT PER CENT
------------------------ -----------
<S> <C> <C>
Gross offering proceeds $ 307,450,000 100
Public offering expenses:
Underwriting discount and commissions 19,984,250 6.5
Other expenses of the offering (estimated) 3,000,000 1.0
------------------------ -----
$ 284,465,750 92.5
------------------------ -----
------------------------ -----
Redeem common units from TransCanada Border PipeLine and TransCan Northern $ 284,465,750 92.5
Public offering expenses 22,984,250 7.5
------------------------ -----
Total application of proceeds $ 307,450,000 100
------------------------ -----
------------------------ -----
</TABLE>
As shown above, we will not retain any of the proceeds from this offering.
32
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth (1) the capitalization of TC PipeLines as of
March 31, 1999, (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 $21.50 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 March 31,
1999. 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
--------------------- --------------- ---------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(thousands of dollars)
<S> <C> <C> <C>
Partners' capital
General partner..................................... 1 5,014(a) 5,015
Common units........................................ -- 200,828(a) 200,828
284,466(b)
(284,466)(c)
Subordinated units.................................. -- 44,879(a) 44,879
---------- --------------- ----------
Total partners' capital............................. 1 250,721 250,722
---------- --------------- ----------
Total capitalization.............................. 1 250,721 250,722
---------- --------------- ----------
---------- --------------- ----------
</TABLE>
- ------------------------------
(a) As contemplated in this prospectus, the investment in Northern Border
Pipeline is conveyed to TC PipeLines by TransCanada Border PipeLine and
TransCan Northern in exchange for 14,300,000 common units (which will be
redeemed as part of the transactions contemplated in this prospectus),
3,200,000 subordinated units, a 2% combined general partnership interest in
TC PipeLines and the TC PipeLines intermediate partnership and the right to
receive incentive distributions.
(b) Net proceeds to TC PipeLines from the sale of common units are expected to
be approximately $284 million, after deducting underwriting discounts and
commissions and expenses of the offering, estimated to be approximately $23
million.
(c) The net proceeds will be used to redeem all of the common units issued to
TransCanada Border PipeLine and TransCan Northern.
33
<PAGE>
DILUTION
On a pro forma basis as of March 31, 1999 after giving effect to the
transactions contemplated by this prospectus, the tangible net book value of TC
PipeLines' assets would have been approximately $251 million or $14.04 per
common unit (assuming an initial public offering price of $21.50 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.............. $ 21.50
Less: Pro forma tangible net book value per common unit after the
offering (1)..................................................... $ 14.04
---------
Immediate dilution in tangible net book value per common unit to
new investors.................................................... $ 7.46
---------
---------
</TABLE>
- ------------------------------
(1) Determined by dividing the total number of units (14,300,000 common units,
3,200,000 subordinated units and the 2% general partner interest having
dilutive effect equivalent to 357,143 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
contemplated by this prospectus:
<TABLE>
<CAPTION>
UNITS ACQUIRED TOTAL CONSIDERATION
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
NUMBER PER CENT AMOUNT PER CENT
------------- ----------- ---------------- -----------
General Partner and its
affiliates(1)(2)....................... 3,557,143 19.9 $ 49,893,678 14.0
New investors............................ 14,300,000 80.1 307,450,000 86.0
------------- --- ---------------- ---
Total.................................... 17,857,143 100 $ 357,343,678 100
------------- --- ---------------- ---
------------- --- ---------------- ---
</TABLE>
- ------------------------------
(1) Upon the consummation of the transactions contemplated by this prospectus,
the general partner and its affiliates will own an aggregate 3,200,000
subordinated units and a 2% general partner interest in TC PipeLines, having
a dilutive effect equivalent to 357,143 units.
(2) The asset 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 March 31, 1999,
after giving effect to the application of the net proceeds of the offering,
is approximately $50 million.
34
<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. 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 cash
reserves, as described below in "--Available Cash". 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 of $0.45 per unit, 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.
We determined the amount of the minimum quarterly distribution based on the
current level of distributions being paid by Northern Border Pipeline to its
partners. There is no assurance, however, that the minimum quarterly
distribution will be made on the common units.
We will make quarterly distributions of Available Cash to unitholders
regardless of whether the amount of distribution is less than the minimum
quarterly distribution. If distributions from Available Cash on the common units
for any quarter during the subordination period are less than the minimum
quarterly distribution of $0.45 per common unit, holders of common units will be
entitled to arrearages. Common unit arrearages will accrue and be paid in a
future quarter if there is Available Cash remaining after the minimum quarterly
distribution is paid for that quarter. 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.
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.
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
35
<PAGE>
the minimum quarterly distribution on the common units for that quarter
and for any prior quarters during the subordination period;
- Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until there has been distributed for each outstanding
subordinated unit an amount equal to the minimum quarterly distribution
for that quarter; and
- Thereafter, in the manner described in "--Incentive Distribution Rights"
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 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 outstanding unit an amount equal to
the minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "--Incentive Distribution Rights"
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. See
"--Distributions from Capital Surplus" below.
Operating Surplus is defined in the glossary and generally means:
(1) our cash balance on the date we begin operations, plus $20 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:
(1) borrowings other than Working Capital Borrowings,
(2) sales of debt and equity securities, and
(3) sales or other dispositions of assets for cash, other than inventory,
36
<PAGE>
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
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 treated as Capital Surplus, which would represent a
return of capital.
In general, Capital Surplus is first 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 in the payment of minimum quarterly
distributions on the common units. After these distributions have been made the
distinction between Operating Surplus and Capital Surplus will cease. All
subsequent distributions will be treated as from Operating Surplus. See
"--Distributions from Capital Surplus" below. 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 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 (1,066,667
subordinated units); and
(b) June 30, 2003 for one-third of the subordinated units (1,066,667
subordinated units),
in either case, if at the end of the applicable quarter each of the three
Conversion Criteria events described in (1), (2) and (3) of the preceding
paragraph shall have occured; 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:
37
<PAGE>
(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 those interests.
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:
(1) the Operating Surplus determined at the end of that period; and
(2) the Operating Surplus determined at the beginning of that period.
Working Capital Borrowings are generally borrowings used solely for working
capital purposes or to pay distributions to the partners of TC PipeLines if
there has been a temporary interruption or delay in the receipt of cash
distributions from Northern Border Pipeline.
INCENTIVE DISTRIBUTION RIGHTS
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 has been achieved. The incentive
distribution rights are held by the general partner. The target distribution
levels are 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 of $0.45 for that quarter; and
(2) Available Cash from Operating Surplus has been distributed on the common
units in an amount necessary to eliminate any cumulative arrearages in
payment of the minimum quarterly distributions on the common units.
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, 85% to all units, pro rata, and 15% to the general partner, until
each unitholder has received a total of $0.5275 for that quarter (the
"First Target Distribution");
- Second, 75% to all units, pro rata, and 25% to the general partner, until
each unitholder has received a total of $0.6900 for that quarter (the
"Second Target Distribution"); and
38
<PAGE>
- 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 amount of Available Cash from Operating
Surplus that would be distributed on a yearly basis to the unitholders and the
general partner at each of the target distribution levels. This table is based
on the 14,300,000 common units and the 3,200,000 subordinated units to be
outstanding immediately after the offering and assumes that there are no
arrearages in payment of the minimum quarterly distribution on the common units.
The "Percentage" columns under "Yearly Distributions" in the table below show
the percentage interest of the unitholders and the general partner in Available
Cash from Operating Surplus that would be distributed on a yearly basis between
the indicated target distribution levels. The "Amount" columns under "Yearly
Distribution" in the table below show the cumulative amount that would be
distributed on a yearly basis to the unitholders and the general partner if
Available Cash from Operating Surplus equaled the indicated target distribution
level.
<TABLE>
<CAPTION>
YEARLY DISTRIBUTIONS
---------------------------------------------------------------------------
UNITHOLDERS GENERAL PARTNER TOTAL
------------------------------ ------------------------------ -----------
AMOUNT AMOUNT AMOUNT
TARGET DISTRIBUTION LEVEL--YEARLY (MILLIONS) PERCENTAGE (MILLIONS) PERCENTAGE (MILLIONS)
- --------------------------------------------------- ----------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
98% 2%
Minimum Quarterly Distribution..... $ 1.80 $ 31.50 $ 0.64 $ 32.14
85 15
First Target Distribution.......... 2.11 36.93 1.60 38.53
75 25
Second Target Distribution......... 2.76 48.30 5.39 53.69
50 50
Thereafter......................... above 2.76 -- -- --
</TABLE>
The amounts and percentages shown under "Yearly Distributions-General
Partner" include the general partner's combined 2% general partner interest and
its incentive distribution rights. The amounts and percentages shown under
"Yearly Distributions--Unitholders" include amounts distributable on both the
common units and the subordinated units. Assuming the general partner continues
to own 3,200,000 subordinated units and other persons own 14,300,000 common
units, the general partner will receive 18.3% of each amount shown as
distributable to all unitholders.
TC PipeLines determined the minimum quarterly distribution based on the
current level of distributions being paid by Northern Border Pipeline to its
partners. The other target distribution levels were determined by negotiations
between the representatives of the underwriters and our general partner to
provide an incentive to our general partner to increase Available Cash from
Operating Surplus distributable to the unitholders.
39
<PAGE>
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 from Capital Surplus equal to the initial public offering
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
distributions from Capital Surplus in 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 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.
We do not anticipate that there will be significant distributions from
Capital Surplus.
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.
40
<PAGE>
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 TC PipeLines, the 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 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. Any further net gains recognized upon liquidation will be
allocated in a manner that takes
41
<PAGE>
into account the incentive distribution rights of the general partner.
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, 85% to all units, pro rata, and 15% to the general partner, until
there has been allocated under this priority 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 85% to the units, pro
rata, and 15% to the general partner for each quarter of our
existence;
- Fifth, 75% to all units, pro rata, and 25% to the general partner, until
there has been allocated under this priority 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 75% to the units, pro
rata, and 25% to the general partner for each quarter of our
existence;
- 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
clause (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;
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<PAGE>
- 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 end of 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.
43
<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 $20.0 million.
ASSUMPTIONS. 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, calculated in accordance with FERC
regulations, not generally accepted accounting principles;
- 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 contributions 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 its partners, including 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.
During 1998, Northern Border Pipeline distributed approximately $61.2
million to its partners. Cash distributable by Northern Border Pipeline to its
partners in 1998 as compared to 1999 is impacted by two significant events:
(1) the Chicago project being placed in service on December 22, 1998, and
(2) a change in the policy of Northern Border Pipeline regarding the timing
of cash distributions to its partners.
These are discussed below.
CHICAGO PROJECT. During the majority of the year ended December 31, 1998,
the Chicago project was not in service and therefore
44
<PAGE>
not generating operating cash flow. Accordingly, cash distributable to the
partners of Northern Border Pipeline for 1998 did not include operating cash
flows associated with the Chicago project, which was placed in service on
December 22, 1998.
CHANGE IN TIMING OF CASH DISTRIBUTIONS BY NORTHERN BORDER PIPELINE. In
December 1998, the Northern Border Pipeline management committee changed its
policy regarding the timing of cash distributions to its partners, as follows:
- Changed the timing of distributions from the last business day of the
quarter to the second business day of the second month following the end
of the quarter. For example, for the fourth quarter ended December 31 the
distribution date changed from December 31 to February 2.
- Changed the computation period for distributions from quarterly with one
month in arrears to quarterly. For example, making distributions quarterly
with one month in arrears, the distribution that would have been made on
December 31 would have included the distributable cash for September,
October and November. Making distributions quarterly, the distribution
made on February 2 would include the distributable cash for October,
November and December.
As a result of this change in the timing of distributions:
- The distribution that otherwise would have been paid to the partners of
Northern Border Pipeline in the fourth quarter of 1998 was instead paid in
the first quarter of 1999 on February 2, 1999. If this change in timing
had not occurred, the distributions during 1998 would have been
approximately $30.3 million more than the actual distributions of
approximately $61.2 million.
- The distribution of $38.0 million paid on February 2, 1999 included
distributable cash for four months (September, October, November and
December 1998), rather than three months.
The distribution to the partners of Northern Border Pipeline in the second
quarter of 1999 is expected to be paid on May 4, 1999 and will include
distributable cash for three months (January, February and March 1999). The
distribution to the partners of Northern Border Pipeline in the second quarter
of 1999 is expected to be approximately $29.8 million.
TC PIPELINES' PRO FORMA AVAILABLE CASH. The amount of Available Cash
constituting Operating Surplus needed to pay the minimum quarterly distribution
for four quarters on the common units and the subordinated units and the related
distribution on the general partner interest to be outstanding upon the closing
of the offering is approximately:
<TABLE>
<S> <C>
Common units..................... $25.7 million
Subordinated units............... 5.8 million
General partner interest......... 0.6 million
-------------
Total.......................... $32.1 million
</TABLE>
If the transactions contemplated in this prospectus had been completed on
January 1, 1998, pro forma Available Cash from Operating Surplus generated
during 1998 would have been approximately $17.2 million. This amount 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 the period by approximately
$14.9 million.
The change in the timing of distributions to the partners of Northern Border
Pipeline resulted in a one-time shift in the payment of distributable cash from
the fourth quarter of 1998 to the first quarter of 1999. If this change in the
timing of distributions had not occurred, then TC PipeLines' pro forma Available
Cash from Operating Surplus for 1998 would have been approximately $26.3 million
rather than approximately $17.2 million.
The amount of Available Cash constituting Operating Surplus needed to pay
the minimum quarterly distribution for one quarter on the
45
<PAGE>
common units and the subordinated units and the related distribution on the
general partner interest to be outstanding upon the closing of the offering is
approximately:
<TABLE>
<CAPTION>
<S> <C>
Common units........................... $ 6.4 million
Subordinated units..................... 1.4 million
General partner interest............... 0.2 million
-------------
Total............................ $ 8.0 million
</TABLE>
As a result of the change in the timing of distributions to the partners of
Northern Border Pipeline:
- The distribution paid on February 2, 1999 included cash generated by
Northern Border Pipeline during four months (September, October, November
and December 1998), rather than three months, and
- TC PipeLines' pro forma Available Cash from Operating Surplus for the
first quarter of 1999 would have been approximately $11.1 million.
The amount of pro forma Available Cash from Operating Surplus corresponding
to cash generated by Northern Border Pipeline during the three months of
October, November and December of 1998, rather than four months, is
approximately $8.2 million. This amount would have exceeded the amount needed to
pay the minimum quarterly distribution on the common units and the subordinated
units and the related distribution on the general partner interest by
approximately $0.1 million.
If the transactions contemplated in this prospectus had been completed on
January 1, 1999, TC PipeLines would receive a distribution expected to be paid
to its partners by Northern Border Pipeline on May 4, 1999 of approximately $8.9
million. This distribution, made up of cash generated by Northern Border
Pipeline in the months of January, February and March of 1999, is the first
distribution to fully reflect the new ongoing cash distribution policy of
Northern Border Pipeline and the operating cash flows from the Chicago project.
We expect that with this distribution and after payment of its expenses TC
PipeLines would have sufficient Available Cash from Operating Surplus to pay the
full minimum quarterly distribution on the common units and the subordinated
units and the related distribution on the general partner interest for the
second quarter of 1999.
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 an earlier period. For
definitions of Available Cash and Operating Surplus, see the glossary.
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<PAGE>
SELECTED PRO FORMA FINANCIAL DATA OF TC PIPELINES
The following unaudited Selected Pro Forma Financial Data as of and for the
three months ended March 31, 1999 and for the year ended December 31, 1998 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 various 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 the Pro Forma Financial
Statements of TC PipeLines appearing elsewhere in this prospectus. The following
information should not be deemed indicative of future operating results for TC
PipeLines.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1999 DECEMBER 31, 1998
--------------------------- ------------------------
<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)........................................... 9,094 30,069
General and administrative expenses..................... (300) (1,200)
-------- ----------
Net income to partners................................ 8,794 28,869
-------- ----------
-------- ----------
Net income per unit(1)................................ $ 0.49 $ 1.62
-------- ----------
-------- ----------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline(2)............... 250,721
Total assets............................................ 250,722
Partners' capital
General partner(3).................................... 5,015
Common units(3)....................................... 200,828
Subordinated units(3)................................. 44,879
--------
250,722
--------
--------
</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 14,300,000 common units and 3,200,000
subordinated units are outstanding at all times during the period presented.
(2) The pro forma investment balance as of March 31, 1999 represents the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCanada Border PipeLine and
TransCan Northern as at that date. The balance also equates to 30% of the
net assets of Northern Border Pipeline as at March 31, 1999.
(3) Pro forma partners' capital is allocated 2% to the general partner, 80.1% to
the common unitholders and 17.9% to the subordinated unitholders.
47
<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, 1998, 1997, 1996, 1995 and 1994 is derived
from the audited financial statements of Northern Border Pipeline and the
selected financial information below for Northern Border Pipeline as of and for
the three months ended March 31, 1999 and 1998 is derived from the unaudited
financial statements of Northern Border Pipeline. Some reclassifications have
been made to the prior years' financial data to conform with the presentation
used in the audited financial statements for the year ended December 31, 1998.
The operating data for all periods presented is derived from the records of
Northern Border Pipeline. 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- --------- ---------- ----------
<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......... 73,635 47,504 196,600 186,050 201,943 206,497 211,580
Operations and maintenance...... 9,102 7,127 29,447 28,522 26,974 25,573 27,682
Depreciation and amortization... 12,785 9,782 40,989 38,708 46,979 47,081 41,959
Taxes other than income......... 7,477 6,009 21,381 22,393 24,390 23,886 24,438
Regulatory credit............... -- (353) (8,878) -- -- -- --
----------- ----------- ---------- ---------- --------- ---------- ----------
Operating income.............. 44,271 24,939 113,661 96,427 103,600 109,957 117,501
Interest expense, net........... (14,399) (6,411) (25,541) (29,360) (32,670) (35,106) (38,375)
Other income (expense).......... 443 1,734 12,111 5,705 2,913 (316) (1,968)
----------- ----------- ---------- ---------- --------- ---------- ----------
Net income.................... 30,315 20,262 100,231 72,772 73,843 74,535 77,158
----------- ----------- ---------- ---------- --------- ---------- ----------
----------- ----------- ---------- ---------- --------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating
activities.................... 37,284 28,314 103,777 115,328 136,808 127,429 121,679
Capital expenditures............ 57,261 103,836 651,169 152,070 18,597 8,310 3,086
Distributions to partners....... 38,015 9,509 61,205 99,322 102,845 98,517 87,509
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment..................... 1,742,517 1,168,380 1,714,523 1,100,890 937,859 957,587 983,843
Total assets.................... 1,830,500 1,208,252 1,790,889 1,147,120 974,137 1,011,361 1,063,210
Long-term debt, including
current maturities............ 927,000 469,000 862,000 459,000 377,500 410,000 445,000
Partners' capital............... 835,738 662,165 843,438 581,412 526,962 555,964 579,946
OPERATING DATA (UNAUDITED):
Natural gas delivered (millions
of cubic feet)................ 202,851 156,233 619,669 633,280 633,908 615,133 597,898
Average throughput (millions of
cubic feet per day)........... 2,327 1,774 1,737 1,770 1,764 1,720 1,663
</TABLE>
48
<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 FOLLOWING DISCUSSION OF 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 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 are
expected to be influenced by and to reflect the same factors that influence the
financial results of Northern Border Pipeline until TC PipeLines owns additional
assets.
In December 1998, Northern Border Pipeline changed its policy regarding
distributions to its partners, with the unanimous consent of the members of its
management committee, in two respects. The timing of distributions was changed
as discussed under "Cash Available for Distribution". In addition, the
components of the formula used to calculate quarterly distributions were changed
to better reflect Northern Border Pipeline's operating practices. The principal
change was to deduct from the quarterly amount otherwise distributable to its
partners an amount equal to 35% of maintenance capital expenditures for the
quarter, rather than obtaining capital contributions from its partners for this
amount. As a result of this change, beginning in 1999 Northern Border Pipeline
funds 35% (which corresponds to the equity portion) of maintenance capital
through reduced cash distributions, which previously would have been funded
through working capital or cash capital contributions from its partners.
Upon the closing of the offering, TC PipeLines will enter into a $40 million
unsecured two year 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 enabling TC PipeLines to make distributions
to its partners if there has been a temporary interruption or delay in the
receipt of cash distributions from Northern Border Pipeline.
We expect that Northern Border Pipeline will request capital contributions
in aggregate of approximately $12 million from TC PipeLines in 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
THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Operating revenues increased $26.1 million for the first quarter of 1999, as
compared to the same period in 1998, due primarily to Northern Border Pipeline
placing the facilities for the Chicago project into
49
<PAGE>
service. New firm transportation agreements with 27 shippers provided for
additional receipt capacity of 700 million cubic feet per day, a 42% increase.
The Chicago project increased Northern Border Pipeline's rate base, which
increased Northern Border Pipeline's return for the first quarter of 1999.
Recoveries of pipeline operating expenses also increased due to the new
facilities.
Operations and maintenance expense increased $2.0 million for the first
quarter of 1999, from the comparable period in 1998, due primarily to operations
and maintenance expenses for the Chicago project facilities and administrative
expenses.
Depreciation and amortization expense increased $3.0 million for the first
quarter of 1999, as compared to the same period in 1998, due primarily to
Northern Border Pipeline placing the facilities for the Chicago project into
service. The impact of the additional facilities on depreciation and
amortization expense was partially offset by a decrease in the depreciation rate
applied to transmission plant from 2.5% to 2.0%. Northern Border Pipeline agreed
to reduce the depreciation rate at the time the Chicago project was placed into
service, as part of a previous rate case settlement.
Taxes other than income increased $1.5 million for the first quarter of
1999, as compared to the same period in 1998, due primarily to ad valorem taxes
attributable to the facilities placed into service for the Chicago project.
Interest expense, net increased $8.0 million for the first quarter of 1999,
as compared to the same period in 1998, due to an increase in interest expense
of $5.3 million and a decrease in interest expense capitalized of $2.7 million.
Interest expense increased due primarily to an increase in average debt
outstanding, reflecting amounts borrowed to finance a portion of the capital
expenditures for the Chicago project. The impact of the increased borrowings on
interest expense was partially offset by a decrease in average interest rates
between 1998 and 1999. The decrease in interest expense capitalized is due to
the completion of construction of the Chicago project in December 1998.
Other income decreased $1.3 million for the first quarter of 1999, as
compared to the same period in 1998, primarily due to a decrease in the
allowance for equity funds used during construction. The decrease in the
allowance for equity funds used during construction is due to the completion of
construction of the Chicago project in December 1998.
1998 COMPARED TO 1997
Operating revenues, net increased $10.5 million (6%) for the year ended
December 31, 1998, as compared to the results for the comparable period in 1997
due primarily to returns on higher levels of invested equity. Northern Border
Pipeline's FERC tariff provides an opportunity to recover all of the operations
and maintenance costs of the pipeline, taxes other than income taxes, interest,
depreciation and amortization, an allowance for income taxes and a regulated
return on equity. Northern Border Pipeline is generally allowed to collect from
its shippers a return on unrecovered rate base as well as recover that rate base
through depreciation and amortization. The return amount Northern Border
Pipeline collects from its shippers declines as the rate base is recovered. As a
result of placing the facilities for the Chicago project into service, Northern
Border Pipeline added approximately $840 million to its gas plant in service in
1998.
Depreciation and amortization expense increased $2.3 million (6%) for the
year ended December 31, 1998, as compared to the same period in 1997 primarily
due to facilities that were placed in service in 1998.
For the year ended December 31, 1998, Northern Border Pipeline recorded a
regulatory credit of approximately $8.9 million. During the construction of the
Chicago project, Northern Border Pipeline placed some new facilities into
service in advance of the December 1998 in service date to maintain gas flow at
firm contracted capacity while existing facilities were being modified. The
regulatory credit results in deferral of the cost of service of these new
facilities. Northern Border Pipeline is allowed to recover from its shippers the
regulatory asset that resulted from the cost of service deferral over a ten-year
period
50
<PAGE>
commencing with the in-service date of the Chicago project.
Interest expense, net decreased $3.8 million (13%) for the year ended
December 31, 1998, as compared to the results for the same period in 1997, due
to an increase in interest expense of $11.5 million offset by an increase in the
amount of interest expense capitalized of $15.3 million. The increase in
interest expense is due primarily to an increase in average debt outstanding,
reflecting amounts borrowed to finance a portion of the capital expenditures for
the Chicago project. The increase in interest expense capitalized primarily
relates to Northern Border Pipeline's expenditures for the Chicago project.
Other income increased $6.4 million (112%) for the year ended December 31,
1998, as compared to the same period in 1997. The increase was primarily due to
an $8.8 million increase in the allowance for equity funds used during
construction. The increase in the allowance for equity funds used during
construction primarily relates to Northern Border Pipeline's expenditures for
the Chicago project. Other income for 1997 included $4.8 million received by
Northern Border Pipeline for vacating some microwave frequency bands.
Northern Border Pipeline employs a microwave system that uses the 2Ghz. band
of radio frequencies for transmitting operational data of the pipeline. This
bandwidth was subsequently reserved by the Federal Communications Commission for
personal communications services. As a result, Northern Border Pipeline vacated
21 of the 39 segments of its microwave system and received payments during 1997.
The remaining 18 segments of Northern Border Pipeline's microwave system are
located in sparsely populated areas. The payments related to the vacated
segments received during 1997 were a one-time occurrence and Northern Border
Pipeline does not expect to receive any material payments for vacating microwave
frequency bands in the future.
1997 COMPARED TO 1996
Operating revenues, net 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 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, net decreased $3.3 million (10%) for the year ended
December 31, 1997, as compared to the results for the same period in 1996, due
to an increase in the amount of interest capitalized. This increase primarily
relates to Northern Border Pipeline's expenditures for the Chicago project.
Other income increased $2.8 million (96%) 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 in 1997 by Northern Border Pipeline for vacating some
microwave frequency bands. This increase was partially offset by the reversal
into income of $2.2 million of
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<PAGE>
previously established reserves for regulatory issues in 1996.
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $9.0 million to $37.3
million for the first quarter of 1999, as compared to the same period in 1998,
primarily attributed to the Chicago project facilities placed into service in
late December 1998.
Cash flows provided by operating activities decreased $11.5 million to
$103.8 million for the year ended December 31, 1998 as compared to the same
period in 1997 primarily related to a $25.4 million reduction for changes in
accounts payable, exclusive of accruals for the Chicago project. In addition,
for the year ended December 31, 1998, there was a $7.4 million reduction for
changes in over/ under recovered cost of service. These reductions were
partially offset by the effect of the refund activity in 1997 discussed below.
The over/under recovered cost of service is the difference between Northern
Border Pipeline's estimated billings to its shippers, which are determined on a
six-month cycle, and the actual cost of service determined in accordance with
the FERC tariff. The difference is either billed to or credited back to the
shippers accounts. Cash flows provided by operating activities for the year
ended December 31, 1997 reflected a $52.6 million refund in October 1997 in
accordance with the Stipulation approved by the FERC to settle Northern Border
Pipeline's November 1995 rate case. During 1997, $40.4 million had been
collected subject to refund by Northern Border Pipeline as a result of its rate
case.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $57.3 million for the first quarter of 1999 include
$51.9 million for the Chicago project. The remaining capital expenditures for
the first quarter of 1999 are primarily related to renewals and replacements of
existing facilities. For the comparable period in 1998, capital expenditures
were $103.8 million, which included $102.2 million for the Chicago project.
Capital expenditures of $651.2 million for the year ended December 31, 1998,
include $638.7 million for the Chicago project and $11.7 million for linepack
gas. The remaining $0.8 million of capital expenditures for 1998 is primarily
related to renewals and replacements of existing facilities.
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.
Total capital expenditures for 1999 are estimated to be $131 million
including $30 million for Project 2000 and $85 million for the Chicago project.
Approximately $37 million of the capital expenditures for the Chicago project is
for construction completed in 1998. An additional $16 million of 1999 capital
expenditures is planned for renewals and replacements of the existing
facilities. Northern Border Pipeline anticipates funding its 1999 capital
expenditures primarily by borrowing under the pipeline's credit agreement and
using internal resources.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities decreased $43.5 million to $27.0
million for the first quarter of 1999, as compared to the same period in 1998.
During the first quarter of 1998, Northern Border Pipeline's general partners
contributed $70.0 million to finance a portion of the capital expenditures for
the Chicago project. Distributions paid to the general partners increased $28.5
million for the first quarter of 1999 as compared to the same period in 1998.
The distribution for the first quarter of 1999 was impacted by increased
earnings as well as a change in the timing of distribution payments. The
distribution for the first quarter of 1998 was impacted by a rate case refund
during the fourth quarter of 1997. Borrowings under the pipeline's credit
agreement increased $55 million for the first quarter of 1999 as compared to the
same period in 1998, which were used to finance a portion of the capital
expenditures for the Chicago project.
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<PAGE>
Cash flows provided by financing activities increased $512.4 million to
$564.8 million for the year ended December 31, 1998, as compared to the same
period in 1997. Financing activities for 1998 include borrowings under the
pipeline's credit agreement of $403.0 million and were used primarily for
construction expenditures related to the Chicago project. Contributions received
from the general partners increased $142.0 million to $223.0 million and were
used by Northern Border Pipeline to fund a portion of its capital expenditures.
Distributions to the general partners decreased $38.1 million to $61.2 million
primarily due to a change in the timing of Northern Border Pipeline's
distributions.
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's credit agreement totaled $209 million
and were used primarily to retire amounts related to Northern Border Pipeline's
then existing bank loan agreements of $137.5 million and for construction
expenditures related to the Chicago project.
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 the note purchase
agreement and the supplemental agreement are filed as an exhibit to the
registration statement of which this prospectus is a part.
Northern Border Pipeline's obligations under the note purchase agreement and
supplemental agreement are unsecured and non-recourse to the general partners of
Northern Border Pipeline. The note purchase 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.
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 purchase agreement) premium.
The note purchase 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 purchase
agreement) not exceed 2.3 to 1 on a consolidated basis. As of March 31,
1999, the ratio was 1.74 to 1 on a consolidated basis;
- 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
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<PAGE>
note purchase 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 purchase agreement, so long as no Default or Event of Default
(as defined in the note purchase 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
purchase agreement) would not exceed $20 million plus (or minus in case of a
negative amount) the sum of:
- Consolidated Net Income (as defined in the note purchase agreement) for
the Computation Period,
- 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 purchase
agreement),
- an amount equal to Current Taxes (as defined in the note purchase
agreement) for the Computation Period and interest payable in respect of
any income tax deficiencies (to the extent recovered under the FERC tariff
during the Computation Period),
- an amount equal to 35% of Deferred Income Taxes (as defined in the note
purchase agreement) during the Computation Period, and
- an amount equal to 35% of Depreciation (as defined in the note purchase
agreement) during the Computation Period.
Under the most restrictive debt covenant, the amount of partners' capital that
could have been distributed as of March 31, 1999 was approximately $130 million.
If an Event of Default (as defined in the note purchase 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 material terms of the
pipeline's credit agreement, a copy of which is filed as an exhibit to the
registration statement of which this prospectus is a part.
Northern Border Pipeline's obligations under the credit agreement are
unsecured obligations, rank equally with the notes and 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 maturing in June 2002 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 maturing in June 2000 to be used for the construction of the Chicago
project. Effective as of March 31, 1999, the three-year revolving credit
facility converted to a term loan maturing in June 2002. 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 (1) 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)
under 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 March 31, 1999, $549.5 million had been borrowed on the
three-year revolving credit facilities, which has been converted to a term loan
maturing in June 2002, and $127.5 million has been borrowed on the five-year
revolving credit facilities maturing in June 2002.
The credit agreement contains various restrictive covenants applicable to
Northern Border Pipeline, including restrictions on liens, additional
indebtedness, investments, mergers,
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<PAGE>
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 March 31, 1999, the ratio was .53
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.
SETTLEMENT OF 1995 FERC RATE CASE AND 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 in
excess of 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, Northern Border
Pipeline implemented a new depreciation schedule with an extended depreciable
life, a $31 million settlement adjustment mechanism that effectively reduces the
allowed return on rate base after completion of construction of the Chicago
project in December 1998, and the Chicago project cost containment mechanism.
The purpose of the project cost containment mechanism was to limit Northern
Border Pipeline's ability to include cost overruns for the Chicago project in
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 Chicago project cost containment mechanism, the
actual cost of the project is compared to the budgeted cost. If there is a cost
overrun of $6 million or less, the shippers will bear the actual cost of the
project through its inclusion in Northern Border Pipeline's rate base. If there
is a cost savings of $6 million or less, the full budgeted cost will be included
in 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, with the final construction cost estimated
to be $892 million. Thus, 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.
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<PAGE>
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 properly
completed under 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 under the project cost
containment mechanism, a non-cash charge to write down transmission plant of
Northern Border Pipeline may result and that charge could be material to the
operating results of Northern Border Pipeline and TC PipeLines.
AMORTIZATION OF INCENTIVE RATE OF RETURN
The Northern Border Pipeline rate base includes, as an additional amount, a
one-time ratemaking adjustment to reflect the receipt of a financial incentive
on the original construction of the pipeline. Since inception, the rate base
adjustment, called an incentive rate of return, has been amortized through
monthly additions to the cost of service. As a result, TC PipeLines' pro forma
net income for 1998 includes $4.2 million for such amortization along with a
related income tax allowance. This impact on net income is expected to continue
until November 2001 when the incentive rate of return will be fully amortized.
See "Business of Northern Border Pipeline--FERC Regulation--COST OF SERVICE
TARIFF".
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Northern Border Pipeline's interest rate exposure results from its variable
rate borrowings from commercial banks. To mitigate potential fluctuations in
interest rates, Northern Border Pipeline maintains a significant portion of its
debt portfolio in fixed rate debt. Northern Border Pipeline also uses interest
rate swap agreements to increase the portion of its fixed rate debt and uses
interest rate forward agreements to establish an approximate effective borrowing
rate for anticipated long-term debt issuances.
If interest rates average one percentage point more than rates in effect as
of December 31, 1998, Northern Border Pipeline's annual interest expense would
increase by approximately $5.2 million. This amount has been determined by
considering the impact of the hypothetical interest rates on Northern Border
Pipeline's variable rate borrowings and interest rate swap agreements
outstanding as of December 31, 1998. Northern Border Pipeline's tariff provides
the pipeline an opportunity to recover, among other items, interest expense.
Therefore, TC PipeLines believes that Northern Border Pipeline would be allowed
to recover the increase in its interest expense, if it were to occur. Thus,
there would not be any material impact on Northern Border Pipeline's annual
earnings and cash flow from a hypothetical one percentage point increase in
interest rates. As of March 31, 1999, there has not been any material changes to
Northern Border Pipeline's interest rate exposure as compared to December 31,
1998.
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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. In addition, a great deal of information
processing technology is embedded in microelectronic devices. (This discussion
constitutes a year 2000 readiness disclosure under the Year 2000 Information and
Readiness Disclosure Act.)
The Year 2000 problem results from the use in computer hardware and software
of two digits rather than four digits to define the applicable year. As a
result, computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000.
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 pipeline operations
conducted in a manner that is safe for personnel and the public. Pipeline
operations include:
- the flow of natural gas through the pipeline with the operation of
thirteen natural gas fired compressor stations,
- two electric powered compressor stations,
- measurement stations for receipt and delivery of gas, and
- the supervisory control and data acquisition computer system.
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, Northern Border Pipeline has identified, inventoried,
and assessed computer software, hardware, embedded chips, and third-party
interfaces. Where necessary, remediation, replacement, or adequate work-arounds
have been identified and implemented or are in the process of being implemented.
The workaround Northern Border Pipeline has employed in very limited instances
is to turn the system clocks back to a past date so that the systems will not
roll-over to the year 2000 for several years. System clocks would be turned back
at two compressor stations that have an older control system that has not been
upgraded. TC PipeLines believes that there is limited risk involved with turning
the clocks back on these computer systems because all functions are local to the
station and their operations are not dependent on knowing the exact date. This
strategy allows the computers to continue to function until replaced.
At this time, TC PipeLines believes that Northern Border Pipeline's plan to
ensure that their mission critical systems are Year 2000 ready is appropriate.
As far as non-mission critical systems, it is TC PipeLines' understanding that
at the current time the systems are approximately 90% Year 2000 ready, based on
the work effort involved. Additional work remaining consists primarily of
completing upgrades of certain off-the-shelf software.
Northern Border Pipeline's plan recognizes that the computer,
telecommunications and other systems of outside entities have the potential for
major, mission-critical, adverse
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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. Northern Border Pipeline has
made initial contacts with all critical third-party entities and has received
responses from all but two of the parties contacted. Northern Border Pipeline
will continue its efforts with the remaining two entities to determine their
Year 2000 readiness. 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, remediating through
replacement or 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 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. TC PipeLines knows of no specific Northern Border
Pipeline systems that are susceptible to problems that can only be identified
after January 1, 2000.
Northern Border Pipeline has in place a Year 2000 contingency plan designed
to address specific Year 2000 related problems including loss of all commercial
electrical power, loss of all commercial telecommunications, and unforeseen
failures in critical systems. In the event of loss of commercial power, all
critical Northern Border Pipeline facilities have back up power sources
including auxiliary generators and battery back up except for the two electric
powered compressor stations. Northern Border Pipeline has its own internal,
private communications systems for voice, data, and the supervisory control and
data acquisition computer system traffic. All of the communications sites have
back-up power sources. Northern Border Pipeline also has a redundant back-up
site for critical operation and systems functions. All compressor facilities
will be manned at year end so that unforeseen issues can be dealt with
immediately.
Northern Border Pipeline has not incurred material historical costs
associated with the Year 2000 issues. Further, TC PipeLines believes 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 below, 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 is 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.
Other important difficulties relate to:
- the lack of control over and difficulty inventorying, assessing,
remediating, verifying and testing outside systems;
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<PAGE>
- 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 failures that occur despite implementation of the plan, as it may
be modified over time.
In a recent SEC release regarding Year 2000 disclosures, the SEC stated that
public companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios
Northern Border Pipeline may face leads to contemplation of the following
possibilities:
- widespread failure of electrical, gas, and similar supplies by utilities
serving Northern Border Pipeline;
- widespread disruption of the services of communications common carriers;
- similar disruption to means and modes of transportation for Northern
Border Pipeline and its employees, contractors, suppliers, and customers;
- significant disruption to Northern Border Pipeline's ability to gain
access to, and remain working in, office buildings and other facilities;
and
- the failure of outside systems, the effects of which would have a
cumulative material adverse impact on Northern Border Pipeline's mission-
critical systems.
Among other things, Northern Border Pipeline could face substantial claims
due to:
- service interruptions;
- inability to fulfill contractual obligations;
- inability to account for certain revenues or obligations or to bill
shippers accurately and on a timely basis; and
- increased expenses associated with litigation, stabilization of operations
following mission-critical failures, and the execution of contingency
plans.
Northern Border Pipeline could also experience an inability by shippers to
pay, on a timely basis or at all, obligations owed to Northern Border Pipeline.
Under these circumstances, the adverse effect on Northern Border Pipeline, and
the diminution of Northern Border Pipeline's revenues, would be material,
although not quantifiable at this time. Northern Border Pipeline will continue
to monitor business conditions with the aim of assessing and quantifying
material adverse effects, if any, that result or may result from the Year 2000
problem.
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, except as to any material adverse
effect that may result from any Year 2000 problem in Northern Border Pipeline,
as discussed above.
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MARKET OVERVIEW
The supply of Canadian natural gas imported into the United States increased
from 1.26 trillion cubic feet in 1988 to 2.84 trillion cubic feet in 1997, an
increase of approximately 125%. Over the same period, total United States
natural gas demand increased by approximately 22%. Consequently, Canadian
natural gas has increased its market share in the United States of total natural
gas consumption from 7.0% in 1988 to 12.9% in 1997.
IMPORTS OF CANADIAN NATURAL GAS
(TRILLIONS OF CUBIC FEET)
<TABLE>
<CAPTION>
TOTAL U.S. NET IMPORTS FROM NET CANADIAN
YEAR CONSUMPTION CANADA MARKET SHARE
- --------------------------------------- --------------- ------------------- -----------------
<S> <C> <C> <C>
1988................................... 18.03 1.26 7.0%
1989................................... 18.80 1.30 6.9%
1990................................... 18.72 1.43 7.6%
1991................................... 19.04 1.69 8.9%
1992................................... 19.54 2.03 10.0%
1993................................... 20.28 2.22 11.0%
1994................................... 20.71 2.51 12.1%
1995................................... 21.58 2.79 12.9%
1996................................... 21.97 2.83 12.9%
1997................................... 21.98 2.84 12.9%
</TABLE>
- ------------------------
Source: Energy Information Administration, Natural Gas Monthly August 1998, U.S.
Natural Gas Imports and Exports--1997, Tables SR1, SR4 and SR5
The majority of this increasing Canadian supply has been supported by the
extensive natural gas reserves found in the western Canadian sedimentary basin,
located in the provinces of Alberta, British Columbia, and Saskatchewan. While
this basin had remaining established natural gas reserves of 65 trillion cubic
feet as of December 31, 1997, it remains relatively undeveloped with a reserves
to production ratio of approximately 11 years at current production levels.
These estimates are based on information from the Canadian Association of
Petroleum Producers and internal analyses by TransCanada. Remaining established
natural gas reserves are those reserves that can be recovered under present and
anticipated economic conditions using current technology and technical
judgement. In comparison, the more mature natural gas basins in the lower 48
United States, with remaining reserves of approximately 157 trillion cubic feet
as of December 31, 1997, have a reserves to production ratio of approximately
8.4 years. These estimates are from the Energy Information Administration 1997
Annual Report dated September 1998. We believe that the western Canadian
sedimentary basin is poised for production increases in the future as the basin
undergoes further development. From 1995 to the end of 1997, natural gas
production increased by 6%, and, as indicated in the table below, we expect this
production to increase by 26% from 1998 to 2010.
WESTERN CANADIAN SEDIMENTARY BASIN MARKETABLE NATURAL GAS PRODUCTION:
HISTORICAL AND FORECAST
<TABLE>
<CAPTION>
1995(1) 1996(1) 1997(1) 1998(2) 1999(2) 2000(2) 2005(2)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Production (billions of cubic
feet per day).................. 14.6 15.3 15.5 16.1 17.3 17.8 19.8
Production Growth from 1995...... 5% 6% 10% 18% 22% 36%
<CAPTION>
2010(2)
-----------
<S> <C>
Production (billions of cubic
feet per day).................. 20.3
Production Growth from 1995...... 39%
</TABLE>
- ------------------------
(1) Canadian Association of Petroleum Producers Statistical Handbook.
(2) "The Future Natural Gas Supply Capability of the Western Canadian
Sedimentary Basin 1997-2019", prepared by Sproule Associates Limited for
TransCanada PipeLines Limited, April 1998.
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The Northern Border pipeline system currently serves the midwest region of
the United States, including Ohio, Wisconsin, Indiana, Michigan and Illinois. In
addition, Northern Border transports gas for delivery in Montana, North Dakota,
South Dakota, Minnesota and Iowa. Based on data in the table below, we expect
that the midwest market for natural gas will grow at a rate of 1.4% per year
until 2010 which is equivalent to a total incremental demand of 1.9 billion
cubic feet per day.
One of the key objectives of our business strategy is to participate in
extensions and expansions of our current Northern Border Pipeline asset as well
as pursue select acquisitions of other high quality pipeline assets. We intend
to target the northeastern United States with our strategy and thereby
capitalize on the growing demand for natural gas in this region, which includes
the states of Maine, Massachusetts, Vermont, Rhode Island, New Hampshire,
Connecticut, New York, New Jersey and Pennsylvania. Between 1993 and 1997,
natural gas demand in these northeastern states increased by 18% and currently
represents 14.0% of the total United States demand. We expect this trend to
continue, with natural gas demand in the northeast region forecast to grow at a
rate of approximately 2.5% per year until at least 2010, as indicated in the
following table. This growth rate would result in a total incremental demand
over that period of 2.8 billion cubic feet per day.
HISTORICAL AND FORECAST NATURAL GAS DEMAND(1)(2)
<TABLE>
<CAPTION>
NORTHEAST MIDWEST
TOTAL NORTHEAST PERCENTAGE MIDWEST PERCENTAGE
U.S. GAS GAS OF GAS GAS OF GAS
DEMAND DEMAND DEMAND DEMAND DEMAND
----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(BCF/D) (BCF/D) (%) (BCF/D) (%)
1993........................................... 55.6 7.4 13.3% 10.0 18.0%
1994........................................... 56.7 7.8 13.8% 10.1 17.8%
1995........................................... 59.1 8.4 14.2% 10.6 17.9%
1996........................................... 60.2 8.4 14.0% 11.1 18.4%
1997........................................... 60.2 8.7 14.5% 10.7 17.8%
1998........................................... 60.2 8.4 14.0% 10.8 17.9%
1999........................................... 61.9 8.7 14.1% 11.1 17.9%
2000........................................... 62.9 8.8 14.0% 11.3 18.0%
2005........................................... 69.8 10.0 14.3% 11.8 16.9%
2010........................................... 76.7 11.2 14.6% 12.7 16.6%
</TABLE>
- ------------------------
(1) Actuals through 1997 are from the Energy Information Administration's
"Historical Natural Gas Annual 1930 Through 1997", Table 22, plus an
adjustment for lease, plant, and pipeline fuel.
(2) Forecast values from 1998 to 2010 are based on an average of forecasts,
including Energy Information Administration's "1999 Annual Energy Outlook",
the Gas Research Institute's "1999 Baseline Projections Databook", and
Standard & Poor's DRI "Fall/Winter 1998/99 Energy Service U.S. Outlook".
The growth in natural gas demand in the midwest and northeast regions of the
United States primarily reflects growth in the electrical generation business,
as well as growth in the commercial and industrial sectors. In addition, we
believe that the influence of the Clean Air Act and other environmental
legislation will contribute to demand for cleaner burning fuels such as natural
gas instead of coal or oil. Accordingly, we believe the demand for pipeline
capacity to transport natural gas will also increase 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 for pipeline
assets. We believe that TransCanada's United States based pipeline assets will
provide us with acquisition opportunities. Furthermore, we believe that
opportunities may exist to acquire from TransCanada non-natural gas transmission
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. Natural gas demand in the northeast
region of the United States is projected to grow at a rate of approximately 2.5%
per year until at least 2010 as discussed under "Market Overview". 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. We believe 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 complements 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 is part of a 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
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and facilitate the flow of natural gas to the growing markets in the
northeastern United States. Our objective 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.
- 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 over 40 years, and we
expect to benefit from the services of its management which 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 97% of the Northern Border pipeline system's
capacity was under contract through mid-September 2003 with a weighted
average contract life, based upon annual cost of service obligations, of
slightly under eight 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 Partners' three general partners in proportion to their general partner
interests in Northern Border Partners. As a result, the 70% voting power of
Northern Border Partners' 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. As of December 31, 1998, Northern Plains employed
approximately 190 individuals located at its headquarters in Omaha, Nebraska and
at locations along the pipeline route. Northern Plains' employees are not
represented by any labor union and are not covered by any collective bargaining
agreements.
GENERAL
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. Northern Border
Pipelines' revenues are equal to the cost of service actually incurred for
providing service to its shippers as determined under its FERC-regulated tariff.
The FERC-regulated 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. The tariff provides an opportunity to recover:
- all of the operations and maintenance costs of the pipeline,
- taxes other than income taxes,
- interest,
- depreciation and amortization,
- an allowance for income taxes and
- a regulated return on equity.
Northern Border Pipeline is generally allowed to collect from its shippers a
return on 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 proportionate 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
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Northern Border Pipeline does not assume any natural gas commodity price risk.
THE NORTHERN 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/or extended in 1991, 1992, and 1998.
The Northern Border pipeline system has pipeline access to natural gas
reserves in the western Canadian sedimentary basin in the provinces of Alberta,
British Columbia and Saskatchewan in Canada, as well as the Williston Basin in
the United States. The Pipeline System also has access to production of
synthetic gas processed at the Dakota Gasification Plant in North Dakota.
The Northern Border pipeline system consists of 822 miles of 42-inch
diameter pipe designed to transport 2,373 million cubic feet per day from the
Canadian border to Ventura, Iowa; 30-inch diameter pipe and 36-inch diameter
pipe, each approximately 147 miles in length, designed to transport 1,300
million cubic feet per day 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 four 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
Northern Border Pipeline connects with multiple pipelines which allow its
shippers to access the various natural gas markets served by those pipelines.
The Northern Border pipeline system interconnects with pipeline facilities of:
- Northern Natural Gas Company, an Enron subsidiary, at Ventura, Iowa as
well as multiple smaller interconnections in South Dakota, Minnesota and
Iowa;
- Natural Gas Pipeline Company of America at Harper, Iowa;
- MidAmerican Energy Company at Iowa City and Davenport, Iowa;
- 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.
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PROJECT 2000
In October 1998, Northern Border Pipeline applied to the FERC for approval
of its Project 2000 to expand and extend its Northern Border pipeline system
into Indiana by November 2000. If approved and constructed, Project 2000 will
strategically position Northern Border Pipeline to move natural gas east and
will place it in direct contact with major industrial natural gas consumers.
Project 2000 would afford shippers on the extended pipeline system access to the
northern Indiana industrial zone, including Northern Indiana Public Service
Company, a major midwest local distribution company with a large industrial load
requirement.
Permanent releases of capacity have been negotiated between several existing
and project shippers originally included in the October 1998 application. On
March 25, 1999, Northern Border Pipeline amended its application to the FERC to
reflect these changes.
Project 2000 revised capital expenditures are estimated to be $126 million
and, with timely regulatory approvals, we anticipate construction activities to
begin in late 1999. TC PipeLines' share of capital expenditures is expected to
be approximately $12 million payable during 2000. Proposed facilities will
include approximately 34.4 miles of 36-inch pipeline and a total net increase of
22,500 compressor horsepower at three compressor stations, one meter station and
related facilities.
As a result of the proposed revised expansion, the pipeline will have the
ability to receive 1,484 million cubic feet per day from Ventura to Harper,
Iowa, 844 million cubic feet per day from Harper to Manhattan, Illinois, and 544
million cubic feet per day on the new extension from Manhattan to North Hayden,
Indiana.
Five 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
Project 2000 shippers are: Bethlehem Steel Corporation, El Paso Energy Marketing
Company, Northern Indiana Public Service Company, Peoples Energy Services
Corporation, and The People's Light and Coke Company.
The proposed pipeline extension will interconnect with Northern Indiana
Public Service Company at the terminus near North Hayden, Indiana. Northern
Indiana Public Service has confirmed to Northern Border Pipeline that the
interconnect will be able to receive the required capacity.
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.
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 a natural gas liquids extraction plant may be
built near the Alliance 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
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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.
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, as of December 31, 1998, is contracted by producers
and marketers. The remaining firm capacity is contracted to local distribution
companies (5%) and interstate pipelines (2%). As of December 31, 1998, the
termination dates of these contracts ranged from October 31, 2001 to December
21, 2013 and the weighted average contract-life, based upon annual cost of
service obligations was slightly under eight years with at least 97% of capacity
contracted through mid-September 2003.
In 1998, the five shippers that contributed the greatest amount of revenue
to Northern Border Pipeline were as follows: Pan-Alberta Gas U.S. Inc. (44.4%),
TransCanada PipeLines Limited, an affiliate of our general partner (7.2%), Husky
Gas Marketing Inc. (4.9%), ProGas USA Inc. (4.1%) and PanCanadian Energy
Services Inc (3.8%). No other shipper was responsible for more than 4.0% of
Northern Border Pipeline's revenue in 1998. The 20 largest shippers, in total,
were responsible for 95.9% of Northern Border Pipeline's revenue in 1998.
Northern Border Pipeline's recent expansion and extension in 1998, the
Chicago project, was underpinned by a large group of shippers which now
represent 38.9% of the Northern Border pipeline system's cost of service. Those
shippers signed contracts for a minimum of ten years from the date the Chicago
project facilities came in service, with the earliest termination date being
December 21, 2008. The five largest shippers which were part of the Chicago
project expansion are: TransCanada PipeLines Limited, an affiliate of our
general partner (5.3%), PanCanadian Energy Services Inc. (4.5%), Enron Capital &
Trade Resources Corp, an affiliate of Northern Border Partners (3.9%), AEC
Marketing (U.S.A) Inc. (3.1%), and Hess Energy Services Company LLC (2.9%).
Currently, based on their proportionate shares of the cost of service of the
Northern Border pipeline system for the first six months of 1999 the five
largest shippers are: Pan-Alberta Gas U.S. Inc. (26.5%), TransCanada PipeLines
Limited, an affiliate of our general partner (10.8%), PanCanadian Energy
Services Inc (7.0%), Enron Capital & Trade Resources Corp, an affiliate of
Northern Border Partners (5.3%) and PetroCanada Hydrocarbons Inc. (4.1%). No
other shipper is currently responsible for more than 5.0% of Northern Border
Pipeline's cost of service. The 20 largest shippers, in total, are responsible
for an estimated 88.2% of Northern Border Pipeline's cost of service.
There are four contracts totaling 141 million cubic feet per day, 3.7% of
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.
Northern Border Pipeline's largest shipper, Pan-Alberta Gas U.S., currently
holds 707 million cubic feet per day, 26.5% of cost of service, under three
contracts with terms that have been extended to October 31, 2003. The extension
of the termination date for one of the contracts covering 150 million cubic feet
per
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day is subject to further authorization by the FERC. 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, among others, 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.
Some of Northern Border Pipeline's shippers are affiliated with TransCanada
and the general partners and subsidiaries of Northern Border Partners.
TransCanada holds contracts representing 10.8% of the proportionate share of the
cost of service. Enron Capital & Trade Resources Corp., a subsidiary of Enron
holds contracts representing 5.3% of the proportionate share of the cost of
service. TransContinental Gas Pipe Line Corporation, a subsidiary of Williams,
holds contracts representing 0.8% of the proportionate share of the cost of
service.
Order 636, as discussed below under "FERC Regulation--Open Access
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.
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
a proportionate 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 proportionate share of the cost of service regardless of
the amount of natural gas they actually transport. The cost of service tariff is
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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 return on equity approved by the FERC. Northern Border Pipeline may
not charge or collect more than its cost of service under its tariff on file
with the FERC.
Northern Border Pipeline's investment in the pipeline system is reflected in
various accounts referred to collectively as its regulated "rate base." The cost
of service includes a return, with related income taxes, on the rate base. Over
time, the rate base declines as a result of, among other things, monthly
depreciation and amortization. The Northern Border Pipeline rate base includes,
as an additional amount, a one-time ratemaking adjustment to reflect the receipt
of a financial incentive on the original construction of the pipeline. Since
inception, the rate base adjustment, called an incentive rate of return, has
been amortized through monthly additions to the cost of service. As a result, TC
PipeLines' pro forma net income for 1998 included $4.2 million for such
amortization along with a related income tax allowance. This impact on net
income is expected to continue until November 2001 when the incentive rate of
return is fully amortized.
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency between the cost of service
determined for that period according to the FERC tariff and the estimated
billing is accumulated, including carrying charges. This amount is then either
billed to or credited back to the shippers' accounts.
Northern Border Pipeline also provides interruptible transportation service.
Interruptible transportation service is transportation in circumstances when
surplus capacity is available after satisfying firm service requests. The
maximum rate charged to interruptible shippers is calculated from cost of
service estimates on the basis of contracted capacity. Northern Border Pipeline
credits all revenue from the interruptible transportation service to the firm
shippers against cost of service amounts already paid.
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.
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 in excess of 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. For purposes of calculating this return, the equity base is
determined by FERC regulations, and not in accordance with GAAP. 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,
it was 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
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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.
The capital project cost containment mechanism for the Chicago project is
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Settlement of 1995 FERC Case and Project Cost Containment
Mechanism".
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 right of first refusal 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.
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
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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. Although TC PipeLines believes
that Northern Border Pipeline's operations and facilities comply in all material
respects with applicable environmental and safety regulations, risks of
substantial costs and liabilities are inherent in pipeline operations, and we
cannot provide any assurances that Northern Border Pipeline will not incur these
costs and liabilities. Northern Border Pipeline has ongoing environmental and
safety audit programs.
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. While it is unclear if Northern
Border Pipeline has the right of eminent domain over tribal lands, Northern
Border Pipeline has the right of eminent domain over allotted lands.
In 1980, Northern Border Pipeline entered into a pipeline right-of-way lease
with the Fort Peck Tribal Executive Board, for and on behalf of the Assiniboine
and Sioux Tribes of the Fort Peck Indian Reservation. This pipeline right-of-way
lease, which was approved by the Department of the Interior in 1981, granted 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
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term. Northern Border Pipeline continues to operate 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 was entered on March 18, 1999 condemning permanent easements in
Northern Border Pipeline's favor on the tracts in question. The court ordered
approximately $22,000 as compensation. 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.
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 TC PipeLines'
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".
On February 10, 1999, a lawsuit entitled LINDA NELL RHODES, ET AL. v.
NORTHERN BORDER PIPELINE CO., ET AL. was commenced in state court, Harris
County, Texas, against Northern Border Pipeline, Northern Border Partners, L.P.,
Northern Plains Natural Gas Co. and Enron Corp. The action seeks compensatory
and other damages, including punitive damages, relating to an incident which
occurred on November 24, 1998, in which an employee of Associated Pipeline
Contractors, Inc., a contractor providing pipeline construction services to the
Chicago project at the time of the incident, was fatally injured. The action is
currently in discovery. At this time, TC PipeLines is unable to predict the
outcome of the action but, based upon currently known facts, believes that the
ultimate resolution of the action would not reasonably be expected to have a
material adverse effect on the results of operations or financial condition of
Northern Border.
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.$17.2 billion and net income from
continuing operations of Cdn.$426 million. For the three months ended March 31,
1999, TransCanada had revenues of Cdn.$3.3 billion and net income from
continuing operations of Cdn.$174 million. As of December 31, 1998 and March 31,
1999, TransCanada had assets of approximately 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. In addition to the 30% interest in Northern Border Pipeline, 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;
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- 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;
- 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.
A map showing TransCanada's interests in these North American pipeline
systems appears on the inside back cover of this prospectus.
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 and crude oil. 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 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 three of the members of the board of directors of the general
partner who are neither officers or employees of the general partner nor
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 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 President, Chief Executive Officer and Director
Russell K. Girling.................................. 36 Chief Financial Officer and Director
Paul F. MacGregor................................... 42 Vice-President, Business Development
Bruce A. Westell.................................... 52 Vice-President and Treasurer
Gary G. Penrose..................................... 56 Vice-President, Taxation
Karyn A. Brooks..................................... 45 Vice-President
Rhondda E.S. Grant.................................. 41 Corporate Secretary
Bruce W. Simpson.................................... 54 Director
Ronald J. Turner.................................... 46 Director
</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 BASc 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 & Maritimes System and the Portland System.
Mr. Carruthers holds a BComm from the University of Calgary.
RUSSELL K. GIRLING has been Vice-President, Finance of TransCanada since
January 1999. He was Executive Vice-President, Power of TransCanada Energy Ltd.
from June 1998 to January 1999. He was Senior Vice-President, North American
Power of TransCanada Energy from May 1997 to June 1998 and prior thereto, he was
Vice-President, Power of TransCanada Energy. Mr. Girling holds a BComm and an
MBA 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,
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Finance and Operations groups. Mr. MacGregor holds an MBA, with a major in
accounting, from McMaster University, and a BASc 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. 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.
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
BComm (Honours) from Queen's University.
RHONDDA E.S. GRANT has acted as Corporate Secretary and Associate General
Counsel, Corporate of TransCanada since July 1998. From October 1994 to July
1998, Ms. Grant was Corporate Secretary and Associate General Counsel of NOVA
Corporation. Prior to October 1994, Ms. Grant was Associate General Counsel,
Corporate of NOVA Corporation. From 1989 to 1994, 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.
BRUCE W. SIMPSON has been Executive Vice-President of TransCanada since July
1998. From May 1994 to July 1998 Mr. Simpson was Senior Vice-President, NOVA
Corporation and President and Chief Operating Officer of NOVA Gas Transmission
Ltd. Prior to that time Mr. Simpson was Senior Vice-President of NOVA's
predecessor, and President and Chief Operating Officer of the Alberta Gas
Transmission Division of that company. Mr. Simpson received a BComm from the
University of Alberta in 1967, and was admitted to the Institute of Chartered
Accountants of Alberta in 1970.
RONALD J. TURNER has been Senior Vice-President of TransCanada and President
of Alberta Gas Transmission of TransCanada since July 1998. He was
Vice-President, Value Process West, NOVA Chemicals Ltd. and Executive
Vice-President of NOVA Gas Transmission Ltd. from December 1997 to July 1998.
Prior thereto and from July 1994, he was Vice-President, Facilities Provision,
NOVA Gas Transmission Ltd. Prior to July 1994, Mr. Turner was Vice-President,
Engineering, Alberta Gas Transmission Division of NOVA Corporation. Mr. Turner
holds a BSc in Civil Engineering from University of Canterbury in New Zealand.
Shortly after completion of the transactions contemplated in this
prospectus, the general partner will add three independent directors who have
not been for five years and are not currently owners, officers, employees of the
general partner nor officers or employees, of any affiliate of the general
partner. These three additional directors will be sole members of 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,
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and allocable 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.
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 completion of the transactions contemplated in this
prospectus, 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 under the Incentive Distribution
Rights. See "Cash Distribution Policy--Incentive Distribution Rights". 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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SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units that will
be issued upon the consummation of the transactions contemplated in this
prospectus 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 1,055,000 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.......................... 3,200,000 100%
TC PipeLines GP, Inc................................... 3,200,000 100
George W. Watson....................................... --
John W. Carruthers..................................... --
Russell K. Girling..................................... --
Paul F. MacGregor...................................... --
Bruce A. Westell....................................... --
Gary G. Penrose........................................ --
Karyn A. Brooks........................................ --
Rhondda E.S. Grant..................................... --
Bruce W. Simpson....................................... --
Ronald J. Turner....................................... --
All directors and executive officers as a group (10
persons)............................................. --
</TABLE>
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The following table sets forth the beneficial ownership of TransCanada
common shares held by directors and executive officers of the general partner as
of March 31, 1999. The shares beneficially owned include both outstanding
TransCanada common shares and TransCanada common shares issuable upon exercise
of outstanding options within 60 days after March 31, 1999. Shares subject to
exercisable stock options include 405,882 for Mr. Watson; 33,972 for Mr.
Carruthers; 25,080 for Mr. Girling; 18,122 for Mr. MacGregor; 75,025 for Mr.
Westell; 39,138 for Mr. Penrose; 24,404 for Ms. Brooks; 4,029 for Ms. Grant;
41,311 for Mr. Simpson; and 33,237 for Mr. Turner.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED CLASS
- ------------------------------------------------------------------------------------------ ------------ ---------------
<S> <C> <C>
George W. Watson.......................................................................... 445,321 *
John W. Carruthers........................................................................ 33,972 *
Russell K. Girling........................................................................ 25,080 *
Paul F. MacGregor......................................................................... 18,382 *
Bruce A. Westell.......................................................................... 77,080 *
Gary G. Penrose........................................................................... 41,370 *
Karyn A. Brooks........................................................................... 25,280 *
Rhondda E.S. Grant........................................................................ 4,029 *
Bruce W. Simpson.......................................................................... 144,357 *
Ronald J. Turner.......................................................................... 42,430 *
All directors and executive officers as a group (10 persons).............................. 856,301 *
</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.
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. A conflicts committee of the board of
directors of the general partner will, at the request of the general partner,
review conflicts of interest. 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 considered to be fair and
reasonable to TC PipeLines. Any resolution is considered to be fair and
reasonable to TC PipeLines if that resolution is:
- 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;
- on terms no less favorable to TC PipeLines than those generally being
provided to or available from unrelated third parties; or
- 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.
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.
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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 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
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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 TC
PipeLines.
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.
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.
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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. Neither the Delaware Act nor case law defines with particularity the
fiduciary duties owed by general partners to limited partners of a limited
partnership. The Delaware Act does provide that Delaware limited partnerships
may, in their partnership agreements, restrict or expand the fiduciary duties
owed by a general partner to limited partners and the partnership.
In order to induce the general partner to manage the business of TC
PipeLines, the partnership agreement contains various provisions restricting the
fiduciary duties that might otherwise be owed by the general partner. The
following is a summary of the material restrictions of the fiduciary duties owed
by the general partner to the limited partners.
<TABLE>
<S> <C>
State-Law Fiduciary Duty Standards........... Fiduciary duties are generally considered to
include an obligation to act with due care
and loyalty. The duty of care, in the absence
of a provision in a partnership agreement
providing otherwise, would generally require
a general partner to act for the partnership
in the same manner as a prudent person would
act on their own behalf. The 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.
The Delaware Act generally 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.
</TABLE>
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<TABLE>
<S> <C>
Partnership Agreement Modified Standards..... The partnership agreement 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. For
example, the partnership agreement permits
the general partner to make a number of
decisions in its "sole discretion." This
entitles the general partner to consider only
the interests and factors that it desires and
it shall have no duty or obligation to give
any consideration to any interest of, or
factors affecting, TC PipeLines, its
affiliates or any limited partner. Other
provisions of the partnership agreement
provide that the general partner's actions
must be made in its reasonable discretion.
These standards reduce the obligations to
which the general partner would otherwise be
held.
The partnership agreement generally provides
that affiliated transactions and resolutions
of conflicts of interest not involving a
required vote of unitholders must be "fair
and reasonable" to TC PipeLines under the
factors previously set forth. In determining
whether a transaction or resolution is "fair
and reasonable" the general partner may
consider interests of all parties involved,
including its own. Unless the general partner
has acted in bad faith, the action taken by
the general partner shall not constitute a
breach of its fiduciary duty. These standards
reduce the obligations to which the general
partner would otherwise be held.
The partnership agreement specifically
provides that it shall not be a breach of the
general partner's fiduciary duty if its
affiliates engage in business interests and
activities in competition with, or in
preference or to the exclusion of, TC
PipeLines. Also, the general partner and its
affiliates have no obligation to present
business opportunities to TC PipeLines. These
standards reduce the obligations to which the
general partner would otherwise be held.
</TABLE>
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<TABLE>
<S> <C>
In addition to the other more specific
provisions limiting the obligations of the
general partner, the partnership agreement
further provides that the general partner and
its officers and directors will not be liable
for monetary damages to TC PipeLines, the
limited partners or assignees for errors of
judgment or for any acts or omissions if the
general partner and those other persons acted
in good faith.
</TABLE>
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 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.
TC PipeLines is required to indemnify the general partner and its officers,
directors, employees, affiliates, partners, members, agents and trustees, to the
fullest extent permitted by law, against liabilities, costs and expenses
incurred by the general partner or these other persons. This indemnification is
required if the general partner or these persons acted in good faith and in a
manner they reasonably believed to be in, or (in the case of a person other than
the general partner) not opposed to, the best interests of TC PipeLines.
Indemnification is required for criminal proceedings if the general partner or
these other persons had no reasonable cause to believe their conduct was
unlawful. 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 completion of the offering, the common units will be registered under
the Exchange Act, and TC PipeLines will be subject to the reporting and other
requirements of the Exchange Act. TC PipeLines will be required to file periodic
reports containing financial and other information with the SEC.
THE UNITS
The common units and the subordinated units represent limited partner
interests in TC PipeLines. The holders of units are entitled 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, L.L.C. will serve as registrar and
transfer agent for the common units and will receive a fee from TC PipeLines.
All fees charged by the transfer agent for transfers of common units will be
borne by TC PipeLines, except that the following fees shall be paid by
unitholders:
- 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.
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 shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in respect of its
activities in that capacity, except for any liability due to any gross
negligence 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. The resignation or removal of the transfer agent shall become effective upon
the appointment by TC PipeLines of a successor transfer agent and registrar and
its acceptance of the appointment. If no successor has been appointed and
accepted the appointment within 30 days after notice of the 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
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 the investor. Any subsequent transfers of a common
unit will not be recorded by the transfer agent or recognized by TC PipeLines
unless the transferee executes and delivers a transfer application. The form of
transfer application is set forth as Appendix B to this prospectus and is also
set forth on the reverse side of the certificates representing the common units.
By executing and delivering a transfer application, the transferee of common
units
(1) becomes the record holder of the 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,
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(3) agrees to be bound by the terms and conditions of, and executes, the TC
PipeLines partnership agreement,
(4) represents that the 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. The general partner may withhold its consent in its sole discretion.
Transfer applications may be completed, executed and delivered by a
transferee's broker, agent or nominee. TC PipeLines is entitled to treat the
nominee holder of a common unit as the absolute owner. In that case, the
beneficial holder's rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the beneficial owner and the
nominee holder.
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
- the right to assign the common units to a purchaser or other transferee,
and
- the right to transfer the right to seek admission as a substituted limited
partner in TC PipeLines.
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, and
- may not receive federal income tax information or reports furnished to
record holders of common units.
The transferor of common units will have a duty to provide the transferee
with all information that may be necessary to transfer the common units. 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
the 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".
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 purposes,
except as otherwise required by law or stock exchange regulations.
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
TC PipeLines, and the rights of holders to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units. See "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 and the subordinated units for each of the three non-overlapping
four-quarter periods immediately preceding that date equaled or exceeded the
sum of the minimum quarterly distribution on all of the outstanding common
units and subordinated units during those periods,
(2) the Adjusted Operating Surplus generated during each of the three
non-overlapping four-quarter periods immediately preceding that date equaled
or exceeded the sum of the minimum quarterly distribution on all of the
common units and the subordinated units that were outstanding on a fully
diluted basis and the related distributions on the general partner interests
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 and to the extent the tests for
conversion described below are satisfied, a portion of the subordinated units
may convert into common units prior to June 30, 2004. Subordinated units will
convert into common units on a one-for-one basis on the first day after the
record date established for the distribution in respect of any quarter ending on
or after:
- June 30, 2002 with respect to one-third of the subordinated units
(1,066,667 subordinated units), and
- June 30, 2003 with respect to one-third of the subordinated units
(1,066,667 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 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 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 the incentive distribution rights into common units or
to receive cash in exchange for those interests.
LIMITED VOTING RIGHTS
Holders of subordinated units will sometimes vote as a single class together
with the common units and sometimes 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
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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 in connection with the
removal of the general partner,
(3) a dissolution or reconstitution of TC PipeLines,
(4) a merger of TC PipeLines,
(5) issuance of limited partner interests in some circumstances and
(6) some 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 some
circumstances. Removal of the general partner requires:
(1) a two-thirds vote of all outstanding units voting as a single class,
and
(2) the election of a successor general partner by the holders of a
majority of the outstanding common units and subordinated units, voting as
separate classes.
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 TC PIPELINES 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 TC PipeLines intermediate partnership and engaging in any
business activity that may be engaged in by the TC PipeLines 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 that 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 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.
The 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
8,580,000 additional common units or units on a parity with common units,
without the approval of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes.
During the subordination period or thereafter, we may issue an unlimited
number of common units as follows:
(1) upon exercise of the underwriters' over-allotment 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 in connection 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 underwriters' 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 TC PipeLines 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
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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 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 the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes; 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 the holders of
a majority of the outstanding common units and subordinated units, voting as
separate classes.
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
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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, as otherwise permitted by the
partnership agreement;
(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 majority of the outstanding common units and subordinated units,
voting as separate classes, 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
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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 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 majority of the outstanding common units and subordinated
units, voting as separate classes;
(2) the sale, exchange or other disposition of all or substantially all of the
assets and properties of TC PipeLines and the TC PipeLines 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 majority of the
outstanding common units and subordinated units, voting as separate classes, 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 units who elected to reconstitute TC PipeLines
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 TC
PipeLines 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
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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 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 majority of the
outstanding common units and subordinated units, voting as separate classes, 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
majority of the outstanding common units and subordinated units, voting as
separate classes, 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. Any
removal of this kind is also subject to the approval of a successor general
partner by the vote of the holders of a majority of the outstanding common units
and subordinated units, voting as separate classes. The ownership of an
aggregate of 18.3% of the outstanding units and all of the subordinated units by
the general partner has the practical effect of making the general partner's
removal quite difficult.
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
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rights for a cash payment equal to 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.
If the above-described option is not exercised by either the departing
general 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.
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.
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 TC PipeLines 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 TC PipeLines 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, 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 the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes. 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
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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. This loss of voting rights does not apply to
any person or group that acquires the units from our general partner or its
affiliates and any transferees of that person or group approved by our general
partner.
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 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 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
any class of units then outstanding, 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
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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 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 or subsequently approved 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
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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;
(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 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
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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 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 or their assignees if an exemption from
the registration requirements is not otherwise available. These registration
rights continue for two years following any withdrawal or removal of the general
partner as the general partner of TC PipeLines. 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 3,200,000 (or 1,055,000 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 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 the securities outstanding, or
(2) the average weekly reported trading volume of the common units for
the four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific 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
common units under Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and 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 8,580,000 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 majority of the outstanding common units and
subordinated units, voting as separate classes. The 8,580,000 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,
under an employee benefit plan or in connection with some 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 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".
Under 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, these registration rights allow the
general partner and its affiliates or their assignees holding any units to
require registration of these units and to include these units in a registration
by TC PipeLines of other units, including units offered by TC PipeLines or by
any unitholder. These registration rights will continue in effect for two years
following any withdrawal or removal of the general
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partner as the general partner of TC PipeLines. In connection with any
registration of this kind, TC PipeLines will indemnify each unitholder
participating in the 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 incidental to any registration,
excluding underwriting discounts and commissions. 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 some of its affiliates 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 IS A
SUMMARY OF THE MATERIAL 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. The address of Northern Border Pipeline is 1111 South 103rd Street,
Omaha, Nebraska 68124-1000, and its telephone number is (402) 398-7700.
On March 17, 1999, Northern Plains, Pan Border, Northwest Border Pipeline,
the subsidiaries of TransCanada, the general partners of Northern Border
Pipeline, the Northern Border Pipeline management committee, and the operator of
Northern Border Pipeline, entered into an agreement that provides for, among
other things, (1) the consent to transfer the 30% general partner interest from
the subsidiaries of TransCanada to TC PipeLines or its subsidiary upon closing
of the offering and (2) the admission of TC PipeLines or its subsidiary as a
general partner in Northern Border Pipeline.
Therefore, 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.
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
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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 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, despite the fact that the TC PipeLines
representative on the Northern Border Pipeline management committee voted
against that project. The 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 Responsibilities".
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 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
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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.
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
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 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 "--Management and Voting" above.
The cash distribution policy of Northern Border Pipeline as currently
approved by the Northern Border Pipeline management committee 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 the
quarter, excluding specific noncash items, plus
(2) 100% of the current portion of any allowance for income taxes 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, each as
computed under Northern Border Pipeline's tariff, minus
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(4) an amount equal to 35% of maintenance capital expenditures for that
quarter.
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 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 primarily from a
retroactive adjustment to Northern Border Pipeline's depreciation schedule that
was agreed to in the settlement of its rate case. See "Business of Northern
Border Pipeline--FERC Regulation--Cost of Service Tariff".
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 particular capital accounts of the
partners in accordance with their particular 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 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 the total amount of additional contributions requested. If TC
PipeLines elected not to make 30% of the additional contribution, its interest
in Northern Border Pipeline would be diluted.
CHANGE TO CORPORATE FORM
The Northern Border Pipeline partnership agreement provides that, under some
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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. Our
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 the TC PipeLines
partnership agreement, however, our 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 indemnification in favor of
the members of the audit and compensation committee.
BUSINESS OPPORTUNITIES
The partners of Northern Border Pipeline have agreed to amend the Northern
Border Pipeline partnership agreement to provide that the partners, their
affiliates and transferees, will not have any duty to offer business
opportunities to Northern Border Pipeline, with specified exceptions.
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 this kind of 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 particular capital accounts.
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TAX CONSIDERATIONS
THIS SECTION SETS FORTH THE MATERIAL FEDERAL INCOME TAX CONSIDERATIONS THAT
MAY BE RELEVANT TO THE DECISION TO PURCHASE UNITS OF A PROSPECTIVE UNITHOLDER
WHO IS AN INDIVIDUAL CITIZEN OR RESIDENT 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 THESE 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, OR ON ANY MATTERS OF
ANY TAX LAW OTHER THAN FEDERAL INCOME TAX LAW. MOREOVER, THE DISCUSSION FOCUSES
ON UNITHOLDERS WHO ARE INDIVIDUAL CITIZENS OR RESIDENTS OF THE UNITED STATES WHO
ARE NOT SUBJECT TO SPECIAL CIRCUMSTANCES PERSONAL TO THE UNITHOLDER AND HAS ONLY
LIMITED APPLICATION TO CORPORATIONS, ESTATES, TRUSTS, NON-RESIDENT ALIENS OR
OTHER UNITHOLDERS SUBJECT TO SPECIALIZED TAX TREATMENT, INCLUDING 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 STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP OR DISPOSITION OF COMMON UNITS
AND IN DETERMINING WHETHER OR NOT SUCH UNITHOLDER IS SUBJECT TO SPECIAL
CIRCUMSTANCES OR SPECIALIZED TAX TREATMENT WHICH COULD AFFECT THE FEDERAL INCOME
TAX TREATMENT OF SUCH UNITHOLDER.
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 the TC PipeLines intermediate partnership will each be
treated as a partnership, and
(2) owners of common units, with specified exceptions, as described in
"--Limited Partner Status" below, will be treated as partners of TC
PipeLines but not the TC PipeLines intermediate partnership.
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
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Unit Ownership--TREATMENT OF SHORT SALES"),
(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 TC PipeLines 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
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to the Northern Border Pipeline partnership agreement, which modification
would permit Northern Border Pipeline to engage in any activity other than
the 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 the 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 1% of Northern Border Pipeline's income in 1998
was not qualifying income and, that for 1999, less than 1% of TC PipeLines'
income will be nonqualifying income; however, these estimates could change from
time to time and may be affected by the activities of Northern Border Pipeline
Company. Based upon and subject to these estimates, the factual representations
and covenants 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
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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,
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 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 that 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 the 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
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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 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 that period that
will be less than 10% 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 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 some 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 that 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
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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
those 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 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, including 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 that 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
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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 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 particular 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 for any of the years through 2002, that loss will be allocated to the
general partner. If we have a net loss for any year after 2002, that loss will
generally be allocated among the general partner and the unitholders in
accordance with their particular percentage interests in us until the capital
account balances of the unitholders are reduced to zero, and thereafter any loss
will be allocated 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, gain, loss and deduction 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, 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.
Treasury 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
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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, loss or deduction with respect to those units
would not be reportable by the unitholder;
- 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, loss or deduction
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 for 1999 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") under 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 our 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
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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 this approach, we
intend to depreciate the portion of a Section 743(b) 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 the 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. This kind of 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 the units' share of the aggregate tax basis of our
assets immediately prior to the transfer. In that 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 specific 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 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
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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 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
that 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 those 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 that
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
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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 Unit Ownership--SECTION 754 ELECTION". To the extent that the 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 this type of 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 this kind of an aggregate
approach is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to some unitholders and risk the
loss of depreciation and amortization deductions not taken in the year that
these 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 the 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 our convention been
respected. In that case, the unitholder may have been entitled to additional
deductions against
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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 a contest by the IRS is unlikely
because a 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 those
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 Nasdaq National Market 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 that 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 specified 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 specified 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 those 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, that 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, that type of 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 share of income, gain, loss and deduction.
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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 those
accounting and reporting conventions are impermissible. Any 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 some 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 that 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, judicial 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 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 (including 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 those 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 that 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 that 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 that
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 that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our 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 the 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, including 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 initially 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. We may also own property or do business
in other states in the future.
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
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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". 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
additional considerations because the investments of these 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 the investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making the investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated
business taxable income by the 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 the 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 specified 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 the 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 the 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 Internal Revenue 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 some circumstances. Under 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 under
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some provisions of the federal securities laws,
(b) the entity is an "operating company"--i.e., it is primarily engaged
in 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 some interests held by the general partner, its
affiliates, and some other persons) is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to
ERISA, including 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 offered by this prospectus 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. Kenneth R. Blackman and Robert Cassanos, partners of Fried, Frank, Harris,
Shriver & Jacobson, are directors and officers of TCPL International
Investments, Inc., a wholly owned holding company subsidiary of TransCanada.
Specific legal matters in connection with the common units offered by this
prospectus will be 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 sheets of TC PipeLines, LP as of March 31, 1999 and December 31,
1998 have 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 TC PipeLines GP, Inc. as of March 31, 1999 and
December 31, 1998 have 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,
1998, 1997 and 1996, 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 March 31, 1999, the related unaudited statements of income and
cash flows for the three-month periods ended March 31, 1999 and 1998, and the
related unaudited statement of changes in partners' capital for the three-month
period ended March 31, 1999, included in this prospectus and in the registration
statement, Arthur Andersen LLP has reported that they have applied limited
procedures in
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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 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 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.
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 this 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. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms.
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 maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or obtained 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. These statements can be identified by the use of forward-looking
terminology including "may," "believe," "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.
These forward-looking statements involve risks and uncertainties. When
considering these 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 could cause our actual results to
differ materially from those contained in any forward-looking statement.
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UNDERWRITING
TC PipeLines and the underwriters named below have entered into an
underwriting agreement with respect to the common units being offered. Subject
to specified 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........................................................ 14,300,000
-----------
-----------
</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
2,145,000 common units from TC PipeLines to cover the 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 table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by TC PipeLines. These
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. Securities dealers may resell any common units purchased from
the underwriters to various 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 public 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 some of its affiliates 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 on a parity with
U-1
<PAGE>
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 over-allotment option is exercised). See
"Units Available for Future Sale" for a discussion of 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 quoted on the Nasdaq National Market under the
symbol "TCLPZ".
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 some 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 the 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 Nasdaq
National Market, 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 of the underwriters 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 some of its affiliates have agreed to indemnify the
several underwriters against various liabilities, including liabilities under
the Securities Act.
Some 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
these services.
U-2
<PAGE>
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TC PipeLines, LP:
Pro Forma Balance Sheet--March 31, 1999.................................................................. F-2
Pro Forma Statements of Income--Three Months Ended March 31, 1999 and Year Ended December 31, 1998....... F-3
Notes to Pro Forma Financial Statements.................................................................. F-4
Report of Independent Chartered Accountants.............................................................. F-6
Balance Sheets--March 31, 1999 and December 31, 1998..................................................... F-7
Note to Balance Sheets................................................................................... F-7
Northern Border Pipeline Company:
Report of Independent Public Accountants dated April 14, 1999............................................ F-8
Balance Sheet--March 31, 1999 (unaudited)................................................................ F-9
Statements of Income--Three Months ended March 31, 1999 and 1998 (unaudited)............................. F-10
Statements of Cash Flows--Three Months ended March 31, 1999 and 1998 (unaudited)......................... F-11
Statement of Changes in Partners' Capital--Three Months ended March 31,1999 (unaudited).................. F-12
Selected Notes to Financial Statements................................................................... F-13
Report of Independent Public Accountants dated January 19, 1999.......................................... F-14
Balance Sheets--December 31, 1998 and 1997............................................................... F-15
Statements of Income--Years Ended December 31, 1998 and 1997............................................. F-16
Statements of Cash Flows--Years Ended December 31, 1998 and 1997......................................... F-17
Statements of Changes in Partners' Capital--Years Ended December 31, 1998 and 1997....................... F-18
Notes to Financial Statements............................................................................ F-19
Report of Independent Public Accountants dated January 26, 1998.......................................... F-26
Balance Sheets--December 31, 1997 and 1996............................................................... F-27
Statements of Income--Years Ended December 31, 1997 and 1996............................................. F-28
Statements of Cash Flows--Years Ended December 31, 1997 and 1996......................................... F-29
Statements of Changes in Partners' Capital--Years Ended December 31, 1997 and 1996....................... F-30
Notes to Financial Statements............................................................................ F-31
TC PipeLines GP, Inc. (General Partner):
Report of Independent Chartered Accountants.............................................................. F-38
Balance Sheets--March 31, 1999 and December 31, 1998..................................................... F-39
Note to Balance Sheets................................................................................... F-39
</TABLE>
F-1
<PAGE>
TC PIPELINES, LP
PRO FORMA BALANCE SHEET
MARCH 31, 1999
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TC PIPELINES, LP ADJUSTMENTS TC PIPELINES, LP
---------------- ----------- ----------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Investment in TC PipeLines Intermediate Limited
Partnership......................................................... 1 -- 1
284,466(d)
(284,466)(e)
Investment in Northern Border Pipeline................................ -- 250,721(b) 250,721
--- ----------- --------
1 250,721 250,722
--- ----------- --------
--- ----------- --------
PARTNERS' CAPITAL
General Partner....................................................... 1 5,014(b) 5,015
Common Units.......................................................... -- 200,828(b) 200,828
284,466(d)
(284,466)(e)
Subordinated Units.................................................... -- 44,879(b) 44,879
--- ----------- --------
1 250,721 250,722
--- ----------- --------
--- ----------- --------
</TABLE>
The accompanying notes to the pro forma financial statements are an
integral part of this statement.
F-2
<PAGE>
TC PIPELINES, LP
PRO FORMA STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 YEAR ENDED DECEMBER 31, 1998
----------------------------------------------- -----------------------------------------------
PRO FORMA PRO FORMA TC PRO FORMA PRO FORMA TC
TC PIPELINES, LP ADJUSTMENTS PIPELINES, LP TC PIPELINES, LP ADJUSTMENTS PIPELINES, LP
---------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income from
Investment in Northern
Border Pipeline......... -- 9,094(f) 9,094 -- 30,069(f) 30,069
General and Administrative
Expenses................ -- (300) (g) (300) -- (1,200)(g) (1,200)
---------------- ----------- ------- ---------------- ----------- --------------
Net Income to Partners.... -- 8,794 8,794 -- 28,869 28,869
---------------- ----------- ------- ---------------- ----------- --------------
---------------- ----------- ------- ---------------- ----------- --------------
Net Income Per Unit....... $ 0.49(h) $ 1.62(h)
------- --------------
------- --------------
</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
MARCH 31, 1999 AND DECEMBER 31, 1998
(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%), TransCanada Border PipeLine Ltd. (6%) and TransCan
Northern Ltd. (24%).
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma financial statements of TC PipeLines, LP have been prepared as
if the transactions (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 March 31, 1999 in
the case of the pro forma balance sheet and as of January 1,1998, in the case of
the pro forma statements of income for the year ended December 31, 1998 and the
three months ended March 31, 1999. The financial statements are based on
currently available information and certain estimates and assumptions, and
therefore the actual financial results will differ from the pro forma financial
results. 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 and unaudited
financial statements and notes thereto of TC PipeLines, LP and Northern Border
Pipeline.
The significant assumptions are as follows:
(a) TransCanada Border PipeLine Ltd. and TransCan Northern 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.
(b) The Partnership is in a position to exercise significant influence over
Northern Border Pipeline therefore the investment is accounted for using
the equity method of accounting. The pro forma investment balance as of
March 31, 1999 represents the combined carrying values of the investment
in Northern Border Pipeline as reflected in the financial records of
TransCanada Border PipeLine Ltd. and TransCan Northern Ltd. as of that
date. The
F-4
<PAGE>
TC PIPELINES, LP
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
balance also equates to 30% of the net assets of Northern Border Pipeline
as of March 31, 1999.
As contemplated in the offering, the investment in Northern Border
Pipeline is conveyed to the Partnership in exchange for 14,300,000 common
units (which will not be outstanding after the Transactions), 3,200,000
subordinated units, a 2% combined general partnership interest in the
Partnership and the right to receive incentive distributions.
Total Partners' Capital is allocated based on partnership interest after
the Transactions, with 80.1% (represented by 14,300,000 common units) to
the common units, 17.9% (represented by 3,200,000 subordinated units) to
the subordinated units and 2% (represented by a 2% general partner
interest with a unit equivalency of 357,143 units) to the General
Partner.
The subordinated units generally receive quarterly cash distributions
only when the common units have received a minimum quarterly distribution
of $0.45 per unit for each quarter since commencement of operations.
Subordinated units will convert into common units on a one-for-one basis
when the subordination period ends. The subordination period will end
when TC PipeLines, LP meets financial tests specified in the partnership
agreement but generally cannot end before June 30, 2004 (with the
possibility of early conversion of some subordinated units in 2002 and
2003).
(c) The underwriters' over-allotment option is not exercised.
(d) Net proceeds to the Partnership from the sale of common units are
expected to be approximately $284 million, after deducting underwriting
discounts and commissions and expenses of the offering totaling
approximately $23 million.
(e) As outlined in the prospectus, the net proceeds will be used to redeem
all of the common units issued to TransCanada Border PipeLine Ltd. and
TransCan Northern Ltd.
(f) Pro forma equity income represents 30% of the net income of Northern
Border Pipeline.
(g) 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>
(h) 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 14,300,000
common units and 3,200,000 subordinated units are outstanding at all
times during the periods presented.
F-5
<PAGE>
TC PIPELINES, LP
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- --------------
<S> <C> <C>
ASSETS
Cash................................................................................ $ 10 $ 10
Investment in TC PipeLines Intermediate Limited Partnership......................... 990 990
----------- -------
$ 1,000 $ 1,000
----------- -------
----------- -------
PARTNERS' CAPITAL..................................................................... $ 1,000 $ 1,000
----------- -------
----------- -------
</TABLE>
NOTE TO BALANCE SHEETS
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 14,300,000 common units, representing
limited partner interests in the Partnership, pursuant to a public offering and
to concurrently issue 3,200,000 subordinated units, representing additional
limited partner interests in the Partnership, to TC PipeLines GP, Inc., the
partnership's general partner, as well as an aggregate 2% general partner
interest in the Partnership and the Intermediate Partnership, on a combined
basis.
TC PipeLines GP, Inc. 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 March 31, 1999.
F-7
<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 March 31, 1999, the related statements of
income and cash flows for the three-month periods ended March 31, 1999 and 1998,
and the related statement of changes in partners' capital for the three-month
period ended March 31, 1999. 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
April 14, 1999
F-8
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1999
------------
<S> <C>
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service........................................................................................ 2,341,857
Construction work in progress..................................................................... 2,099
------------
Total property, plant and equipment............................................................. 2,343,956
Less: Accumulated provision for depreciation and amortization..................................... 601,439
------------
Net property, plant and equipment............................................................... 1,742,517
------------
CURRENT ASSETS
Cash and cash equivalents......................................................................... 44,397
Accounts receivable............................................................................... 27,064
Materials and supplies, at cost................................................................... 2,909
Under recovered cost of service................................................................... --
------------
Total current assets............................................................................ 74,370
------------
DEFERRED CHARGES.................................................................................... 13,613
------------
1,830,500
------------
------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................................... 835,738
------------
LONG-TERM DEBT...................................................................................... 927,000
------------
CURRENT LIABILITIES
Accounts payable.................................................................................. 27,860
Accrued taxes other than income................................................................... 22,045
Accrued interest.................................................................................. 7,530
Over recovered cost of service.................................................................... 509
------------
Total current liabilities....................................................................... 57,944
------------
RESERVES AND DEFERRED CREDITS....................................................................... 9,818
------------
1,830,500
------------
------------
</TABLE>
The accompanying report of independent public accountants and
the selected notes to financial statements should be read
in conjunction with this statement.
F-9
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING REVENUES........................................................................... 73,635 47,504
--------- ---------
OPERATING EXPENSES
Operations and maintenance................................................................. 9,102 7,127
Depreciation and amortization.............................................................. 12,785 9,782
Taxes other than income.................................................................... 7,477 6,009
Regulatory credit.......................................................................... -- (353)
--------- ---------
Operating expenses....................................................................... 29,364 22,565
--------- ---------
OPERATING INCOME............................................................................. 44,271 24,939
--------- ---------
INTEREST EXPENSE
Interest expense........................................................................... 14,413 9,137
Interest expense capitalized............................................................... (14) (2,726)
--------- ---------
Interest expense, net.................................................................... 14,399 6,411
--------- ---------
OTHER INCOME
Allowance for equity funds used during construction........................................ 16 1,625
Other income, net.......................................................................... 427 109
--------- ---------
Other income............................................................................. 443 1,734
--------- ---------
NET INCOME................................................................................... 30,315 20,262
--------- ---------
--------- ---------
</TABLE>
The accompanying report of independent public accountants and
the selected notes to financial statements should be read
in conjunction with these statements.
F-10
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ 30,315 20,262
--------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 12,788 9,785
Amortization of debt expense.......................................................... 91 91
Allowance for equity funds used during construction................................... (16) (1,625)
Regulatory credit..................................................................... -- (355)
Other reserves and deferred credits................................................... -- 15
Changes in components of working capital.............................................. (5,894) 141
--------- ----------
Total adjustments................................................................... 6,969 8,052
--------- ----------
Net cash provided by operating activities........................................... 37,284 28,314
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net..................................... (57,261) (103,836)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners............................................................. -- 70,000
Distributions to Partners............................................................... (38,015) (9,509)
Issuance of long-term debt.............................................................. 65,000 10,000
--------- ----------
Net cash provided by financing activities............................................. 26,985 70,491
--------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................................... 7,008 (5,031)
Cash and cash equivalents--beginning of period............................................ 37,389 19,986
--------- ----------
Cash and cash equivalents--end of period.................................................. 44,397 14,955
--------- ----------
--------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).................................................... 18,540 11,542
--------- ----------
--------- ----------
Changes in components of working capital:
Accounts receivable..................................................................... (8,160) 1,401
Materials and supplies.................................................................. 451 190
Accounts payable........................................................................ 541 (109)
Accrued taxes other than income......................................................... 2,217 1,626
Accrued interest........................................................................ (4,233) (5,222)
Over/under recovered cost of service.................................................... 3,290 2,255
--------- ----------
Total................................................................................. (5,894) 141
--------- ----------
--------- ----------
</TABLE>
The accompanying report of independent public accountants and
the selected notes to financial statements should be read
in conjunction with these statements.
F-11
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
NORTHER
BORDER
TRANSCANADA TRANSCAN INTERMEDIATE
BORDER NORTHERN LIMITED
PIPELINE LTD. LTD. PARTNERSHIP TOTAL
------------- ----------- ------------ ---------
Balance,
December 31, 1998......................................... 50,606 202,425 590,407 843,438
Net income.................................................. 1,819 7,275 21,221 30,315
Distributions............................................... (2,281) (9,123) (26,611) (38,015)
------------- ----------- ------------ ---------
Balance,
March 31, 1999............................................ 50,144 200,577 585,017 835,738
------------- ----------- ------------ ---------
------------- ----------- ------------ ---------
</TABLE>
The accompanying report of independent public accountants and
the selected notes to financial statements should be read
in conjunction with this statement.
F-12
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
SELECTED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
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, 1998, 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 responsibilities 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 amount was $303.9 million as of March 31, 1999
and is primarily related to accelerated depreciation and other plant-related
differences.
3. Accounts payable shown on the accompanying balance sheet includes
approximately $20.7 million at March 31, 1999 of project costs incurred but
not paid on Northern Border Pipeline's expansion and extension of its
pipeline system that was placed into service in late December 1998. These
costs are recorded in natural gas transmission plant in service on the
accompanying balance sheet and are excluded from the change in accounts
payable and expenditures for property, plant and equipment, net on the
accompanying statements of cash flows.
4. In October 1998, Northern Border Pipeline filed a certificate application
with the FERC to seek approval to expand and extend its pipeline system into
Indiana by November 2000 (Project 2000). If approved and constructed,
Project 2000 would afford shippers on the extended pipeline system access to
industrial gas consumers in northern Indiana. As a result of permanent
releases of capacity between several existing and project shippers
originally included in the October 1998 application, Northern Border
Pipeline amended its application with the FERC in March 1999. Project 2000
revised capital expenditures are estimated to be approximately $126 million
and, with timely regulatory approvals, construction activities are expected
to begin in late 1999.
Numerous parties have filed to intervene in this proceeding. Several parties
have protested this application asking that the FERC deny Northern Border
Pipeline's request for rolled-in rate treatment for the new facilities and
that Northern Border Pipeline be required to solicit indications of interest
from existing shippers for capacity releases that would possibly eliminate
the construction of certain new facilities.
F-13
<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, 1998 and 1997, 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, 1998 and 1997, 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 19, 1999
F-14
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................... 2,302,457 1,497,743
Construction work in progress................................................... 1,530 211,378
-------------- --------------
Total property, plant and equipment........................................... 2,303,987 1,709,121
Less: Accumulated provision for depreciation and amortization................... 589,464 608,231
-------------- --------------
Net property, plant and equipment............................................... 1,714,523 1,100,890
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents....................................................... 37,389 19,986
Receivables..................................................................... 18,904 17,337
Materials and supplies, at cost................................................. 3,360 3,677
Under recovered cost of service................................................. 2,781 --
-------------- --------------
Total current assets.......................................................... 62,434 41,000
-------------- --------------
DEFERRED CHARGES.................................................................. 13,932 5,230
-------------- --------------
1,790,889 1,147,120
-------------- --------------
-------------- --------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................. 843,438 581,412
-------------- --------------
LONG-TERM DEBT.................................................................... 862,000 459,000
-------------- --------------
CURRENT LIABILITIES
Accounts payable................................................................ 44,042 61,618
Accrued taxes other than income................................................. 19,828 20,294
Accrued interest................................................................ 11,763 10,367
Over recovered cost of service.................................................. -- 4,601
-------------- --------------
Total current liabilities..................................................... 75,633 96,880
-------------- --------------
RESERVES AND DEFERRED CREDITS..................................................... 9,818 9,828
-------------- --------------
1,790,889 1,147,120
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-15
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
OPERATING REVENUES
Operating revenues....................................................................... 196,600 226,019
Provision for rate refunds............................................................... -- (39,969)
--------- ---------
Operating revenue, net................................................................. 196,600 186,050
--------- ---------
OPERATING EXPENSES
Operations and maintenance............................................................... 29,447 28,522
Depreciation and amortization............................................................ 40,989 38,708
Taxes other than income.................................................................. 21,381 22,393
Regulatory credit........................................................................ (8,878) --
--------- ---------
Operating expenses..................................................................... 82,939 89,623
--------- ---------
OPERATING INCOME........................................................................... 113,661 96,427
--------- ---------
INTEREST EXPENSE
Interest expense......................................................................... 44,542 33,020
Interest expense capitalized............................................................. (19,001) (3,660)
--------- ---------
Interest expense, net.................................................................. 25,541 29,360
--------- ---------
OTHER INCOME
Allowance for equity funds used during construction...................................... 10,237 1,400
Other income, net........................................................................ 1,874 4,305
--------- ---------
Other income........................................................................... 12,111 5,705
--------- ---------
NET INCOME................................................................................. 100,231 72,772
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-16
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................................. 100,231 72,772
---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................................ 41,005 38,715
Amortization of debt expense......................................................... 364 296
Allowance for equity funds used during construction.................................. (10,237) (1,400)
Regulatory credit.................................................................... (9,105) --
Provision for rate refunds........................................................... -- 40,403
Rate refunds paid.................................................................... -- (52,630)
Other reserves and deferred credits.................................................. (10) 783
Changes in current assets and liabilities:
Receivables........................................................................ (1,567) 1,927
Materials and supplies............................................................. 317 170
Accounts payable................................................................... (10,769) 14,587
Accrued taxes other than income.................................................... (466) (674)
Accrued interest................................................................... 1,396 14
Over/under recovered cost of service............................................... (7,382) 365
---------- ----------
Total adjustments................................................................ 3,546 42,556
---------- ----------
Net cash provided by operating activities........................................ 103,777 115,328
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net.................................... (651,169) (152,070)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners............................................................ 223,000 81,000
Distributions to Partners.............................................................. (61,205) (99,322)
Issuance of long-term debt............................................................. 403,000 209,000
Retirement of long-term debt........................................................... -- (127,500)
Repayment of note payable.............................................................. -- (10,000)
Long-term debt issuance costs.......................................................... -- (744)
---------- ----------
Net cash provided by financing activities............................................ 564,795 52,434
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................................. 17,403 15,692
Cash and cash equivalents--beginning of period........................................... 19,986 4,294
---------- ----------
Cash and cash equivalents--end of period................................................. 37,389 19,986
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-17
<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, 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
Net income.............................................. 6,014 24,055 70,162 100,231
Contributions........................................... 13,380 53,520 156,100 223,000
Distributions........................................... (3,673) (14,689) (42,843) (61,205)
------------- ------------- ------------ ---------
Balance, December 31, 1998.............................. 50,606 202,425 590,407 843,438
------------- ------------- ------------ ---------
------------- ------------- ------------ ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-18
<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, 1998 and 1997, which are used to allocate net
income and distributions, 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>
Northern Border Pipeline owns a 1,214-mile natural gas transmission pipeline
system extending from the United States-Canadian border near Port of Morgan,
Montana, to a terminus near Manhattan, Illinois.
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 (Pan Border), a wholly-owned subsidiary of Northern Plains,
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. In December 1998, Northern Plains
acquired Pan Border from a subsidiary of Duke Energy Corporation. At the
closing, Pan Border's sole asset consisted of its general partner interest in
the Partnership. 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. Additionally, an Enron
affiliate was responsible for project management on Northern Border Pipeline's
expansion and extension of its pipeline from near Harper, Iowa to a point near
Manhattan, Illinois (The Chicago Project) (see Note 5).
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-19
<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 at December 31, 1997, of project-to-date costs on The Chicago
Project. In December 1998, Northern Border Pipeline placed into service the
facilities for The Chicago Project. At December 31, 1998 and 1997, approximately
$37.4 million and $44.2 million, respectively, of project costs incurred but not
paid for The Chicago Project were recorded in accounts payable and natural gas
transmission plant 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. The effective
depreciation rate applied to Northern Border Pipeline's gross transmission plant
in both 1998 and 1997 was 2.5% (see Note 5). At the time The Chicago Project was
placed into service, Northern Border Pipeline's depreciation rate was reduced to
2.0%. Beginning in the year 2000, the depreciation rate is scheduled to increase
gradually on an annual basis until it reaches 3.2% in 2002. 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 approximately $300 million at both December 31, 1998 and 1997,
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 actual cost of service determined for that period in accordance with the
FERC tariff to the estimated billing is accumulated, including carrying charges
thereon and is either billed to or credited back to the shippers. Revenues
reflect actual cost of service. An amount equal to differences between billing
estimates and the actual cost of service, including carrying charges, is
reflected in current assets or current liabilities.
F-20
<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. 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. Additionally, Northern
Border Pipeline has entered into interest rate forward agreements to hedge the
interest rate on a planned issuance of fixed rate debt. Northern Border Pipeline
does not use these instruments for trading purposes. The cost or benefit of the
interest rate swap agreements is recognized currently as a component of interest
expense. No cost or benefit is currently associated with the interest rate
forward agreements.
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 extend for various terms
with termination dates that range from October 2001 to December 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.
Northern Border Pipeline's largest shipper, Pan-Alberta Gas (U.S.) Inc.
(PAGUS), is presently obligated for approximately 26.5% of the cost of service
through three firm service agreements which expire in October 2003. FERC
approval is required for the extension of one of the firm service agreements,
relating to approximately 6.5% of the cost of service, beyond October 2001.
Financial guarantees exist through October 2001 for approximately 17.0% of the
total cost of service related
F-21
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS (CONTINUED)
to the contracted capacity of PAGUS, including 10.5% guaranteed by Northern
Natural Gas Company, a wholly-owned subsidiary of Enron. 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. Operating revenues from the PAGUS firm service
agreements and interruptible service contracts for the years ended December 31,
1998 and 1997 were $87.3 million and $86.8 million, respectively.
Shippers affiliated with the Partners of Northern Border Pipeline have firm
service agreements representing approximately 16.9% of the cost of service.
These firm service agreements extend for various terms with termination dates
that range from October 2003 to May 2009. Operating revenues from the affiliated
firm service agreements and interruptible service contracts for the years ended
December 31, 1998 and 1997 were $22.4 million and $20.2 million, respectively.
4. CREDIT FACILITIES AND LONG-TERM DEBT
Detailed information on long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Senior notes -- average 8.43%, due from 2000 to 2003.................................... 250,000 250,000
Pipeline Credit Agreement
Five-year revolving credit facility................................................... 127,500 127,500
Three-year revolving credit facility.................................................. 484,500 81,500
--------- ---------
Total................................................................................... 862,000 459,000
--------- ---------
--------- ---------
</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 certain 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 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, 1998 and 1997, 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 one year as
of December 31, 1998, 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, 1998 and 1997, 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 6.17% and
7.09% at December 31, 1998 and 1997, respectively.
F-22
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
During September 1998, Northern Border Pipeline executed interest rate
forward agreements with an aggregate notional amount of $150 million to hedge
the interest rate for a planned issuance of fixed rate debt during 1999. The
average reference interest rate on the agreements, based on ten-year U.S.
Treasury Notes, is 4.90%.
Interest paid, net of amounts capitalized, during the years ended December
31, 1998 and 1997 was $23.8 million and $29.0 million, respectively.
Aggregate required repayments of long-term debt are as follows: $66 million,
$41 million, $690 million and $65 million for 2000, 2001, 2002 and 2003,
respectively. There are no required repayment obligations for 1999. The
aggregate required repayments reflect Northern Border Pipeline's intent and
ability to convert the three-year revolving credit facility to a term loan.
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, 1998 and 1997, respectively, $173 million and $81
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 $287 million and $276 million at December 31, 1998 and
1997, respectively. At both December 31, 1998 and 1997, 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. The estimated
fair value which would be payable to terminate the interest rate forward
agreements, taking into account current interest rates, was approximately $3
million at December 31, 1998. 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 October 1998, Northern Border Pipeline filed a certificate application
with the FERC to seek approval to expand and extend its pipeline system into
Indiana by November 2000 (Project 2000). 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 $130 million.
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 cost of
the linepack gas acquired in 1998, which is included in rate base, totaled
approximately $11.7 million.
F-23
<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 a
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. Under the terms of the
Stipulation, Northern Border Pipeline agreed to further reduce its depreciation
rate to 2.0% and agreed to implement a $31 million settlement adjustment
mechanism (SAM) when The Chicago Project was placed in service. The SAM
effectively reduces the allowed return on rate base.
Also as agreed to in the Stipulation, Northern Border Pipeline implemented a
capital project cost containment mechanism (PCCM). The purpose of the PCCM was
to limit Northern Border Pipeline's ability to include cost overruns on The
Chicago Project in rate base and to provide incentives to Northern Border
Pipeline for cost underruns. The PCCM amount is determined by comparing the
final cost of The Chicago Project to the budgeted cost. 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 project scope changes, as defined in the Stipulation. Such
adjusted budgeted cost of The Chicago Project has been estimated as of the in
service date to be $889 million, with the final construction cost estimated to
be $892 million. Thus, Northern Border Pipeline's report to the FERC and its
shippers in late December 1998, reflected the conclusion that, based on
information as of that date, there would be no adjustment to rate base as a
result of the PCCM. Northern Border Pipeline is obligated by the Stipulation to
update its calculation of the PCCM six months after the in service date of The
Chicago Project. The Stipulation requires the calculation of the PCCM to be
reviewed by an independent national accounting firm. Several parties to the
Stipulation have 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 in an appropriate proceeding in the future.
The parties also stated that if it is determined that Northern Border Pipeline
is not permitted to include certain claimed costs for The Chicago Project in its
rate base, they reserve their rights to seek refunds, with interest, of any
overcollections. Although Northern Border Pipeline believes the initial
computation has been made in accordance with 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 PCCM, a non-cash charge to write down transmission plant may
result and such charge could be material to the operating results of Northern
Border Pipeline.
During the construction of The Chicago Project, Northern Border Pipeline
placed certain new facilities into service in advance of the December 1998 in
service date to maintain gas flow at firm
F-24
<PAGE>
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
contracted capacity while existing facilities were being modified. As required
by the certificate of public convenience and necessity issued by the FERC,
Northern Border Pipeline recorded a regulatory credit of approximately $8.9
million in 1998, which is reflected on the statements of income. The regulatory
credit results in a deferral of the cost of service of these new facilities. The
regulatory asset that resulted from the cost of service deferral is included
with Deferred Charges on the balance sheets at December 31, 1998. Northern
Border Pipeline is allowed to recover the regulatory asset from its shippers
over a ten-year period commencing with the in service date of The Chicago
Project.
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 1999 are estimated to be $131 million. This
includes approximately $30 million for Project 2000 (see Note 5), approximately
$85 million for The Chicago Project and approximately $16 million for renewals
and replacements of the existing facilities. Approximately $37 million of the
capital expenditures for The Chicago Project is for construction completed in
1998. Funds required to meet the 1999 capital expenditures are anticipated to be
provided primarily from debt borrowings and internal sources.
F-25
<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-26
<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-27
<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
Interest expense......................................................................... 33,020 33,117
Interest expense capitalized............................................................. (3,660) (447)
--------- ---------
Interest expense, net.................................................................. 29,360 32,670
--------- ---------
--------- ---------
OTHER INCOME
Other income, net........................................................................ 4,305 2,517
Allowance for equity funds used during construction...................................... 1,400 396
--------- ---------
Other income........................................................................... 5,705 2,913
--------- ---------
NET INCOME................................................................................. 72,772 73,843
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of TC PipeLines GP, Inc.
We have audited the accompanying balance sheets of TC PipeLines GP, Inc. as
of March 31, 1999 and December 31, 1998. These financial statements are the
responsibility of the management of the company. Our responsibility is to
express an opinion on these financial statements 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 sheets referred to above presents fairly, in all
material respects, the financial position of TC PipeLines GP, Inc. as of March
31, 1999 and December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Calgary, Canada
April 29, 1999
F-38
<PAGE>
TC PIPELINES GP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- --------------
<S> <C> <C>
ASSETS
Cash................................................................................ $ 980 $ 980
Investment in TC PipeLines, LP...................................................... 10 10
Investment in TC PipeLines Intermediate Limited Partnership......................... 10 10
----------- -------
$ 1,000 $ 1,000
----------- -------
----------- -------
SHARE CAPITAL......................................................................... $ 1,000 $ 1,000
----------- -------
----------- -------
</TABLE>
NOTE TO BALANCE SHEETS
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 March 31, 1999.
F-39
<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................................................ 20
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................. 23
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........... 32
Section 5.8 Conversion of Subordinated Units....................................... 33
Section 5.9 Limited Preemptive Right............................................... 34
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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.................................................. 47
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
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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
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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
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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
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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 $0.5275 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on June 30,
1999, it means the product of $0.5275 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)(iv),
(v) and (vi) and 6.4(b)(ii), (iii) and (iv).
"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 $0.45 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on June 30,
1999, it means the product of $0.45 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) $20 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 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%,
(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 $0.6900 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on June 30,
1999, it means the product of $0.6900 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 holding Common Units or Subordinated Units,
the amount that bears the same ratio to such
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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 June 30, 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 all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at
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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).
"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.
"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
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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. Amounts drawn from a credit facility to enable the Partnership
to pay distributions to partners of the Partnership if there has been a
temporary interruption or delay in receipt of 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 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.
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.
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ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 LIMITATION OF LIABILITY.
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
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(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 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;
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(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 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.
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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 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 June 30, 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
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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.
(b) Subject to Section 4.6(c) below, on or after June 30, 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 June 30, 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 June
30, 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 June 30, 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).
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(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 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
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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 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; 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) 3,200,000 Subordinated Units, (C) 14,286 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 14,285,714 Common 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 and the
Intermediate 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 14,300,000, (ii) the
"OPTIONAL UNITS" as such term is used in the Underwriting Agreement in an
aggregate number up to 2,145,000 issuable upon exercise of the
Over-Allotment Option pursuant to Section 5.3(b), (iii) the 3,200,000
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.
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Section 5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES.
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 8,580,000 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.
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(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 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 one-third of the Subordinated Units Outstanding
immediately after the closing of the Over-Allotment Option (or the
expiration of the Over-Allotment Option unexercised) 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 June 30, 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 one-third of the Subordinated Units Outstanding
immediately after the closing of the Over-Allotment Option (or the
expiration of the Over-Allotment Option unexercised) 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 June 30, 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
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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;
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, Cumulative Common Unit Arrearage or Unrecovered
Capital) 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, Pro
Rata, 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,
Pro Rata; 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, 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) 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, 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 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) 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.
(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,
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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.
(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).
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(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.
(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
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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.
(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
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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 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.
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(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)
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
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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 June 30, 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, 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 First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 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 Second Target
Distribution over the First Target Distribution for such Quarter; and
(vi) 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 and the Second 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(a)(vi).
(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
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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, 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 First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 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 Second Target
Distribution over the First Target Distribution for such Quarter; and
(iv) 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 and the Second 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)(iv).
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, Common Unit Arrearages and Cumulative Common
Unit Arrearages shall be proportionately adjusted in the event of any
distribution, combination or subdivision (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 and Second Target
Distribution shall be adjusted proportionately downward to equal the product
obtained by multiplying the otherwise applicable Minimum Quarterly
Distribution, First Target Distribution and Second 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. These
adjustments will not apply to the quarter in which the distributions of
Available Cash that are deemed to be from Capital Surplus trigger these
adjustments.
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(b) The Minimum Quarterly Distribution, First Target Distribution and
Second 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)(iv), (v) and (vi), 6.4(b)(ii), (iii) and (iv) and
12.4 or (iii) be allocated items of income, gain, loss or deduction other than
as specified in this Article VI.
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Section 6.9 ENTITY-LEVEL TAXATION.
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 and Second Target Distribution 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 contracts, conveyances or
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 June 30, 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 June 30, 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
to be the
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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 12.2). 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.
A-77
<PAGE>
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
A-78
<PAGE>
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]
A-79
<PAGE>
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:
A-80
<PAGE>
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>
A-81
<PAGE>
[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, LP, 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 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 or its subsidiaries 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 treated as Capital Surplus until
a hypothetical holder of a common unit acquired in the offering has received
Available Cash equal to the initial public offering price for the unit and any
arrearages in the payment of the minimum quarterly distribution on the unit and,
thereafter, treated as distributed from Operating 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, its subsidiaries or Northern Border Pipeline;
(b) sales of equity interests by TC PipeLines its subsidiaries or Northern
Border Pipeline 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.
C-2
<PAGE>
OPERATING EXPENDITURES: All expenditures of TC PipeLines 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 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 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) $20 million plus all cash of TC PipeLines 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 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 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.
C-3
<PAGE>
Notwithstanding the information above, "Operating Surplus" for the quarter
in which the liquidation date occurs and any later quarter shall equal zero.
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 after June 30, 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 and subordinated 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 outstanding common and subordinated units 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. Amounts drawn from a credit facility to enable TC PipeLines to pay
distributions if there has been a temporary interruption or delay in the receipt
of 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>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1999 1998
----------------- --------------
<S> <C> <C>
(UNAUDITED)
(thousands of dollars)
Pro forma net income of TC PipeLines........................................... 8,794 28,869
Add: Pro forma distributions from Northern Border Pipeline..................... 11,404 18,362
Less: Pro forma equity income from investment.................................. (9,094) (30,069)
------- --------------
Pro forma Available Cash from Operating Surplus(a)(b)(c)(d).................... 11,104 17,162
------- --------------
------- --------------
</TABLE>
- --------------------------
(a) The pro forma adjustments in the unaudited pro forma financial statements
are based upon currently available information and various 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 but
Available Cash and Operating Surplus are defined in the TC PipeLines
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 an earlier period.
(b) For the year ended December 31, 1998, 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 year ended December 31, 1998 does not
include operating cash flows associated with the Chicago project, which was
placed in service on December 22, 1998.
(c) 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 the
related distribution on the combined 2% general partner interest will be
$32.1 million (approximately $25.7 million for the common units,
approximately $5.8 million for the subordinated units and approximately $0.6
million for the general partner interest). The pro forma amount of Available
Cash from Operating Surplus for 1998 would not have been sufficient to cover
the minimum quarterly distribution during 1998 on all of the common units
and the subordinated units and the related distribution on the general
partner interest by approximately $14.9 million. In December 1998, Northern
Border Pipeline changed its policy regarding the timing of cash
distributions to its partners as discussed at "Cash Available for
Distribution". This change in the timing of distributions to the partners of
Northern Border Pipeline resulted in a one-time shift in the payment of
distributable cash from the fourth quarter of 1998 to the first quarter of
1999. If this change in the timing of distributions had not occurred, then
TC PipeLines' pro forma Available Cash from Operating Surplus for 1998 would
have been approximately $26.3 million rather than approximately $17.2
million.
(d) The amount of Available Cash from Operating Surplus needed to distribute the
minimum quarterly distribution for one quarter on the common units and
subordinated units to be outstanding immediately after the offering and the
related distribution on the combined 2% general partner interest will be
$8.0 million (approximately $6.4 million for the common units, approximately
$1.4 million for the subordinated units and approximately $0.2 million for
the general partner interest). The amount of pro forma Available Cash from
Operating Surplus for the first quarter of 1999 corresponding to cash
generated by Northern Border Pipeline during the three months of October,
November and December 1998, rather than four months, is approximately $8.2
million and would have exceeded the amount of the minimum quarterly
distribution during the first quarter of 1999 on all of the common units and
the subordinated units and the related distribution on the general partner
interest by approximately $0.1 million.
D-1
<PAGE>
Inside Back Cover
[Map of TransCanada's North American Pipeline Interests]
<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................................... 17
The Transactions............................... 30
Use of Proceeds................................ 32
Pro Forma Capitalization....................... 33
Dilution....................................... 34
Cash Distribution Policy....................... 35
Cash Available for Distribution................ 44
Selected Pro Forma Financial Data of TC
PipeLines.................................... 47
Selected Historical Financial and Operating
Data of Northern Border Pipeline............. 48
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 49
Market Overview................................ 60
Business of TC PipeLines....................... 62
Business of Northern Border Pipeline........... 64
TransCanada PipeLines Limited.................. 73
Management..................................... 75
Security Ownership of Principal Beneficial
Owners and Management........................ 79
Conflicts of Interest and Fiduciary
Responsibilities............................. 81
Description of the Common Units................ 87
Description of the Subordinated Units.......... 89
The Partnership Agreement...................... 91
Units Eligible for Future Sale................. 103
Northern Border Pipeline Partnership
Agreement.................................... 105
Tax Considerations............................. 110
Investment in TC PipeLines by Employee Benefit
Plans........................................ 127
Validity of the Common Units................... 128
Experts........................................ 128
How to Obtain Other Information about TC
PipeLines.................................... 129
Forward-Looking Statements..................... 129
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>
------------------
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.
14,300,000 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
Nasdaq listing fee, the amounts set forth below are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................ $ 101,253
NASD filing fee................................................................ 30,500
Nasdaq listing fee............................................................. 95,000
Printing and engraving expenses................................................ 1,000,000
Legal fees and expenses........................................................ 1,300,000
Accounting fees and expenses................................................... 200,000
Transfer agent and registrar fees.............................................. 40,000
Miscellaneous.................................................................. 233,247
----------
TOTAL.................................................................. 3,000,000
</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 8 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.
Section 124 of the Canada Business Corporation Act ("CBCA") and Section 6 of
the TransCanada's By-law No. 1 provide for the indemnification of persons who
act at TransCanada's request as directors and officers of subsidiaries of
TransCanada. Under these provisions, TransCanada shall indemnify persons who act
at TransCanada's request as a director or officer of a subsidiary of TransCanada
(or a former director or officer) against all costs, charges and expenses,
including amounts paid to settle an action or satisfy a judgment, reasonably
incurred by such director or officer in respect of any civil, criminal or
administrative action or proceeding (other than in respect to an action by or on
behalf of TransCanada to procure a judgment in its favor) to which such director
or officer (or a former director or officer) is made a party by reason of his or
her position with TransCanada, if he or she fulfills the following two
conditions: (a) he or she acted honestly and in good faith with a view to the
best interests of TransCanada and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, he
or she had reasonable grounds for believing that his or her conduct was lawful.
In respect of an action by or on behalf of TransCanada to procure a judgment in
its favor, TransCanada, with the approval of a court, may indemnify a director
or officer of TransCanada (or a former director of officer) against all costs,
charges and expenses reasonably incurred by him or her in connection with such
action if he or she fulfills the conditions set out in clause (a) and (b) of the
previous sentence. Notwithstanding the foregoing, a director or officer of
TransCanada (or a former director or officer) is entitled to indemnification
from TransCanada in respect of all costs, charges and expenses reasonably
incurred by him or her in connection with the defense of any civil, criminal or
II-1
<PAGE>
administrative action or proceeding to which he or she is made party by reason
of his or per position with TransCanada if he or she was substantially
successful on the merits in his or her defense of the action or proceeding and
if he or she fulfills the conditions in clauses (a) and (b) of this paragraph.
TransCanada maintains directors' and officers' liability insurance with
policy limits of U.S.$150 million in the aggregate, subject to a deductible in
respect of corporate reimbursement of U.S.$250,000 for each loss. Generally,
under this insurance TransCanada is reimbursed for payments made under corporate
indemnity provisions on behalf of its directors and officers, and individual
directors and officers (or their heirs and legal representatives) are reimbursed
for losses arising during the performance of their duties for which they are not
indemnified by TransCanada. Major exclusions from coverage include claims
arising from illegal acts, those acts which result in personal profit, violation
of any fiduciary duty under the United States of America Employee Retirement
Income Security Act of 1974, pollution damage (except for resultant shareholder
actions) and claims brought by a director or officer against another director or
officer of TransCanada or by TransCanada against a director or officer except
for shareholder derivative actions.
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") 14,300,000 common units, 3,200,000 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.
*10.1-- Form of Amended and Restated Agreement of Limited Partnership of TC PipeLines
Intermediate Limited Partnership.
10.2-- Form of Contribution, Conveyance and Assumption Agreement among TC PipeLines, LP
and certain other parties.
**10.3-- Northern Border Pipeline Company General Partnership Agreement between Northern
Border Intermediate Limited Partnership, TransCanada Border PipeLine Ltd., and
TransCan Northern Ltd., effective March 9, 1978 as amended (Exhibit 3.2 to
Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158).
***10.3.1 Seventh Supplement Amending Northern Border Pipeline Company General Partnership
Agreement dated as of September 23, 1993.
**10.4-- Note Purchase Agreement between Northern Border Pipeline Company and the parties
listed therein, dated July 15, 1992 (Exhibit 10.6 to Northern Border Partners
L.P. Form S-1 Registration Statement No. 33-66158).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
**10.5-- 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).
**10.6-- Form of Credit Agreement among Northern Border Pipeline Company, The First
National Bank of Chicago, as Administrative Agent, The First National Bank of
Chicago, Royal Bank of Canada, and Bank of America National Trust and Savings
Association, as Syndication Agents, First Chicago Capital Markets, Inc., Royal
Bank of Canada, and BancAmerica Securities, Inc. as Joint Arrangers and Lenders
(as defined therein) dated as of June 16, 1997 (Exhibit 10(c) to Northern Border
Partners L.P. Form S-3 Registration Statement No. 33-40601).
**10.7-- Operating Agreement between Northern Border Pipeline Company and Northern Plains
Natural Gas Company, dated February 28, 1980. (Exhibit 10.3 to Northern Border
Partners L.P. Form S-1 Registration Statement No. 33-66158).
**10.8 Guaranty made by Panhandle Eastern Pipeline Company, dated October 31, 1992
(Exhibit 10.9 to Northern Border Partners L.P. Form S-1 Registration Statement
No. 33-66158).
**10.9 Northern Border Pipeline Company U.S. Shippers Service Agreement between
Northern Border Pipeline Company and Enron Gas Marketing, Inc., dated June 22,
1990 (Exhibit 10.10 to Northern Border Partners L.P. Form S-1 Registration
Statement No. 33-66158).
**10.10 Amended Exhibit A to Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and Enron Gas Marketing, Inc.
(Exhibit 10.10.1 to Northern Border Partners L.P. 1993 Form 10-K SEC File No.
1-12202).
**10.10.1 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).
**10.10.2 Amended Exhibit A 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).
**10.10.3 Amended Exhibit A to Northern Border Pipeline Company U.S. Shipper Service
Agreement effective April1, 1998. (Exhibit 10.10.4 to Northern Border Partners
L.P. 1995 Form 10-K SEC File No. 1-12202).
**10.11 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. 1-12202).
**10.11.1 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. 1-12202).
**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 PipeLines 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. 1-12202).
**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. 1-12202).
**10.14 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. 1-12202).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
**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 10.22 to Northern Border Partners L.P. 1997 Form 10-K
SEC File No. 1-12202).
**10.16 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. 1-12202).
**10.17 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. 1-12202).
**10.18 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. 1-12202).
**10.19 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. 1-12202).
**10.20 Agreement among Northern Plains Natural Gas Company, Pan Border Gas Company,
Northwest Border Pipeline Company, TransCanada Border PipeLine Ltd., TransCan
Northern Ltd., Northern Border Intermediate Limited Partnership, Northern Border
Partners, L.P., and the Management Committee of Northern Border Pipeline, dated
as of March 17, 1999 (Exhibit 10.21 to Northern Border Partners L.P. 1988 Form
10-K SEC File No. 1-12202).
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)
***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
II-4
<PAGE>
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 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 May 3, 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>
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 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 and Director
-------------------------- (principal executive May 3, 1999
John W. Carruthers officer)
Chief Financial Officer
* and Director
-------------------------- (principal financial and May 3, 1999
Russell K. Girling accounting officer)
*
-------------------------- Director May 3, 1999
Ronald J. Turner
*
-------------------------- Director May 3, 1999
Bruce W. Simpson
</TABLE>
*By: /S/ JOHN W. CARRUTHERS
------------------------------
John W. Carruthers,
as Attorney-in-Fact
May 3, 1999
II-7
<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 Amended and Restated Agreement of Limited Partnership of TC PipeLines
Intermediate Limited Partnership......................................................
10.2-- Form of Contribution, Conveyance and Assumption Agreement among TC PipeLines, LP and
certain other parties.................................................................
**10.3-- Northern Border Pipeline Company General Partnership Agreement between Northern Border
Intermediate Limited Partnership, TransCanada Border PipeLine Ltd., and TransCan
Northern Ltd., effective March 9, 1978 as amended (Exhibit 3.2 to Northern Border
Partners L.P. Form S-1 Registration Statement No. 33-66158)...........................
***10.3.1 Seventh Supplement Amending Northern Border Pipeline Company General Partnership
Agreement dated as of September 23, 1993..............................................
**10.4-- Note Purchase Agreement between Northern Border Pipeline Company and the parties listed
therein, dated July 15, 1992 (Exhibit 10.6 to Northern Border Partners L.P. Form S-1
Registration Statement No. 33-66158)..................................................
**10.5-- 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).............................................................................
**10.6-- 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)...............................................................
**10.7-- Operating Agreement between Northern Border Pipeline Company and Northern Plains Natural
Gas Company, dated February 28, 1980. (Exhibit 10.3 to Northern Border Partners L.P.
Form S-1 Registration Statement No. 33-66158).........................................
**10.8 Guaranty made by Panhandle Eastern Pipeline Company, dated October 31, 1992 (Exhibit
10.9 to Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158)...
**10.9 Northern Border Pipeline Company U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Gas Marketing, Inc., dated June 22, 1990 (Exhibit 10.10 to
Northern Border Partners L.P. Form S-1 Registration Statement No. 33-66158)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**10.10 Amended Exhibit A to Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Gas Marketing, Inc. (Exhibit
10.10.1 to Northern Border Partners L.P. 1993 Form 10-K SEC File No. 1-12202).........
**10.10.1 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.
1-12202)..............................................................................
**10.10.2 Amended Exhibit A 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. 1-12202)....................................
**10.4 Amended Exhibit A to Northern Border Pipeline Company U.S. Shipper Service Agreement
effective April 1, 1998. (Exhibit 10.10.4 to Northern Border Partners L.P. 1995 Form
10-K SEC File No. 1-12202)............................................................
**10.11 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. 1-12202)....................
**10.11.1 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. 1-12202)....................
**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 PipeLines
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. 1-12202)............................................................
**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. 1-12202)....................................
**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.
1-12202)..............................................................................
**10.14 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)............................................................................
**10.15 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 10.22 to Northern Border Partners L.P. 1997 Form 10-K SEC File No.
1-12202)..............................................................................
</TABLE>
<PAGE>
<TABLE>
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EXHIBIT NO. DESCRIPTION PAGE
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**10.16 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. 1-12202)..................................................
**10.17 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.
1-12202)..............................................................................
**10.18 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. 1-12202).......................................................
**10.19 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. 1-12202).......................................................
***10.20 Agreement among Northern Plains Natural Gas Company, Pan Border Gas Company, Northwest
Border Pipeline Company, TransCanada Border PipeLine Ltd., TransCan Northern Ltd.,
Northern Border Intermediate Limited Partnership, Northern Border Partners, L.P., and
the Management Committee of Northern Border Pipeline, dated as of March 17, 1999
(Exhibit 10.21 to Northern Border Partners L.P. 1998 Form 10-K SEC File No.
1-12202...............................................................................
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.................................................................
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* To be filed by amendment.
** Indicates exhibits incorporated by reference.
*** Previously filed.
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Exhibit 1.1
TC PIPELINES, LP
________ COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
UNDERWRITING AGREEMENT
_________, 1999
Goldman, Sachs & Co.
Salomon Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
TC PipeLines, LP, a Delaware limited partnership (the "Partnership"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of ........ common units representing limited partner interests in the
Partnership ("Common Units") and, at the election of the Underwriters, up to . .
. . . . additional Common Units. The aggregate of . . . . Common Units is herein
called the "Firm Units" and the aggregate of . . . . . additional Common Units
is herein called the "Optional Units." The Firm Units and the Optional Units
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Units."
It is understood and agreed to by all parties that the Partnership was
formed to acquire a 30% general partner interest in Northern Border Pipeline
Company, a Texas general partnership ("Northern Border Pipeline"). At the First
Time of Delivery (as defined herein), the Partnership will own its interest in
Northern Border Pipeline through its subsidiary, TC PipeLines Intermediate
Limited Partnership, a Delaware limited partnership (the "Intermediate
Partnership"). TC PipeLines GP, Inc., a Delaware corporation, serves as the
general partner of the Partnership and the Intermediate Partnership (the
"General Partner"). The General Partner is a wholly-owned indirect subsidiary of
TransCanada PipeLines Limited, a Canadian corporation ("TransCanada"). The
Partnership, the Intermediate Partnership, the General Partner, TransCan
Northern Ltd., a Delaware corporation and wholly-owned direct subsidiary of
TransCanada ("TransCan Northern") and TransCanada Border PipeLine, Ltd., a
Nevada corporation and wholly-owned indirect subsidiary of TransCanada
("TransCanada Border PipeLine") are hereinafter referred to collectively as the
"TC Entities." The Partnership, the Intermediate Partnership and the General
Partner are hereinafter referred to collectively as the "Partnership Entities."
1. a. The TC Entities, jointly and severally, represent and
warrant to, and agree with, each of the Underwriters that:
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i. A registration statement on Form S-1 (File No.
333-69947) (the "Initial Registration Statement") in respect
of the Units has been filed with the Securities and Exchange
Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than
a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Act"), which became effective upon filing, no
other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; and
no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto
or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated
or threatened by the Commission (any preliminary prospectus
included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter
called a "Preliminary Prospectus"); the various parts of the
Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto
and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the
Initial Registration Statement became effective or such part
of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, are hereinafter collectively
called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b)
under the Act, is hereinafter called the "Prospectus;"
ii. No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and
each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that this representation and
warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished
in writing to the Partnership by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
iii. The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all
material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto, and as of
the applicable filing date as to the Prospectus and any
amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading; PROVIDED, HOWEVER, that this
representation and warranty shall not apply to any statements
or omissions made in reliance upon and in conformity with
information furnished in writing to the Partnership by an
Underwriter through Goldman, Sachs & Co. expressly for use
therein;
iv. None of the Partnership Entities has sustained
since the date of the latest audited financial statements
included in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has not been any change in the
capitalization or long-term debt of any of the Partnership
Entities or any material adverse change, or any
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development involving a prospective material adverse change,
in or affecting the general affairs, management, financial
position, partners' capital, stockholders' equity or results
of operations of the Partnership Entities, taken as a whole,
otherwise than as set forth or contemplated in the Prospectus;
v. None of the Partnership Entities owns in fee
simple or under lease any real property or buildings; at such
Time of Delivery, the Partnership Entities will have good and
marketable title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of
such property by the Partnership Entities;
vi. Each of the Partnership and the Intermediate
Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the laws of the
State of Delaware, with power and authority (partnership and
other) to own its properties and conduct its business as
described in the Prospectus, and has been duly qualified as a
foreign limited partnership for the transaction of business
and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification except where
the failure to be so qualified (A) would not subject the
Partnership or the Intermediate Partnership to material
liability or disability or (B) would not subject the limited
partners of the Partnership to any liability or disability;
vii. The General Partner has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with power and
authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has
been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification except where the failure to be so qualified (A)
would not subject the General Partner to material liability or
disability or (B) would not subject the limited partners of
the Partnership to any liability or disability; and, other
than its partnership interests in the Partnership and the
Intermediate Partnership, the General Partner does not own,
and at such Time of Delivery, will not own, directly or
indirectly, any equity or long-term debt securities of any
corporation or have an equity interest in any firm,
partnership, joint venture, association or other entity;
viii. TransCan Northern has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with power and
authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has
been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no liability or disability by
reason of the failure to be so qualified in any such
jurisdiction;
ix. TransCanada Border PipeLine has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the State of Nevada, with power and
authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has
been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no liability or disability by
reason of the failure to be so qualified in any such
jurisdiction;
x. At the First Time of Delivery (as defined herein),
after giving effect to the issuance of the Firm Units, the
Partnership will have an authorized capitalization as set
forth in the
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Prospectus, and the Units to be issued and sold by the
Partnership to the Underwriters hereunder will be duly
authorized by the Amended and Restated Agreement of Limited
Partnership of TC PipeLines, LP (the "Partnership Agreement"),
and when issued against payment therefor as provided herein,
will be validly issued, fully paid and non-assessable (except
as nonassessability may be affected by certain provisions of
the Delaware Revised Uniform Limited Partnership Act, as
amended (the "Delaware Act")) and conform to the description
of the Common Units contained in the Prospectus;
xi. At such Time of Delivery, after giving effect to
the transactions contemplated in the Prospectus, the General
Partner will be the sole general partner of the Partnership
with a 1% general partner interest in the Partnership; such
general partner interest will be duly authorized by the
Partnership Agreement and validly issued to the General
Partner; at such Time of Delivery, the General Partner will
own all of the issued and outstanding Subordinated Units (as
defined in the Prospectus); such Subordinated Units will be
duly authorized by the Partnership Agreement, validly issued
to the General Partner, fully paid (to the extent required
under the Partnership Agreement) and nonassessable (except as
such nonassessability may be affected by certain provisions of
the Delaware Act); at such Time of Delivery, the General
Partner will own all of the Incentive Distribution Rights (as
defined in the Prospectus); such Incentive Distribution Rights
will be duly authorized by the Partnership Agreement, validly
issued to the General Partner, fully paid (to the extent
required under the Partnership Agreement) and nonassessable
(except as such nonassessability may be affected by certain
provisions of the Delaware Act); and at such Time of Delivery,
the General Partner will own such general partner interest,
Subordinated Units and Incentive Distribution Rights free and
clear of all liens, encumbrances, security interests,
equities, charges or claims;
xii. At such Time of Delivery, the General Partner
will be the sole general partner of the Intermediate
Partnership with a 1.0101% general partner interest in the
Intermediate Partnership; such general partner interest will
be duly authorized by the Amended and Restated Agreement of
Limited Partnership of TC PipeLines Intermediate Limited
Partnership (the "Intermediate Partnership Agreement") and
validly issued to the General Partner; and at such Time of
Delivery, the General Partner will own such general partner
interests free and clear of all liens, encumbrances, security
interests or adverse claims;
xiii. At such Time of Delivery, the Partnership will
be the sole limited partner of the Intermediate Partnership
with a 98.9899% limited partner interest in the Intermediate
Partnership; such limited partner interest will be duly
authorized by the Intermediate Partnership Agreement, validly
issued to the Partnership, fully paid (to the extent required
by the Intermediate Partnership Agreement) and nonassessable
(except as nonassessability may be affected by certain
provisions of the Delaware Act); and at such Time of Delivery,
the Partnership will own such limited partner interest free
and clear of all liens, encumbrances, security interests or
adverse claims;
xiv. As of the date of this Agreement, TransCan
Northern and TransCanada Border Pipeline collectively own a
30% general partner interest in Northern Border Pipeline free
and clear of all liens, encumbrances, security interests,
equities, charges or claims; and at such Time of Delivery, the
Intermediate Partnership will own a 30% general partner
interest in Northern Border Pipeline free and clear of all
liens, encumbrances, security interests or adverse claims;
xv. Except for the Partnership's limited partner
interest in the Intermediate Partnership and the Intermediate
Partnership's general partner interest in Northern Border
Pipeline, neither the Partnership nor the Intermediate
Partnership own, and at such Time of Delivery neither will
own, directly or indirectly, any equity or long-term debt
securities of any corporation or have an equity interest in
any firm, partnership, joint venture, association or other
entity;
4
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xvi. The issue and sale of the Units by the
Partnership and the compliance by the TC Entities with all of
the provisions of this Agreement and the consummation of the
transactions contemplated herein and in the Prospectus
(including, without limitation, the transfer of the 30%
general partner interest in Northern Border Pipeline to the
Intermediate Partnership) (A) will not conflict with or result
in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to
which any of the TC Entities or Northern Border Pipeline is a
party or by which any of the TC Entities or Northern Border
Pipeline is bound or to which any of the property or assets of
any of the TC Entities or Northern Border Pipeline is subject,
(B) will not result in any violation of or conflict with the
provisions of the articles or certificate of incorporation,
bylaws, certificate of limited partnership, agreement of
limited partnership, general partnership agreement or other
governing documents of any of the TC Entities or Northern
Border Pipeline or violate or conflict with any statute, (C)
will not violate or conflict with any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the TC Entities or Northern Border Pipeline
or any of their properties and (D) will not result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of any of the Partnership Entities,
except, in the case of clauses (A), (C) or (D) which,
individually or in the aggregate, would not be reasonably
expected to have a material adverse effect on the condition
(financial or otherwise) or on the business, properties or
results of operations of the Partnership Entities, taken as a
whole (a "Material Adverse Effect"); and no consent, approval,
authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for
the issue and sale of the Units or the consummation by the TC
Entities of the transactions contemplated by this Agreement,
except the registration under the Act of the Units and such
consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of the Units by the Underwriters;
xvii. None of the TC Entities or Norther Border
Pipeline is in violation of its articles or certificate of
incorporation, bylaws, certificate of limited partnership,
agreement of limited partnership or other governing documents;
xviii. None of the TC Entities or Norther Border
Pipeline is in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by
which it or any of its properties may be bound which default,
individually or in the aggregate, would be reasonably expected
to result in a Material Adverse Effect on the ability of any
of the TC Entities to enter into or perform its obligations
set forth in this Agreement;
xix. The statements set forth in the Prospectus under
the caption "Description of Common Units," insofar as they
purport to constitute a summary of the terms of the Units and
under the caption "Tax Considerations," insofar as they
purport to describe the provisions of the laws and documents
referred to therein, are fair summaries in all material
respects;
xx. Other than as set forth in the Prospectus, there
are no legal or governmental proceedings pending to which any
of the TC Entities or Norther Border Pipeline is a party or of
which any property of any of the TC Entities or Norther Border
Pipeline is the subject which, if determined adversely to any
of the TC Entities or Norther Border Pipeline could reasonably
be expected to, individually or in the aggregate, result in a
Material Adverse Effect; and, to the best of each of the TC
Entities' knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others;
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xxi. None of the Partnership Entities or TransCanada
Border PipeLine is nor, after giving effect to the offering
and sale of the Units, will be an "investment company", as
such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
xxii. None of the Partnership Entities or TransCanada
Border PipeLine is nor, after giving effect to the offering
and sale of the Units, will be a "holding company" or
"affiliate" of a holding company or public utility, as defined
in the Public Utility Holding Company Act of 1935;
xxiii. KPMG LLP, who have certified certain financial
statements of the Partnership and the General Partner, and
Arthur Andersen LLP, who have certified certain financial
statements of Northern Border Pipeline, are each independent
public accountants as required by the Act and the rules and
regulations of the Commission thereunder;
xxiv. Each of the TC Entities has reviewed its
operations and that of any third parties with which the TC
Entities have a material relationship to evaluate the extent
to which the business or operations of the TC Entities will be
affected by the Year 2000 Problem. As a result of such review,
the TC Entities have no reason to believe, and do not believe,
that (other than as described in the Prospectus) the Year 2000
Problem will have a material adverse effect on the general
affairs, management, the current or future consolidated
financial position, business prospects, partners' capital or
results of operations of the TC Entities or result in any
material loss or interference with any of the TC Entities'
business or operations. The "Year 2000 Problem" as used herein
means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of
data or in the operation of mechanical or electrical systems
of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring
prior to January 1, 2000;
xxv. Each of the Partnership Entities carries, or is
covered by, insurance in such amounts and covering such risks
as is customarily obtained by businesses similarly situated,
taking into account self-insurance;
xxvi. Except as described in the Prospectus, the TC
Entities possess, and are operating in compliance in all
material respects with, all certificates, authorities or
permits issued by the appropriate local, state, federal or
foreign regulatory agencies or bodies necessary to conduct the
business currently (or, as described or contemplated in the
Prospectus, to be) operated by them, except for such
certificates, authorizations or permits which, if not
obtained, would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect
upon the ability of the TC Entities to conduct their
businesses in all material respects as currently conducted and
as contemplated by the Prospectus to be conducted; and, except
as described in the Prospectus, none of the TC Entities has
received any notice of proceedings relating to the revocation
or modification of any such certificate, authorization or
permit which, individually or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would be
expected to have a material adverse effect upon the ability of
the TC Entities to conduct their businesses in all material
respects as currently conducted and as contemplated by the
Prospectus to be conducted;
xxvii. The Partnership Entities maintain a system of
internal accounting control sufficient to provide reasonable
assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles in the United States ("U.S. GAAP") or
generally accepted accounting principles in Canada ("Canadian
GAAP"), as the case may be, and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv)
the
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recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken
with respect to any differences;
xxviii. The TC Entities (i) are in compliance with
any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and
safety, the environment or imposing liability or standards of
conduct concerning any Hazardous Material (as hereinafter
defined) ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such
permits, licenses or approvals would not, individually or in
the aggregate, result in a material adverse change, or any
development involving a prospective material adverse change,
in or affecting the general affairs, management, financial
position, partners' capital, stockholders' equity or results
of operations of the TC Entities taken as a whole. The term
"Hazardous Material" means (A) any "hazardous substance" as
defined by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, (B) any
"hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (C) any petroleum or petroleum
product, (D) any polychlorinated biphenyl and (E) any
pollutant or contaminant or hazardous, dangerous, or toxic
chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law;
xxix. In the ordinary course of business, the TC
Entities conduct a periodic review of the effect of
Environmental Laws on the business, operations and properties
of the TC Entities, in the course of which they identify and
evaluate associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential
liabilities to third parties). Except as set forth in the
Registration Statement and the Prospectus there are no costs
and liabilities associated with or arising in connection with
Environmental Laws as currently in effect (including, without
limitation, costs of compliance therewith) which would,
individually or in the aggregate, result in a Material Adverse
Effect;
xxx. The TC Entities are in compliance with all
federal, state and local employment and labor laws, including,
but not limited to, laws relating to non-discrimination in
hiring, promotion and pay of employees; no labor dispute with
the employees of the TC Entities exists or, to the knowledge
of the TC Entities, is imminent or threatened; and none of the
TC Entities is aware of any existing, imminent or threatened
labor disturbance by the employees of any of its principal
suppliers, manufacturers or contractors; in any case that
would result in a Material Adverse Effect;
xxxi. There are no preemptive rights or other rights
to subscribe for or to purchase, nor any restriction upon the
transfer of, any limited partner interests in the Partnership
or the Intermediate Partnership pursuant to either the
Partnership Agreement or the Intermediate Partnership
Agreement (except as described in the Prospectus) or other
governing documents or any agreement or other instrument to
which the Partnership or the Intermediate Partnership is a
party or by which either of them may be bound; there are no
outstanding options or warrants to purchase any Common Units
or Subordinated Units (except pursuant to this Agreement);
xxxii. The offering and sale of Units as contemplated
by this Agreement does not give rise to any rights for or
relating to the registration of any partnership interests or
other securities of the Partnership;
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xxxiii. This Agreement has been duly authorized,
executed and delivered by each of the TC Entities, constitutes
a valid and binding agreement with respect to each of such
entities and is enforceable against each of them in accordance
with the terms hereof;
xxxiv. On or before the First Date of Delivery, each
of the Contribution, Conveyance and Assumption Agreement (the
"Contribution Agreement"), the $40 million unsecured revolving
credit facility between the Partnership and TransCanada
Pipeline USA Ltd. (the "Revolving Credit Facility"), and
________________ (collectively, the "Operative Documents") to
which any of the TC Entities is a party, has been duly
authorized, executed and delivered by the respective TC
Entities and constitutes a valid and binding agreement of the
respective TC Entities and is enforceable against the
respective TC Entities in accordance with its respective
terms;
xxxv. On or before the First Time of Delivery, the
Partnership Agreement will have been duly authorized, executed
and delivered by the General Partner and the Organizational
Limited Partner and will be a valid and legally binding
agreement of the General Partner and the Organizational
Limited Partner, enforceable against the General Partner and
the Organizational Limited Partner in accordance with its
terms; on or before the First Time of Delivery, the
Intermediate Partnership Agreement will have been duly
authorized, executed and delivered by each of the General
Partner and the Partnership and will be a valid and legally
binding agreement of the General Partner and the Partnership,
enforceable against each of them in accordance with its terms;
xxxvi. The financial statements (including the
related notes and supporting schedules) included in the
Registration Statement and the Prospectus present fairly in
all material respects the financial position, results of
operations and cash flow of the entities purported to be shown
thereby on the basis stated therein at the respective dates or
for the respective periods which have been prepared in
accordance with U.S. GAAP or Canadian GAAP, as the case may
be, consistently applied through the periods involved, except
to the extent disclosed therein. The selected pro forma
information set forth in the Registration Statement and the
Prospectus under the caption "Selected Pro Forma Financial
Data of the Partnership" is accurately presented in all
material respects and prepared on a basis consistent with the
audited and unaudited historical consolidated financial
statements and pro forma financial statements from which it
has been derived. The pro forma financial statements of the
Partnership included in the Registration Statement and the
Prospectus have been prepared in all material respects in
accordance with the applicable accounting requirements of
Article 11 of Regulation S-X of the Commission; the
assumptions used in the preparation of such pro forma
financial statements are, in the opinion of the management of
the TC Entities, reasonable; and the pro forma adjustments
reflected in such pro forma financial statements have been
properly applied to the historical amounts in compilation of
such pro forma financial statements;
xxxvii. On or before the First Time of Delivery, the
Units will be approved for listing, subject to official notice
of issuance, on the Nasdaq National Market (the "Exchange");
xxxviii. None of the TC Entities has or, to their
knowledge, has any employee or agent thereof made any payment
of funds to any of the TC Entities or received or retained any
funds therefrom in violation of any law, rule or regulation of
a character required to be disclosed in the Prospectus;
xxxix. Each of the TC Entities has filed all material
federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon, other than taxes
which are being contested in good faith and for which adequate
reserves have been established in accordance with U.S. GAAP or
Canadian GAAP, as the case may be, there are no tax returns of
any of the TC Entities that are currently being audited by
state, local or federal taxing authorities or
8
<PAGE>
agencies (and with respect to which any of the TC Entities has
received notice), where the findings of such audit, if
adversely determined, would result in a material adverse
change, or any development involving a prospective material
adverse change, in or affecting the general affairs,
management, financial position, partners' capital,
stockholders' equity or results of operations of the TC
Entities, taken as a whole, or subject the Partnership or the
limited partners of the Partnership to any material liability
or disability;
xl. With respect to each employee benefit plan,
program and arrangement (governed by the laws of Canada or the
United States, including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"))
maintained or contributed to by the TC Entities, or with
respect to which the Partnership could incur any liability
under ERISA (collectively, the "Benefit Plans"), no event has
occurred, in connection with which the Partnership could be
subject to any liability under the terms of such Benefit Plan,
applicable law (including, without limitation, ERISA and the
Internal Revenue Code of 1986, as amended) or any applicable
agreement that could materially adversely affect the financial
condition, results of operations or business of the TC
Entities, taken as a whole, or subject the Partnership or the
limited partners of the Partnership to any material liability
or disability;
xli. Northern Border Pipeline has not sustained since
the date of the latest audited financial statements included
in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and,
since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not
been any change in the capitalization or long-term debt of
Northern Border Pipeline or any material adverse change, or
any development involving a prospective material adverse
change, in or affecting the general affairs, management,
financial position, partners' capital or results of Northern
Border Pipeline otherwise than as set forth or contemplated in
the Prospectus;
xlii. Northern Border Pipeline has good and
indefeasible title to all real and personal property necessary
to own and operate the Northern Border pipeline system (as
such term is used in the Prospectus) as described in the
Prospectus, free and clear of all liens, claims, encumbrances
and defects except (1) as described in the Prospectus and (2)
such as do not materially interfere with the ownership,
operation or benefits of ownership of the Northern Border
pipeline system or materially increase the cost of operation
or ownership of the Northern Border pipeline system, provided
that, (a) with respect to the gas transmission pipelines and
right-of-way interests related thereto (the "Pipeline
Properties") the foregoing shall only constitute a
representation that, except as described in the Prospectus,
(i) Northern Border Pipeline has sufficient title to enable it
to use such Pipeline Properties in its business as they have
been used in the past and as are proposed to be used in the
future as described in the Prospectus and (ii) any lack of
title has not had and will not have any material adverse
effect on the ability of Northern Border Pipeline to use such
Pipeline Properties as they have been used in the past and are
proposed to be used in the future as described in the
Prospectus and will not materially increase the cost of such
use, and (b) with respect to any real property, buildings and
equipment held under lease by Northern Border Pipeline, such
real property, buildings and equipment are held by Northern
Border Pipeline under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such real
property, buildings and equipment by such person;
xliii. Northern Border Pipeline has been duly formed
and is validly existing as a Texas general partnership, with
all necessary power and authority (partnership and other) to
own or lease its properties and conduct its business as
described in the Prospectus, and has been duly qualified for
the transaction of business and is in good standing under the
laws of each other
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<PAGE>
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification or is subject
to no material liability or disability by reason of the
failure to be so qualified in any such jurisdiction;
xliv. As of the date of this Agreement, TransCan
Northern and TransCanada Border Pipeline collectively own a
30% general partner interest in Northern Border Pipeline free
and clear of all liens, encumbrances, security interests,
equities, charges or claims; and at such Time of Delivery, the
Intermediate Partnership will own a 30% general partner
interest in Northern Border Pipeline free and clear of all
liens, encumbrances, security interests, equities, charges or
claims;
xlv. Northern Border Pipeline carries, or is covered
by, insurance in such amounts and covering such risks as is
customarily obtained by businesses similarly situated, taking
into account self-insurance;
xlvi. Except as described in the Prospectus, Northern
Border Pipeline possesses, and is operating in compliance in
all material respects with, all certificates, authorities or
permits issued by the appropriate local, state, federal or
foreign regulatory agencies or bodies necessary to conduct the
business currently (or, as described or contemplated in the
Prospectus, to be) operated by it, except for such
certificates, authorizations or permits which, if not
obtained, would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect
upon the ability of Northern Border Pipeline to conduct its
businesses in all material respects as currently conducted;
and, except as described in the Prospectus, Northern Border
Pipeline has not received any notice of proceedings relating
to the revocation or modification of any such certificate,
authorization or permit which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling
or finding, would be expected to have a material adverse
effect upon the ability of Northern Border Pipeline to conduct
its businesses in all material respects as currently
conducted;
xlvii. Northern Border Pipeline maintains a system of
internal accounting control sufficient to provide reasonable
assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation
of financial statements in conformity with U.S. GAAP and to
maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability
for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences;
xlviii. Northern Border Pipeline (A) is in compliance
with any and all applicable Environmental Laws, (B) has
received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their
respective businesses and (C) is in compliance with all terms
and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such
permits, licenses or approvals would not, individually or in
the aggregate result in a material adverse change, or any
development involving a prospective material adverse change,
in or affecting the general affairs, management, financial
position, partners' capital, stockholders' equity or results
of operations of Northern Border Pipeline;
xlix. In the ordinary course of its business,
Northern Border Pipeline conducts a periodic review of the
effect of Environmental Laws on the business, operations and
properties of Northern Border Pipeline, in the course of which
it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and
any potential liabilities to third parties). Except as set
forth in the Registration Statement and the Prospectus there
are no costs and liabilities associated
10
<PAGE>
with or arising in connection with Environmental Laws as
currently in effect (including, without limitation, costs of
compliance therewith) which would, individually or in the
aggregate have a material adverse effect on the condition
(financial or otherwise) or on the business, properties or
results of operations of Northern Border Pipeline;
l. The selected historical information set forth in
the Registration Statement and the Prospectus under the
caption "Selected Historical Financial and Operating Data of
Northern Border Pipeline" is accurately presented in all
material respects and prepared on a basis consistent with the
audited historical consolidated financial statements from
which it has been derived;
li. Northern Border Pipeline has filed all material
federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon, other than taxes
which are being contested in good faith and for which adequate
reserves have been established in accordance with U.S. GAAP,
there are no tax returns of Northern Border Pipeline that are
currently being audited by state, local or federal taxing
authorities or agencies (with respect to which Northern Border
Pipeline has received notice), where the findings of such
audit, if adversely determined, would result in a material
adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs,
management, financial position, partners' capital,
stockholders' equity or results of operations of Northern
Border Pipeline.
lii. The TC Entities have reviewed Northern Border
Pipeline's operations and that of any third parties with which
Northern Border Pipeline has a material relationship to
evaluate the extent to which the business or operations
Northern Border Pipeline will be affected by the Year 2000
Problem. As a result of such review, the TC Entities have no
reason to believe, and do not believe, that the Year 2000
Problem will have a material adverse effect on the general
affairs, management, the current or future consolidated
financial position, business prospects, partners' capital or
results of operations of Northern Border Pipeline or result in
any material loss or interference with Northern Border
Pipeline's business or operations;
b. TransCanada represents and warrants to, and agrees with,
each of the Underwriters that:
i. The Registration Statement, the Prospectus and
each Preliminary Prospectus do not and will not, as of the
applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as
to the Prospectus and each Preliminary Prospectus and any
amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required
to be stated therein with respect to TransCanada or necessary
to make the statements therein with respect to TransCanada not
misleading; PROVIDED, HOWEVER, that this representation and
warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished
in writing to the Partnership by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
ii. TransCanada has been duly organized, and is
validly existing as a corporation in good standing under the
laws of Canada, with power and authority (corporate and other)
to own its properties and conduct its business as described in
the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material
liability or disability by reason of the failure to be so
qualified in any such jurisdiction, except where the failure
to so qualify would not reasonably be expected to have a
material adverse effect on the ability of TransCanada or any
of the TC Entities to enter into or perform its obligations
set forth in this Agreement or to consummate any of the
transactions contemplated herein or in the Prospectus (a "TC
Material Adverse Effect");
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<PAGE>
iii. TransCanada owns, directly or indirectly, all of
the issued and outstanding shares of capital stock of each of
TransCan Northern, the General Partner and TransCanada Border
Pipeline, free and clear of all liens, encumbrances, equities
or claims; such shares of capital stock are duly authorized,
validly issued, fully paid and nonassessable;
iv. The compliance by TransCanada with all of the
provisions of this Agreement and the consummation of the
transactions contemplated herein and in the Prospectus (A)
will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which TransCanada is a
party or by which TransCanada is bound or to which any of the
property or assets of TransCanada is subject, (B) will not
result in any violation of or conflict with the provisions of
the articles or certificate of incorporation, or other
governing documents of TransCanada or violate or conflict with
any statute, (C) will not violate or conflict with any order,
rule or regulation of any court or governmental agency or body
having jurisdiction over TransCanada or any of their
properties and (D) will not result in the creation or
imposition of any lien, charge or encumbrance up on any assets
of the Partnership Entities, except, in the case of clauses
(A), (C) or (D) which, individually or in the aggregate, would
not reasonably be expected to have a TC Material Adverse
Effect; and no consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale
of the Units or the consummation by TransCanada of the
transactions contemplated by this Agreement, except the
registration under the Act of the Units and such consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Units by
the Underwriters;
v. TransCanada is not in violation of its articles or
certificate of incorporation, bylaws, or other governing
documents;
vi. TransCanada is not in default in the performance
or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties
may be bound which, individually or in the aggregate, would
reasonably be expected to result in a TC Material Adverse
Effect;
vii. Other than as set forth in the Prospectus, there
are no legal or governmental proceedings pending to which
TransCanada is a party or of which any property of TransCanada
is the subject which, if determined adversely to TransCanada
would reasonably be expected to, individually or in the
aggregate, result in a TC Material Adverse Effect; and, to the
best of TransCanada's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
viii. TransCanada is not and, after giving effect to
the offering and sale of the Units, will not be an "investment
company", as such term is defined in the Investment Company
Act;
ix. TransCanada is not and, after giving effect to
the offering and sale of the Units, will not be subject to
regulation as a "holding company" or "affiliate" of a holding
company or a public utility, as defined in the Public Utility
Holding Company Act of 1935;
12
<PAGE>
x. KPMG LLP, who have certified certain financial
statements of the Partnership and the General Partner are
independent public accountants as required by the Act and the
rules and regulations of the Commission thereunder;
xi. This Agreement has been duly authorized, executed
and delivered by TransCanada and constitutes a valid and
binding agreement and is enforceable against TransCanada in
accordance with the terms hereof;
xii. On or before the First Date of Delivery, each of
the Operative Documents to which TransCanada is a party, has
been duly authorized, executed and delivered, constitutes a
valid and binding agreement and is enforceable against
TransCanada in accordance with its respective terms;
c. TransCanada shall have the same responsibility and
liability for any misrepresentation in or breach of Section 1(a) to the same
extent as if TransCanada had made such representations and warranties jointly
and severally with the TC Entities.
2. Subject to the terms and conditions herein set forth, (a) the
Partnership agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the
Partnership, at a purchase price per unit of $.............., the number of Firm
Units set forth opposite the name of such Underwriter in Schedule I hereto and
(b) in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Units as provided below, the Partnership agrees to
sell to each of the Underwriters, and each of the Underwriters agrees, severally
and not jointly, to purchase from the Partnership, at the purchase price per
unit set forth in clause (a) of this Section 2, that portion of the number of
Optional Units as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Units by a fraction the numerator of which is the
maximum number of Optional Units which such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of Optional Units that all of the
Underwriters are entitled to purchase hereunder.
The Partnership hereby grants to the Underwriters the right to purchase
at their election up to ................... Optional Units, at the purchase
price per unit set forth in the paragraph above, for the sole purpose of
covering overallotments in the sale of the Firm Units. Any such election to
purchase Optional Units may be exercised only by written notice from you to the
Partnership, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Units to be
purchased and the date on which such Optional Units are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Partnership otherwise agree
in writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm Units, the
several Underwriters propose to offer the Firm Units for sale upon the terms and
conditions set forth in the Prospectus.
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<PAGE>
4. a. The Units to be purchased by each Underwriter hereunder, in
book entry form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Partnership shall be delivered by or on behalf of the
Partnership to Goldman, Sachs & Co., through the facilities of the Depository
Trust Company ("DTC") for the account of such Underwriter, against payment by
or on behalf of such Underwriter of the purchase price therefor by wire
transfer of Federal (same-day) funds to the account specified by the
Partnership to Goldman, Sachs & Co. at least forty-eight hours in advance.
The Partnership will cause the certificates representing the Units to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of DTC
or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Units, 9:30
a.m., New York time, on ............., 1999 or such other time and date as
Goldman, Sachs & Co. and the Partnership may agree upon in writing, and, with
respect to the Optional Units, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman,
Sachs & Co. of the Underwriters' election to purchase such Optional Units, or
such other time and date as Goldman, Sachs & Co. and the Partnership may
agree upon in writing. Such time and date for delivery of the Firm Units is
herein called the "First Time of Delivery", such time and date for delivery
of the Optional Units, if not the First Time of Delivery, is herein called
the "Second Time of Delivery", and each such time and date for delivery is
herein called a "Time of Delivery."
b. The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Units and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New
York 10004 (the "Closing Location"), and the Units will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at the
Closing Location at 2:00 p.m., New York City time, on the New York Business Day
next preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. Each of the Partnership Entities agrees (and solely with respect to
(e) and (l) of this Section 5, each of the TC Entities and TransCanada agrees)
with each of the Underwriters:
a. To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior to
the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise you,
promptly after it receives notice thereof, of the issuance by the Commission of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the qualification of
the Units for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
b. Promptly from time to time to take such action as you may
reasonably request to qualify the Units for offering and sale under the
securities laws of such jurisdictions in the United States as you may request
and to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Units, provided that in connection therewith
the Partnership shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction, provided
further that the Units will only be offered in the United States and to
residents thereof. The Units have not been and will not be registered under
Canadian provincial securities laws and may not be offered, sold or delivered
within Canada or to Canadian persons;
14
<PAGE> c. Prior to 10:00 A.M., New York City time, on the
New York Business Day next succeeding the date of this Agreement and from
time to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of issue of the Prospectus in connection with the
offering or sale of the Units and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be necessary
during such period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to prepare and furnish
without charge to each Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter
is required to deliver a prospectus in connection with sales of any of the
Units at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act;
d. To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Partnership and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of the
Partnership, Rule 158);
e. During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder any Common Units, Subordinated Units or any securities of the
Partnership that are substantially similar to the Common Units or Subordinated
Units, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Common Units,
Subordinated Units or any such substantially similar securities (other than
pursuant to employee stock option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the date
of this Agreement), without your prior written consent;
f. During a period of five years from the effective date of
the Registration Statement, to furnish to its Unitholders as soon as practicable
after the end of each fiscal year an annual report (including a balance sheet
and statements of income, partners' capital and cash flows of the Partnership
and its consolidated subsidiaries certified by independent public accountants)
and, as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), to make available to its Unitholders
consolidated summary financial information of the Partnership for such quarter
in reasonable detail;
g. During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to Unitholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Partnership is listed; and (ii)
such additional information concerning the business and financial condition of
the Partnership as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Partnership and its subsidiaries are consolidated in reports furnished to its
unitholders generally or to the Commission);
15
<PAGE>
h. To use the net proceeds received by it from the sale of the
Units pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
i. To use its best efforts to list, subject to notice of
issuance, the Units on the Exchange;
j. To file with the Commission such information on Form 10-Q
or Form 10-K as may be required by Rule 463 under the Act;
k. If the Partnership elects to rely upon Rule 462(b), the
Partnership shall file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date
of this Agreement, and the Partnership shall at the time of filing either pay to
the Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act; and
l. TransCanada shall beneficially own, directly or indirectly,
all of the issued and outstanding shares of the General Partner until the later
of (i) the date that TransCanada or any of its affiliates is no longer providing
the Revolving Credit Facility and (ii) six months after such time that none of
the officers of the General Partner are directors, officers or employees of
TransCanada or any of its affiliates.
6. Each of the TC Entities and TransCanada covenants and agrees with
one another and with the several Underwriters that the Partnership will pay or
cause to be paid the following: (i) the fees, disbursements and expenses of the
Partnership's counsel and accountants in connection with the registration of the
Units under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Units; (iii) all reasonable expenses in connection with the qualification of
the Units for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriters (of not more than $5,000) in connection with such qualification and
in connection with the Blue Sky survey; (iv) all fees and expenses in connection
with listing the Units on the Exchange; and the filing fees incident to, and the
fees and disbursements of counsel for the Underwriters (of not more than $5,000)
in connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Units; (v) the cost of
preparing certificates for the Units; (vi) the cost and charges of any transfer
agent or registrar; and (vii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that the Partnership
shall bear the cost of any other matters not directly relating to the sale and
purchase of the Units pursuant to this Agreement, and that except as provided in
this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Units by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Units to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the TC Entities and TransCanada herein are, at and as of such Time of Delivery,
true and correct, the condition that the TC Entities and TransCanada shall have
performed all of their obligations hereunder theretofore to be performed, and
the following additional conditions:
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a. The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Partnership has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
b. Andrews & Kurth L.L.P., counsel for the Underwriters, shall
have furnished to you such written opinion or opinions, dated such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii), (iv),
(xiv), (xxv) and certain matters contained in (xix) of subsection (c) below as
well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
c. Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Partnership, shall have furnished to you their written opinion, dated such Time
of Delivery, in form and substance satisfactory to you, to the effect that:
i. Each of the Partnership and the Intermediate
Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the laws of the
State of Delaware, with partnership power and authority to own
its properties and conduct its business as described in the
Prospectus;
ii. The General Partner has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with corporate power
and authority to own its properties and conduct its business
as described in the Prospectus;
iii. TransCan Northern is validly existing as a
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus;
iv. The Units to be issued and sold to the
Underwriters by the Partnership pursuant to the Underwriting
Agreement on the First Time of Delivery and the limited
partner interests represented thereby have been duly
authorized by the Partnership Agreement and, when issued and
delivered against payment therefor as provided in the
Underwriting Agreement, will be validly issued, fully paid (to
the extent required under the Partnership Agreement) and
nonassessable (except as such nonassessability may be affected
by the Delaware Act); other than the ______ Subordinated Units
and the Incentive Distribution Rights that will be owned by
the General Partner, the Units will be the only limited
partner interests of the Partnership issued and outstanding at
such Time of Delivery;
v. Each of the Partnership and the Intermediate
Partnership has been duly qualified as a foreign limited
partnership for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification except where the failure to be so
qualified (A) would not subject the Partnership or the
Intermediate Partnership to material liability or disability
or (B) would not subject the limited partners of the
Partnership to any liability or disability;
vi. The General Partner has been duly qualified as a
foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in
which it owns or leases properties or conducts any business so
as to require such qualification, except where the failure to
be so qualified (A) would not subject the General Partner to
material liability or disability or (B) would not subject the
limited partners of the Partnership to any liability or
disability;
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vii. At such Time of Delivery, after giving effect to
the transactions contemplated in the Prospectus, the General
Partner will be the sole general partner of each of the
Partnership and the Intermediate Partnership with a general
partner interest in the Partnership of 1.0% and a general
partner interest in the Intermediate Partnership of 1.0101%;
such general partner interests are duly authorized by the
Partnership Agreement and the Intermediate Partnership
Agreement, respectively, validly issued and are owned of
record by the General Partner free and clear of all liens,
security interests, or "adverse claims" (as defined in Section
8-102(a)(1) of the Uniform Commercial Code of the State of New
York (A) in respect of which a financing statement under the
Uniform Commercial Code of the State of Delaware naming the
General Partner as debtor is on file in the offices of the
Secretary of State of the State of Delaware as of ___________,
1999 or (B) otherwise known to such counsel;
viii. At such Time of Delivery, after giving effect
to the transactions contemplated in the Prospectus, the
General Partner will own of record all of the Incentive
Distribution Rights; such Incentive Distribution Rights are
duly authorized by the Partnership Agreement, validly issued,
fully paid (to the extent required under the Partnership
Agreement) and nonassessable (except as such nonassessability
may be affected by the Delaware Act); and such Incentive
Distribution Rights are owned of record by the General Partner
free and clear of all liens, security interests, adverse
claims (as defined above) (A) in respect of which a financing
statement under the Uniform Commercial Code of the State of
Delaware naming the General Partner as debtor is on file in
the offices of the Secretary of State of the State of Delaware
as of ___________, 1999 or (B) otherwise known to such
counsel;
ix. At such Time of Delivery, after giving effect to
the transactions contemplated in the Prospectus, the General
Partner will own of record _______ Subordinated Units and such
Subordinated Units and the limited partner interests
represented thereby are duly authorized by the Partnership
Agreement, validly issued, fully paid (to the extent required
under the Partnership Agreement) and nonassessable (except as
such nonassessability may be affected by the Delaware Act);
such Subordinated Units are owned of record by the General
Partner free and clear of all liens, security interests,
adverse claims (as defined above) (A) in respect of which a
financing statement under the Uniform Commercial Code of the
State of Delaware, naming the General Partner as debtor is on
file in the offices of the Secretary of State of Delaware as
of __________, 1999 or (B) otherwise known to such counsel;
x. The offer, sale and issuance of _________ Common
Units to (and the redemption by the Partnership of such Common
Units from) TransCan Northern pursuant to the Partnership
Agreement and the Contribution Agreement is exempt from the
registration requirements of the Act and the securities laws
of the State of New York;
xi. The offer, sale and issuance of _________ Common
Units, _________ Subordinated Units, and the Incentive
Distribution Rights to TransCanada Border PipeLine, the
redemption by the Partnership of _________ Common Units from
TransCanada Border PipeLine and the transfer by TransCanada
Border PipeLine of _________ Subordinated Units and the
Incentive Distribution Rights to the General Partner, in each
case pursuant to the Partnership Agreement and the
Contribution Agreement, are exempt from the registration
requirements of the Act and the securities laws of the State
of New York;
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xii. The Partnership is the sole limited partner of
the Intermediate Partnership, with a limited partner interest
in the Intermediate Partnership of 98.9899%; such limited
partner interest is duly authorized by the Intermediate
Partnership Agreement and is validly issued, fully paid (to
the extent required under the Intermediate Partnership
Agreement) and nonassessable (except as such nonassessability
may be affected by the Delaware Act); and such limited partner
interest in the Intermediate Partnership is owned of record by
the Partnership free and clear of all liens, security
interests, or adverse claims (as defined above) (A) in respect
of which a financing statement under the Uniform Commercial
Code of the State of Delaware naming the Partnership as debtor
is on file in the offices of the Secretary of State of the
State of Delaware as of _________, 1999 or (B) otherwise known
to such counsel;
xiii. All of the issued and outstanding shares of
capital stock of the General Partner are duly authorized,
validly issued, fully paid and nonassessable; and TransCanada
Border PipeLine owns such shares of record, free and clear of
all liens, security interests or adverse claims (as defined
above) (A) in respect of which a financing statement under the
Uniform Commercial Code of the State of Delaware naming
TransCanada Border Pipeline as debtor is on file in the
offices of the Secretary of State of the State of Delaware as
of _________, 1999 or (B) otherwise known to such counsel;
xiv. This Agreement has been duly authorized,
executed and delivered by the Partnership, the Intermediate
Partnership, the General Partner and TransCan Northern, and
has been duly executed and delivered by TransCanada Border
PipeLine;
xv. Each of the Partnership Agreement, the
Intermediate Partnership Agreement and the Revolving Credit
Agreement to which the Partnership, the Intermediate
Partnership, the General Partner, TransCan Northern or
TransCanada Border PipeLine is a party has been duly
authorized and validly executed and delivered by the
respective party (except that we assume and express no opinion
regarding and assume the due authorization of any agreement by
TransCanada Border PipeLine). Each of the Partnership
Agreement, the Intermediate Partnership Agreement and the
Revolving Credit Agreement constitutes a valid and binding
obligation of the Partnership, the Intermediate Partnership,
the General Partner, TransCanada, TransCan Northern or
TransCanada Border PipeLine, as the case may be, enforceable
against each such party in accordance with its respective
terms, subject to (A) applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar
laws from time to time in effect affecting creditors' rights
and remedies generally, (B) general principles of equity
(regardless of whether such principles are considered in a
proceeding at law or in equity) and (C) public policy,
applicable law relating to fiduciary duties and
indemnification and an implied covenant of good faith and fair
dealing.
xvi. The Partnership has all requisite partnership
power and authority to issue, sell and deliver (A) the Units,
in accordance with and upon the terms and conditions set forth
in the Underwriting Agreement and the Partnership Agreement
and (B) the Subordinated Units and Incentive Distribution
Rights, in accordance with and upon the terms and conditions
set forth in the Partnership Agreement and the Contribution
Agreement;
xvii. The issue and sale of the Units being delivered
at such Time of Delivery by the Partnership and the
performance by the TC Entities and TransCanada with their
respective obligations under this Agreement and their
consummation of the transactions contemplated herein (A) will
not breach or violate any of the terms or provisions of, or
constitute a default under, any agreement or instrument to
which any of the Partnership Entities is a party or by which
any of the Partnership Entities is bound (the opinion in this
clause (A) being limited (x) to our review of only the
agreements, or instruments that are listed on Annex ____
hereto and (y) in that we express no opinion with respect to
any violation or default not readily ascertainable from the
face of any such agreement or instrument or arising under or
based upon any cross-default provision insofar as it relates
to a default under an agreement or instrument not so listed,
or arising under or based upon any covenant of a financial or
numerical nature or
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requiring computation), (B) will not violate any of the
provisions of the Certificate of Limited Partnership or
Agreement of Limited Partnership of the Partnership or
Intermediate Partnership, the Certificate of Incorporation or
Bylaws of the General Partner, (C) will not violate any
present law, or present regulation of any governmental agency
or authority, of the State of New York or the State of
Delaware pursuant to the Delaware General Corporation Law
or the Delaware Act or the United States of America [exclude
FERC and state analogues] known by us to be applicable to any
of the Partnership Entities, order, rule or regulation known
to such counsel of any court or governmental agency or body
having jurisdiction over the Partnership Entities or any of
their respective properties and (D) will not result in the
creation or imposition of any lien, security interest or other
encumbrance upon any property or assets of any of the
Partnership Entities under any agreement or instrument to
which any of the Partnership Entities is a party or by which
any of the Partnership Entities is bound (the opinion in this
clause (D) being limited to our review of only those
agreements or instruments that are listed in Annex ____
hereto), except, in the case of clauses (A), (C) or (D) which,
individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect;
xviii. The issue and sale of the Units by the
Partnership and the consummation by the TC Entities of the
transactions contemplated by this Agreement do not require
under present law any filing or registration by any TC Entity
with, or approval or consent to any TC Entity of, any
governmental agency or authority of the State of New York or
the State of Delaware pursuant to the Delaware General
Corporation Law or the Delaware Act or of the United States
of America that has not been made or obtained, except the
registration under the Act and the Securities Exchange Act of
1934, as amended, of the Units, and such filings, consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Units
by the Underwriters;
xix. The statements in the Registration Statement and
Prospectus under the captions "The Transactions," "Cash
Distribution Policy," "Conflicts of Interest and Fiduciary
Responsibilities," "Description of the Common Units",
"Description of the Subordinated Units", "The Partnership
Agreement", "Northern Border Pipeline Partnership Agreement"
and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Description of
Indebtedness of Northern Border Pipeline" insofar as they
purport to describe the provisions of the (A) the Partnership
Agreement, (B) the Intermediate Partnership Agreement, (C) the
Contribution Agreement, (D) the [Revolving Credit Agreement ],
(E) the partnership agreement of Northern Border Pipeline, as
amended to ______________, (F) the [Note Agreement] of
Northern Border Pipeline and (G) the [Credit Agreement] of
Northern Border Pipeline, or of the Delaware Act, as referred
to therein, are fair summaries of the matters covered thereby
in all material respects, and the Units, the Common Units, the
Subordinated Units and the Incentive Distribution Rights
conform as to legal matters in all material respects to the
descriptions thereof contained in the Registration Statement
and Prospectus under the captions "Prospectus Summary--The
Offering," "Cash Distribution Policy," "Description of the
Common Units," "Description of the Subordinated Units" and
"The Partnership Agreement;"
xx. The opinion of such counsel that is filed as
Exhibit 8.1 to the Registration Statement is confirmed and the
Underwriters may rely upon such opinion as if it were
addressed to them;
xxi. The Registration Statement was declared
effective under the Act on _________, 1999; to our knowledge,
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or threatened by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has
been made in the manner and within the time period required by
such Rule;
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<PAGE>
xxii. None of the Partnership, the Intermediate
Partnership, the General Partner, TransCan Northern,
TransCanada Border PipeLine and TransCanada is, and after
giving effect to the offering and sale of the Units and the
application of the proceeds thereof as described in the
Prospectus, none of the Partnership, the Intermediate
Partnership, the General Partner, TransCanada Border PipeLine
and TransCanada will be an "investment company" as such term
is defined in the Investment Company Act of 1940;
xxiii. Assuming that the Underwriters are acting
without notice of any adverse claim (as defined in 8-102(a) of
the Uniform Commercial Code of the State of New York), upon
the delivery to the Underwriters of certificates evidencing
the Units issued in the name of the Underwriters and payment
by the Underwriters of the purchase price for the Units, the
Underwriters will be "protected purchasers" (as such term is
used in Section 8-303 of the Uniform Commercial Code of the
State of New York).
xxiv. There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any limited partner interests of the
Partnership or the Intermediate Partnership pursuant to the
Partnership Agreement or the Intermediate Partnership
Agreement (except as described or referred to in the
Prospectus), or to our knowledge, pursuant to any other
agreement or instrument to which the Partnership, the
Intermediate Partnership or the General Partner are a party;
neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated by this
Agreement gives rise to any rights for or relating to the
registration of any Units or other securities of the
Partnership pursuant to the Partnership Agreement or the
Intermediate Partnership Agreement, or to our knowledge,
pursuant to any other agreement or instrument to which the
Partnership, the Intermediate Partnership or the General
Partner are a party; to our knowledge, there are no
outstanding options or warrants to purchase any Common Units
or Subordinated Units or other partnership interests in the
Partnership or Intermediate Partnership issued or granted by
the Partnership or the Intermediate Partnership pursuant to
any agreement or other instrument to which the Partnership or
the Intermediate Partnership is a party;
xxv. The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the
Partnership prior to such Time of Delivery as of their
respective effective or issue dates (other than the financial
statements, notes or schedules included or omitted from the
Registration Statement or Prospectus or other financial
data included in or omitted from the Registration Statement
or Prospectus, as to which such counsel need express no
opinion) appeared on their face to be responsive as to form
in all material respects with the requirements of the Act and
the rules and regulations thereunder;
Such counsel shall also state that In the course of
its engagement to represent or advise the TC Entities and
TransCanada professionally, they have not become aware of any
pending legal proceeding before, or pending investigation by,
any court or administrative agency or authority of the United
States of America or the State of New York, or any arbitration
tribunal, against any of the TC Entities, TransCanada or
Northern Border Pipeline Company in each case that is required
to be described in the Prospectus or the Registration
Statement which has not been so described. In making the
foregoing statement, such counsel shall have endeavored, to
the extent they believe necessary, to determine from lawyers
currently in their firm who have performed substantive legal
services for any of the TC Entities or TransCanada, whether
such services involved substantive attention in the form of
legal representation concerning pending legal proceedings or
pending investigations or overtly threatened litigation of the
nature referred to above, and such counsel may rely upon
certificates of officers of the TC Entities and TransCanada.
Beyond that, such counsel shall not make made any review,
search or investigation of public files or records or files or
records of any of the TC Entities, TransCanada or Northern
Border Pipeline Company, or of their respective transactions,
or any other investigation or inquiry with respect to the
foregoing statement.
In addition, such counsel shall state that, in the
course of the preparation of the Registration Statement and
the Prospectus they participated in conferences with
certain of the officers and representatives of, and the
independent public accountants for, the TC Entities,
TransCanada and Northern Border PipeLine at which the
contents of the Registration Statement and Prospectus were
discussed. Such counsel shall also state that, between the
date of the Registration Statement and the time of delivery
of this opinion, they participated in additional
conferences with certain officers and representatives of
the TC Entities, TransCanada and Northern Border PipeLine
at which the contents of the Registration Statement and the
Prospectus were discussed. Given the limitations inherent
in the independent vertification of factual matters and the
character of determinations involved in the registration
process, which counsel shall state are not passing upon and
do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except as stated
in paragraph 19 above. Such counsel shall then state that,
subject to the foregoing and on the basis of the
information they gained in the course of the performance of
the services referred to above, including information
obtained from officers and representatives of the TC
Entities, TransCanada and Northern Border PipeLine.
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<PAGE>
(i) no facts have come to their attention that cause them
to believe that the Registration Statement, at the time it
became effective, contained any untrue statement of a
material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its
date, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading, and (ii) they
do not know of any contract or other document of a
character required to be filed as an exhibit to the
Registration Statement which are not filed as required.
Also, subject to the foregoing, such counsel shall state
that no facts have come to such counsel's attention in the
course of the proceedings described in the second sentence
of this paragraph that cause them to believe that the
Prospectus, as of the date and time of delivery hereof,
contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading. In each case,
however, such counsel may state that they do not express
any view or belief with respect to (i) financial
statements, notes or schedules included or omitted in the
Registration Statement or the Prospectus, (ii) other
financial data included in or omitted from the Registration
Statement or Prospectus, or (iii) discussions of the
regulation of TransCanada's, Northern Border Pipeline's or
the TC Entities' businesses by the Federal Energy
Regulatory Commission or similar federal or state laws. In
connection with the foregoing, such counsel may state that
it is the understanding of the Underwriters that such
counsel does not act as United States regulatory counsel to
TransCanada, Northern Border Pipeline or the TC Entities
and that they do not hold themselves out as expert in the
regulation of the generation, transportation, distribution
or delivery of natural gas, oil, electricity or other
specially regulated commodities or services, including
pipelines, transmission lines, storage facilities and
related facilities and equipment, or the import or export
of such commodities or services;
d. Kristine Delkus, counsel for the Partnership, shall have
furnished to you her written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
i. the statements in the Registration Statement and
the Prospectus under the caption "Business of Northern Border
Pipeline --FERC Regulation," insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate and fair in all material respects;
ii. The issue and sale of the Units by the
Partnership and the consummation of the transactions
contemplated by the Contribution Agreement, the Partnership
Agreement and the Intermediate Partnership Agreement do not
require under present law any filing or registration by
TransCanada or any of the TC Entities with, or approval or
consent to any TC Entity or TransCanada of, the Federal Energy
Regulatory Commission that has not been made or obtained,
except _________; and
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<PAGE>
iii. None of the TC Entities or TransCanada is nor,
after giving effect to the offering and sale of the Units,
will be subject to regulation as a "holding company" or
"affiliate" of a holding company or public utility, as defined
in the Public Utility Holding Company Act of 1935.
e. Robert Pitt, Canadian counsel for TransCanada, shall have
furnished to you his written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
i. TransCanada is validly existing as a corporation
in good standing under the laws of Canada, with corporate
power and authority to own its properties and conduct its
business as described in the Prospectus;
<PAGE>
ii. TransCanada has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification or is subject to no material
liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact
upon certificates of officers of such entities or certificates
of public officials of various jurisdictions, provided that
such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and
certificates);
iii. To the best of such counsel's knowledge and
other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which TransCanada,
TransCan Northern, TransCanada Border PipeLine or Northern
Border PipeLine Company is a party or of which any property of
such entities is the subject which, if determined adversely to
any such party would, individually or in the aggregate, result
in a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others;
iv. This Agreement has been duly authorized, executed
and delivered by TransCanada;
v. All of the issued and outstanding shares of
capital stock of each of TransCan Northern and TransCanada
Border PipeLine are owned of record by TransCanada free and
clear of all liens, security interests or adverse claims (as
defined above);
vi. [Each of the Operative Agreements to which
TransCanada is a party has been duly authorized and validly
executed and delivered by TransCanada, constitutes a valid and
binding obligation of and is enforceable against TransCanada
in accordance with its respective terms, subject to (A)
applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws from time to time
in effect affecting creditors' rights and remedies generally
and general principles of equity (regardless of whether such
principles are considered in a proceeding at law or in equity)
and (B) public policy, applicable law relating to fiduciary
duties and indemnification and an implied covenant of good
faith and fair dealing; (THIS OPINION IS REQUESTED ONLY IF ANY
OF THE OPERATIVE AGREEMENTS WILL BE GOVERNED BY THE LAWS OF
CANADA)]
vii. The issue and sale of the Units being delivered
at such Time of Delivery by the Partnership and the
performance by TransCanada, TransCan Northern and TransCanada
Border Pipeline with all of their respective obligations under
this Agreement and the consummation of the transactions herein
contemplated (A) will not result in a breach or violate any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which any of
such entities is a party or by which any of such entities is
bound or to which any of the property or assets of any of such
entities is subject, (B) will not result in any violation of
or conflict with the provisions of the articles of
incorporation, by-laws or other organizational documents of
TransCanada or violate or conflict with any statute, (C) will
not violate or conflict with any order, rule or regulation
known to such counsel of any court or governmental agency or
body having jurisdiction over TransCanada or any of its
properties and (D) will not result in the creation or
imposition of any lien, security interest or other encumbrance
upon any property or assets of any of the Partnership
Entities, except, in the case of clauses (A), (C) or (D)
which, individually or in the aggregate, would not reasonably
be expected to have a Material Adverse Effect; and
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<PAGE>
viii. No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the consummation
by TransCanada of the transactions contemplated by this
Agreement or as described in the Prospectus.
f. Baker & Hostetler LLP, Texas counsel to the Partnership,
shall have furnished to you their written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
i. Northern Border Pipeline is validly existing as a
general partnership under the laws of the State of Texas, with
full partnership power and authority to own, lease and operate
its properties and conduct its business in all material
respects as described in the Prospectus;
ii. The issue and sale of the Units being delivered
at such Time of Delivery by the Partnership and the compliance
by the TC Entities and TransCanada with all of the provisions
of this Agreement and the consummation of the transactions
contemplated herein and in the Prospectus (including, without
limitation, the transfer by TransCan Northern and TransCanada
Border Pipeline of the 30% general partner interest in
Northern Border Pipeline to the Intermediate Partnership) will
not violate or conflict with the provisions of the General
Partnership Agreement or other governing documents of Northern
Border Pipeline;
iii. At such Time of Delivery, the Intermediate
Partnership owns a 30% general partnership interest in
Northern Border Pipeline; such general partner interest is
owned of record by the Intermediate Partnership free and clear
of all liens, security interests, claims as defined herein)
[(A) in respect of which a financing statement under the
Uniform Commercial Code of the State of Delaware naming the
Intermediate Partnership or TransCan Northern as debtor is on
file in the offices of the Secretary of State of the State of
Delaware, (B) in respect of which a financing statement under
the Uniform Commercial Code of the State of Nevada naming
TransCanada Border PipeLine as debtor is on file in the
offices of the Secretary of State of the State of Nevada or
(C) otherwise known to such counsel;]
iv. The General Partnership Agreement governing
Northern Border Pipeline, as amended and in effect on such
Time of Delivery, constitutes a valid and legally binding
agreement of the Intermediate Partnership and is enforceable
against the Intermediate Partnership in accordance with its
terms, subject to (A) applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar
laws from time to time in effect affecting creditors' rights
and remedies generally and general principles of equity
(regardless of whether such principles are considered in a
proceeding at law or in equity) and (B) public policy,
applicable law relating to fiduciary duties and
indemnification and an implied covenant of good faith and fair
dealing;
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<PAGE>
v. The Contribution Agreement constitutes a valid and
legally binding agreement of TransCanada Border PipeLine,
TransCan Northern, TransCanada, the Partnership, the
Intermediate Partnership and the General Partner and is
enforceable against such parties in accordance with its terms,
subject to (A) applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar laws from time
to time in effect affecting creditors' rights and remedies
generally and general principles of equity (regardless of
whether such principles are considered in a proceeding at law
or in equity) and (B) public policy, applicable law relating
to fiduciary duties and indemnification and an implied
covenant of good faith and fair dealing;
g. _________, Nevada counsel to the TC Entities, shall have
furnished to you their written opinion, dated such time of Delivery, in form and
substance satisfactory to you, to the effect that:
<PAGE>
i. TransCanada Border PipeLine in validly existing as
a corporation in good standing under the laws of the State of
Nevada with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; and
ii. The Underwriting Agreement and each of the
Operative Agreements to which TransCanada Border PipeLine is a
party has been duly authorized by TransCanada Border PipeLine.
h. On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery, KPMG
LLP and Arthur Andersen LLP shall each have furnished to you a letter, dated the
respective dates of delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex I(a)
hereto and a draft of the form of letter to be delivered on the effective date
of any post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
i. (i) None of the TC Entities or Northern Border Pipeline
shall have sustained since the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capitalization or long-term debt of any of the TC Entities or
Northern Border Pipeline or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, partners' capital or results of operations of any of the TC Entities,
taken as a whole, or Northern Border Pipeline, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in Clause (i) or (ii), is in the judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Units being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
j. On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded Northern Border Pipeline's debt securities by
any "nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii)
no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of any
of Northern Border Pipeline's debt securities;
k. On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material limitation in
trading in securities generally on the Exchange; (ii) a suspension or
material limitation in trading in the Partnership's securities; (iii) a
suspension or material limitation in the trading of the securities of ;
(iv) a general moratorium on commercial banking activities declared by either
Federal or New York State authorities; or (v) the outbreak or escalation of
hostilities involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any such event
specified in this Clause (vi) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Units being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
25
<PAGE>
l. The Units at such Time of Delivery shall have been duly
listed, subject to notice of issuance, on the Exchange;
m. The Partnership shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement;
n. At the First Time of Delivery, (i) each of the Operative
Documents shall have been executed and delivered and become effective and (ii)
the transactions contemplated by the Operative Documents to occur at the First
Time of Delivery shall have been consummated;
o. [The Partnership has obtained and delivered to the
Underwriters executed copies of an agreement from each officer and director of
the General Partner, TransCan Northern and TransCanada Border Pipeline and each
executive officer and director of TransCanada, substantially to the effect set
forth in Section 5(e) hereof in form and substance satisfactory to you]; and
p. The Partnership shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of officers of the
Partnership satisfactory to you as to the accuracy of the representations and
warranties of the Partnership herein at and as of such Time of Delivery, as to
the performance by the Partnership of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Partnership shall have
furnished or caused to be furnished certificates as to the matters set forth in
subsections (a) and (h) of this Section.
8. a. Each of the TC Entities and TransCanada, jointly and
severally, will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that each
of the TC Entities and TransCanada shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Partnership by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
b. Each Underwriter will indemnify and hold harmless the TC
Entities and TransCanada against any losses, claims, damages or liabilities to
which any of the TC Entities or TransCanada may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Partnership by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the TC Entities and TransCanada for any legal or other expenses
reasonably incurred by the TC Entities and TransCanada in connection with
investigating or defending any such action or claim as such expenses are
incurred.
26
<PAGE>
c. Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party (which consent shall not be unreasonably withheld or delayed), be
counsel to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action
or claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by
or on behalf of any indemnified party.
d. If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the TC Entities and TransCanada on
the one hand and the Underwriters on the other from the offering of the
Units. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party
failed to give the notice required under subsection (d) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the TC Entities and
TransCanada on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the TC
Entities and TransCanada on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Partnership bear to
the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the TC Entities or TransCanada on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. Each of the TC Entities, TransCanada and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
subsection (e) were determined by PRO RATA allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Units underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
27
<PAGE>
e. The obligations of the TC Entities and TransCanada under
this Section 8 shall be in addition to any liability which they may otherwise
have and shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section 8 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each officer and director of the General
Partner (including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the General Partner) and
to each person, if any, who controls the General Partner within the meaning of
the Act.
9. a. If any Underwriter shall default in its obligation to
purchase the Units which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Units on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Units, then the Partnership shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Units on such terms. In the event
that, within the respective prescribed periods, you notify the Partnership that
you have so arranged for the purchase of such Units, or the Partnership notifies
you that they have so arranged for the purchase of such Units, you or the
Partnership shall have the right to postpone a Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Partnership agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Units.
b. If, after giving effect to any arrangements for the
purchase of the Units of a defaulting Underwriter or Underwriters by you and the
Partnership as provided in subsection (a) above, the aggregate number of such
Units which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Units to be purchased at such Time of Delivery, then the
Partnership shall have the right to require each non-defaulting Underwriter to
purchase the number of Units which such Underwriter agreed to purchase hereunder
at such Time of Delivery and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Units which
such Underwriter agreed to purchase hereunder) of the Units of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
28
<PAGE>
c. If, after giving effect to any arrangements for the
purchase of the Units of a defaulting Underwriter or Underwriters by you and the
Partnership as provided in subsection (a) above, the aggregate number of such
Units which remains unpurchased exceeds one-eleventh of the aggregate number of
all of the Units to be purchased at such Time of Delivery, or if the Partnership
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Units of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and to sell the
Optional Units) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Partnership, except for the expenses to be
borne by the Partnership and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Partnership and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Partnership, or any officer or director or
controlling person of the General Partner, and shall survive delivery of and
payment for the Units.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Partnership shall not be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason any Units are
not delivered by or on behalf of the Partnership as provided herein, the
Partnership will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Units not so delivered, but the Partnership
shall then be under no further liability to any Underwriter in respect of the
Units not so delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10005, (facsimile number 212-
_________) Attention: Registration Department; and if to the Partnership shall
be delivered or sent by mail, telex or facsimile transmission to the address of
the Partnership set forth in the Registration Statement, Attention: Secretary
with a copy to the Agent for Service of Process as set forth in the Registration
Statement; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire or telex constituting such Questionnaire, which address will be
supplied to the Partnership by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the TC Entities and TransCanada, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the General
Partner and each person who controls the General Partner or any Underwriter, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Units from any Underwriter shall be deemed
a successor or assign by reason merely of such purchase.
29
<PAGE>
14. Each of the parties hereto irrevocably (i) agrees that any legal
suit, action or proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby may be instituted in any court within the
Borough of Manhattan of New York City, (ii) waives, to the fullest extent it may
effectively do so, any objection which it may now or hereafter have to the
laying of venue of any such proceeding and (iii) submits to the exclusive
jurisdiction of such courts in any such suit, action or proceeding. TransCanada
has appointed ___________________, New York, New York, as its authorized agent
(the "Authorized Agent") upon whom process may be served in any such action
arising out of or based on this Agreement or the transactions contemplated
hereby which may be instituted in any such court by any Underwriter or by any
person who controls any Underwriter, expressly consents to the jurisdiction of
any such court in respect of any such action, and waives any other requirements
of or objections to personal jurisdiction with respect thereto. Such appointment
shall be irrevocable. TransCanada represents and warrants that the Authorized
Agent has agreed to act as such agent for service at process and agrees to take
any and all action, including the filing of any and all documents and
instruments, that may be necessary to continue such appointment in full force
and effect as aforesaid. Service of process upon the Authorized Agent and
written notice of such service to TransCanada shall be deemed, in every respect,
effective service of process upon such party.
15. In respect of any judgment or order given or made for any amount
due hereunder that is expressed and paid in a currency (the "judgment
currency") other than United States dollars, TransCanada will indemnify each
Underwriter against any loss incurred by such Underwriter as a result of any
variation as between (i) the rate of exchange at which the United States
dollar amount is converted into the judgment currency for the purpose of such
judgment or order and (ii) the rate of exchange at which an Underwriter is
able to purchase United States dollars with the amount of the judgment
currency actually received by such Underwriter. The foregoing indemnity shall
constitute a separate and independent obligation of TransCanada and shall
continue in full force and effect notwithstanding any such judgment or order
as aforesaid. The term "rate of exchange" shall include any premiums and
costs of exchange payable in connection with the purchase of or conversion
into United States dollars.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Partnership and each of the Representatives plus
one for each counsel counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, each of the
TC Entities and TransCanada. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Partnership for examination, upon request, but without warranty
on your part as to the authority of the signers thereof.
Very truly yours,
TC PIPELINES, LP
By: TC PipeLines GP, Inc.,
its General Partner
By:
Name:
Title:
TC PIPELINES INTERMEDIATE LIMITED
PARTNERSHIP
By: TC PipeLines GP, Inc.,
its General Partner
By:
Name:
Title:
30
<PAGE>
TC PIPELINES GP, INC.
By:
Name:
Title:
TRANSCAN NORTHERN LTD.
By:
Name:
Title:
TRANSCANADA BORDER PIPELINE LTD.
By:
Name:
Title:
TRANSCANADA PIPELINES LIMITED
By:
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
BY:
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
31
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
TOTAL NUMBER OF NUMBER OF OPTIONAL UNITS TO
FIRM UNITS TO BE BE PURCHASED IF MAXIMUM
UNDERWRITER PURCHASED OPTION EXERCISED
----------- --------- ----------------
<S> <C> <C>
Goldman, Sachs & Co.
Salomon Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Total.......................................................
</TABLE>
<PAGE>
ANNEX I
DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
i. They are independent certified public accountants with
respect to the Partnership and ____________ within the meaning of the
Act and the applicable published rules and regulations thereunder;
ii. In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Partnership for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been [SEPARATELY] furnished to the
representatives of the Underwriters (the "Representatives")[AND ARE
ATTACHED HERETO];
iii. They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which [HAVE BEEN SEPARATELY FURNISHED TO THE REPRESENTATIVES] [AND
ARE ATTACHED HERETO] and on the basis of specified procedures including
inquiries of officials of the Partnership who have responsibility for
financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that caused them
to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
iv. The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Partnership for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Partnership's Annual Reports on Form 10-K for such fiscal years;
v. They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
<PAGE>
vi. On the basis of limited procedures, not
constituting an examination in accordance with generally accepted
auditing standards, consisting of a reading of the unaudited financial
statements and other information referred to below, a reading of the
latest available interim
financial statements of _____________, inspection of the minute books
of _____________ since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of
_____________ responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the
consolidated long-term debt of the Partnership and
_____________, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
<PAGE>
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
vii. In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Partnership and _____________, which appear in the Prospectus,
or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Partnership and _____________ and have found
them to be in agreement.
<PAGE>
EXHIBIT 10.2
CONTRIBUTION, CONVEYANCE
AND
ASSUMPTION AGREEMENT
DATED AS OF ______ __, 1999
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS................................................................1
2. CONTRIBUTION OF INTERESTS IN NORTHERN BORDER PIPELINE......................1
3. CONTRIBUTION OF INTERESTS IN ILP...........................................2
4. TRANSFER OF INTERESTS IN MLP AND ILP TO GP; UNDERWRITERS' OVER-
ALLOTMENT OPTION.....................................................3
5. CONDITIONS TO CLOSING AND EFFECTIVENESS OF INDEMNIFICATION.................3
6. CLOSING....................................................................4
7. INDEMNIFICATION............................................................4
7.1 EXCULPATION AND INDEMNIFICATION BY THE TRANSFERORS...............4
7.2 EXCULPATION AND INDEMNIFICATION BY THE ILP.......................5
7.3 SPECIFIC INDEMNIFICATION ISSUES..................................5
7.4 NOTICE AND PAYMENT OF CLAIMS.....................................6
7.5 DEFENSE OF THIRD PARTY CLAIMS....................................7
7.6 COOPERATION AND PRESERVATION OF RECORDS..........................8
8. ARBITRATION................................................................9
9. MISCELLANEOUS..............................................................10
9.1 HEADINGS; REFERENCES; INTERPRETATION.............................10
9.2 SUCCESSORS AND ASSIGNS...........................................11
9.3 NO THIRD PARTY RIGHTS............................................11
9.4 COUNTERPARTS.....................................................11
9.5 GOVERNING LAW....................................................11
9.6 SEVERABILITY.....................................................11
9.7 DEED; BILL OF SALE; ASSIGNMENT...................................11
9.8 AMENDMENT OR MODIFICATION........................................11
9.9 INTEGRATION......................................................11
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This CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT (this
"Agreement"), dated as of ______ __, 1999, is entered into by and among
TRANSCANADA BORDER PIPELINE LTD., a Nevada corporation ("TRANSCANADA BORDER
PIPELINE"), TRANSCAN NORTHERN LTD., a Delaware corporation ("TRANSCAN NORTHERN"
and together with TransCanda Border PipeLine, the "TRANSFERORS"), TRANSCANADA
PIPELINES LIMITED, a Canadian corporation ("TRANSCANADA"), TC PIPELINES, LP, a
Delaware limited partnership (the "MLP"), TC PIPELINES INTERMEDIATE LIMITED
PARTNERSHIP, a Delaware limited partnership (the "ILP"), and TC PIPELINES GP,
INC., a Delaware corporation (the "GP").
RECITALS
TransCanada Border PipeLine owns a 6% general partner interest
(the "TRANSCANADA BORDER PIPELINE INTEREST") in Northern Border Pipeline
Company, a Texas general partnership ("NORTHERN BORDER PIPELINE").
TransCan Northern owns a 24% general partner interest (the
"TRANSCAN NORTHERN INTEREST," and together with the TransCanada Border PipeLine
Interest, the "TRANSFERRED INTERESTS") in Northern Border Pipeline.
The parties hereto desire to set forth their mutual agreement
regarding the Transferred Interests and related matters.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
hereto agree as follows:
1. DEFINITIONS.
Any capitalized term used herein but not defined shall have
the meaning given such term in that certain Amended and Restated Agreement of
Limited Partnership of TC PipeLines, LP dated __________, 1999 (the "MLP
PARTNERSHIP AGREEMENT").
2. CONTRIBUTION OF INTERESTS IN NORTHERN BORDER PIPELINE.
On the date hereof (the "EFFECTIVE DATE"), the following
transactions shall occur:
(a) TransCanada Border PipeLine hereby conveys, contributes,
transfers, assigns and delivers as a capital contribution to the ILP (and the
ILP accepts and agrees to be admitted with), a general partner interest in
Northern Border Pipeline representing a 6% "Partner's Percentage" (which term
shall, for purposes of this
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SECTION 2, have the meaning assigned to it in the Northern Border Pipeline
Partnership Agreement) in Northern Border Pipeline, and in exchange therefor,
the ILP hereby issues to TransCanada Border PipeLine (i) a 1.0101% general
partner interest in the ILP and (ii) an 18.9899% limited partner interest in the
ILP representing a combined 20% partner interest in the ILP; and
(b) TransCan Northern hereby conveys, contributes, transfers,
assigns and delivers as a capital contribution to the ILP (and the ILP accepts
and agrees to be admitted with), a general partner interest in Northern Border
Pipeline representing a 24% Partner's Percentage in Northern Border Pipeline,
and in exchange therefor, the ILP hereby issues to TransCan Northern an 80%
limited partner interest in the ILP.
TO HAVE AND TO HOLD the above described interests in Northern
Border Pipeline unto the ILP, its successors and assigns, forever, subject,
however, to the terms and conditions stated in this Agreement. Each of
TransCanada Border PipeLine and TransCan Northern acknowledges and agrees that
the foregoing contribution by it of such general partner interest in Northern
Border Pipeline is intended to, and shall be construed as, a contribution by
such party of all of its interest as a general partner in Northern Border
Pipeline (including, without limitation, all of its rights of every kind and
character in and to Northern Border Pipeline and under the Northern Border
Pipeline Partnership Agreement).
3. CONTRIBUTION OF INTERESTS IN ILP.
Upon completion of the transactions in SECTION 2 of this
Agreement on the Effective Date, the following transactions shall occur:
(a) The MLP shall issue and sell 14,300,000 Common Units to
the Underwriters in a public offering as described in the Underwriting Agreement
(the "PUBLIC OFFERING");
(b) TransCanada Border PipeLine hereby conveys, contributes,
transfers, assigns and delivers to the MLP, as a capital contribution, an
18.9899% limited partner interest in the ILP, and in exchange therefor, the MLP
hereby issues to TransCanada Border PipeLine (i) a 1.0% general partner interest
in the MLP, (ii) a limited partner interest in the MLP consisting of 14,286
Common Units and 3,200,000 Subordinated Units, and (iii) the Incentive
Distribution Rights; and
(c) TransCan Northern hereby conveys, contributes, transfers,
assigns and delivers to the MLP, as a capital contribution, an 80% limited
partner interest in the ILP, and in exchange therefor, the MLP hereby issues to
TransCan Northern a limited partner interest in the MLP consisting of 14,285,714
Common Units.
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TO HAVE AND TO HOLD the above described limited partner
interests in the ILP unto the MLP, its successors and assigns, forever, subject,
however, to the terms and conditions stated in this Agreement. Each of
TransCanada Border PipeLine and TransCan Northern acknowledges and agrees that
the foregoing contribution by it of such limited partner interest in the ILP is
intended to, and shall be construed as, a contribution by such party of all of
its interest as a limited partner in the ILP (including, without limitation, all
of its rights of every kind and character as a limited partner in and to the ILP
and under the ILP Partnership Agreement).
4. TRANSFER OF INTERESTS IN MLP AND ILP TO GP; UNDERWRITERS'
OVER-ALLOTMENT OPTION.
(a) Upon completion of the transactions in SECTION 3 of this
Agreement on the Effective Date, the following transactions shall occur:
(i) The MLP shall use the proceeds of the Public Offering,
after underwriting discounts and commissions and payment of expenses, to
redeem all of the Common Units of the MLP issued to TransCanada Border
PipeLine and TransCan Northern under SECTION 3 of this Agreement; and
(ii) TransCanada Border PipeLine hereby conveys,
contributes, transfers, assigns and delivers to the GP as a contribution to
capital (i) the 1.0% general partner interest in the MLP, (ii) the 1.0101%
general partner interest in the ILP, (iii) the limited partner interest in
the MLP consisting of 3,200,000 Subordinated Units and (iv) the Incentive
Distribution Rights.
(b) If the over-allotment option is exercised by the
Underwriters pursuant to the Underwriting Agreement:
(i) The MLP shall issue and sell up to an additional
2,145,000 Common Units (the "OVERALLOTMENT UNITS") to the Underwriters in
the Public Offering in respect of any portion of the over-allotment option
exercised by the Underwriters; and
(ii) The MLP shall use the proceeds received from the
issuance and sale of the Overallotment Units to redeem Subordinated Units
held by the GP on a one-for-one basis equal to the number of Common Units
issued upon exercise of the over-allotment option.
5. CONDITIONS TO CLOSING AND EFFECTIVENESS OF INDEMNIFICATION.
(a) The obligations of each party to close the transactions
contemplated by this Agreement shall be subject to the prior satisfaction of
each of the following conditions:
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(i) There shall not be in effect any injunction or
restraining order issued by a court of competent jurisdiction barring the
consummation of any of the transactions contemplated by this Agreement; and
(ii) All of the conditions under the Underwriting
Agreement (other than those conditions relating to the consummation of the
transactions contemplated by this Agreement) shall have been (or the MLP
believes on the Effective Date, as defined in SECTION 6, will be) satisfied
or waived and the Underwriting Agreement shall be in full force and effect,
enforceable against the Underwriters in accordance with its terms (subject
to the consummation of the transactions contemplated by this Agreement).
(b) SECTION 7 shall become operative upon the closing of the
transactions contemplated by this Agreement.
6. CLOSING.
Subject to the satisfaction of the conditions in SECTION 5 of this
Agreement, the closing of the transactions contemplated by this Agreement shall
take place on the Effective Date at the offices of Fried, Frank, Harris, Shriver
& Jacobson, One New York Plaza, New York, New York 10004 (or at such other place
as the parties may agree).
7. INDEMNIFICATION.
7.1 EXCULPATION AND INDEMNIFICATION BY THE TRANSFERORS. Subject to
SECTION 7.3, the Transferors and their Affiliates shall, without any further
responsibility or liability of, or recourse to, the MLP or the ILP, absolutely
and irrevocably be solely liable and responsible for (i) their respective
federal, state, local and foreign income tax and corporate franchise tax
liabilities of the Transferors and their Affiliates (including all federal,
state, local and foreign income tax liabilities attributable to ownership of the
Transferred Interests prior to the Effective Time), including any such income
tax liabilities of the Transferors and their Affiliates that may result from the
consummation of the transactions contemplated by this Agreement, and (ii) any
and all claims, liabilities and obligations of the Transferors and their
Affiliates (whether accruing or arising before, on or after the Effective Date)
which primarily arise out of or relate to any property, operations or business
of the Transferors or their Affiliates other than with respect to the
Transferred Interests (the items in (i) and (ii), collectively the "EXCLUDED
LIABILITIES"). The MLP or the ILP shall not be liable to any of the Transferors
and their Affiliates or any third parties for any reason whatsoever on account
of any of the Excluded Liabilities.
For purposes of this Agreement, "AFFILIATES" of the Transferors include
TransCanada but shall exclude the MLP, the ILP, Northern Border Pipeline and
their respective Subsidiaries.
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The Transferors and TransCanada shall indemnify, defend, save and hold
harmless the MLP and the ILP from and against all claims, liabilities,
obligations, losses, costs, costs of defense (as and when incurred), including
expenses, fines, charges, penalties, allegations, demands, damages (including
but not limited to actual, punitive or consequential, foreseen or unforeseen,
known or unknown), settlements, awards or judgments of any kind or nature
whatsoever and reasonable outside attorneys' and consultants' fees, to the
extent arising out of (a) the Excluded Liabilities, or (b) the breach by the
Transferors or TransCanada of any of their respective obligations under this
Agreement, all of which are hereinafter collectively referred to as the
"TRANSFEREE DAMAGES".
Transferee Damages with respect to which, but only to the extent that,
any proceeds are received by, or on behalf of, the MLP, the ILP or any of their
Affiliates, from any third party insurance policy (and are non-reimbursable by
the MLP, the ILP or any of their Affiliates), shall not be the subject of
indemnification under this Agreement.
7.2 EXCULPATION AND INDEMNIFICATION BY THE ILP. Subject to SECTION 7.3,
the ILP shall, without any further responsibility or liability of, or recourse
to, any of the Transferors and their Affiliates, absolutely and irrevocably
assume and be solely liable and responsible for any and all claims, liabilities
and obligations (whether accruing or arising before, on or after the Effective
Date) which primarily arise out of or relate to the Transferred Interests, other
than Excluded Liabilities (the "ASSUMED LIABILITIES"). None of the Transferors
and their Affiliates shall be liable to the ILP or any third parties for any
reason whatsoever on account of any of the Assumed Liabilities.
The ILP shall indemnify, defend, save and hold harmless each of the
Transferors and their Affiliates from and against all claims, liabilities,
obligations, losses, costs, costs of defense (as and when incurred), including
expenses, fines, charges, penalties, allegations, demands, damages (including
but not limited to actual, punitive or consequential, foreseen or unforeseen,
known or unknown), settlements, awards or judgments of any kind or nature
whatsoever and reasonable outside attorneys' and consultants' fees, to the
extent arising out of (a) the Assumed Liabilities or (b) the breach by the ILP
of any of its obligations under this Agreement, all of which are hereinafter
collectively referred to as the "TRANSFEROR DAMAGES".
Transferor Damages with respect to which, but only to the extent that,
any proceeds are received by, or on behalf of, the Transferors, or by any of
their Affiliates, from any third party insurance policy (and are
non-reimbursable by the Transferors or any of their Affiliates), shall not be
the subject of indemnification under this Agreement.
7.3 SPECIFIC INDEMNIFICATION ISSUES. (a) In the event a claim, demand,
action or proceeding is brought by a third party in which the liability as
between the Transferors and their Affiliates, on the one hand, and the ILP, on
the other hand, is determined after
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trial in any judgment, award or decree to be joint or concurrent or in which the
entitlement to indemnification hereunder is not readily determinable, the
parties shall negotiate in good faith in an effort to agree, as between the
Transferors and their Affiliates, on the one hand, and the ILP, on the other
hand, on the proper allocation of liability or entitlement to indemnification,
as well as the proper allocation of the costs of any joint defense or settlement
pursuant to SECTION 7.5(D) of this Agreement, all in accordance with the
provisions of, and the principles set forth in, this Agreement. In the absence
of any such agreement, such allocation of liability, entitlement to
indemnification and allocation of costs shall be subject to ultimate resolution
between the Transferors and their Affiliates, on the one hand, and the ILP, on
the other hand, pursuant to SECTION 8 of this Agreement.
(b) It is acknowledged that after the Effective Time, the
parties may have various business relationships, which relationships will be
described in contracts, agreements and other documents entered into by the
relevant parties. Such documents may include agreements by the parties and their
affiliates to supply, after the Effective Time, credit or services. Such
business relationships shall not be subject to the indemnity provisions hereof,
unless the parties expressly agree to the contrary in the agreements governing
such relationships.
7.4 NOTICE AND PAYMENT OF CLAIMS. (a) If any person entitled to a
defense and/or indemnification under this Agreement (the "INDEMNIFIED PARTY")
determines that it is or may be entitled to a defense or indemnification by the
ILP or any of the Transferors or their Affiliates, as the case may be (the
"INDEMNIFYING PARTY"), under this Agreement:
(i) The Indemnified Party shall deliver promptly to the
Indemnifying Party a written notice and demand for a defense or
indemnification, specifying the basis for the claim for defense and/or
indemnification, the nature of the claim, and if known, the amount for
which the Indemnified Party reasonably believes it is entitled to be
indemnified. Nothing in this subparagraph shall be interpreted to
invalidate any claim by the Indemnified Party to be entitled to
indemnification, except to the extent the failure of the Indemnified Party
to deliver such notice resulted in actual prejudice.
(ii) The Indemnifying Party shall have 30 days from
receipt of the notice requesting indemnification within which to either:
(A) assume the defense of such litigation or claim; (B) pay the claim in
immediately available funds; (C) reserve its rights pending resolution
under SECTION 7.5(D); or (D) object in accordance with CLAUSE (B) of this
SECTION 7.4. This 30-day period may be extended by agreement of the
parties. Nothing in this subparagraph shall be interpreted to abrogate or
delay a party's obligation to provide the other with a defense under this
Agreement.
(b) The Indemnifying Party may object to the claim for defense
and/or indemnification set forth in any notice; PROVIDED, HOWEVER, that if the
Indemnifying Party
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does not give the Indemnified Party written notice setting forth its objection
to such claim (or the amount thereof) and the grounds therefor within the same
30-day period (or any extended period), the Indemnifying Party shall be deemed
to have acknowledged its liability to provide a defense or to pay the amount of
such claim and, subject to SECTION 8 of this Agreement, the Indemnified Party
may exercise any and all of its rights under applicable law to collect such
amount or obtain such defense. Any objection to a claim for a defense or
indemnification shall be resolved in accordance with SECTION 8 of this
Agreement.
(c) To the extent provided in the last sentence of SECTION 7.1
of this Agreement or the last sentence of SECTION 7.2 of this Agreement, the
right to a defense or indemnification under this Agreement applies only insofar
as defense and indemnification are not provided for by insurance (whether
through a third party or otherwise). Nevertheless, the potential availability of
insurance coverage to the Transferors, their Affiliates, or the ILP shall not
relieve the other party of its obligations for defense or indemnification
hereunder, or delay either party's obligation to the other to assume a defense
or pay any sums due hereunder.
(d) Payments due to be made to any Indemnified Party under
this SECTION 7 shall bear interest from the date on which the Indemnified Party
paid any amount or actually suffered a loss in respect of Transferee Damages or
Transferor Damages, as the case may be, to but excluding the date of actual
payment (whether before or after judgment) at the prime rate announced by
Chemical Bank for its corporate customers during such period.
(e) Payments due to be made under this Agreement shall be free
and clear of all deductions, withholdings, set-offs or counterclaims whatsoever,
except as may be required by law.
7.5 DEFENSE OF THIRD PARTY CLAIMS. (a) If the Indemnified Party's claim
for indemnification is based, under this Agreement, on a claim, demand,
investigation, action or proceeding, judicial or otherwise, brought by a third
party, and the Indemnifying Party does not object under SECTION 7.4(B) of this
Agreement, the Indemnifying Party shall, within the 30 day period (or any
extended period) referred to in SECTION 7.4(A) of this Agreement, assume the
defense of such third-party claim at its sole cost and expense and shall
thereafter be designated as the "CASE HANDLER." Any such defense shall be
conducted by attorneys employed by the Indemnifying Party. The Indemnified Party
may retain attorneys of its own choosing to participate in such defense at the
Indemnified Party's sole cost and expense.
(b) If the Indemnifying Party assumes the defense of any such
third-party claim, the Indemnifying Party may settle or compromise the claim
without the prior consent of the Indemnified Party so long as all present and
future claims relating to the
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compromised claim against the Indemnified Party are irrevocably and
unconditionally released in full.
(c) The Indemnifying Party shall pay to the Indemnified Party
in immediately available funds the amount for which the Indemnified Party is
entitled to be indemnified within 30 days after the settlement or compromise of
such third-party claim or the judgment of a court of competent jurisdiction (or
within such longer period as agreed to by the parties). If the Indemnifying
Party does not assume the defense of any such third-party claim, the
Indemnifying Party shall be bound by the result obtained with respect thereto by
the Indemnified Party, except that the Indemnifying Party has the right to
contest that it is obligated to the Indemnified Party under the terms of this
Agreement, provided the Indemnifying Party shall have raised its objection in a
timely manner under SECTION 7.4 of this Agreement.
(d) In the event a claim, demand, action or proceeding is
brought by a third party in which the liability as between the ILP and the
Transferors and their Affiliates is alleged to be joint or in which the
entitlement to indemnification hereunder is not readily determinable, the
parties shall cooperate in a joint defense. Such joint defense shall be under
the general management and supervision of the party which is expected to bear
the greater share of the liability, and which will be considered the Case
Handler, unless otherwise agreed; PROVIDED, HOWEVER, that neither party shall
settle or compromise any such joint defense matter without the consent of the
other. The costs of such joint defense, any settlement and any award or judgment
(unless the award or judgment specifies otherwise) shall be borne as the parties
may agree; or in the absence of such agreement, such costs shall be borne by the
party incurring such costs, subject to ultimate resolution between the ILP and
the Transferors pursuant to SECTION 8 of this Agreement.
7.6 COOPERATION AND PRESERVATION OF RECORDS. (a) The ILP and the
Transferors and their Affiliates shall cooperate with one another fully and in a
timely manner in connection with the defense of any litigation and claims
pending as of the Effective Date or brought, threatened or alleged after the
Effective Date, against the ILP and/or the Transferors and their Affiliates.
(b) Such cooperation shall include, without limitation, making
available to the other party, during normal business hours and upon reasonable
notice, all books, records and information ("LITIGATION RECORDS"), officers and
employees (without substantial interruption of employment) necessary or useful
in connection with any actual or threatened claim, investigation, audit, action
or proceeding.
(c) Each party shall maintain the Litigation Records, or at
the request of the other party, shall issue, notices exempting from destruction
any Litigation Records which the requesting party represents may be necessary to
the defense of, or required to be produced in discovery in connection with, any
such claim, investigation, audit, action
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or proceeding and shall refrain from destroying any such Litigation Records
until authorized by the requesting party. The requesting party shall notify the
other party promptly when the Litigation Records are no longer required to be
maintained.
(d) The party requesting access to Litigation Records or
officers and employees pursuant to CLAUSE (B) hereof or preservation of
Litigation Records pursuant to CLAUSE (C) hereof shall bear all reasonable
out-of-pocket expenses (except reimbursement of salaries, employee benefits and
general overhead) incurred by the other party in connection with providing such
Litigation Records or officers and employees.
(e) The party providing Litigation Records hereunder may
elect, upon a reasonable basis and within a reasonable time, to designate all or
a portion of the Litigation Records as confidential or proprietary. If
Litigation Records are so designated, the party receiving them will treat them
as it would its own confidential or proprietary information and will take all
reasonable steps to protect and safeguard the Litigation Records while in its
own custody and will attempt to shield such information from disclosure by
motions to quash, motions for a protective order, redaction or other appropriate
actions.
8. ARBITRATION.
Resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract, tort, statute or
otherwise, including but not limited to, disputes over arbitrability and
disputes in connection with claims by third parties (collectively, "DISPUTES"),
shall be exclusively governed by and settled in accordance with the provisions
of this SECTION 8; PROVIDED, HOWEVER, that nothing contained herein shall
preclude any party from seeking or obtaining (a) injunctive relief or (b)
equitable or other judicial relief, in each case to preserve the status quo,
pending resolution of Disputes hereunder. Any party may commence proceedings
hereunder by delivering a written notice to any other party providing reasonable
description of the Dispute to the other, and expressly requesting arbitration
hereunder. The parties hereby agree to submit all Disputes to arbitration under
the terms hereof, which arbitration shall be final, conclusive and binding upon
the parties, their successors and assigns. The arbitration shall be conducted in
Houston, Texas, by a single arbitrator (the "ARBITRATOR") selected by agreement
of the parties not later than ten (10) days after delivery of the Demand or,
failing such agreement, appointed pursuant to the commercial arbitration rules
of the American Arbitration Association, as amended from time to time (the "AAA
RULES"). If the arbitrator so selected becomes unable to serve, his or her
successor shall be similarly selected or appointed. The arbitration shall be
conducted pursuant to the Federal Arbitration Act and such procedures as the
parties involved in any Dispute may agree, or, in the absence of or failing such
agreement, pursuant to the AAA Rules. Notwithstanding the foregoing: (i) each
party shall have the right to audit the books and records of each other party
that are reasonably related to the Dispute; (ii) each party shall provide to
each
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other Party involved in the applicable Dispute, reasonably in advance of any
hearing, copies of all documents which such party intends to present in such
hearing; and (iii) each party shall be allowed to conduct reasonable discovery
through written requests for information, document requests, requests for
stipulation of fact and depositions, the nature and extent of which discovery
shall be determined by the Arbitrator, taking into account the needs of the
parties and the desirability of making discovery expeditious and cost effective.
All hearings shall be conducted on an expedited schedule, and all proceedings
shall be confidential. Any party may, at its expense, make a stenographic record
thereof. The Arbitrator shall complete all hearings not later than ninety days
after its selection or appointment, and shall make a final award not later than
thirty days thereafter. The award shall be in writing and shall specify the
factual and legal basis for the award. The Arbitrator shall apportion all costs
and expenses of arbitration, including the Arbitrator's fees and expenses and
fees and expenses of experts, between the prevailing and non-prevailing Party as
the Arbitrator deems fair and reasonable. Notwithstanding the foregoing, in no
event may the Arbitrator award multiple, punitive or exemplary damages. Any
arbitration award shall be binding and enforceable against each Party involved
in the particular Dispute and judgment may be entered thereon in any court of
competent jurisdiction.
9. MISCELLANEOUS.
9.1 HEADINGS; REFERENCES; INTERPRETATION. All article and section
headings in this Agreement are for convenience only and shall not be deemed to
control or affect the meaning or construction of any of the provisions hereof.
All references herein to articles and sections shall, unless the context
requires a different construction, be deemed to be references to the articles
and sections of this Agreement. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders, and the singular shall include the plural and vice versa. The use
herein of the word "including" following any general statement, term or matter
shall not be construed to limit such statement, term or matter to the specific
items or matters set forth immediately following such word or to similar items
or matters, whether or not nonlimiting language (such as "without limitation,"
"but not limited to," or words of similar import) is used with reference
thereto, but rather shall be deemed to refer to all other items or matters that
could reasonably fall within the broadest possible scope of such general
statement, term or matter. Except as otherwise expressly provided herein, any
reference in this Agreement to any document shall mean such document as amended,
restated, supplemented or otherwise modified from time to time.
9.2 SUCCESSORS AND ASSIGNS. The Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
9.3 NO THIRD PARTY RIGHTS. The provisions of this Agreement are not
intended to and do not create rights in any other person or confer upon any
other person any
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benefits, rights or remedies and no person is or is intended to be a third party
beneficiary of any of the provisions of this Agreement.
9.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one agreement binding on
the parties hereto.
9.5 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the internal the laws of the State of Texas without regard
to the conflicts of law principles thereof.
9.6 SEVERABILITY. If any of the provisions of this Agreement are held
by any court of competent jurisdiction to contravene, or to be invalid under,
the laws of any political body having jurisdiction over the subject matter
hereof, such contravention or invalidity shall not invalidate the entire
Agreement. Instead, this Agreement shall be construed as if it did not contain
the particular provision or provisions held to be invalid, and an equitable
adjustment shall be made and necessary provision added so as to give effect to
the intention of the parties as expressed in this Agreement at the time of
execution of this Agreement.
9.7 DEED; BILL OF SALE; ASSIGNMENT. To the extent required by
applicable law, this Agreement shall also constitute a "deed", "bill of sale" or
"assignment" of the Transferred Interests.
9.8 AMENDMENT OR MODIFICATION. This Agreement may be amended or
modified, or any provision waived or rescinded, from time to time only by the
written agreement of the Parties directly bound by, or benefited from, the
provisions in respect of which such amendment, modification, waiver or
rescission is sought.
9.9 INTEGRATION. This Agreement supersedes all previous understandings
or agreements between the parties, whether oral or written, with respect to its
subject matter. This Agreement constitutes an integrated agreement which contain
the entire understanding of the parties with respect to the subject matter
hereto. No understanding, representation, promise or agreement, whether oral or
written, is intended to be or shall be included in or form part of this
Agreement unless it is contained in a written amendment hereto executed by the
parties hereto after the date of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto as of the date first above written.
TRANSCANADA BORDER PIPELINE LTD.
By: ________________________________
Name:
Title:
TRANSCAN NORTHERN LTD.
By: _______________________________
Name:
Title:
TRANSCANADA PIPELINES LIMITED
By: ________________________________
Name:
Title:
TC PIPELINES, LP
By: TC PIPELINES GP, INC.
its general partner
By: ________________________________
Name:
Title:
TC PIPELINES INTERMEDIATE LIMITED
PARTNERSHIP
By: TC PIPELINES GP, INC.
its general partner
By: ________________________________
Name:
Title:
-12-
<PAGE>
TC PIPELINES GP, INC.
By: ________________________________
Name:
Title:
-13-
<PAGE>
Exhibit 15.1
[Letterhead of Arthur Andersen, LLP]
April 29, 1999
TC PipeLines, LP
Four Greenspoint Plaza
16945 Northchase Drive
Houston, Texas 77060
We are aware that TC PipeLines, LP has included in its Registration Statement
No. 333-69947 the unaudited balance sheet of Northern Border Pipeline Company
as of March 31, 1999, the related unaudited statements of income and cash
flows for the three-month periods ended March 31, 1999 and 1998, and the
related unaudited statement of changes in partners' capital for the
three-month period ended March 31, 1999, which includes our report dated
April 14, 1999, covering the unaudited interim financial information.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered a part of the Registration Statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen, LLP
<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 19, 1999, and January 26,
1998, included herein and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
Omaha, Nebraska
April 29, 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
May 3, 1999
