<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-88577
$200,000,000
NORTHERN BORDER PIPELINE COMPANY
OFFER TO EXCHANGE
UP TO $200,000,000 7.75% SENIOR NOTES DUE 2009, SERIES A
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
ANY AND ALL OUTSTANDING 7.75% SENIOR NOTES DUE 2009
We are offering to exchange up to $200,000,000 aggregate principal amount
of our new 7.75% Senior Notes due 2009, Series A for any and all of our existing
7.75% Senior Notes due 2009. The terms of the new notes are substantially
identical to the terms of the existing notes, except that we have registered the
new notes with the Securities and Exchange Commission. Because we have
registered the new notes, the new notes generally will not be subject to
transfer restrictions and will not be entitled to registration rights.
YOU SHOULD CAREFULLY CONSIDER "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
THE NEW NOTES:
- The new notes will mature on September 1, 2009.
- We will pay interest on the new notes semiannually on March 1 and
September 1 of each year beginning March 1, 2000 at the rate of 7.75% per
annum.
- We may redeem the new notes, in whole, at any time, or in part, from time
to time, if we pay noteholders a redemption price which includes a
make-whole premium. There is no sinking fund for the notes.
THE EXCHANGE OFFER:
- Our offer is subject to customary conditions relating to the proper
tender of existing notes, which we may waive.
- The exchange offer is not conditioned upon a minimum aggregate principal
amount of existing notes being tendered.
- Our offer to exchange existing notes for new notes will be open until
5:00 p.m., New York City time, on February 11, 2000, unless we extend the
expiration date.
- You may withdraw your tender of existing notes at any time prior to the
expiration of the exchange offer, unless we have already accepted your
existing notes for exchange.
- If you fail to tender your existing notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- The exchange of existing notes for new notes in the exchange offer will
not be a taxable event for U.S. federal income tax purposes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
January 12, 2000
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Summary Financial and Operating Data........................ 10
Risk Factors................................................ 11
Use of Proceeds............................................. 16
Capitalization.............................................. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 27
Management.................................................. 35
Beneficial Ownership of Partnership Interests............... 40
Material Relationships and Related Transactions............. 40
The Exchange Offer.......................................... 41
Description of the Notes.................................... 49
United States Federal Tax Considerations.................... 61
Northern Border Pipeline Company Partnership Agreement...... 64
Plan of Distribution........................................ 68
Legal Matters............................................... 69
Experts..................................................... 69
Reliance on Information..................................... 69
Forward Looking Statements.................................. 69
Where You Can Find Additional Information................... 70
Index to Financial Statements............................... F-1
</TABLE>
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SUMMARY
The summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider. You should
read the entire prospectus carefully, including the "Risk Factors" section and
the financial statements and related notes, and should consider consulting with
your own legal and tax advisors. The existing notes and new notes are
collectively referred to in this prospectus as the "notes."
THE EXCHANGE OFFER
On August 17, 1999, we completed the private offering of $200,000,000 of
our 7.75% Senior Notes due 2009. We entered into a registration rights agreement
with the initial purchasers in the private offering of the existing notes in
which we agreed, among other things, to use our reasonable best efforts to
ensure that the registration statement registering new notes, of which this
prospectus forms a part, becomes effective no later than February 13, 2000, or
180 days after the original issuance of the existing notes. This exchange offer
entitles you to exchange your existing notes for new notes with identical terms
that are registered with the Securities and Exchange Commission. You should read
the discussion below and under the headings "Description of the Notes" and "The
Exchange Offer" for further information regarding the new notes and the exchange
offer.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer......... We are offering to exchange up to $200,000,000 of
the new notes for up to $200,000,000 of the
existing notes. Existing notes may be exchanged
only in $1,000 increments. The new notes will
evidence the same debt as the existing notes, and
the existing notes and the new notes will be
governed by the same indenture.
Resale..................... We believe that the new notes issued in the
exchange offer may be offered for resale, resold
and otherwise transferred by you without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that:
- the new notes are being acquired in the ordinary
course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the new notes issued to you
in the exchange offer; and
- you are not an "affiliate" of ours.
If any of these conditions are not satisfied and
you transfer any new notes issued to you in the
exchange offer without delivering a prospectus
meeting the requirements of the Securities Act of
1933 or without an exemption from registration of
your new notes from such requirements, you may
incur liability under the Securities Act. We do not
assume or indemnify you against any such liability.
Each broker-dealer that is issued new notes in the
exchange offer for its own account in exchange for
notes which were acquired as a result of
market-making or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of the new notes. Such
broker-dealer may use this prospectus for an offer
to resell, resale or other retransfer of the new
notes issued to it in the exchange offer.
Broker-dealers who
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acquired existing notes directly from us in the
initial offering and not as a result of
market-making or other trading activities must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with the secondary resale of the new
notes. Such broker-dealers may not use this
prospectus in connection with the resale of the new
notes.
Record Date................ We mailed this prospectus and the related exchange
offer documents to registered holders of existing
notes on January 12, 2000.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time, February 11, 2000 or a later date
and time if we extend it.
Withdrawal................. You may withdraw the tender of your existing notes
pursuant to the exchange offer at any time prior to
5:00 p.m., New York City time, on the expiration
date. To withdraw, the exchange agent must receive
a notice of withdrawal at its address indicated
under "The Exchange Offer -- Exchange Agent" before
5:00 p.m., New York City time, on the expiration
date. We will return, as promptly as practicable
after the expiration or termination of the exchange
offer, any existing notes not accepted for exchange
for any reason without expense to you.
Conditions to the Exchange
Offer...................... The exchange offer is subject to customary
conditions relating to the proper tender of
existing notes, which we may waive. See "The
Exchange Offer -- Conditions of the Exchange
Offer."
Procedures for Tendering
Existing Notes............. If you wish to accept the exchange offer, you must
complete, sign and date the accompanying letter of
transmittal in accordance with the instructions in
the letter of transmittal, and deliver the letter
of transmittal, along with the existing notes
(unless you hold your existing notes through DTC,
the Euroclear System -- "Euroclear" -- , or Cedel
Bank, Societe Anonyme -- "CEDEL") and any other
required documentation, to the exchange agent. By
executing the letter of transmittal, you will make
representations that ensure your ability to
transfer the new notes without compliance with the
prospectus delivery requirements set forth under
"-- Resale" above.
If you hold your existing notes through DTC,
Euroclear or CEDEL, by participating in the
exchange offer, you will agree to be bound by the
letter of transmittal as though you had executed
such letter of transmittal.
We will accept for exchange any and all existing
notes which are properly tendered (and not
withdrawn) in the exchange offer prior to the
expiration date. The new notes issued pursuant to
the exchange offer will be delivered promptly
following the expiration date. See "The Exchange
Offer -- Acceptance of Existing Notes for
Exchange."
Effect of Not Tendering.... Existing notes that are not tendered or that are
tendered but not accepted will, following the
completion of the exchange offer, continue to be
subject to the existing restrictions upon transfer
thereof. We will have no further obligation to
provide for the registration under the Securities
Act of such existing notes.
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Special Procedures for
Beneficial Owners.......... If you are the beneficial owner of book-entry
interests and your name does not appear on a
security position listing of DTC, Euroclear or
CEDEL as the holder of such book-entry interests or
if you are a beneficial owner of existing notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such book-entry
interest or existing notes in the exchange offer,
you should contact the registered holder promptly
and instruct such person to tender on your behalf.
Guaranteed Delivery
Procedures................. If you wish to tender your existing notes and all
required documentation and procedures cannot be
obtained or completed prior to the expiration date,
you may tender your existing notes according to the
guaranteed delivery procedures set forth under "The
Exchange Offer -- Procedures for Tendering Existing
Notes -- Guaranteed Delivery."
Registration Rights
Agreement.................. We sold the existing notes to the initial
purchasers in a private placement in reliance on
Regulation D, Rule 144A and Regulation S under the
Securities Act. In connection with the sale, we
entered into a registration rights agreement with
the initial purchasers under which we agreed to:
- file a registration statement relating to an
exchange offer, not later than 120 days
after the closing of the existing note
transaction, which would enable holders to
exchange the existing notes for new notes
with identical terms, but without transfer
restrictions;
- use our reasonable best efforts to cause the
registration statement to become effective
within 180 days after the existing notes
were issued;
- use our reasonable best efforts to complete
the exchange within 30 days after the
registration statement becomes effective;
and
- file a shelf registration statement for the
resale of the existing notes if we cannot
effect an exchange offer within the
specified period and in other circumstances
described in the registration rights
agreement.
The interest rate on the notes will increase by
0.25% each time we do not meet the deadlines
referred to in, or otherwise comply with our
obligations under, the registration rights
agreement. These deadlines and obligations are
summarized above. The interest rate shall be
increased by 0.25% per annum per default each 90
days that the default is not cured. Such interest
rate increases, however, may not exceed a total of
1.0% per annum.
The exchange offer satisfies all registration
rights under which we are currently obligated. Such
rights terminate upon consummation of the exchange
offer. You will not be entitled to any exchange or
registration rights with respect to the new notes.
Federal Tax
Considerations............. Exchanging your existing notes for new notes
pursuant to the exchange offer will not constitute
a sale or an exchange for federal income tax
purposes. See "United States Federal Tax
Considerations."
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Use of Proceeds............ We will not receive any proceeds from the exchange
of notes pursuant to the exchange offer.
Exchange Agent............. We have appointed Bank One Trust Company, National
Association, as the exchange agent for the exchange
offer. The mailing address and telephone number of
the exchange agent are 1 Bank One Plaza, Suite
IL1-0126, Chicago, Illinois 60670, phone: (402)
496-1960. See "The Exchange Offer -- Exchange
Agent."
SUMMARY OF THE TERMS OF THE NEW NOTES
The terms of the new notes and the existing notes are substantially the
same in all material respects, except that (1) the new notes will be freely
transferable by the holders except as otherwise provided in this prospectus; (2)
holders of new notes will have no registration rights; and (3) the new notes
will contain no provisions for an increase in their stated interest rate.
New Notes Offered.......... $200,000,000 principal amount of 7.75% Senior Notes
due 2009, Series A.
Interest Rate.............. 7.75% per annum.
Interest Payment Dates..... Interest will be paid on March 1 and September 1 of
each year, beginning March 1, 2000.
Maturity................... September 1, 2009.
Use of Proceeds............ We will not receive any cash proceeds from the
exchange offer.
Ratings.................... The following ratings have been obtained on the
notes: A3 by Moody's Investors Service, Inc., A- by
Standard & Poor's Ratings Services and A- by Duff &
Phelps Credit Rating Co. These ratings have been
obtained with the understanding that the rating
agencies will continue to monitor our credit
ratings, and will make future adjustments when they
feel it is necessary. A rating reflects only the
view of a rating agency. It is not a recommendation
to buy, sell or hold the notes. Any rating can be
revised upward or downward or withdrawn at any time
by a rating agency if it decides the circumstances
warrant such a change.
Ranking.................... The new notes will be senior unsecured and
unsubordinated obligations and will rank equally
with all our other existing and future senior and
unsubordinated indebtedness. As of September 30,
1999, our existing aggregate indebtedness
(excluding the $200,000,000 principal amount of
existing notes outstanding) with which the new
notes will rank equally was approximately $689
million.
The indenture does not limit the amount of
unsecured debt we may incur. The indenture contains
restrictions on our ability to incur secured
indebtedness unless the same security is also
provided for the benefit of holders of the new
notes.
Financial Covenants and
Events of Default.......... We will issue the new notes under an indenture with
Bank One Trust Company, National Association,
successor to The First National Bank of Chicago, as
trustee. The indenture includes material financial
covenants, including:
- limitation on liens;
- restrictions on incurrence of secured
indebtedness; and
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- limitation on sale-leaseback transactions.
The indenture provides for events of default,
including default on other significant
indebtedness.
Optional Redemption........ Upon 30 days' notification to noteholders, we may
redeem the new notes. Redemption of the new notes
can be in whole, at any time, or in part, from time
to time. The redemption price will include a
make-whole premium.
Form and Denomination...... The new notes will be represented by one or more
global notes. The global notes will be deposited
with Bank One Trust Company, National Association,
as book-entry depositary, for the benefit of DTC
and its participants.
Initially, you will not receive new notes in
certificated form. However, subject to the
provisions of the indenture described under the
heading "Description of the Notes -- Depositary
Procedures," you may elect to receive certificated
notes.
The book-entry depositary will issue to DTC one or
more certificateless book-entry interests
representing each global note. DTC will operate a
system of dealing in the book-entry interests by
maintaining records of interests of DTC
participants in book-entry interests.
The global notes will be shown on, and transfers of
such notes will be effected only through, records
maintained in book-entry form by DTC and its direct
and indirect participants, including depositaries
for Euroclear and CEDEL.
Notes issued or transferred will be in minimum
principal amounts of $1,000 and multiples thereof.
Same-day Settlement........ The new notes will trade in DTC's Same-day Funds
Settlement System until maturity or redemption.
Therefore, secondary market trading activity in the
notes will be settled in immediately available
funds.
Trustee, Registrar and
Transfer Agent............. Bank One Trust Company, National Association,
successor to The First National Bank of Chicago.
Governing Law.............. The notes and the indenture relating to the notes
will be governed by, and construed in accordance
with, the laws of the State of New York.
Investment
Considerations............. See "Risk Factors" for a discussion of factors you
should carefully consider before deciding to
exchange your existing notes for new notes.
NORTHERN BORDER PIPELINE COMPANY
We own a 1,214-mile United States interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border to natural gas
markets in the midwestern United States. Our pipeline system connects with
multiple pipelines, which allow shippers to access the various natural gas
markets served by those pipelines.
Our pipeline system was initially constructed in 1982 and was expanded
and/or extended in 1991, 1992 and 1998. The most recent expansion and extension,
called The Chicago Project, was completed in late 1998, and increased our
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 nine months ended September 30, 1999, we
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estimate that we transported approximately 24% of the total amount of natural
gas imported from Canada to the United States. Over the same period,
approximately 91% of the natural gas we transported was produced in the western
Canadian sedimentary basin located in the provinces of Alberta, British Columbia
and Saskatchewan.
We transport natural gas for shippers under a tariff regulated by the
Federal Energy Regulatory Commission. The tariff allows us an opportunity to
recover from our shippers our cost of service, including operations and
maintenance costs, taxes other than income taxes, interest, depreciation and
amortization, an allowance for income taxes and a regulated return on equity.
Shippers contract to pay for a proportionate share of those costs by way of a
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. We do not own the natural gas that we transport and therefore we do
not assume any natural gas commodity price risk. As of September 30, 1999,
approximately 97% of our pipeline capacity was contractually committed through
mid-September 2003 and the weighted average contract life, based on annual cost
of service obligations, was over seven years. Our pipeline system serves more
than 40 shippers with diverse operating and financial profiles.
Northern Border Pipeline Company is a general partnership formed in 1978.
The general partners are Northern Border Partners, L.P. and TC PipeLines, LP,
both of which are publicly traded partnerships. Each of Northern Border Partners
and TC PipeLines holds its interest, 70% and 30% of voting power, respectively,
through a subsidiary limited partnership. The general partners of Northern
Border Partners are two subsidiaries of Enron Corp. and one subsidiary of The
Williams Companies, Inc. The general partner of TC PipeLines is a subsidiary of
TransCanada PipeLines Limited.
Our pipeline system is operated by Northern Plains Natural Gas Company, a
wholly-owned subsidiary of Enron. Our management is overseen by a four-member
management committee. Three representatives are designated by Northern Border
Partners, with each of its general partners selecting one representative; one
representative is designated by TC PipeLines. For a discussion of specific
relationships with affiliates, refer to "Material Relationships and Related
Transactions."
Our principal executive offices are located at 1111 South 103rd Street,
Omaha, Nebraska 68124-1000. Our telephone number is (402) 398-7700.
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SUMMARY FINANCIAL AND OPERATING DATA
The summary financial information as of and for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 is derived from our audited financial
statements, and the summary financial information as of and for the nine months
ended September 30, 1999 and 1998 is derived from our unaudited financial
statements. The operating data for all periods presented are derived from our
records. The Summary Financial and Operating Data should be read in conjunction
with our financial statements and related notes, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT OTHER FINANCIAL AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues, net.............. $ 220,582 $ 145,476 $ 196,600 $ 186,050 $201,943 $ 206,497 $ 211,580
Operations and maintenance........... 27,806 21,581 29,447 28,522 26,974 25,573 27,682
Depreciation and amortization........ 38,806 30,060 40,989 38,708 46,979 47,081 41,959
Taxes other than income.............. 21,894 17,267 21,381 22,393 24,390 23,886 24,438
Regulatory credit.................... -- (4,709) (8,878) -- -- -- --
---------- ---------- ---------- ---------- -------- ---------- ----------
Operating income............... 132,076 81,277 113,661 96,427 103,600 109,957 117,501
Interest expense, net................ 44,347 18,400 (25,541) (29,360) (32,670) (35,106) (38,375)
Other income (expense)............... 646 9,174 12,111 5,705 2,913 (316) (1,968)
---------- ---------- ---------- ---------- -------- ---------- ----------
Net income to partners......... $ 88,375 $ 72,051 $ 100,231 $ 72,772 $ 73,843 $ 74,535 $ 77,158
========== ========== ========== ========== ======== ========== ==========
CASH FLOW DATA:
Net cash provided by operating
activities......................... $ 133,284 $ 83,390 $ 103,777 $ 115,328 $136,808 $ 127,429 $ 121,679
Capital expenditures................. 89,562 484,219 651,169 152,070 18,597 8,310 3,086
Distributions to partners............ 97,914 61,205 61,205 99,322 102,845 98,517 87,509
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and equipment.... $1,739,112 $1,602,862 $1,714,523 $1,100,890 $937,859 $ 957,587 $ 983,843
Total assets......................... 1,805,214 1,653,804 1,790,889 1,147,120 974,137 1,011,361 1,063,210
Long-term debt, including current
maturities......................... 900,757 724,000 862,000 459,000 377,500 410,000 445,000
Partners' capital.................... 833,899 789,258 843,438 581,412 526,962 555,964 579,946
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(1)......................... 3.0 3.4 3.2 3.2 3.2 3.1 3.0
OPERATING DATA:
Natural gas delivered (millions of
cubic feet)........................ 623,697 454,071 619,669 633,280 633,908 615,133 597,898
Average throughput (millions of cubic
feet per day)...................... 2,351 1,698 1,737 1,770 1,764 1,720 1,663
</TABLE>
- ---------------
(1) "Earnings" means the sum of (a) pre-tax income from continuing operations;
and (b) fixed charges. "Fixed charges" means the sum of (a) interest
expensed and capitalized; (b) amortized premiums, discounts and capitalized
expenses related to indebtedness; and (c) an estimate of the interest within
rental expenses.
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RISK FACTORS
You should consider the following risk factors together with all of the
other information included in this prospectus in evaluating the exchange offer.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE
CONSEQUENCES.
The existing notes were not registered under the Securities Act or under
the securities laws of any state. You may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from applicable registration requirements. If you do not
exchange or properly tender your existing notes for new notes pursuant to this
exchange offer, you will not be able to freely trade your existing notes. In
order to sell your existing notes in these circumstances, you must transfer them
under an exemption from the applicable registration requirements or in a
transaction not subject to the registration requirements of the Securities Act.
Moreover, the exchange offer satisfies the registration rights you received in
connection with the existing notes and those rights terminate upon consummation
of the exchange offer.
IF YOU DO NOT PROPERLY TENDER YOUR EXISTING NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED EXISTING NOTES AND YOUR ABILITY TO TRANSFER EXISTING NOTES WILL BE
ADVERSELY AFFECTED.
We will only issue new notes in exchange for existing notes that are timely
received by the exchange agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the existing notes and you should
carefully follow the instructions on how to tender your existing notes. Neither
we nor the exchange agent are required to tell you of any defects or
irregularities with respect to your tender of the existing notes. If you do not
tender your existing notes or if we do not accept your existing notes because
you did not tender your existing notes properly, then, after we consummate the
exchange offer, you may continue to hold existing notes that are subject to the
existing transfer restrictions.
In addition, if you tender your existing notes for the purpose of
participating in a distribution of the new notes, you will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the new notes. If you are a broker-dealer that
receives new notes for your own account in exchange for existing notes that you
acquired as a result of market-making activities or any other trading
activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such new notes. After the exchange
offer is consummated, if you continue to hold any existing notes, you may have
difficulty selling them because there will be fewer existing notes outstanding.
THERE IS NO PUBLIC MARKET FOR THE NOTES.
Before the offering of the notes, there was no public market for the notes
and we do not intend to apply for the listing of the notes on any securities
exchange or for quotation of the notes on the Nasdaq National Market. We have
been advised by the initial purchasers of the existing notes that they intend to
make a market in the notes, as permitted by applicable laws and regulations. The
initial purchasers are not obligated, however, to make a market in the notes and
any market making activity may be discontinued at any time without notice at the
sole discretion of each initial purchaser. This market-making activity will be
restricted by limitations imposed by the Securities Act and the Securities
Exchange Act of 1934, and may be limited during our exchange offer for the
existing notes. We cannot assure you as to the liquidity of the public market
for the new notes or that an active public market for the new notes will
develop. If an active public market does not develop, the market price and
liquidity of the new notes may be adversely affected. See "Plan of
Distribution."
THE ISSUANCE OF THE NEW NOTES MAY ADVERSELY AFFECT THE MARKET FOR THE EXISTING
NOTES.
If existing notes are tendered for exchange and accepted in the exchange
offer, the trading market for the untendered and tendered but unaccepted
existing notes could be adversely affected.
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OUR POLICY GOVERNING CASH DISTRIBUTIONS TO OUR GENERAL PARTNERS IS AT THE
DISCRETION OF OUR MANAGEMENT COMMITTEE AND MAY NEGATIVELY IMPACT OUR ABILITY TO
REPAY LONG-TERM INDEBTEDNESS.
In general, our partnership agreement provides that distributions to our
partners 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 our management committee.
Decisions made by our management committee regarding cash distributions
could inhibit our ability to repay long-term indebtedness, including the new
notes.
CROSS-ACCELERATION OF PAYMENTS
An event of default under our existing senior notes or our bank credit
facility would result in payment on the new notes being accelerated. If we were
not paying on either our existing senior notes or our bank credit facility,
resulting in an event of default, we would not be able to pay either required
principal or interest on the new notes. For additional information regarding our
existing senior notes and our bank credit facility, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Description of Existing Indebtedness."
A DECLINE IN THE AVAILABILITY OF ECONOMIC WESTERN CANADIAN NATURAL GAS MAY
REDUCE THE NEED FOR SHIPPERS TO CONTRACT FOR CAPACITY ON OUR PIPELINE SYSTEM.
Our long-term financial condition is dependent on the continued
availability of economic western Canadian natural gas for import into the United
States. Natural gas reserves may require significant capital expenditures by
others for exploration and development drilling and the installation of
production, gathering, storage, transportation and other facilities that permit
natural gas to be produced and delivered to pipelines that interconnect with our
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. Additional pipeline
export capacity also could accelerate depletion of these reserves.
As of September 30, 1999, approximately 97% of our pipeline capacity was
contractually committed through mid-September 2003 and the weighted average
contract life, based on annual cost of service obligations, was over seven
years. If the availability of western Canadian natural gas were to decline over
this period, existing shippers may be unlikely to extend their contracts or we
may be unable to find replacement shippers for that capacity. We cannot give you
any assurances as to the timing of discovery or development of additional
natural gas reserves or their availability to interconnect with our pipeline
system, or the economic competitiveness of such supplies in the markets we
serve.
IF DEMAND FOR WESTERN CANADIAN NATURAL GAS DECREASES, SHIPPERS MAY NOT ENTER
INTO OR RENEW CONTRACTS.
Our business depends in part on the level of demand for western Canadian
natural gas in the markets our 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 our pipeline system. Demand for western
Canadian natural gas also influences the ability and willingness of shippers to
use our pipeline system to meet demand.
A variety of factors could cause the demand for natural gas to fall in the
markets that our pipeline system serves. These factors include:
- economic conditions;
- fuel conservation measures;
- alternative energy requirements and prices;
- climatic conditions;
- government regulation; and
- technological advances in fuel economy and energy generation devices.
We cannot predict whether these or other factors will have an adverse effect on
demand for use of our pipeline system or how significant that adverse effect
could be.
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OUR OPERATIONS ARE REGULATED EXTENSIVELY BY THE FERC AND ANY MATERIAL ADVERSE
CHANGES IN THE FERC REGULATORY ENVIRONMENT MAY HAVE A NEGATIVE IMPACT ON OUR
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS.
We are subject to extensive regulation by the FERC. FERC's regulatory
authority extends to matters including:
- the tariff structure;
- allowed rate of return on equity;
- the services that we are permitted to perform or abandon;
- the ability to seek recovery of various categories of costs; and
- the acquisition, construction and disposition of pipeline facilities.
Under FERC regulations, customers generally are allowed to contest our
rates or rate structure and terms and conditions of service. Our operating
revenues could be reduced as a result of such action by:
- a reduction in the current FERC-allowed rate of return on equity; or
- any other adverse change to our rates, rate structure and terms and
conditions of service.
We filed a rate proceeding with the FERC on May 28, 1999 for a
redetermination of our allowed equity rate of return. In this proceeding, we
proposed, among other things, to increase our allowed equity rate of return. The
total annual cost of service increase due to our proposed changes is
approximately $30 million. A number of our shippers and competing pipelines have
filed interventions and protests. In June 1999, the FERC issued an order in
which the proposed changes were suspended until December 1, 1999, after which
they were implemented with subsequent billings subject to refund. The order set
for hearing not only our proposed changes but also several issues raised by
intervenors including the appropriateness of the cost of service tariff, our
depreciation schedule and our creditworthiness standards.
Several parties, including ourselves, asked for clarification or rehearing
of various aspects of the June order. On August 31, 1999, the FERC issued an
order that provided that the issue of combining the cost of service of the
existing system with the cost of service of The Chicago Project for purposes of
calculating a system-wide transportation charge, or "rolled-in rate treatment,"
may be examined in this proceeding. Also, since the amount of The Chicago
Project costs to be included in rate base, which is the total amount of our
investment in facilities and other assets that the FERC allows a return on, is
governed by the settlement in our previous rate case, the FERC consolidated that
proceeding with this case and directed that the presiding Administrative Law
Judge conduct any further proceedings that may be appropriate. While we had not
proposed in this case to change the depreciation rates approved in our last rate
case, the order also provided that we have the burden of proving that our
depreciation rates are just and reasonable. A procedural schedule has been
established which calls for the hearing to commence in July 2000. At this time,
we can give no assurance as to the outcome on any of these issues.
Given the extent of regulation by the FERC and potential changes to
regulations, we cannot give you any assurance regarding:
- the likely federal regulations under which we will operate in the future;
or
- the effect that regulation will have on our financial position, results
of operations and cash flows.
IF ANY SHIPPER FAILS TO PERFORM ITS CONTRACTUAL OBLIGATIONS, OUR FINANCIAL
POSITION, RESULTS OF OPERATIONS AND CASH FLOWS COULD BE ADVERSELY IMPACTED.
We have a limited number of major shippers. If one of these shippers fails
to perform its contractual obligation and we are unable to recontract its
capacity, our financial position could by adversely impacted.
Based on their proportionate shares of our cost of service, as of September
30, 1999, the five largest shippers are: Pan-Alberta Gas (U.S.) Inc. (25.7%),
TransCanada PipeLines Limited (10.8%), PanCanadian Energy Services Inc. (7.0%),
Enron Capital & Trade Resources Corp. (5.7%) and PetroCanada Hydrocarbons Inc.
(4.9%). The 20 largest shippers, in total, are responsible for an estimated
88.7% of our cost of service.
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IF WE DO NOT MAINTAIN OR INCREASE OUR RATE BASE BY SUCCESSFULLY COMPLETING
FERC-APPROVED PROJECTS, THE AMOUNT OF REVENUE ATTRIBUTABLE TO THE RETURN ON THE
RATE BASE WE COLLECT FROM OUR SHIPPERS WILL DECREASE OVER TIME.
The cost of our pipeline system is reflected in our financial records in
various accounts collectively referred to as "rate base." We are generally
allowed to collect from our customers a return on the rate base as reflected in
our financial records as well as recover that rate base through depreciation.
Under our cost of service tariff, the amount we may collect from customers
decreases monthly 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 our earnings, we must maintain or increase our 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 economic natural gas reserves;
- available capacity on pipelines that connect with our pipeline system;
- the execution of natural gas transportation contracts;
- the approval of any expansion or extension of the system by the
management committee, or in some cases, a ruling from an arbitrator, see
"Northern Border Pipeline Company Partnership Agreement;"
- obtaining financing for these projects; and
- receipt and acceptance of necessary regulatory approvals.
Our ability to complete these projects is also subject to numerous
business, economic, regulatory, competitive and political uncertainties that are
beyond our control, and we cannot assure you that these projects will be
completed.
BECAUSE OF THE HIGHLY COMPETITIVE NATURE OF THE NATURAL GAS TRANSMISSION
BUSINESS, WE MAY NOT BE ABLE TO MAINTAIN EXISTING CUSTOMERS OR ACQUIRE NEW
CUSTOMERS WHEN THE CURRENT SHIPPER CONTRACTS EXPIRE.
We cannot give any assurances that we will be able to renew or replace our
current shipper contracts, 97% of which have terms ending in or after September
2003. Our ability to renew or replace our shipper contracts may be negatively
impacted by competition from alternative sources of supply in the United States
and competition from other pipelines.
Other pipeline systems that transport natural gas from Canada serve the
same regions served by our pipeline system. As a result, we face competition
from other pipeline systems. The Alliance Pipeline has received regulatory
approval and has begun construction. Upon its completion (expected in late
2000), we will compete directly with the Alliance Pipeline in the transportation
of natural gas from the western Canadian sedimentary basin to markets in the
midwest United States. Williams has a minority interest in the Alliance
Pipeline.
Natural gas is also produced in the United States and transported by
competing pipeline systems to the same regions that are served by our pipeline
system.
LITIGATION OR GOVERNMENTAL REGULATION RELATING TO ENVIRONMENTAL PROTECTION AND
OPERATIONAL SAFETY MAY RESULT IN SUBSTANTIAL COSTS AND LIABILITIES.
Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. We believe that our
operations comply in all material respects with applicable environmental and
safety regulations.
However, risks of substantial costs and liabilities are inherent in
pipeline operations. The construction, operation and maintenance of a natural
gas pipeline system involves activities that have the potential of impacting the
environment and the public. While we have not encountered any serious
environmental problems in our operational history, we cannot give you any
assurance that substantial 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
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property damages resulting from our operations, could result in substantial
costs and liabilities. Although we cannot qualify or quantify the potential
costs or liabilities, the possibility that they may be incurred is a risk
specific to our operations.
IF THE FERC DOES NOT ALLOW US TO INCLUDE A PORTION OF THE COSTS OF THE CHICAGO
PROJECT IN OUR RATE BASE, OUR FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH
FLOWS MAY BE NEGATIVELY IMPACTED.
The FERC may not permit us to include a portion of the costs associated
with construction of The Chicago Project in our rate base. If that were to
happen, we would not be able to recover those costs from our shippers and our
financial position, results of operations and cash flows would be adversely
affected.
As part of the settlement of our 1995 rate case with the FERC, a project
cost containment mechanism was implemented to limit our ability to include cost
overruns on The Chicago Project and to provide incentives for cost underruns.
The project cost containment mechanism amount is determined by comparing the
final cost of The Chicago Project to the budgeted cost.
The settlement agreement required the budgeted cost for The Chicago
Project, which had been filed with the FERC for approximately $839 million, to
be adjusted for the effects of inflation and for costs attributable to changes
in project scope, as defined by the agreement. We have determined the budgeted
cost of The Chicago Project, as adjusted for the effects of inflation and
project scope changes, to be $897 million with the final construction cost
estimated to be $894 million. Our notification to the FERC and our shippers in
June 1999 in our final report reflects the conclusion that there will be a $3
million addition to rate base related to the project cost containment mechanism.
Under the order issued August 31, 1999 in our pending rate case, we were
required to file our final report in that proceeding.
Although we believe that the computations in the final report have been
completed under the terms of the settlement agreement, we are unable to predict
at this time whether any adjustments will be required. Later developments may
prevent recovery of amounts originally calculated 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
our operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Settlement of 1995 FERC Rate Case and
Project Cost Containment Mechanism."
WE MAY ENCOUNTER PROBLEMS AS A RESULT OF THE YEAR 2000 ISSUE AND OUR RELIANCE ON
INFORMATION SYSTEMS TECHNOLOGY.
We developed a plan, which will be modified as events warrant, to address
Year 2000 problems. All of our mission-critical systems have operated to date.
However, we cannot assure you that there will not be circumstances under which
we may face severe issues as a result of Year 2000. These issues represent
likely "worst case scenarios" and are described under "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Year 2000."
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes in
exchange for the existing notes.
The proceeds received from the offering of the existing notes were used to
reduce indebtedness outstanding under a credit agreement which provides both a
term loan facility and a revolving credit facility. For additional information
on the indebtedness, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Existing
Indebtedness -- Description of bank credit facility."
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
This table is derived from and should be read in conjunction with our financial
statements and related notes.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt:
Existing senior notes..................................... $ 250,000
Credit agreement.......................................... 439,000
7.75% Senior Notes due 2009............................... 200,000
Unamortized proceeds from termination of interest rate
forward agreements..................................... 12,719
Unamortized debt discount................................. (962)
----------
Total long-term debt.............................. 900,757
Partners' capital........................................... 833,899
----------
Total capitalization........................................ $1,734,656
==========
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations should be read in
conjunction with our financial statements and related notes.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Operating revenues increased $75.1 million (52%) for the nine months ended
September 30, 1999, as compared to the same period in 1998, due primarily to
additional revenue from the operation of The Chicago Project facilities. New
firm transportation agreements with 27 shippers provided for additional receipt
capacity of 700 million cubic feet per day, a 42% increase. Our FERC tariff
provides an opportunity to recover 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. We
are generally allowed an opportunity to collect from our shippers a return on
unrecovered rate base as well as recover that rate base through depreciation and
amortization. The return amount we collect from our shippers declines as the
rate base is recovered. The Chicago Project increased our rate base, which
increased our return, for the nine months ended September 30, 1999. Also
reflected in the increase in 1999 revenues are recoveries of increased pipeline
operating expenses due to the new facilities.
Operations and maintenance expense increased $6.2 million (29%) for the
nine months ended September 30, 1999, from the same period in 1998, due
primarily to operations and maintenance expenses for The Chicago Project
facilities recorded in 1999, expenses incurred for our rate case filed in 1999
and increased employee payroll and benefit expenses.
Depreciation and amortization expense increased $8.7 million (29%) for the
nine months ended September 30, 1999, as compared to the same period in 1998,
due primarily to the placing of The Chicago Project facilities 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%. We 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 $4.6 million (27%) for the nine months
ended September 30, 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.
For the nine months ended September 30, 1998, we recorded a regulatory
credit of $4.7 million. During the construction of The Chicago Project, we
placed 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 deferred the cost of service of these
new facilities. We are allowed to recover from our shippers the regulatory asset
that resulted from the cost of service deferral over a ten-year period
commencing with the in-service date of The Chicago Project.
Interest expense, net increased $25.9 million (141%) for the nine months
ended September 30, 1999, as compared to the same period in 1998, due to an
increase in interest expense of $13.9 million and a decrease in interest expense
capitalized of $12.0 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 (expense) decreased $8.5 million (93%) for the nine months
ended September 30, 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.
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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 1997 due primarily to returns
on higher levels of invested equity.
Depreciation and amortization expense increased $2.3 million (6%) for the
year ended December 31, 1998, as compared to 1997, primarily due to facilities
that were placed in service in 1998.
For the year ended December 31, 1998, we recorded a regulatory credit of
approximately $8.9 million. During the construction of The Chicago Project, we
placed certain 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. We are allowed to recover from our
shippers the regulatory asset that resulted from the cost of service deferral
over a ten-year period 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 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
was 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
expenditures for The Chicago Project.
Other income increased $6.4 million (112%) for the year ended December 31,
1998, as compared to 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 expenditures for The Chicago Project.
Other income for 1997 included $4.8 million received for vacating certain
microwave frequency bands. We employ a microwave system that used 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, we vacated 21 of the 39 segments
of the microwave system and received payments during 1997. The remaining 18
segments of our microwave system are located in sparsely populated areas. The
payments related to the vacated segments received during 1997 were a one-time
occurrence and we do 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 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 our 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 1996 due primarily to increases in employee salary
and benefit expenses.
Depreciation and amortization expense decreased $8.3 million (18%) for the
year ended December 31, 1997, as compared to 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 our 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 1996, due primarily to lower property tax
assessments received in various states where our pipeline system operates.
Interest expense, net decreased $3.3 million (10%) for the year ended
December 31, 1997, as compared to 1996, due to an increase in the amount of
interest capitalized. This increase primarily relates to expenditures for The
Chicago Project.
Other income increased $2.8 million (96%) for the year ended December 31,
1997, as compared to
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1996. The increase was primarily due to $4.8 million received in 1997 for
vacating certain microwave frequency bands. This increase was partially offset
by the reversal into income of $2.2 million of previously established reserves
for regulatory issues in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities
Cash flows provided by operating activities increased $49.9 million to
$133.3 million for the nine months ended September 30, 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 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 of 1997 discussed below. The over/under recovered cost of
service is the difference between estimated billings to our 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 the
November 1995 rate case. During 1997, we collected $40.4 million subject to
refund as a result of our rate case.
Cash flows from investing activities
Capital expenditures of $89.6 million for the nine months ended September
30, 1999 include $78.3 million for The Chicago Project. The remaining capital
expenditures for this period are primarily related to renewals and replacements
of existing facilities. For the same period in 1998, capital expenditures were
$484.2 million, which included $474.4 million for The Chicago Project and $10.0
million for linepack gas purchased from our shippers. Linepack gas is the
natural gas required to fill our pipeline system. The cost of the linepack is
included in our rate base.
Capital expenditures of $651.2 million for the year ended December 31,
1998, included $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, included $135.7 million for The Chicago Project. The remaining $16.4
million of capital expenditures for 1997 is primarily related to renewals and
replacements of existing facilities.
Total capital expenditures for 1999 are estimated to be $111 million,
including $89 million for The Chicago Project. Approximately $37 million of the
capital expenditures for The Chicago Project is for construction completed in
1998. An additional $22 million of 1999 capital expenditures is planned for
renewals and replacements of the existing facilities. We currently anticipate
funding our 1999 capital expenditures primarily by borrowing under our credit
agreement and using internal resources. Under the most restrictive debt
covenants contained in our existing debt agreements, we could incur additional
indebtedness of approximately $315 million at September 30, 1999. See
"-- Description of Existing Indebtedness -- Description of bank credit
facility."
Cash flows from financing activities
Cash flows used in financing activities were $60.6 million for the nine
months ended September 30, 1999, as compared to cash flows provided by financing
activities of $400.8 million for the same period in 1998. During the nine months
ended September 30, 1998, our general partners contributed $197.0 million to
finance a portion of the capital expenditures for The Chicago Project.
Distributions paid to the general partners increased $36.7 million to $97.9
million for the nine months ended September 30, 1999 as compared to the same
period of 1998. The distribution for the nine months ended September 30, 1999
was impacted by increased earnings and included distributions for ten months
activity, rather than nine months, resulting from a change in the timing of
distribution payments. The
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distribution for the nine months ended September 30, 1998 was impacted by a rate
case refund during the fourth quarter of 1997. Financing activities for the nine
months ended September 30, 1999 included $197.5 million from the issuance of the
existing notes, net of associated debt, discounts and issuance costs, and $12.9
million from the termination of interest rate forward agreements. Advances under
our credit agreement, which were primarily used to finance a portion of the
capital expenditures for The Chicago Project, were $82 million for the nine
months ended September 30, 1999 as compared to advances of $265 million for the
same period in 1998. Payments on our credit agreement were $255 million for the
nine months ended September 30, 1999.
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 our
credit agreement of $403.0 million and were used primarily for construction
expenditures related to The Chicago Project. Contributions received from our
general partners increased $142.0 million to $223.0 million and were used to
fund a portion of our capital expenditures. Distributions to the general
partners decreased $38.1 million to $61.2 million primarily due to a change in
the timing of distribution payments.
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 contributions from our general partners
of $81.0 million. Borrowings under our credit agreement totaled $209 million and
were used primarily to retire amounts related to existing bank loan agreements
of $137.5 million and for construction expenditures related to The Chicago
Project.
DESCRIPTION OF EXISTING INDEBTEDNESS
Description of existing notes
For a description of the existing notes, refer to "Description of the
Notes."
Description of existing senior notes
The following is a summary of the material terms of $250 million aggregate
principal amount of senior notes we issued 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.
Our obligations under the note purchase agreement and supplemental
agreement are unsecured and non-recourse to the general partners. 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.
We may at any time, at our 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, including:
- a requirement that the ratio of total indebtedness to partners' capital
(as defined in the note purchase agreement) not exceed 2.3 to 1 on a
consolidated basis. As of September 30, 1999, the ratio was 1.7 to 1 on a
consolidated basis;
- a 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 management committee be our operator;
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- restrictions on specific liens, investments, lines of business, mergers,
consolidations or sales of assets;
- restrictions on amendments, modification or cancellation of any
controlled service agreement or related support agreement (as defined in
the note purchase agreement), subject to some exceptions; and
- restrictions on transactions with affiliates 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, we
are permitted to make cash distributions to our 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 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 September 30, 1999 was approximately $137
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
We entered into a credit agreement, dated as of June 16, 1997 with several
financial institutions to borrow up to a total principal amount of $750 million.
The credit agreement was entered into with The First National Bank of Chicago,
Royal Bank of Canada and Bank of America National Trust and Savings Association,
as syndication agents. The following is a summary of the material terms of our
credit agreement.
Our obligations under the credit agreement are unsecured obligations, rank
equally with the existing senior notes and are non-recourse to the general
partners. 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
prior credit facilities 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 March 31, 1999, the three-year
revolving credit facility converted to a term loan maturing in June 2002. The
credit agreement permits us 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.
We 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 our leverage ratio or credit rating or (2) under an auction
procedure set forth in the credit agreement. We are required to pay a facility
fee on the total principal amount of $749.5 million. As of September 30, 1999,
$439.0 million was outstanding under the term loan. No funds were outstanding
under the five-year revolving credit facility. The average effective interest
rate applicable to our borrowings under the term loan is 5.78% as of September
30, 1999.
The credit agreement contains various restrictive covenants, including
restrictions on liens, additional indebtedness, investments, mergers,
consolidations, sales of assets, guarantees, entering into transactions with
affiliates, allowing final judgments in excess of $25 million to remain
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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 our indebtedness to the sum
of its general partners' capital plus indebtedness to exceed 0.65 to 1 on a
consolidated basis. As of September 30, 1999, the ratio was 0.52 to 1 on a
consolidated basis.
The credit agreement also contains various affirmative covenants, customary
for this type of facility, including a covenant that we will use our best
efforts to cause our tariff to remain effective at all times, use our best
efforts to maintain existing service agreements and support agreements (as
defined in the credit agreement), and that we 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, we
reached a settlement that was filed in a stipulation and agreement. Although the
stipulation was contested, it was approved by the FERC in August 1997. As agreed
to in the settlement, we implemented (1) a new depreciation schedule with an
extended depreciable life, (2) a $31 million settlement adjustment mechanism
that effectively reduces the allowed return on rate base and (3) an incentive
mechanism designed to contain the amount of construction cost for The Chicago
Project and the resulting monthly transportation charges. The purpose of the
incentive mechanism, called the project cost containment mechanism, was to limit
our ability to include cost overruns for The Chicago Project in our rate base
and to provide incentives for cost underruns. The settlement agreement required
the budgeted cost for The Chicago Project, which had been initially filed with
the FERC for approximately $839 million, to be adjusted for the effects of
inflation and for costs attributable to changes in project scope, as defined in
the settlement agreement.
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 our 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, the $6 million plus 50% of the excess will be included in
our rate base. All cost overruns exceeding 5% of the budgeted cost are excluded
from the rate base.
We have determined the budgeted cost of The Chicago Project, as adjusted
for the effects of inflation and project scope changes, to be $897 million, with
the final construction cost estimated to be $894 million. Our notification to
the FERC and our shippers in June 1999 in our final report reflects the
conclusion that there will be a $3 million addition to rate base related to the
project cost containment mechanism.
The stipulation required the calculation of the project cost containment
mechanism to be reviewed by an independent national accounting firm. The
independent accountants completed their examination of our calculation of the
project cost containment mechanism in October 1999. The independent accountants
concluded we had complied in all material respects with the requirements of the
stipulation related to the project cost containment mechanism. Under the order
issued August 31, 1999 by the FERC in our pending rate case, we filed our final
report and the independent accountants' report in that proceeding.
Although we believe that the computations in the final report have been
properly completed under the terms of the stipulation, we are unable to predict
at this time whether any adjustments will be required. Later developments may
prevent recovery of amounts originally calculated under the project cost
containment mechanism, which may result in a non-cash charge to write down our
balance sheet transmission plant line item, and that charge could be material to
our operating results.
AMORTIZATION OF INCENTIVE RATE OF RETURN ADJUSTMENT
Our 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 called the incentive rate of return adjustment.
Since inception, the incentive
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rate of return adjustment has been amortized through monthly additions to the
cost of service. The amortization continues until November 2001 when the
incentive rate of return is fully amortized. See "Business -- FERC
Regulation -- Cost of service tariff."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest rate exposure results from variable rate borrowings from
commercial banks. To mitigate potential fluctuations in interest rates, we
attempt to maintain a significant portion of our debt portfolio in fixed rate
debt. We also use interest rate swap agreements to increase the portion of fixed
rate debt. As of September 30, 1999, approximately 55% of our debt portfolio,
after considering the effect of the interest rate swap agreements, is in fixed
rate debt.
If interest rates average one percentage point more than rates in effect as
of December 31, 1998, our 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 our variable rate borrowings and
interest rate swap agreements outstanding as of December 31, 1998. Our tariff
provides the pipeline an opportunity to recover, among other items, interest
expense. We believe that we would be allowed to recover any increase in interest
expense, and that there would not be any material impact on our annual earnings
and cash flow from a hypothetical one percentage point increase in interest
rates. As of September 30, 1999, there has not been any material change to our
interest rate exposure as compared to December 31, 1998.
YEAR 2000
Similar to most businesses, we rely 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.
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 us and our suppliers
and customers.
We 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.
We are 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.
Before January 1, 2000, we identified, inventoried and assessed computer
software, hardware, embedded chips and third-party
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interfaces. Where necessary, remediation and replacements were identified and
implemented. All of our mission- critical and non-mission-critical systems have
operated to date, with no interruption in our business operations.
Our plan recognizes that the computer, telecommunications and other systems
of outside entities have the potential for major, mission-critical, adverse
effects on the conduct of our business. We do not have control of these outside
systems. However, our plan includes an ongoing process of identifying and
contacting outside entities whose systems have or may have a substantial effect
on our ability to continue to conduct the mission-critical aspects of our
businesses without disruption from Year 2000 problems. To date, there have been
no material adverse effects on the conduct of our business from any outside
entities.
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 our 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 our
systems and outside systems. As the steps are repeated, it is likely that new
problems will be identified and addressed. We presently do not know of any of
our pipeline systems that are susceptible to problems that can only be
identified after January 1, 2000.
We have 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 of our critical pipeline
facilities have back-up power sources including auxiliary generators and battery
back-up except for the two electric powered compressor stations. We have our 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. We also have a redundant back-up site for
critical operation and systems functions.
We have not incurred material costs associated with the Year 2000 issues.
Further, we believe that our future costs of implementing the plan will not be
material. Although we believe our estimates are reasonable and there have been
no material adverse effects to date, 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 we will not be adversely affected by
Year 2000 issues.
The extent and magnitude of the Year 2000 problem as it may affect our
operations were and continue to be 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. We believe that we have identified and remediated
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;
- the complexity of evaluating all software (computer code) internal to our
operations 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 still can be no assurance for example
that all outside systems were adequately remediated so that they were Year 2000
ready, 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 our 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-
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related failures that occur despite implementation of the plan, as it may be
modified over time.
In a SEC release regarding Year 2000 disclosures, the SEC stated that
public companies must disclose the most reasonably likely worst case Year 2000
scenario. Although there have been no material adverse effects on the conduct of
our business to date, analysis of the most reasonably likely worst case
scenarios we may face leads to contemplation of the following possibilities:
- widespread failure of electrical, gas, and similar supplies by utilities
serving us;
- widespread disruption of the services of communications common carriers;
- similar disruption to means and modes of transportation for us and our
contractors, suppliers and customers;
- significant disruption to our 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 our mission-critical systems.
Among other things, we 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.
We could also experience an inability by shippers to pay, on a timely basis
or at all, obligations owed to us. Under these circumstances, the adverse effect
on our operations, and the diminution of our revenues, would be material,
although not quantifiable at this time. We will continue to monitor business
conditions to assess and quantify material adverse effects, if any, that result
or may result from the Year 2000 problem.
This discussion under the heading "Year 2000" constitutes year 2000
readiness disclosure under the Year 2000 Information and Readiness Disclosure
Act. Compliance with the Year 2000 Information and Readiness Disclosure Act does
not limit or otherwise affect any claims or actions under the federal securities
laws.
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BUSINESS
STRUCTURE
Northern Border Pipeline Company is a general partnership formed in 1978.
The general partners are Northern Border Partners, L.P. and TC PipeLines, LP,
both of which are publicly traded partnerships. Each of Northern Border Partners
and TC PipeLines holds its interest, 70% and 30% of voting power, respectively,
through a subsidiary limited partnership as follows:
[NORTHERN BORDER CHART]
- ---------------
* These entities each have three general partners: (1) Northern Plains Natural
Gas Company, (2) Pan Border Gas Company and (3) Northwest Border Pipeline
Company.
** These entities each have one general partner: TC PipeLines GP, Inc.
A four-member management committee oversees our management. Northern Border
Partners controls 70% of the voting power of the management committee and
designates three members. TC PipeLines controls 30% of the voting power of the
management committee and designates one member. See "Management."
Under our partnership agreement, each of Northern Plains Natural Gas
Company, Pan Border Gas Company and Northwest Border Pipeline Company has the
right to select one of Northern Border Partners' representatives on the
management committee. Voting power on the management committee is presently
allocated among Northern Border Partners' three representatives in proportion to
their general partner interests in Northern Border Partners. As a result, the
70% voting power of Northern Border Partners' three representatives on the
management committee is allocated as follows: 35% to the representative
designated by Northern Plains, 22.75% to the representative designated by Pan
Border and 12.25% to the representative designated by Northwest Border. Northern
Plains and Pan Border are subsidiaries of Enron Corp. Therefore, Enron controls
57.75% of the voting power of the management committee and has the right to
select two of the members of the management committee. Northwest Border is a
subsidiary of The Williams Companies, Inc.
Our 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
We generate revenues from the receipt and delivery of natural gas at points
along our pipeline system according to individual transportation contracts with
our shippers.
The FERC-regulated tariff specifies the calculation of amounts to be paid
by shippers and the general terms and conditions of transportation service on
our pipeline system. The tariff provides an opportunity to recover:
- 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.
We are generally allowed to collect from our shippers a return on our rate
base as well as recover that rate base through depreciation and amortization.
Under the present form of tariff, in the absence of additions to the rate
base, the amount received under our regulated return on equity decreases as the
rate base is recovered.
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Billings for firm transportation agreements are based on contracted
capacity to determine the proportionate share of the cost of service and are not
dependent upon the percentage of available capacity actually used.
We do not own the natural gas that we transport and therefore we do not
assume any natural gas commodity price risk.
THE NORTHERN BORDER
PIPELINE SYSTEM
With the completion of The Chicago Project in December 1998, we own 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.
Construction of our pipeline was initially completed in 1982. Our pipeline was
expanded and/or extended in 1991, 1992 and 1998.
Our 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.
Our pipeline system also has access to synthetic gas produced at the Dakota
Gasification plant in North Dakota. For the nine months ended September 30,
1999, of the natural gas transported on our system, approximately 91% was
produced in Canada, approximately 5% was produced by the Dakota Gasification
plant, and approximately 4% was produced in the Williston Basin.
Our 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 in total 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 15 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 51 tower
sites.
At its northern end, our pipeline system is connected to TransCanada's
majority-owned Foothills Pipe Lines (Sask.) Ltd. system in Canada, which is
connected to the Alberta system owned by TransCanada and Transgas Limited in
Saskatchewan. The Alberta system gathers and transports approximately 80% of
Canadian natural gas production. Our 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
Our pipeline system connects with multiple pipelines which allows our
shippers to access the various natural gas markets served by those pipelines.
Our 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;
- Alliant Power Company at Prophetstown, Illinois;
- Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
- Midwestern Gas Transmission Company near Channahon, Illinois;
- ANR Pipeline Company near Manhattan, Illinois; and
- The Peoples Gas Light and Coke Company near Manhattan, Illinois at the
terminus of our pipeline system.
The Ventura, Iowa interconnect with Northern Natural Gas Company functions
as a large market center, where natural gas transported on our 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, we applied to the FERC for approval of Project 2000 to
expand and extend our pipeline system into Indiana by November 2000. If approved
and constructed, Project 2000 will strategically position us to move natural gas
east of Chicago and will place us 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 reassignments of contracted transportation capacity, or "capacity
releases" have been negotiated between several existing and project shippers
originally included in the October 1998 application. On March 25, 1999, we
amended our application to the FERC to reflect these changes. Numerous parties
have filed to intervene in this proceeding. Several parties have protested this
application asking that the FERC deny our request for rolled-in rate treatment
for the new facilities and that we be required to solicit indications of
interest from existing shippers for capacity releases that would possibly
eliminate the construction of certain new facilities. "Rolled-in rate
treatment," as discussed under "Risk Factors" on page 13, is the combining of
the cost of service of the existing system with the cost of service related to
the new facilities for purposes of calculating a system-wide transportation
charge.
Project 2000 revised capital expenditures are estimated to be $126 million.
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, our pipeline system will
have the ability to transport 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 all of the transportation
capacity, subject to the satisfaction of 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 Peoples Gas 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 us that the interconnect will be able to
receive the required capacity.
On September 15, 1999, the FERC issued a policy statement on certification
and pricing of new construction projects. The policy statement announces a
preference for establishing the transportation charge for new construction on a
separate, stand-alone basis, also known as "incremental pricing." This reverses
the existing presumption in favor of rolled-in pricing when the impact of the
new capacity is not more than a 5% increase to existing rates and results in
system-wide benefits. As set forth above, our amended application to construct
facilities to expand our system was filed based upon rolled-in rate treatment.
We are uncertain at this time how implementation of this policy may impact
Project 2000.
COMPETITION
We compete with other pipeline companies that transport natural gas from
the western Canadian sedimentary basin or that transport natural gas to markets
in the midwestern United States. The competitors for the supply of natural gas
include six pipelines, one of which is under construction and is described
below, and the Canadian domestic users in the western Canadian sedimentary basin
region. Our competitive position is affected by the availability of Canadian
natural gas for export, the prices of natural gas in alternative markets, the
cost of producing natural gas in Canada, 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 of the United States. For the nine months ended September 30, 1999 we
estimate that we transported approximately 24% of the total amount of Canadian
natural gas imported into the United States.
The Alliance Pipeline has received Canadian and United States regulatory
approvals and has
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begun construction. Its sponsors have announced their plans for the Alliance
Pipeline to be in service by late 2000. Upon its completion, we would compete
directly with the Alliance Pipeline. The Alliance Pipeline would transport
natural gas from the western Canadian sedimentary basin to the midwestern United
States.
We expect that the Alliance Pipeline would transport for its shippers gas
containing high-energy liquid hydrocarbons. Additional facilities to extract the
natural gas liquids must be constructed to permit Alliance to deliver natural
gas with the liquids-rich element. We understand that a natural gas liquids
extraction plant is being constructed near the Alliance Pipeline's terminus in
Chicago.
As a consequence of the Alliance Pipeline, there may be a large increase in
natural gas moving from the western Canadian sedimentary basin to Chicago. There
are several additional projects proposed to transport natural gas from the
Chicago area to growing eastern markets that would provide access to additional
markets for our shippers. The proposed projects currently being pursued by third
parties and TransCanada are targeting markets in eastern Canada and the
northeast United States. These proposed projects are in various stages of
regulatory approval; none have commenced construction.
Williams has a minority interest in the Alliance Pipeline. TransCanada and
other unaffiliated companies own and operate pipeline systems which transport
natural gas from the same natural gas reserves in western Canada that supply our
customers.
Natural gas is also produced in the United States and transported by
competing pipeline systems to the same destinations as our pipeline system.
SHIPPERS
Our pipeline system serves more than 40 shippers with diverse operating and
financial profiles. Based upon shippers' cost of service obligations, as of
September 30, 1999, 93% of the firm capacity is contracted by producers and
marketers. The remaining firm capacity is contracted to local distribution
companies (5%) and interstate pipelines (2%). As of September 30, 1999, 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 over seven years with at least 97% of capacity
contracted through mid-September 2003.
Based on their proportionate shares of the cost of service, as of September
30, 1999, the five largest shippers are: Pan-Alberta Gas (U.S.) Inc. (25.7%),
TransCanada PipeLines Limited (10.8%), PanCanadian Energy Services Inc (7.0%),
Enron Capital & Trade Resources Corp. (5.7%) and PetroCanada Hydrocarbons Inc.
(4.9%). The 20 largest shippers, in total, are responsible for an estimated
88.7% of our cost of service.
As of September 30, 1999, our largest shipper, Pan-Alberta holds 690
million cubic feet per day under three contracts with terms to October 31, 2003.
An affiliate of Enron provides guaranties for 300 million cubic feet per day of
Pan-Alberta's contractual obligations through October 31, 2001. In addition,
Pan-Alberta'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 our shippers are affiliated with the general partners of Northern
Border Partners and TC PipeLines. TransCanada holds contracts representing 10.8%
of the cost of service. Enron Capital & Trade Resources Corp., a subsidiary of
Enron, holds contracts representing 5.7% of the cost of service.
Transcontinental Gas Pipe Line Corporation, a subsidiary of Williams, holds a
contract representing 0.8% of the cost of service. See "Certain Relationships
and Related Transactions."
Order 636, as discussed below under "FERC Regulation -- Open access
regulation," has created a secondary market in existing capacity. As a result, a
shipper with a firm transportation contract may release, on a temporary basis,
part or all of the shipper's firm capacity to a third party. The releasing party
receives credit against amounts due under its firm transportation contract for
revenues received by us 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
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other shippers who have agreed to comply with the underlying contractual and
regulatory obligations associated with that capacity.
FERC REGULATION
General
We are subject to extensive regulation by the FERC as a "natural gas
company" under the Natural Gas Act. Under the Natural Gas Act and the Natural
Gas Policy Act, the FERC has jurisdiction with respect to virtually all aspects
of our business, including:
- transportation of natural gas;
- rates and charges;
- construction of new facilities;
- extension or abandonment of service and facilities;
- accounts and records;
- depreciation and amortization policies;
- the acquisition and disposition of facilities; and
- the initiation and discontinuation of services.
Where required, we hold certificates of public convenience and necessity
issued by the FERC covering our 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. Our books and records
are periodically audited under Section 8.
The FERC regulates our 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
Our 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
regulated by the FERC and provides an opportunity to recover operations and
maintenance costs of our 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. We may not charge or collect more than
our cost of service under our tariff on file with the FERC.
Our investment in our pipeline system is reflected in various accounts
referred to collectively as our 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. Our rate base currently 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. The amortization continues until
November 2001 when the incentive rate of return is fully amortized.
We bill 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.
We also provide interruptible transportation service. Interruptible
transportation service is transportation in circumstances when surplus capacity
is available after satisfying firm service requests. The maximum rate charged to
interruptible shippers is calculated from cost of service estimates on the basis
of contracted capacity. Except for certain limited situations, we credit all
revenue from the interruptible transportation service to the cost of service for
the benefit of our firm shippers.
In our 1995 rate case, we reached a settlement that was filed in a
stipulation and agreement. Although it was contested, it was approved by the
FERC on August 1, 1997. In the settlement, the
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depreciation rate was established at 2.5% from January 1, 1997 through the
in-service date of The Chicago Project and, at that time, it was reduced to
2.0%. Starting in the year 2000, the depreciation rate is scheduled to increase
gradually on an annual basis until it reaches 3.2% in 2002.
The settlement also determined several other cost of service parameters. In
accordance with the effective tariff, our allowed equity rate of return is
12.0%. For at least seven years from the date The Chicago Project was completed,
under the terms of the settlement, we may continue to calculate our allowance
for income taxes as a part of our cost of service in the manner we have
historically used. In addition, a settlement adjustment mechanism of $31 million
was implemented, which effectively reduces the allowed return on rate base.
Also as agreed to in the settlement, we implemented a capital project cost
containment mechanism for The Chicago Project. For further discussion of the
capital project cost containment mechanism, refer to "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Settlement of
1995 FERC Rate Cases and Project Cost Containment Mechanism."
In May 1999, we filed a rate case wherein we proposed, among other things,
to increase our allowed equity rate of return. The total annual cost of service
increase due to our proposed changes is approximately $30 million. A number of
our shippers and competing pipelines have filed interventions and protests. In
June 1999, the FERC issued an order in which the proposed changes were suspended
until December 1, 1999, after which they were implemented with subsequent
billings subject to refund. The order set for hearing not only our proposed
changes but also several issues raised by intervenors including the
appropriateness of the cost of service tariff, our depreciation schedule and our
creditworthiness standards. Several parties, including ourselves, asked for
clarification or rehearing of various aspects of the June order. On August 31,
1999, the FERC issued an order that provided that the issue of rolled-in rate
treatment of The Chicago Project may be examined in this proceeding. Also, since
the amount of The Chicago Project costs to be included in rate base is governed
by the settlement in our previous rate case, the FERC consolidated that
proceeding with this case and directed that the presiding Administrative Law
Judge conduct any further proceedings that may be appropriate. While we had not
proposed in this case to change the depreciation rates approved in our last rate
case, the order also provided that we have the burden of proving that our
depreciation rates are just and reasonable. A procedural schedule has been
established which calls for the hearing to commence in July 2000. At this time,
we can give no assurance as to the outcome on any of these issues.
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. Since the inception of our business, we have been a
transportation-only interstate pipeline, so the unbundling of services required
by Order 636 did not impact us directly.
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 29, 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 FERC's proposals to revise right of first refusal procedures on our ability
to renew or recontract long-term service agreements once existing agreements
expire cannot be determined.
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. The
intent of Order 587 was to assist shippers that deal with more than one pipeline
by
32
<PAGE> 32
establishing standardized business practices and procedures. These business
standards, developed by the Gas Industry Standards Board, govern important
business practices including shipper supplied service nominations, allocation of
available capacity, accounting and invoicing of transportation service,
standardized internet business transactions and capacity release. We have
implemented the necessary changes to our tariff and internal systems so we can
fully comply with the business standards as required by these orders. Compliance
with Order 587 has not adversely impacted our financial position.
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 29,
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. The proposed
regulations could lead to changes in the manner by which existing capacity is
made available for short-term transportation and how such capacity is priced.
Since we are fully contracted at this time, the proposed regulations are more
likely to effect changes in the rights and obligations of our shippers who hold
capacity. Although the precise impact of the proposed regulations on us, if any,
cannot be predicted, we do not believe that it is likely to have a material,
adverse impact to our operations. 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.
On September 15, 1999, the FERC issued a policy statement on certification
and pricing of new construction projects. The policy statement announces a
preference for pricing new construction incrementally. This reverses the
existing presumption in favor of rolled-in pricing when the impact of the new
capacity is not more than a 5% increase to existing rates and results in
system-wide benefits. Also, in examining new projects, the FERC will evaluate
the efforts by the applicant to minimize adverse impact to its existing
customers, to competitor pipelines and their captive customers and to landowners
and communities affected by the proposed route of the pipeline. If the public
benefits outweigh any residual adverse effects, the FERC will proceed with the
environmental analysis of the project. This policy is to be applied on a
case-by-case basis.
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. A final rule issued on September 15, 1999 adopting
procedural regulations defining a new voluntary collaborative filing process.
These regulations permit an applicant to obtain the assistance of the FERC staff
in preparing its application and beginning the environmental review in the
pre-filing state.
The impact on any final rules adopted by the FERC as a result of the
proceedings discussed in the prior two paragraphs cannot be assessed at this
time.
On two other proceedings, FERC has issued final rules amending its
regulations governing issuance of pipeline construction certificates and
procedures under which shippers or others may have complaints considered by
FERC. We do not currently believe that these rules will be adverse to our
operations.
ENVIRONMENTAL AND SAFETY MATTERS
Our operations are subject to federal, state and local laws and regulations
relating to safety and the protection of the environment which include the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, 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 we believe that our operations and facilities
comply in all material respects with applicable environmental and safety
regulations, risks of substantial costs and liabilities
33
<PAGE> 33
are inherent in pipeline operations, and we cannot provide any assurances that
we will not incur these costs and liabilities. We have ongoing environmental and
safety audit programs.
PROPERTIES
We hold the right, title and interest in our pipeline system. We own all of
our material equipment and personal property and lease office space in Omaha,
Nebraska. With respect to real property, our pipeline system falls into two
basic categories: (a) parcels which we own in fee, including nearly all of the
compressor stations, measurement stations and pipeline field office sites; and
(b) parcels where our interest 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 our pipeline system. The
right to construct and operate the pipeline across some property was obtained
through exercise of the power of eminent domain. We continue to have the power
of eminent domain in each of the states in which we operate our pipeline system,
although we 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 we have the
right of eminent domain over tribal lands, we have the right of eminent domain
over allotted lands.
In 1980, we 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 the right and
privilege to construct and operate our pipeline on some tribal lands, for a term
of 15 years, renewable for an additional 15-year term at our option without
additional rental. We continue to operate this portion of the pipeline located
on tribal lands in accordance with our 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, we 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, we undertook efforts to
obtain voluntary consents from individual Indian owners for a new right-of-way,
and we 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. 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. However, we are continuing to
negotiate with the parties involved in order to reach a positive resolution.
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 our favor on the tracts in question.
LITIGATION
In addition to the condemnation actions and matters related to FERC
regulation, various legal actions that have arisen in the ordinary course of
business are pending. In our opinion, none of these proceedings would reasonably
be expected to have a material adverse impact on our financial position, results
of operations or cash flows.
34
<PAGE> 34
MANAGEMENT
Northern Border Pipeline Company is overseen by the management committee,
which is composed of the following individuals:
Larry L. DeRoin, Chairman(1)
Stanley C. Horton(1)
Garry P. Mihaichuk(2)
Cuba Wadlington, Jr.(1)
- ---------------
(1) Designated by Northern Border Partners.
(2) Designated by TC PipeLines.
Larry L. DeRoin (57) has been a member of our management committee since
1985 and has been Chairman since 1988. Mr. DeRoin was named Chief Executive
Officer of Northern Border Partners in July 1993. Mr. DeRoin has been the
President and a director of Northern Plains, an Enron subsidiary and our
operator, since 1985.
Stanley C. Horton (49) has been a member of our management committee since
December 1998. Mr. Horton is the Chairman and Chief Executive Officer of the Gas
Pipeline Group of Enron Corp. and has held that position since January 1997.
Prior to that, Mr. Horton served as Co-Chairman and Chief Operating Officer of
Enron Operations Corp. (1996-1997) and President and Chief Operating Officer of
Enron Pipeline and Liquids Group (1993-1996).
Garry P. Mihaichuk (46) has been a member of our management committee since
September 1999, when he was named President and Chief Executive Officer of TC
PipeLines GP, Inc. In July 1999, Mr. Mihaichuk was appointed Senior Vice
President and President of Transmission for TransCanada PipeLines Limited. He
has been associated with TransCanada since July 1996, when he was appointed
President and Chief Executive Officer of TransCanada's International Business
Unit. Previously, Mr. Mihaichuk served as Chairman of Amoco Orient Company and
Senior Vice President for Amoco Corporation (1994-1996).
Cuba Wadlington, Jr. (56) was named to the management committee on December
1, 1999. On January 4, 2000, Mr. Wadlington was named President and Chief
Executive Officer of Williams Gas Pipeline. Previously, he had served as
Executive Vice President and Chief Operating Officer of Williams Gas Pipeline
since July 1999. Mr. Wadlington joined Transco in 1995 when Williams acquired
Transco Energy Company. From 1995 to 1999, he served as senior vice president
and general manager of Williams Gas Pipeline-Transco. From 1988 to 1995, he
served as senior vice president and general manager of Williams Western Pipeline
Company, executive vice president of Kern River Gas Transmission Company, and
director of Northwest Pipeline Corporation and Williams Western Pipeline, all
affiliates or subsidiaries of Williams. Mr. Wadlington serves on the Board of
Directors of Sterling Bancshares Inc., a public company subject to the reporting
requirements of the Exchange Act.
Day-to-day management and operations are the responsibility of the
operator, Northern Plains, as set forth in the operating agreement. We have no
employees or executive officers. Officers and employees of Northern Plains
provide services to our operations and we reimburse Northern Plains for such
costs. We do not compensate members of the management committee for their
services.
There is also an audit and compensation committee composed of members
appointed by the management committee. The audit and compensation committee,
consisting of Messrs. Mihaichuk and Wadlington, oversees the annual audit
process and confers with Arthur Andersen LLP, our independent public
accountants. The committee is also responsible for setting up guidelines for
compensation to be paid to the executive officers of Northern Plains, each of
whom spends at least a portion of his or her time on our operations, for which
Northern Plains is reimbursed as indicated above. Currently, there is one
vacancy on the committee.
35
<PAGE> 35
EXECUTIVE DISCLOSURE AND COMPENSATION
Executive Disclosure
Jerry L. Peters (41) has served as Treasurer of Northern Plains since
October 1998, Vice President of Finance for Northern Plains since July 1994 and
director of Northern Plains since August 1994. He has been associated with
Northern Plains since 1985.
Executive Compensation
The following table summarizes information regarding compensation paid or
accrued during each of the last three completed fiscal years to Messrs. Larry L.
DeRoin and Jerry L. Peters ("Named Officers") by Northern Plains, our operator.
Messrs. DeRoin and Peters are both employees of Northern Plains, but contribute
services to our operations, for which we reimburse Northern Plains. Northern
Plains is an affiliate of Enron. Amounts of Enron common stock and options
contained herein have not been adjusted for the 2-for-1 stock split effective
August 16, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
-------------------------------------------- ALL OTHER
SECURITIES COMPENSATION
OTHER RESTRICTED UNDERLYING -------------------
ANNUAL STOCK OPTIONS/ LTIP
NAME & POSITION YEAR SALARY BONUS(1) COMPENSATION(2) AWARDS(3) SARS (#) PAYOUTS(4) (5)
--------------- ---- -------- -------- --------------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry L. DeRoin............... 1998 $256,067 $250,000 $ 7,200 $125,024 9,510 $ -- $6,380
Chief Executive Officer 1997 $247,333 $200,000 $ 11,908 $ -- 15,285 $ -- $ --
1996 $239,667 $144,000 $ 6,900 $ -- 18,220 $56,250 $1,102
Jerry L. Peters............... 1998 $123,225 $110,000 $ 1,214 $ 60,030 10,000 $ -- $1,956
Chief Financial and 1997 $118,750 $ 47,500 $ 1,200 $ -- 5,715 $ -- $ --
Accounting Officer 1996 $114,525 $ 28,000 $ -- $ -- 5,045 $ -- $ 767
</TABLE>
- ---------------
(1) For 1996 and 1997, Mr. Peters' bonus awards were $48,000 and $80,000
respectively. The bonuses detailed exclude amounts deferred into Enron's
Bonus Stock Option Program. Mr. Peters received a grant of 3,215 options to
purchase Enron common stock during 1997 in lieu of a $20,000 cash bonus
payment for 1996 and 4,435 options during 1998 in lieu of a $32,500 cash
bonus payment for 1997. The 1998 amount reflects the full bonus earned,
including deferrals.
(2) Includes "Perquisites and Other Personal Benefits" if value is greater than
the lesser of $50,000 or 10% of reported salary and bonus. Also, under
Enron's 1985 Deferral Plan, interest is credited on amounts deferred based
on 150% of Moody's seasoned corporate bond yield index with a minimum rate
of 12%, which for 1996, 1997 and 1998 was the minimum rate of 12%. No
interest has been reported as Other Annual Compensation under Enron's 1985
Deferral Plan for participating Named Officers because the crediting rates
during 1996, 1997 and 1998, did not exceed 120% of the long-term Applicable
Federal Rate ("AFR") of 14.38% in effect at the time the 1985 Deferral Plan
was implemented. Interest has been reported as Other Annual Compensation
under Enron's 1994 Deferral Plan during 1996 for the participating Named
Officers because the crediting rate of 9% exceeded 120% of the AFR of 7.29%
in effect at the time the 1994 Deferral Plan was implemented. Beginning
January 1, 1996, Enron's 1994 Deferral Plan credits interest based on fund
elections chosen by participants. Since earnings on deferred compensation
invested in third-party investment vehicles, comparable to mutual funds,
need not be reported, no interest has been reported as Other Annual
Compensation under Enron's 1994 Deferral Plan during 1996, 1997 and 1998.
Other Annual Compensation also includes cash perquisite allowances.
(3) The aggregate total of shares in unreleased Enron restricted stock holdings
and their values as of December 31, 1998, for each of the Named Officers is:
Mr. DeRoin, 2,191 shares valued at $125,024; Mr. Peters, 1,052 shares valued
at $60,030. This represents performance based restricted stock which was
granted in lieu of performance units for the 1999-2002 performance period.
Assuming continuous employment with Enron or an affiliate, the award will
become vested and will be released January 31, 2002 as follows: (a) 33 1/3%
of the total number of shares granted will vest and be released if earnings
36
<PAGE> 36
targets, as set by the Board of Directors of Enron in its sole discretion,
are met in any one year of the three year period 1999, 2000 and 2001, (b)
66 2/3% of the total number of shares granted will vest and be released if
earnings targets, as set by the Board of Directors of Enron in its sole
discretion, are met in any two years of the three year period 1999, 2000 and
2001, and (c) 100% of the total number of shares granted will vest and be
released if earnings targets, as set by the Board of Directors of Enron in
its sole discretion, are met in each of the three years or cumulatively over
the three year period 1999, 2000 and 2001. Shares of restricted stock which
do not become vested according to the above provisions will be canceled.
(4) The amount shown for 1996 for Mr. DeRoin represents payouts made under
Enron's Performance Unit Plan account.
(5) The amounts shown include the value, as of year-end 1996 and 1998, of Enron
Common Stock allocated during those years to employees' special subaccounts
under Enron's Employee Stock Ownership Plan, and 1998 matching contributions
to employees' Enron Corp. Savings Plan.
Stock Option Grants During 1998
The following table sets forth information with respect to grants of stock
options pursuant to Enron's stock plans to the Named Officers. No stock
appreciation rights were granted during 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------
% OF
TOTAL
OPTIONS/
SARS POTENTIAL REALIZABLE VALUE AT
GRANTED PRICE APPRECIATION FOR OPTION
OPTIONS/ TO EXERCISE ASSUME ANNUAL RATES OF
SARS EMPLOYEES OR STOCK TERM(6)
GRANTED IN FISCAL BASE PRICE EXPIRATION -----------------------------
NAME (#)(1) YEAR ($/SH) DATE 0%(5) 5% 10%
---- -------- ---------- ----------- ---------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry L. DeRoin..................... 9,510(2) 0.12% $57.0625 12/31/05 $ -- $220,920 $514,835
Jerry L. Peters..................... 4,435(3) 0.06% $40.1250 01/19/05 $ -- $ 72,446 $168,829
1,000(4) 0.01% $50.9375 10/12/08 $ -- $ 32,035 $ 81,182
4,565(2) 0.06% $57.0625 12/31/05 $ -- $106,046 $247,132
</TABLE>
- ---------------
(1) If a "change of control" (as defined in the Enron Stock Plans) were to occur
with respect to Enron before the options become exercisable and are
exercised, the vesting described below will be accelerated and all such
outstanding options shall be surrendered and the optionee shall receive a
cash payment by Enron in an amount equal to the value of the surrendered
options (as defined in the Enron Stock Plans).
(2) Represents stock options awarded under the Long-Term Incentive Program for
1999. Grants under this program are granted on the last trading day of the
prior year, due to regulations under Section 162(m) of the Internal Revenue
Code. Options have a seven-year term, and are 25% vested on the date of
grant with an additional 25% vesting on the anniversary of the date of grant
through December 31, 2001.
(3) Represents stock options in lieu of 1997 bonus payment in January 1998.
Options have a seven year term and immediate vesting.
(4) Represents stock options awarded for retention purposes. Options have a
ten-year term, and are 20% vested on the date of grant with an additional
20% vesting on each anniversary of the date of grant through October 12,
2002.
(5) An appreciation in stock price, which will benefit all stockholders, is
required for optionees to receive any gain. A stock price appreciation of
zero percent would render the option without value to the optionees.
(6) The dollar amounts under these columns represent the potential realizable
value of each grant of options assuming that the market price of Common
Stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by the SEC and therefore are not intended to forecast
possible future appreciation, if any, of the price of Common Stock.
37
<PAGE> 37
Aggregated Stock Option/SAR Exercises During 1998 and Stock Option/SAR Values as
of December 31, 1998
The following table sets forth information with respect to the Named
Officers concerning the exercise of Enron SARs and options during the last
fiscal year and unexercised Enron options and SARs held as of the end of the
fiscal year:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
OPTIONS/SARS AT IN-THE-MONEY SARS
SHARES DECEMBER 31, 1998 AT DECEMBER 31, 1998
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry L. DeRoin....... 96,745 $2,901,089 51,438 19,827 $995,040 $218,105
Jerry L. Peters....... 3,145 $ 77,736 21,450 6,795 $410,704 $ 51,864
</TABLE>
Long-Term Incentive Plan -- Awards in 1998
The following table provides information concerning Long-Term Incentive
Plan awards under the Performance Unit Plan of Enron for the 1998-2001
performance period. Grants are made at the beginning of each fiscal year and
each unit is assigned a value of $1.00. The units are subject to a four-year
performance period, at the end of which Enron's total shareholder return is
compared to that of the 11 peer companies included in the Current Peer Group. At
that time, the units are assigned a value ranging from $0 to $2.00 based on the
rank of Enron's shareholder return within the Current Peer Group. To be valued
at the maximum of $2.00, Enron must rank first, and to be valued at the target
of $1.00, Enron must rank third. Regardless of Enron's rank, Enron's shareholder
return must be above the return on 90-day U.S. Treasury Bills over the same
performance period in order for any value to be assigned.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES, PERFORMANCE ESTIMATED FUTURE PAYOUTS
UNITS OR OTHER UNDER NON-STOCK PRICE-BASED PLANS
OR OTHER PERIOD UNTIL -------------------------------------
NAME RIGHTS(#) MATURATION PAYOUT THRESHOLD($) TARGET($) MAXIMUM($)
---- --------- ----------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Larry L. DeRoin.................. 100,000 4 years $ -- $100,000 $200,000
</TABLE>
Retirement and Supplemental Benefit Plans
Enron maintains the Enron Corp. Cash Balance Plan which is a
noncontributory defined benefit plan to provide retirement income for employees
of Enron and its subsidiaries. Through December 31, 1994, participants in the
Cash Balance Plan with five years or more of service were entitled to retirement
benefits in the form of an annuity based on a formula that uses a percentage of
final average pay and years of service. In 1995, Enron's Board of Directors
adopted an amendment to and restatement of the Cash Balance Plan changing the
plan's name from the Enron Corp. Retirement Plan to the Enron Corp. Cash Balance
Plan. In connection with a change to the retirement benefit formula, all
employees became fully vested in retirement benefits earned through December 31,
1994. The formula in place prior to January 1, 1995 was suspended and replaced
with a benefit accrual in the form of a cash balance of 5% of annual base pay
beginning January 1, 1996. Under the Cash Balance Plan, each employee's accrued
benefit will be credited with interest based on ten-year Treasury Bond yields.
Enron also maintains a noncontributory employee stock ownership plan which
covers all eligible employees. Allocations to individual employees' retirement
accounts within the ESOP offset a portion of benefits earned under the Cash
Balance Plan. December 31, 1993, was the final date on which ESOP allocations
were made to employees' retirement accounts.
In addition, Enron has a Supplemental Retirement Plan that is designed to
assure payments to certain employees of that retirement income that would be
provided under the Cash Balance Plan except for the dollar limitation on accrued
benefits imposed by the Internal Revenue Code, and a Pension Program for
Deferral Plan Participants that provides supplemental retirement benefits equal
to any reduction in benefits due to deferral of salary into Enron's Deferral
Plan.
38
<PAGE> 38
The following table sets forth the estimated annual benefits payable under
normal retirement at age 65, assuming current remuneration levels without any
salary or bonus projections and participation until normal retirement at age 65,
with respect to the named officers under the provisions of the foregoing
retirement plans.
<TABLE>
<CAPTION>
ESTIMATED
CURRENT CREDITED CURRENT ESTIMATED
CREDITED YEARS OF COMPENSATION ANNUAL BENEFIT
YEARS OF SERVICE COVERED PAYABLE UPON
SERVICE AT AGE 65 BY PLANS RETIREMENT*
-------- --------- ------------ --------------
<S> <C> <C> <C> <C>
Mr. DeRoin................................... 31.3 39.0 $256,067 $138,009
Mr. Peters................................... 13.9 37.8 $123,225 $ 71,933
</TABLE>
- ---------------
* The estimated annual benefits payable are based on the straight life annuity
form without adjustment for any offset applicable to a participant's
retirement subaccount in Enron's ESOP.
Mr. DeRoin participates in the Executive Supplemental Survivor Benefit
Plan. In the event of death after retirement, the Plan provides an annual
benefit to the participant's beneficiary equal to 50 percent of the
participant's annual base salary at retirement, paid for 10 years. The Plan also
provides that in the event of death before retirement, the participant's
beneficiary receives an annual benefit equal to 30% of the participant's annual
base salary at death, paid for the life of the participant's spouse (but for no
more than 20 years in some cases).
Severance Plans
Enron's Severance Pay Plan, as amended, provides for the payment of
benefits to employees who are terminated for failing to meet performance
objectives or standards or who are terminated due to reorganization or economic
factors. The amount of benefits payable for performance related terminations is
based on length of service and may not exceed six weeks' pay. For those
terminated as the result of reorganization or economic circumstances, the
benefit is based on length of service and amount of pay up to a maximum payment
of 26 weeks of base pay. If the employee signs a Waiver and Release of Claims
Agreement, the severance pay benefits are doubled. Under no circumstances will
the total severance pay benefit exceed 52 weeks of pay. Under the Enron Corp.
Change of Control Severance Plan, in the event of an unapproved change of
control of Enron, any employee who is involuntarily terminated within two years
following the change of control will be eligible for severance benefits equal to
two weeks of base pay multiplied by the number of full or partial years of
service, plus one month of base pay for each $10,000 (or portion of $10,000)
included in the employee's annual base pay, plus one month of base pay for each
five percent of annual incentive award opportunity under any approved plan. The
maximum an employee can receive is 2.99 times the employee's average W-2
earnings over the past five years.
Reimbursement to Northern Plains for the Services of Messrs. DeRoin and Peters
We reimbursed Northern Plains an aggregate of $0.7 million for the fiscal
year 1998 for services rendered to us by the Named Officers. We expect to
reimburse Northern Plains approximately $1.0 million for such services for
fiscal year 1999.
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<PAGE> 39
BENEFICIAL OWNERSHIP OF PARTNERSHIP INTERESTS
The following table sets forth the beneficial ownership of general
partnership interests of Northern Border Pipeline Company. There are no limited
partnership interests.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER GENERAL PARTNERSHIP INTEREST
------------------------ ----------------------------
<S> <C>
Northern Border Partners, L.P.(1)........................... 70%
TC PipeLines, LP(2)......................................... 30%
</TABLE>
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(1) The address of Northern Border Partners, L.P. is 1400 Smith Street, Houston,
Texas 77002. Northern Border Partners holds its 70% general partnership
interest through Northern Border Intermediate Limited Partnership, a
subsidiary limited partnership. Northern Border Partners has three general
partners: Northern Plains Natural Gas Company, Pan Border Gas Company and
Northwest Border Pipeline Company. Northern Plains and Pan Border are
wholly-owned subsidiaries of Enron Corp. and Northwest Border is a
wholly-owned subsidiary of The Williams Companies, Inc.
(2) The address of TC PipeLines, LP is Four Greenspoint Plaza, 16945 Northchase
Drive, Houston, Texas 77060. TC PipeLines holds its 30% general partnership
interest through TC PipeLines Intermediate Limited Partnership, a subsidiary
limited partnership. TC PipeLines has one general partner: TC PipeLines GP,
Inc., a wholly-owned subsidiary of TransCanada PipeLines Limited.
MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS
We have extensive ongoing relationships with our general partners and
certain of their affiliates. Since 1980, Northern Plains, an affiliate of Enron,
has acted and will continue to act as the operator of our pipeline system
pursuant to the terms of the operating agreement with Northern Plains. For
fiscal year 1998, the aggregate amount paid and reimbursed to Northern Plains,
for its services as operator, was $30.0 million. We currently anticipate
reimbursing Northern Plains approximately $29.7 million for fiscal year 1999.
For information regarding amounts reimbursed to Northern Plains with respect to
services rendered by Northern Plains' employees that may be deemed our
"executive officers," refer to "Management -- Executive Disclosure and
Compensation."
For a more detailed discussion of our operating agreement, refer to
"Northern Border Pipeline Company Partnership Agreement -- Operator."
Enron Engineering & Construction Company, an affiliate of Enron, provided
project management for the construction of The Chicago Project pursuant to the
terms of a project management agreement between Northern Plains and Enron
Engineering. The project management agreement provided for the appointment of
Enron Engineering as project manager of The Chicago Project. Pursuant to the
agreement, Enron Engineering's responsibilities include (1) the provision of
adequate and qualified manpower necessary for the work contemplated by the
project; (2) procurement of required equipment and materials and the services
for installation; (3) management and monitoring of performance of vendors and
contractors; and (4) obtaining all permits necessary for the work as required by
federal, state or local authorities. Northern Plains compensates Enron
Engineering for costs incurred in performing the required work on The Chicago
Project. Through November 30, 1999, approximately $16.7 million has been paid to
Enron Engineering for project management of The Chicago Project.
In addition, as of September 30, 1999:
- Enron Capital & Trade Resources Corp., an affiliate of Enron, is one of
our transportation customers, and is obligated to pay 5.7% of our annual
cost of service;
- TransCanada Gas Services, an affiliate of TransCanada PipeLines Limited,
is one of our transportation customers and is currently obligated to pay
10.8% of our annual cost of service pursuant to a transportation contract
wherein TransCanada Gas Services acts as the agent of its parent,
TransCanada;
- Transco, an affiliate of Williams, is one of our transportation customers
and is currently
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obligated to pay 0.8% of our annual cost of service; and
- Northern Natural Gas Company, an affiliate of Enron, provides a financial
guaranty for a portion of the transportation capacity held by Pan-Alberta
Gas, which currently represents 10.5% of our annual cost of service.
The terms of all such related transactions are no less favorable to us than
those we would expect to negotiate with unrelated third parties on an arm's
length basis.
Our interests could conflict with the interests of our general partners or
their affiliates, and in such case the members of our management committee will
generally have a fiduciary duty to resolve such conflicts in a manner that is in
our best interest.
Unless otherwise provided for in a partnership agreement, the laws of Texas
generally require a general partner of a partnership to adhere to fiduciary duty
standards under which it owes its partners the highest duties of good faith,
fairness and loyalty. These rules apply to our management committee. Because of
the competing interests identified above, the Northern Border Pipeline Company
Partnership Agreement contains provisions that modify certain of these fiduciary
duties. For example:
- The partnership agreement provides that we indemnify the members of our
management committee and Northern Plains, as the operator, against all
actions if such actions were in good faith and within the scope of their
authority in the course of our business. It also provides that such
persons will not be liable for any liabilities incurred by us as a result
of such acts.
- The partnership agreement states that our general partners will not be
liable to third persons for our losses, deficits, liabilities or
obligations (unless our assets have been exhausted).
- The partnership agreement requires that any contract entered into on our
behalf must contain a provision limiting the claims of persons to our
assets and expressly waiving any rights of such persons to proceed
against our general partners individually.
- The partnership agreement relieves Northern Border Partners and TC
PipeLines, their affiliates and their transferees from any duty to offer
business opportunities to us, except that neither our general partners or
their affiliates may pursue Project 2000 or any other opportunity
relating to expansion or improvements of our pipeline system as it
existed on January 15, 1999.
Our policy regarding cash distributions to our partners is set by our
management committee. See "Northern Border Pipeline Company Partnership
Agreement -- Cash Distribution Policy."
THE EXCHANGE OFFER
REGISTRATION RIGHTS AGREEMENT
We entered into a registration rights agreement with the initial purchasers
of the existing notes under which we agreed to:
- file a registration statement relating to an exchange offer, not later
than 120 days after the closing of the existing note transaction, which
would enable holders to exchange the existing notes for new notes with
identical terms, but without transfer restrictions;
- use our reasonable best efforts to cause the registration statement to
become effective within 180 days after the existing notes were issued;
- use our reasonable best efforts to complete the exchange within 30 days
after the registration statement becomes effective; and
- file a shelf registration statement for the resale of the existing notes
if we cannot effect an exchange offer within the specified period and in
other circumstances described in the registration rights agreement.
The interest rate on the notes will increase by 0.25% each time we do not
meet the deadlines referred to in, or otherwise comply with our obligations
under, the registration rights agreement. The interest rate shall be increased
by 0.25% per annum per default each 90 days that the default is
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not cured. Such interest rate increases, however, may not exceed a total of 1.0%
per annum.
The exchange offer fulfills our obligations under the registration rights
agreement, which are summarized above. Accordingly, there will be no additional
interest paid on the existing notes if (1) the registration statement relating
to the exchange offer becomes effective by February 13, 2000 and (2) we complete
the exchange within 30 days after the registration statement becomes effective.
EXCHANGE TERMS
An aggregate of $200,000,000 principal amount of existing notes are
currently issued and outstanding. The maximum principal amount of new notes that
will be issued in exchange for existing notes is $200,000,000. The terms of the
new notes and the existing notes are substantially the same in all material
respects, except that the new notes will be freely transferable by the holders,
other than as provided in this prospectus.
The new notes will bear interest at a rate of 7.75% per year, payable
semiannually on March 1 and September 1 of each year, beginning on March 1,
2000. Holders of new notes will receive interest from the date of the original
issuance of the existing notes or from the date of the last payment of interest
on the existing notes, whichever is later. Holders of new notes will not receive
any interest on existing notes tendered and accepted for exchange. In order to
exchange your existing notes for transferable new notes in the exchange offer,
you will be required to make the following representations:
- any new notes will be acquired in the ordinary course of your business;
- you have no arrangement with any person to participate in the
distribution of the new notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities
Act, or if you are our affiliate, you will comply with the applicable
registration and prospectus delivery requirements of the Securities Act.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any existing notes
properly tendered in the exchange offer, and the exchange agent will deliver the
new notes promptly after the expiration date (as defined below) of the exchange
offer. We expressly reserve the right to delay acceptance of any of the tendered
existing notes or terminate the exchange offer and not accept for exchange any
tendered existing notes not already accepted if any conditions set forth below
under "-- Conditions of the Exchange Offer" have not been satisfied or waived by
us or do not comply, in whole or in part, with any applicable law.
If you tender your existing notes, you will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the existing notes.
We will pay all charges, expenses and transfer taxes in connection with the
exchange offer, other than certain taxes described below under "-- Transfer
Taxes."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
February 11, 2000, the "expiration date," unless extended by us. We expressly
reserve the right to extend the exchange offer on a daily basis or for such
period or periods as we may determine in our sole discretion from time to time
by giving oral, confirmed in writing, or written notice to the exchange agent
and by making a public announcement by press release to the Dow Jones News
Service prior to 9:00 a.m., New York City time, on the first business day
following the previously scheduled expiration date. During any extension of the
exchange offer, all existing notes previously tendered, not validly withdrawn
and not accepted for exchange will remain subject to the exchange offer and may
be accepted for exchange by us.
To the extent we are legally permitted to do so, we expressly reserve the
absolute right, in our sole discretion, to:
- waive any condition to the exchange offer; and
- amend any of the terms of the exchange offer.
In addition, as the satisfaction of the conditions to the exchange offer is
in our sole discretion, satisfaction may be the equivalent of the waiver of a
condition. Any waiver or amendment to
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the exchange offer will apply to all existing notes tendered, regardless of when
or in what order the existing notes were tendered. If we make a material change
in the terms of the exchange offer or if we waive a material condition of the
exchange offer, we will disseminate additional exchange offer materials, and we
will extend the exchange offer to the extent required by law, which shall be no
less than five days from the date of dissemination. In such an event, we will
also file with the SEC a post-effective amendment to the registration statement
of which this prospectus forms a part.
We expressly reserve the right, in our sole discretion, to terminate the
exchange offer if any of the conditions set forth under "-- Conditions of the
Exchange Offer" exist. Any such termination will be followed promptly by a
public announcement. In the event we terminate the exchange offer, we will give
immediate notice to the exchange agent.
In the event that the exchange offer is withdrawn or otherwise not
completed, new notes will not be given to holders of existing notes who have
tendered their existing notes. Promptly after the termination or withdrawal of
the exchange offer, all existing notes will be returned to noteholders, in
accordance with Rule 14e-1(c) of the Exchange Act.
RESALE OF NEW NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to third parties, we believe that new notes issued under the exchange
offer in exchange for existing notes may be offered for resale, resold and
otherwise transferred by you without compliance with the registration and
prospectus delivery provisions of the Securities Act, if:
- you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act;
- you are acquiring new notes in the ordinary course of your business; and
- you do not intend to participate in the distribution of the new notes.
If you tender existing notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
- you cannot rely on those interpretations by the SEC staff; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and such a secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation
S-K. Accordingly, this prospectus may not be used in connection with such
resales.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, a resale or other
retransfer of new notes only as specifically set forth in this prospectus. Only
broker-dealers that acquired the existing notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives new notes for its own account in exchange for
existing notes, where such existing notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
the new notes. Please read the section captioned "Plan of Distribution" for more
details regarding the transfer of new notes.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE
We will accept for exchange existing notes validly tendered pursuant to the
exchange offer after the later of: (1) the expiration date of the exchange
offer; and (2) the satisfaction or waiver of the conditions specified below
under "-- Conditions of the Exchange Offer." We will also accept existing notes
defectively tendered if we choose to waive such defect. We will not accept
existing notes for exchange subsequent to the expiration date of the exchange
offer. Tenders of existing notes will be accepted only in principal amounts
equal to $1,000 or integral multiples thereof.
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We expressly reserve the right, in our sole discretion, to:
- delay acceptance for exchange of existing notes tendered under the
exchange offer, subject to Rule 14e-1 under the Exchange Act, which
requires that an offeror pay the consideration offered or return the
securities deposited by or on behalf of the holders promptly after the
termination or withdrawal of a tender offer, or
- terminate the exchange offer and not accept for exchange any existing
notes not theretofore accepted for exchange, if any of the conditions set
forth below under "-- Conditions of the Exchange Offer" have not been
satisfied or waived by us or in order to comply in whole or in part with
any applicable law. In all cases, new notes will be issued only after
timely receipt by the exchange agent of certificates representing
existing notes, or confirmation of book-entry transfer, a properly
completed and duly executed letter of transmittal, or a manually signed
facsimile thereof, and any other required documents. For purposes of the
exchange offer, we will be deemed to have accepted for exchange validly
tendered existing notes, or defectively tendered existing notes with
respect to which we have waived such defect, if, as and when we give
oral, confirmed in writing, or written notice to the exchange agent.
Promptly after the expiration date, we will deposit the new notes with
the exchange agent, who will act as agent for the tendering holders for
the purpose of receiving the new notes and transmitting them to the
holders. The exchange agent will deliver the new notes to holders of
existing notes accepted for exchange after the exchange agent receives
the new notes.
If, for any reason, we delay acceptance for exchange of validly tendered
existing notes or we are unable to accept for exchange validly tendered existing
notes, then the exchange agent may, nevertheless, on our behalf, retain tendered
existing notes, without prejudice to our rights described under "-- Expiration
Date; Extensions; Termination; Amendments," "-- Conditions of the Exchange
Offer" and "-- Withdrawal of Tenders," subject to Rule 14e-1 under the Exchange
Act.
If any tendered existing notes are not accepted for exchange for any
reason, or if certificates are submitted evidencing more existing notes than
those that are tendered, certificates evidencing existing notes that are not
exchanged will be returned, without expense, to the tendering holder, or, in the
case of existing notes tendered by book-entry transfer into the exchange agent's
account at a book-entry transfer facility under the procedure set forth under
"-- Procedures for Tendering Existing Notes -- Book-Entry Transfer," such
existing notes will be credited to the account maintained at such book-entry
transfer facility from which such existing notes were delivered, unless
otherwise requested by such holder under "Special Delivery Instructions" in the
letter of transmittal, promptly following the exchange date or the termination
of the exchange offer.
Tendering holders of existing notes exchanged in the exchange offer will
not be obligated to pay brokerage commissions or transfer taxes with respect to
the exchange of their existing notes other than as described in "-- Transfer
Taxes" or in Instruction 6 to the letter of transmittal. We will pay all other
charges and expenses in connection with the exchange offer.
PROCEDURES FOR TENDERING EXISTING NOTES
Any beneficial owner whose existing notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held through
a book-entry transfer facility and who wishes to tender existing notes should
contact such registered holder promptly and instruct such registered holder to
tender existing notes on such beneficial owner's behalf.
Tender of Existing Notes Held Through DTC. The exchange agent and DTC have
confirmed that the exchange offer is eligible for the DTC automated tender offer
program. Accordingly, DTC participants may electronically transmit their
acceptance of the exchange offer by causing DTC to transfer existing notes to
the exchange agent in accordance with DTC's automated tender offer program
procedures for transfer. DTC will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which states
that DTC has received an express acknowledgment from the participant in
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DTC tendering existing notes that are the subject of that book-entry
confirmation that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce such agreement
against such participant. In the case of an agent's message relating to
guaranteed delivery, the term means a message transmitted by DTC and received by
the exchange agent, which states that DTC has received an express acknowledgment
from the participant in DTC tendering existing notes that they have received and
agree to be bound by the notice of guaranteed delivery.
Tender of Existing Notes Held in Physical Form. For a holder to validly
tender existing notes held in physical form:
- the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal, or a manually signed facsimile thereof, together with any
signature guarantees and any other documents required by the instructions
to the letter of transmittal; and
- the exchange agent must receive certificates for tendered existing notes
at such address, or such existing notes must be transferred pursuant to
the procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
existing notes and who cannot comply with the procedures set forth herein
for tender on a timely basis or whose existing notes are not immediately
available must comply with the procedures for guaranteed delivery set
forth below.
LETTERS OF TRANSMITTAL AND EXISTING NOTES SHOULD BE SENT ONLY TO THE EXCHANGE
AGENT, AND NOT TO US OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF EXISTING NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING EXISTING NOTES. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL,
WE SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT
PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF
EXISTING NOTES WILL BE ACCEPTED.
Signature Guarantees. Signatures on the letter of transmittal must be
guaranteed by an eligible institution unless:
- the letter of transmittal is signed by the registered holder of the
existing notes tendered therewith, or by a participant in one of the
book-entry transfer facilities whose name appears on a security position
listing it as the owner of those existing notes, or if any existing notes
for principal amounts not tendered are to be issued directly to the
holder, or, if tendered by a participant in one of the book-entry
transfer facilities, any existing notes for principal amounts not
tendered or not accepted for exchange are to be credited to the
participant's account at the book-entry transfer facility, and neither
the "Special Issuance Instructions" nor the "Special Delivery
Instructions" box on the letter of transmittal has been completed, or
- the existing notes are tendered for the account of an eligible
institution.
An eligible institution is a firm that is a participant in the Security Transfer
Agents Medallion Program or the Stock Exchanges Medallion Program, which is
generally a member of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office in the United States.
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the existing notes at DTC
promptly after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility system and whose name appears on
a security position listing it as the owner of the existing notes may make
book-entry delivery of existing notes by causing the book-entry transfer
facility to transfer such existing notes into the exchange agent's account.
HOWEVER, ALTHOUGH DELIVERY OF EXISTING NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY
TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY, A
PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER
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OF TRANSMITTAL, OR A MANUALLY SIGNED FACSIMILE THEREOF, MUST BE RECEIVED BY THE
EXCHANGE AGENT AT ITS ADDRESS SET FORTH IN THIS PROSPECTUS ON OR PRIOR TO THE
EXPIRATION DATE OF THE EXCHANGE OFFER, OR ELSE THE GUARANTEED DELIVERY
PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH. The confirmation of a
book-entry transfer of existing notes into the exchange agent's account at a
book-entry transfer facility is referred to in this prospectus as a "book-entry
confirmation." Delivery of documents to the book-entry transfer facility in
accordance with that book-entry transfer facility's procedures does not
constitute delivery to the exchange agent.
Guaranteed Delivery. If you wish to tender your existing notes and:
(1) certificates representing your existing notes are not lost but are not
immediately available,
(2) time will not permit your letter of transmittal, certificates
representing your existing notes and all other required documents to reach
the exchange agent on or prior to the expiration date of the exchange
offer, or
(3) the procedures for book-entry transfer cannot be completed on or prior
to the expiration date of the exchange offer, you may tender if all of the
following are complied with:
- your tender is made by or through an eligible institution;
- on or prior to the expiration date of the exchange offer, the exchange
agent has received from the eligible institution a properly completed and
validly executed notice of guaranteed delivery, by manually signed
facsimile transmission, mail or hand delivery, in substantially the form
provided with this prospectus. The notice of guaranteed delivery must:
(a) set forth your name and address, the registered number(s) of your
existing notes and the principal amount of existing notes tendered;
(b) state that the tender is being made thereby;
(c) guarantee that, within three New York Stock Exchange trading days
after the date of the notice of guaranteed delivery, the letter of
transmittal or facsimile thereof properly completed and validly executed,
together with certificates representing the existing notes, or a
book-entry confirmation, and any other documents required by the letter
of transmittal and the instructions thereto, will be deposited by the
eligible institution with the exchange agent; and
- the exchange agent receives the properly completed and validly executed
letter of transmittal or facsimile thereof with any required signature
guarantees, together with certificates for all existing notes in proper
form for transfer, or a book-entry confirmation, and any other required
documents, within three New York Stock Exchange trading days after the
date of the notice of guaranteed delivery.
Other Matters. New notes will be issued in exchange for existing notes
accepted for exchange only after timely receipt by the exchange agent of:
- certificates for (or a timely book-entry confirmation with respect to)
your existing notes, a properly completed and duly executed letter of
transmittal or facsimile thereof with any required signature guarantees,
or, in the case of a book-entry transfer, an agent's message; and
- any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity, including
time of receipt, and acceptance of all tenders of existing notes will be
determined by us, in our sole discretion, the determination of which shall be
final and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF EXISTING
NOTES WILL NOT BE CONSIDERED VALID. We reserve the absolute right to reject any
or all tenders of existing notes that are not in proper form or the acceptance
of which, in our opinion, would be unlawful. We also reserve the right to waive
any defects, irregularities or conditions of tender as to particular existing
notes.
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding.
Any defect or irregularity in connection with tenders of existing notes
must be cured within the
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time we determine, unless waived by us. Tenders of existing notes will not be
deemed to have been made until all defects and irregularities have been waived
by us or cured. Neither we, the exchange agent nor any other person will be
under any duty to give notice of any defects or irregularities in tenders of
existing notes, or will incur any liability to holders for failure to give any
such notice.
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any new notes that you receive will be acquired in the ordinary course of
your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the new notes;
- if you are not a broker-dealer, you are not engaged in and do not intend
to engage in the distribution of the new notes;
- if you are a broker-dealer that will receive new notes for your own
account in exchange for existing notes that were acquired as a result of
market-making activities, you will deliver a prospectus, as required by
law, in connection with any resale of those new notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities
Act, or, if you are an affiliate, you will comply with any applicable
registration and prospectus delivery requirements of the Securities Act.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender of existing notes at any time prior to 5:00 p.m., New York City time, on
the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at its
address set forth below under "-- Exchange Agent," or
- you must comply with the appropriate procedures of DTC's automated tender
offer program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the existing notes to be
withdrawn; and
- identify the existing notes to be withdrawn, including the principal
amount of the existing notes.
If existing notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn existing
notes and otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any existing notes so withdrawn not to
have been validly tendered for exchange for purposes of the exchange offer.
Any existing notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of existing notes tendered by book-entry transfer into
the exchange agent's account at DTC according to the procedures described above,
such existing notes will be credited to an account maintained with DTC for the
existing notes. This return or crediting will take place as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer. You
may retender properly withdrawn existing notes by following one of the
procedures described under "-- Procedures for Tendering Existing Notes" at any
time on or prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We will not be required to accept for exchange, or exchange any new notes
for, any existing notes tendered, and we may terminate, extend or amend the
exchange offer and may, subject to Rule 14e-1 under the Exchange Act, postpone
the acceptance for exchange of existing notes so tendered if, on or prior to the
expiration date of the exchange offer, the following shall have occurred:
- we have determined that the offering and sales under the registration
statement, the filing of such registration statement or the
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maintenance of its effectiveness would require disclosure of or would
interfere in any material respect with any material financing, merger,
offering or other transaction involving us or would otherwise require
disclosure of nonpublic information that could materially and adversely
affect us.
The conditions to the exchange offer are for our sole benefit and may be
asserted by us in our sole discretion or may be waived by us, in whole or in
part, in our sole discretion, whether or not any other condition of the exchange
offer also is waived. We have not made a decision as to what circumstances would
lead us to waive any condition, and any waiver would depend on circumstances
prevailing at the time of that waiver. Any determination by us concerning the
events described in this section shall be final and binding upon all persons.
ALTHOUGH WE HAVE NO PRESENT PLANS OR ARRANGEMENTS TO DO SO, WE RESERVE THE RIGHT
TO AMEND, AT ANY TIME, THE TERMS OF THE EXCHANGE OFFER. WE WILL GIVE HOLDERS
NOTICE OF ANY AMENDMENTS IF REQUIRED BY APPLICABLE LAW.
TRANSFER TAXES
We will pay all transfer taxes applicable to the transfer and exchange of
existing notes pursuant to the exchange offer. If, however:
- delivery of the new notes, and/or certificates for existing notes for
principal amounts not exchanged, are to be made to any person other than
the record holder of the existing notes tendered;
- tendered certificates for existing notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
- a transfer tax is imposed for any reason other than the transfer and
exchange of existing notes to us or our order,
the amount of any such transfer taxes, whether imposed on the record holder or
any other person, will be payable by the tendering holder prior to the issuance
of the new notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your existing notes for new notes in the exchange
offer, you will remain subject to the restrictions on transfer of the existing
notes:
- as set forth in the legend printed on the notes as a consequence of the
issuance of the existing notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise set forth in the memorandum distributed in connection with the
private offering of the existing notes.
EXCHANGE AGENT
Bank One Trust Company, National Association has been appointed as exchange
agent for the exchange offer. You should direct questions and requests for
assistance, requests for additional copies of this prospectus, the letter of
transmittal or any other documents to the exchange agent. You should send
certificates for existing notes, letters of transmittal and any other required
documents to the exchange agent addressed as follows:
Bank One Trust Company, National Association
1 Bank One Plaza
Suite IL1-0126
Chicago, Illinois 60670
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DESCRIPTION OF THE NOTES
We will issue the new notes under an indenture between us and Bank One
Trust Company, National Association, successor to The First National Bank of
Chicago, as trustee, dated as of August 17, 1999. The existing notes were also
issued under the indenture. The terms of the existing notes are identical in all
material respects to the terms of the new notes. However, the existing notes
contain (1) terms with respect to transfer restrictions and, therefore, are not
freely tradeable; and (2) adjustments in the interest rate. The new notes do not
contain either term.
The terms of the notes include those set forth in the indenture and those
made a part of the indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the notes
and the indenture. It does not restate the indenture in its entirety. We urge
you to read the indenture because it, and not this description, defines your
rights as holders of the notes. Copies of the indenture are available at the
offices of the trustee.
THE NOTES
The notes:
- are general unsecured obligations;
- rank equally with all of our other existing and future senior and
unsubordinated debt;
- rank senior to all of our future subordinated debt; and
- are non-recourse to our general partners. See "-- Non-recourse; No
Personal Liability."
Subject to the exceptions, and subject to compliance with the applicable
requirements, set forth in the indenture, we may discharge our obligations under
the indenture with respect to the notes as described under "-- Discharge and
Defeasance."
PRINCIPAL, MATURITY AND INTEREST
The notes will mature on September 1, 2009. We are offering a maximum
aggregate principal amount of the new notes of $200,000,000.
Interest on the notes will:
- accrue at the rate of 7.75% per year;
- be payable semiannually on each March 1 and September 1, commencing March
1, 2000;
- be payable to the person in whose name the notes are registered at the
close of business on the relevant February 15 and August 15 preceding the
applicable interest payment date;
- be computed on the basis of a 360-day year comprised of twelve 30-day
months; and
- be payable on overdue interest to the extent permitted by law at the same
rate as interest is payable on principal.
If any interest payment date, maturity date or redemption date falls on a day
that is not a business day, the payment will be made on the next business day
with the same force and effect as if made on the relevant interest payment date,
maturity date or redemption date. Unless we default on a payment, no interest
will accrue for the period from and after the applicable maturity date or
redemption date.
DENOMINATIONS
The notes will be issued in registered form in denominations of $1,000 each
or integral multiples thereof.
OPTIONAL REDEMPTION
The notes will be redeemable, in whole or in part, at our option
exercisable at any time or from time to time upon not less than 30 and not more
than 60 days' notice as provided in the indenture, on any date prior to their
maturity at a redemption price equal to:
- the principal amount of such notes; plus
- a make-whole premium described below, if any.
The redemption price will never be less than 100% of the principal amount of the
relevant notes plus accrued and unpaid interest thereon, if any, to the
redemption date.
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The amount of the make-whole premium with respect to any note to be
redeemed will be equal to the excess, if any, of:
(1) the sum of the present values, calculated as of the redemption date,
of:
- each interest payment that, but for such redemption, would have been
payable on the note or portion thereof being redeemed on each interest
payment date occurring after the redemption date (excluding any accrued
interest for the period prior to the redemption date); and
- the principal amount that, but for such redemption, would have been
payable at the final maturity of the note being redeemed; over
(2) the principal amount of the note being redeemed.
The present values of interest and principal payments referred to in clause
(1) above will be determined in accordance with generally accepted principles of
financial analysis. These present values will be calculated by discounting the
amount of each payment of interest or principal from the date that each such
payment would have been payable, but for the redemption, to the redemption date
at a discount rate equal to the comparable treasury yield (as defined below)
plus 25 basis points. The make-whole premium will be calculated by an
independent investment banking institution of national standing appointed by us.
If we fail to appoint an independent investment banker at least 45 days prior to
the redemption date, or if the independent investment banker we appoint is
unwilling or unable to make the calculation, the calculation will be made by
Lehman Brothers Inc. If Lehman Brothers Inc. is unwilling or unable to make the
calculation, we will appoint an independent investment banking institution of
national standing to make the calculation.
For purposes of determining the make-whole premium, comparable treasury
yield means a rate of interest per annum equal to the weekly average yield to
maturity of United States Treasury Securities that have a constant maturity that
corresponds to the remaining term to maturity of the notes, calculated to the
nearest 1/12th of a year. The comparable treasury yield will be determined as of
the third business day immediately preceding the applicable redemption date.
The weekly average yields of United States Treasury Securities will be
determined by reference to the most recent statistical release published by the
Federal Reserve Bank of New York and designated "H.15(519) Selected Interest
Rates" or any successor release. If the H.15 statistical release sets forth a
weekly average yield for United States Treasury Securities having a constant
maturity that is the same as the remaining term calculated as set forth above,
then the comparable treasury yield will be equal to such weekly average yield.
In all other cases, the comparable treasury yield will be calculated by
interpolation on a straight-line basis, between the weekly average yields on the
United States Treasury Securities that have a constant maturity closest to and
greater than the remaining term and the United States Treasury Securities that
have a constant maturity closest to and less than the remaining term (in each
case as set forth in the H.15 statistical release or any successor release). Any
weekly average yields calculated by interpolation will be rounded to the nearest
1/100th of 1%, with any figure of 1/200th of 1% or above being rounded upward.
If weekly average yields for United States Treasury Securities are not available
in the H.15 statistical release or otherwise, then the comparable treasury yield
will be calculated by interpolation of comparable rates selected by an
independent investment banker selected in the manner described in the second
preceding paragraph.
In the case of any partial redemption, selection of the notes for
redemption will be made by the trustee on a pro rata basis, by lot or by such
other method as the trustee in its sole discretion shall deem to be fair and
appropriate. However, no note of $1,000 in original principal amount shall be
redeemed in part. If any note is to be redeemed in part only, the notice of
redemption will state the portion of the principal amount to be redeemed. A new
note in principal amount equal to the unredeemed portion of the original note
will be issued upon the cancellation of the original note.
SINKING FUND
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
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METHOD OF PAYMENT
The note requires that payment in respect of the global notes be made by
wire transfer of immediately available funds to the accounts specified by the
holders of the notes. If no such account is specified, we may choose to make
payment at the office of the trustee or by mailing a check to the holder's
registered address.
FINANCIAL COVENANTS
The indenture does not limit the amount of indebtedness or other
obligations that we may incur and does not contain provisions that give you the
right to require us to repurchase your notes in the event of a decline in the
credit rating of our debt securities or upon a change of control. The indenture
contains the following material financial covenants:
Limitation on Liens. We will not, and will not permit any of our
subsidiaries (as defined below) to, issue, create, assume or guarantee any
indebtedness for borrowed money secured by a lien upon any of our Property
(as defined below) or the Property of any subsidiary or upon any shares of
stock or indebtedness of any subsidiary that owns or leases any Property
(whether such Property, shares of stock or indebtedness is now existing or
owned or subsequently created or acquired) without effectively providing
that the notes will be secured equally and ratably with or prior to such
secured debt until such time as such debt is no longer secured by a lien.
The foregoing restriction does not require us to secure the notes if
the liens consist of either Permitted Liens (as defined below) or if the
indebtedness secured by these liens is Exempted Indebtedness (as described
below).
Limitation on Sale-Leaseback Transactions. We will not, and will not
permit any of our subsidiaries to, enter into any Sale-Leaseback
Transaction (as defined below) with respect to any Property unless:
- we or our subsidiary, as the case may be, would be entitled,
pursuant to the provisions of the indenture, to incur indebtedness
secured by a lien on the Property involved in such transaction at
least equal in amount to the Attributable Indebtedness (as defined
below) with respect to that Sale-Leaseback Transaction without
equally and ratably securing the notes pursuant to the covenant
described above in "-- Limitation on Liens;"
- within 12 months after the effective date of such transaction, we
apply an amount equal to not less than the Attributable Indebtedness
of such Sale-Leaseback Transaction either (1) to the voluntary
defeasance or the repayment, redemption or retirement of the notes
or other indebtedness for borrowed money of ours or any of our
subsidiaries that matures more than one year after the creation of
such indebtedness or (2) to the acquisition, construction,
development or improvement of any Property used or useful; (3) any
combination of applications referred to in (1) and (2) above.
Exempted Indebtedness. Notwithstanding the foregoing limitations on
liens and Sale-Leaseback Transactions, we and our subsidiaries may issue,
incur, create, assume, or guarantee indebtedness secured by a lien (other
than a Permitted Lien) without securing the notes, or may enter into
Sale-Leaseback Transactions without complying with the preceding paragraph,
or enter into a combination of such transactions, if the sum of the
aggregate principal amount of all such indebtedness and the Attributable
Indebtedness of all such Sale-Leaseback Transactions then in existence, in
each case not otherwise permitted in the preceding three paragraphs, does
not at the time incurred exceed 10% of our Consolidated Net Tangible Assets
(as defined below).
Payments for Consent. We will not, and will not permit any of our
subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration whether by way of fee, interest or otherwise to or for the
benefit of any holder of notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or
the notes unless such consideration is offered to be paid and is paid to
all holders of the notes that consent, waiver or agree to amend in the time
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frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports. So long as any notes are outstanding, and pursuant to Section
314(a) of the Trust Indenture Act, we will:
(1) for as long as we are required to file information with the SEC
pursuant to the Exchange Act, file with the trustee, within 15 days after
we are required to file with the SEC, copies of the annual report and of
the information, documents and other reports which we may be required to
file with the SEC pursuant to the Exchange Act; or
(2) if we are not required to file information with the SEC pursuant to the
Exchange Act, file with the trustee and the SEC, in accordance with rules
and regulations prescribed from time to time by the SEC, any supplementary
and periodic information, documents and reports which may be required
pursuant to the Exchange Act, in respect of a security listed and
registered on a national securities exchange as may be prescribed in such
rules and regulations.
For so long as any notes remain outstanding and if applicable, we will make
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act available to securities analysts, investors and prospective
investors upon request.
MERGER, AMALGAMATION, CONSOLIDATION AND SALE OF ASSETS
We will not merge, amalgamate or consolidate with or into any other entity
or sell, convey, lease, transfer or otherwise dispose of all or substantially
all of our property or assets to any person, whether in a single transaction or
series of related transactions, except pursuant to Section 14 of our partnership
agreement, and unless:
- either we are the surviving entity or the surviving entity:
-- is an entity organized under the laws of the United States, a state
thereof or the District of Columbia, or Canada or a province thereof; and
-- expressly assumes by supplemental indenture satisfactory to the
trustee, the due and punctual payment of the principal of, premium, if
any, and interest on all of the notes, and the due and punctual
performance or observance of all the other covenants and conditions of
the indenture to be performed or observed by us;
- immediately before and immediately after giving effect to the transaction
or series of transactions, no default or event of default has occurred
and is continuing; and
- we have delivered to the trustee an officer's certificate and opinion of
counsel, each stating that:
-- the merger, amalgamation, consolidation, sale, conveyance, transfer,
lease or other disposition, and if a supplemental indenture is required,
the supplemental indenture, comply with the conditions set forth above
and all other conditions precedent to the transaction have been complied
with.
Notwithstanding the foregoing, any successor (including pursuant to Section
14 of our partnership agreement) must comply with the terms of the indenture,
including the requirement that the successor execute and deliver a supplemental
indenture.
EVENTS OF DEFAULT
"Event of default" when used in the indenture, means any of the following:
- failure to pay the principal of or any premium on any note when due;
- failure to pay interest on any note for 30 days;
- failure to perform any other term, covenant or warranty in the indenture
that continues for 90 days after being given written notice;
- default by us or any of our subsidiaries in the payment at the final
maturity, after the expiration of any applicable grace period, of
principal of, premium, if any, or interest on indebtedness for money
borrowed in the principal amount then outstanding of $25 million or more,
or acceleration of any indebtedness of $25 million or more so that it
becomes due and payable prior to its maturity date and such acceleration
is not rescinded within 60 days after notice to us in accordance with the
indenture;
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- certain events of bankruptcy, insolvency or reorganization; or
- any other event of default included in the indenture.
The trustee may withhold notice to the holders of notes of any default,
except in the payment of principal or interest, if it considers such withholding
of notice to be in the best interests of the holders.
If an event of default occurs and continues, the trustee or the holders of
at least 25% in aggregate principal amount of the notes may declare the entire
principal of all the outstanding notes to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the notes can void the declaration.
Other than its duties in case of a default, a trustee is not obligated to
exercise any of its rights or powers under the indenture at the request, order
or direction of any holders, unless the holders offer to the trustee indemnity
satisfactory to the trustee. If they provide this indemnification, the holders
of a majority in principal amount of the notes may direct the time, method and
place of conducting any proceeding or any remedy available to the trustee, or
exercising any power conferred upon the trustee.
DEFINITIONS
As used in the foregoing description of certain covenants by which we are
bound pursuant to the indenture, the following terms have the following
meanings:
"Attributable Indebtedness" means with respect to a Sale-Leaseback
Transaction involving pipeline assets, at the time of determination, the
lesser of:
- the fair market value (as determined in good faith by our management
committee) of such pipeline assets;
- the present value of the total net amount of rent required to be paid
under the lease involved in such Sale-Leaseback Transaction during the
remaining term thereof (including any renewal term exercisable at the
lessee's option or period for which such lease has been extended),
discounted at the rate of interest set forth or implicit in the terms
of such lease or, if not practicable to determine such rate, the
weighted average interest rate per annum borne by the notes compounded
semiannually; or
- if the obligation with respect to the Sale-Leaseback Transaction
constitutes an obligation that is required to be classified and
accounted for as a capital lease obligation (as defined in the
indenture) for financial reporting purposes in accordance with
generally accepted accounting principles, the amount equal to the
capitalized amount of such obligation determined in accordance with
generally accepted accounting principles and included in the financial
statements of the lessee required to the paid by the lessee.
For purposes of the foregoing definition, rent will not include amounts required
to be paid by the lessee, whether or not designated as rent or additional rent,
on account of or contingent upon maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges. In the case of any lease that is
terminable by the lessee upon the payment of a penalty, such net amount shall be
the lesser of the net amount determined assuming termination upon the first date
such lease may be terminated (in which case the net amount shall also include
the amount of the penalty, but no rent shall be considered as required to be
paid under such lease subsequent to the first date upon which it may be so
terminated) or the net amount determined assuming no such termination.
"Consolidated Net Tangible Assets" means, at any date of determination, the
aggregate amount of total assets included on our most recent quarterly or annual
consolidated balance sheet less applicable reserves reflected in such balance
sheet, after deducting in accordance with generally accepted accounting
principles:
- all current liabilities reflected in such balance sheet; and
- all goodwill, trade names, trademarks, patents, unamortized debt discount
and expense and other like intangibles reflected in such balance sheet.
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"Permitted Liens" include:
- liens existing at or provided for under the terms of agreements existing
on the date of the initial issuance of the notes;
- liens on property, shares of stock, indebtedness or other assets of any
person (which is not a subsidiary) existing at the time such person is
merged into or consolidated with or into us or any of our subsidiaries,
provided that such liens are not incurred in anticipation of such person
becoming a subsidiary or liens existing at the time of a sale, lease or
other disposition of the properties of a person as an entirety or
substantially as an entirety to us or any of our subsidiaries;
- liens on property, shares of stock, indebtedness for borrowed money or
other assets existing at the time of acquisition thereof by us or any of
our subsidiaries, or liens thereon to secure the payment of all or any
part of the purchase price thereof;
- liens on property, shares of stock, indebtedness for borrowed money or
other assets to secure any indebtedness for borrowed money incurred prior
to, at the time of, or within 24 months after, the latest of the
acquisition thereof, or, in the case of property, the completion of
construction, the completion of development or improvements or the
commencement of commercial operation of such property for the purpose of
financing all or any part of the purchase price thereof, such
construction or the making of such development or improvements;
- liens to secure indebtedness owing to us or our subsidiaries;
- liens on property to secure all or part of the cost of acquiring,
constructing, altering, improving, developing or repairing any property
or asset, or improvements used in connection with that property or liens
incurred by us or any of our subsidiaries to provide funds for any such
activities;
- liens in favor of the United States of America or any state, territory or
possession thereof (or the District of Columbia), or any department,
agency, instrumentality or political subdivision of the United States of
America or any state, territory or possession thereof (or the District of
Columbia), to secure partial, progress, advance or other payments
pursuant to any contract or statute or to secure any indebtedness
incurred for the purpose of financing all or any part of the purchase
price or the cost of constructing, developing or improving the property
subject to such liens;
- liens on any property to secure bonds for the construction, installation
or financing of pollution control or abatement facilities, or other forms
of industrial revenue bond financing, or indebtedness issued or
guaranteed by the United States, any state or any department, agency or
instrumentality thereof;
- liens contemplated by Section 7.07 of the indenture;
- liens deemed to exist by reason of negative pledges in respect of
indebtedness; and
- liens to secure any refinancing, refunding, extension, renewal or
replacement of any lien referred to in the bullet points above; provided,
however, that any liens permitted by the terms set forth under any of
such bullet points shall not extend to or cover any property of ours or
of any of our subsidiaries, as the case may be, other than the property
specified in such clauses and improvements thereto or proceeds therefrom.
"Property" means any right or interest of ours or any of our subsidiaries
in or to property of any kind whatsoever, whether real, personal or mixed and
whether tangible or intangible.
"Sale-Leaseback Transaction" means any arrangement with any person
providing for the leasing by us or any of our subsidiaries of any Property,
which Property has been or is to be sold or transferred by us or such subsidiary
to such person, other than:
- any such transaction involving a lease for a term of not more than two
years;
- any such transaction between us and any of our subsidiaries or between
any of our subsidiaries; or
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- any such transaction executed by the time of or within one year after the
latest of the acquisition, the completion of construction, development or
improvement or the commencement of commercial operation of our pipeline
system assets subject to such leasing transaction.
"subsidiary" of any person means:
- any person of which more than 50% of the outstanding voting stock, at the
time of such determination, is owned or controlled, directly or
indirectly, by any person or one or more of the subsidiaries of that
person or a combination thereof; and
- any other person in which such person or one or more of the subsidiaries
of that person or a combination thereof has the power to control by
contract or otherwise the board of directors or equivalent governing body
or otherwise controls such entity.
For purposes of this definition, voting stock means capital stock of the
class or classes which under ordinary circumstances has voting power to elect at
least a majority of the board of directors or equivalent governing body of such
person, provided that capital stock that carries only the right to vote
conditionally upon the occurrence of an event shall not constitute voting stock
whether or not such event shall have occurred.
NON-RECOURSE; NO PERSONAL LIABILITY
None of our management committee members or our general partners or our
general partners' and operator's directors, officers, employees, incorporators
or stockholders, if any, shall have any liability for any of our obligations
under the notes or the indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of notes by accepting
a note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
DISCHARGE AND DEFEASANCE
We will be discharged from our obligations on the notes at any time if we
deposit with the trustee sufficient cash or non-callable government securities
to pay the principal, interest, any premium, and any other sums due to the
stated maturity date or a redemption date of the notes. If this happens, the
holders of the notes will not be entitled to the benefits of the indenture
except for registration of transfer and exchange of notes and replacement of
lost, stolen or mutilated notes. In addition, we will be released from our
obligations to comply with the covenant in the indentures to provide reports and
from restrictions in the indentures on our ability to merge, consolidate or sell
all or substantially all of our assets, and the limitations in the indenture on
liens and sale and leaseback transactions if we irrevocably deposit with the
trustee, in trust, cash or government securities to pay the principal, interest,
premium, if any, and any other sums due to the stated maturity date or
applicable redemption date of the notes and we comply with certain other
conditions. If this happens, our failure to comply with the covenants described
in the preceding sentence will not constitute a default or event of default in
respect of the notes.
Under federal income tax law as of the date of this offering memorandum, a
discharge described in the preceding paragraph may be treated as an exchange of
the related debt securities. Each holder might be required to recognize gain or
loss equal to the difference between the holder's cost or other tax basis for
the notes and the value of the holder's interest in the trust. Holders might be
required to include as income a different amount than would be includable
without the discharge. Prospective investors should seek tax advice to determine
their particular consequences of a discharge, including the applicability and
effect of tax laws other than the federal income tax law.
In addition, we may terminate our obligations under the notes, other than
our obligation to pay the principal of, premium, if any, and accrued and unpaid
interest on such notes and certain other obligations, provided that we either:
(1) deliver all outstanding notes (other than notes for which payment
amounts have been deposited with the trustee as described in the second
preceding paragraph) to the trustee for cancellation; or
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(2) all such notes not so delivered for cancellation have either become due
and payable or will become due and payable at their stated maturity within
one year or are called for redemption within one year, and in the case of
this clause (2) we have deposited with the trustee in trust an amount of
money sufficient to pay and disclose the entire indebtedness of such notes,
including interest to the stated maturity or applicable redemption date.
TRANSFER AND EXCHANGE
The notes will be issued in registered form and may be transferred or
exchanged only in accordance with the indenture. The registrar and the trustee
may require a holder, among other things, to furnish appropriate endorsements
and transfer documents and we may require a holder to pay any taxes and fees
required by law or permitted by the indenture. We are not required to transfer
or exchange any note selected for redemption. Also, we are not required to
transfer or exchange any note for a period of 15 days before a selection of
notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
CONCERNING THE TRUSTEE
Bank One Trust Company, National Association, successor to The First
National Bank of Chicago, serves as trustee under the indenture. We have
appointed the trustee to serve as the paying agent and registrar for the notes.
The trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict or resign. We
currently, and certain of our affiliates may, have banking relationships with
the trustee.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an event of default
shall occur (which shall not be cured), the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
Generally, the notes will be issued in the form of global notes registered
in the name of DTC or its nominee, as described under the caption "-- Global
Securities."
Existing notes issued in certificated form may be exchanged for new notes
in certificated form.
Payment of the principal of and interest on certificated notes is subject
to the indenture and will be made at the corporate trust office of the trustee
or such other office or agency as may be designated by it for such purpose in
New York City. Payment of interest on certificated notes will be made to the
person in whose name such note is registered at the close of business on the
applicable record date. All other terms of the certificated notes are governed
by the indenture.
Except as described below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Depositary Procedures -- Exchange of Book-Entry Notes for Certificated
Notes."
Initially, the trustee will act as paying agent and registrar for the
notes. The notes may be presented for registration of transfer and exchange at
the offices of the registrar.
DEPOSITARY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in those securities between
participants through electronic book-entry changes in accounts of participants.
The participants include securities brokers and dealers (including the initial
purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant,
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either directly or indirectly. Persons who are not participants may beneficially
own securities held by or on behalf of DTC only through the participants or
indirect participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the participants and indirect participants.
DTC has also advised us that pursuant to procedures established by it, (a)
upon deposit of the global notes, DTC will credit the accounts of the designated
participants with portions of the principal amount of global notes and (b)
ownership of such interests in the global notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to participants) or by participants and the indirect
participants (with respect to other owners of beneficial interests in the global
notes).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a global note to such persons may be limited to
that extent. Because DTC can act only on behalf of participants, which in turn
act on behalf of indirect participants and certain banks, the ability of a
person having a beneficial interest in a global note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interest. For certain other restrictions on the
transferability of the notes, see "-- Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS, OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the indenture, we and the trustee will treat the persons
in whose names the notes, including the global notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Payments in respect of the principal and premium and
liquidated damages, if any, and interest on a global note registered in the name
of DTC or its nominee will be payable by the trustee to DTC or its nominee in
its capacity as the registered holder under the indenture. Consequently, none of
us, the trustee nor any of our agents or the trustee's agents has or will have
any responsibility or liability for (a) any aspect of DTC's records or any
participant's or indirect participant's records relating to or payments made on
account of beneficial ownership interests in the global notes, or for
maintaining, supervising or reviewing any of DTC's records or any participant's
or indirect participant's records relating to the beneficial ownership interests
in the global notes or (b) any other matter relating to the actions and
practices of DTC or any of its participants or indirect participants.
DTC has advised us that its current practices for payments of principal,
interest, and the like with respect to securities such as the notes is to credit
the accounts of the relevant participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security such as the global notes as shown
on the records of DTC. Payments by participants and the indirect participants to
the beneficial owners of notes will be governed by standing instructions and
customary practices and will not be the responsibility of DTC, the trustee or
us. Neither we nor the trustee will be liable for any delay by DTC or its
participants in identifying the beneficial owners of the notes, and we and the
trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the notes for
all purposes.
The global notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in immediately available funds.
Transfers between indirect participants (other than indirect participants who
hold an interest in the notes through Euroclear or CEDEL) who hold an interest
through a participant will be effected in accordance with the procedures of such
participant but generally will settle in immediately available funds. Transfers
between and among indirect participants who hold interests in the notes through
Euroclear and CEDEL will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
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Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between participants in DTC, on
the one hand, and Euroclear or CEDEL participants, on the other hand, will be
effected by Euroclear's or CEDEL's respective nominee through DTC in accordance
with DTC's rules on behalf of Euroclear or CEDEL, as the case may be; however,
delivery of instructions relating to cross-market transactions must be made
directly to Euroclear or CEDEL, as the case may be, by the counterparty in such
system in accordance with the rules and procedures and within the established
deadlines (Brussels time for Euroclear and UK time for CEDEL) of such system.
Indirect participants who hold interests in the notes through Euroclear and
CEDEL may not deliver instructions directly to Euroclear's or CEDEL's nominee.
Euroclear or CEDEL, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective nominee to take
action to deliver or receive interests in the relevant global note in DTC, and
to make or receive payment in accordance with normal procedures for same-day
fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an indirect
participant who holds an interest in the notes through Euroclear or CEDEL
purchasing an interest in a global note from a participant in DTC will be
credited, and any such crediting will be reported to the relevant Euroclear or
CEDEL, during the securities settlement processing day (which must be a business
day for Euroclear or CEDEL) immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not access the cash amount
credited to their accounts as a result of a sale of an interest in a global note
to a DTC participant until the European business day for Euroclear and CEDEL
immediately following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account interests in the global notes are credited and only in respect of such
portion of the aggregate principal amount of the notes to which such participant
or participants has or have given direction. However, if there is an Event of
Default under the notes, DTC reserves the right to exchange global notes
(without the direction of one or more of its participants) for legended notes in
certificated form, and to distribute such certificated forms of notes to its
participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the notes among participants, including
Euroclear and CEDEL, they are under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither we, the initial purchasers nor the trustee shall have any responsibility
for the performance by DTC, Euroclear and CEDEL or their respective participants
and indirect participants of their respective obligations under the rules and
procedures governing any of their operations.
DTC and Year 2000 Issues. DTC's management is aware that some computer
applications, systems and the like for processing data that are dependent upon
calendar dates, including dates before, on and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed its participants and other
members of the financial community that is has developed and is implementing a
program so that its computer systems, as the same relate to the timely payment
of distributions (including principal and interest payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be complete within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors on whom the depositary relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the financial community that
it is contacting (and will continue to contact) third-party vendors from whom
the depositary acquires services to: (a) impress upon them the importance of
such services being Year 2000 compliant; and (b) determine the extent of their
efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
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Exchange of Book-Entry Notes for Certificated Notes. A global note is
exchangeable for definitive notes in registered certificated form if (1) DTC (A)
notifies us that it is unwilling or unable to continue as depository for the
global note and we thereupon fail to appoint a successor depository or (B) has
ceased to be a clearing agency registered under the Exchange Act, (2) we, at our
option, notify the trustee in writing that we elect to cause issuance of the
notes in certificated form or (3) there shall have occurred and be continuing a
Default or Event of Default. In addition, beneficial interests in a global note
held by any participant or indirect participant may be exchanged for
certificated notes upon request to DTC by such participant (for itself and on
behalf of an indirect participant) but only upon at least 20 days' prior written
notice given to the trustee by or on behalf of DTC in accordance with customary
procedures. In all cases, certificated notes delivered in exchange for any
global note or beneficial interest therein will be registered in names, and
issued in any approved denominations, requested by or on behalf of DTC (in
accordance with its customary procedures) unless we determine otherwise in
compliance with applicable law.
Neither we nor the trustee will be liable for any delay by the holder of
the global note or DTC in identifying the beneficial owners of notes, and we and
the trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of the global note or DTC for all purposes.
Certificated Notes. Subject to certain conditions, any person having a
beneficial interest in the global note may, upon request to the trustee,
exchange such beneficial interest for notes in the form of certificated notes.
Upon any such issuance, the trustee is required to register such certificated
notes in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof). In addition, if (a) we notify the
trustee in writing that DTC is no longer willing or able to act as a depository
and we are unable to locate a qualified successor within 90 days or (b) we, at
our option, notify the trustee in writing that we elect to cause the issuance of
notes in the form of certificated notes under the indenture or (c) DTC will not
continue to hold the book-entry interests related to the global notes or is no
longer a clearing agency registered under the Exchange Act and we do not replace
DTC within 120 days, then, upon surrender by the global note holder of its
global note, notes in such form will be issued to each person that the global
note holder and DTC identify as being the beneficial owner of the related notes.
Neither we nor the trustee will be liable for any delay by the global note
holder or DTC in identifying the beneficial owners of notes and we and the
trustee may conclusively rely on, and will be protected in relying on,
instructions from the global note holder or DTC for all purposes.
Same-day Settlement and Payment. The indenture will require that payments
in respect of the notes represented by the global note (including principal,
premium, if any, and interest) be made by wire transfer of immediately available
funds to the accounts specified by the global note holder. With respect to
certificated notes, we will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. We expect that secondary
trading in the certificated notes will also be settled in immediately available
funds.
MEETINGS
The indenture contains provisions describing how meetings of the holders of
notes may be convened. A meeting may be called at any time by the trustee, and
also, upon request, by us or the holders of at least 10% in principal amount of
the outstanding notes. A notice of the meeting must always be given in the
manner described under "-- Notices" below. Generally speaking, any resolution
presented at a meeting of the holders of a series of notes may be adopted by the
affirmative vote of the holders of a majority in principal amount of the
outstanding notes, unless the indenture allows the action to be voted upon to be
taken with the approval of the holders of a different specific percentage of
principal amount of the notes. In that case, the holders of outstanding notes of
at least the specified percentage must vote in favor of the action. Any
resolution passed or decision taken at any meeting of holders of notes in
accordance with the indenture will be binding on all holders of notes. The
quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be an aggregate principal amount
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sufficient to take action upon the matter for which the meeting was called.
GOVERNING LAW
The indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York, without regard to conflicts of laws
principles.
NOTICES
Notices to holders of notes will be given by mail to the addresses of such
holders as they appear in the security register.
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UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a discussion of the material U.S. federal income tax
consequences of the ownership and disposition of the notes and the exchange of
the existing notes for new notes and represents the opinion of counsel as to
these matters. Unless otherwise stated, this discussion is limited to the tax
consequences to those persons who purchased the notes from the initial
purchasers and who hold these notes as capital assets under Section 1221 of the
Internal Revenue Code of 1986, as amended. The discussion does not address
specific tax consequences that may be relevant to particular persons including,
for example, financial institutions, broker-dealers, insurance companies,
tax-exempt organizations, and persons in special situations, such as those who
hold notes as part of a straddle, hedge, conversion transaction, or other
integrated investment. In addition, this discussion does not address U.S.
federal alternative minimum tax consequences or any aspect of state, local or
foreign taxation. This discussion is based upon the Code, the Treasury
Department regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect. In counsel's opinion, the notes qualify as indebtedness for
federal income tax purposes, and the following discussion assumes that this
treatment is correct.
For purposes of this discussion, you are a "U.S. Holder" if you are a
beneficial owner of a note and are a U.S. citizen or resident, a corporation,
partnership or other entity created or organized in or under the laws of the
U.S. or of any political subdivision thereof, an estate or specific electing
trusts in existence as of August 28, 1996, the income of which is subject to
U.S. federal income taxation regardless of its source, or a trust if a United
States court is able to exercise primary supervision over its administration and
one or more U.S. persons have the authority to control all of its substantial
decisions. You are a "Non-U.S. Holder" if you are a holder of a note who is not
a U.S. Holder.
PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE SPECIFIC U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM
OF OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
Taxation of Interest. If you are a U.S. Holder, interest on your notes
generally will be taxable as ordinary interest income at the time payments are
accrued or are received in accordance with your regular method of accounting for
federal income tax purposes.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange or
retirement of the notes, you will recognize gain or loss equal to the difference
between the amount realized upon the sale, exchange or retirement (less any
portion allocable to accrued and unpaid interest) and your adjusted tax basis in
the notes. Your adjusted tax basis in the notes generally will be your cost for
the notes, less any principal payments you receive.
The gain or loss you recognize on the sale, exchange or retirement of the
notes will be capital gain or loss. The gain or loss will be long-term capital
gain or loss if you have held the notes for more than twelve months. Long-term
capital gain is subject to a maximum federal tax rate of 20% for U.S. Holders
other than corporations. The deductibility of capital losses by U.S. Holders is
subject to limitation.
To the extent that the amount realized represents accrued but unpaid
interest, that amount must be taken into account as interest income, if it was
not previously included in your income. See "-- Taxation of Interest."
Exchange Offer. Whether you acquired your existing notes from the initial
purchasers or subsequently, you will not recognize any taxable gain or loss on
the exchange of the existing notes for new notes pursuant to the exchange offer,
and your tax basis and holding period in the new notes will be the same as in
the existing notes.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Taxation of Interest. If you are a Non-U.S. Holder, you generally will not
be subject to U.S. federal income or withholding tax on interest paid on the
notes so long as that interest is not effectively connected with your conduct of
a trade or business within the U.S., and you:
- do not actually or constructively own 10% or more of the total combined
voting power of our capital or profits interests;
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- are not a "controlled foreign corporation" with respect to which we are a
"related person" within the meaning of the Code;
- are not a bank within the meaning of Section 881(c)(3)(A) of the Code;
and
- satisfy the requirements of Sections 871(h) or 881(c) of the Code, as
described below under "-- Owner Statement Requirement."
If these conditions are not satisfied, then interest paid on the notes will
be subject to U.S. withholding tax at a rate of 30% unless that rate is reduced
or eliminated pursuant to an applicable tax treaty and you provide us with a
properly completed and executed Form W-8 BEN, as provided for in the Treasury
Regulations.
Sale, Exchange or Retirement of the Notes. Any capital gain you recognize
on the sale, exchange, retirement or other taxable disposition of a note will be
exempt from U.S. federal income and withholding tax, provided that:
- the gain is not effectively connected with your conduct of a trade or
business within the U.S.; and
- if you are an individual, you are not present in the U.S. for 183 days or
more during the taxable year.
Effectively Connected Income. If the interest, gain or other income you
recognize on a note is effectively connected with your conduct of a trade or
business within the U.S., you will be exempt from the withholding tax previously
discussed if you provide us with a properly completed and executed Form W-8 ECI,
but generally will be subject to U.S. federal income tax on the interest, gain
or other income at regular federal income tax rates. In addition to regular U.S.
federal income tax, if you are a corporation, you may be subject to a branch
profits tax equal to 30% of your effectively connected earnings and profits, as
adjusted for certain items, unless you qualify for a lower rate under an
applicable tax treaty.
Federal Estate Taxes. A note held by an individual who at the time of death
is not a citizen or resident of the U.S. will not be subject to U.S. federal
estate tax as a result of such individual's death, provided that the individual
does not actually or constructively own 10% or more of our capital or profits
interests and that the interest accrued on the notes was not effectively
connected with that holder's conduct of a trade or business within the U.S.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We will, where required, report to you and the Internal Revenue Service the
amount of any interest paid on the notes in each calendar year and the amounts
of tax withheld, if any, with respect to those payments. A noncorporate U.S.
Holder may be subject to information reporting and to backup withholding at a
rate of 31% with respect to payments of interest made on a note, or proceeds of
the disposition of a note before maturity, unless the U.S. Holder provides a
correct taxpayer identification number or proof of an applicable exemption and
otherwise complies with applicable requirements of the information reporting and
backup withholding rules.
In the case of payments of interest to Non-U.S. Holders, current Treasury
Regulations provide that the 31% backup withholding tax and certain information
reporting requirements will not apply to payments with respect to which either
the requisite certification, as described above, has been received or an
exemption has otherwise been established, provided that neither we nor our
payment agent has actual knowledge that the holder is a U.S. person or that the
conditions of any other exemption are not in fact satisfied.
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Under current Treasury Regulations, information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
Non-U.S. Holder on the disposition of the notes by or through a U.S. office of a
U.S. or foreign broker, unless the Non-U.S. Holder otherwise establishes an
exemption. Information reporting requirements, but not backup withholding, will
also apply to payment of the proceeds of a disposition of the notes by or
through a foreign office of a U.S. broker or foreign brokers with certain types
of relationships to the U.S. unless the broker has documentary evidence in its
file that the holder of the notes is not a U.S. person and the broker has no
actual knowledge to the contrary, or the holder establishes an exemption.
Neither information reporting nor backup withholding generally will apply to
payment of the proceeds of a disposition of the notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the holder's U.S.
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
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NORTHERN BORDER PIPELINE COMPANY PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement.
ORGANIZATION AND PARTNERS
We are 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. Our address is
1111 South 103rd Street, Omaha, Nebraska 68124-1000, and our telephone number is
(402) 398-7700.
PURPOSE
Our purpose under the 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 our partners
agree otherwise, the purpose clause has the effect of restricting us 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 our activities beyond the
natural gas transmission business.
MANAGEMENT AND VOTING
Except for the day-to-day management of our affairs and the operation of
the pipeline system, which are the responsibility of the operator, our
management is overseen by the management committee.
Under our partnership agreement, voting power on the management committee
is presently allocated among Northern Border Partners' three representatives in
proportion to their general partner interests in Northern Border Partners. As a
result, the 70% voting power of Northern Border Partners' three representatives
on the management committee is allocated as follows: 35% to Northern Plains
Natural Gas Company, 22.75% to Pan Border Gas Company and 12.25% to Northwest
Border Pipeline Company. Each of Northern Plains, Pan Border and Northwest
Border has the right to select one member of the management committee. Northern
Plains and Pan Border are subsidiaries of Enron Corp. Therefore, Enron controls
57.75% of the voting power of the management committee and has the right to
select two of the members of the management committee. Northwest Border is a
subsidiary of The Williams Companies, Inc. and, accordingly, Williams controls
12.25% of the voting power with one representative on the management committee.
TransCanada Pipelines Limited, the parent company of TC PipeLines' sole general
partner, controls 30% of the voting power with one representative on the
management committee.
Generally, our management committee will act by majority vote. However,
unanimity will be required with respect to the following matters, among other
things:
- expansions or extensions of our pipeline system requiring capital
expenditures in an amount requiring certification of those facilities by
the FERC, currently $19.8 million or more;
- settlement of cases brought under Section 4 or 5 of the Natural Gas Act;
- some transfers of general partner interests; and
- any change in, or suspension of, our cash distribution policy.
If, however, all but one of the members of our 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 we should proceed with the disputed matter, using our best
interests as its sole criteria. If the panel concludes that approval of the
matter before it is in our best interests, the matter will be deemed to have
received unanimous approval despite the disapproving vote of the dissenting
member.
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OPERATOR
Our partnership agreement designates Northern Plains as the operator of the
pipeline system. Northern Plains' rights and obligations as operator are
provided for in our partnership agreement and in a separate operating agreement
between Northern Plains and us. 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 us or Northern Plains upon six months
written notice by either party. Substantially all of the services provided by
the operator are provided by employees of Northern Plains who devote their time
to our day-to-day operations.
Our partnership agreement states that Northern Plains may be removed as
operator by unanimous vote of the members of our management committee, other
than the member appointed by Northern Plains. If the total number of members on
our 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 general partnership interest in support of a finding that the operator
has, through misfeasance, nonfeasance or gross negligence, acted in a manner
contrary to our best interests.
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, we have agreed to indemnify the operator against any
claims and liabilities arising out of the good faith performance by the operator
of its responsibilities under our partnership agreement, to the extent the
operator is acting within the scope of its authority and in the course of our
business.
CASH DISTRIBUTION POLICY
In general, our partnership agreement provides that distributions to our
partners 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 our management committee. Any changes to, or suspension of, our cash
distribution policy requires the unanimous approval of our management committee,
subject to arbitration in the event three of the four members of our management
committee vote in favor of the change or suspension. See "-- Management and
Voting" above.
Our cash distribution policy as currently approved by our management
committee provides that we are to make distributions quarterly in an amount
equal to the previous quarter's sum, if positive, of the following, determined
on a regulatory basis of accounting:
(1) 100% of net income generated 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 our tariff, minus
(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 regarding cash distributions could affect our ability to
repay long-term indebtedness.
AUDIT AND COMPENSATION COMMITTEE
Our partnership agreement authorizes each representative on our 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 of our audits 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 our management committee on an annual basis with respect
to these matters.
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ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION
Our partnership agreement provides that, if we have 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
general partnership interests, that are based on relative capital account
balances.
TRANSFER OF INTERESTS
Generally, our general partners are not permitted to transfer their general
partner interests, or any indebtedness owed to them by us, without the unanimous
consent of our management committee. Each general partner may, however, encumber
its interests in our profits and surplus, and any indebtedness, and transfer its
interest in us, 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
Our partnership agreement provides that our management committee may
request additional capital contributions from our general partners. 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 a partner
elected not to make the additional contribution, its general partnership
interest would be diluted.
CHANGE TO CORPORATE FORM
Our partnership agreement provides that, under some circumstances, our
business and assets 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. The transfer
will occur automatically if it becomes unlawful for us to carry on our business
and we hold an effective certificate of public convenience and necessity from
the FERC at that time.
Our general partners may also cause a transfer to a corporation upon the
approval of partners owning at least a two-thirds general partnership interest.
WITHDRAWAL OF GENERAL PARTNERS
Our general partners have the right to withdraw. If they do, the
withdrawing partner's capital account is treated as our contingent liability to
be repaid on our liquidation or at any other time as our management committee
determines that the amount may be repaid without undue hardship to us.
INDEMNIFICATION
Under the terms of our partnership agreement, we have agreed to indemnify
the operator and the members of our 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 our business. This indemnification includes indemnification in favor
of the members of the audit and compensation committee.
BUSINESS OPPORTUNITIES
Our partnership agreement provides that our partners, their affiliates and
transferees, will not have any duty to offer business opportunities to us, with
specified exceptions.
TERMINATION AND DISSOLUTION
Our partnership agreement provides that we will automatically dissolve
upon:
(1) the transfer of all of our business and assets to a corporation;
(2) the sale or abandonment of all or substantially all of our
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 our
business to be carried on. In addition to these automatic dissolution
events, we 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.
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LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Our partnership agreement provides that, following our dissolution, unless
we are reconstituted and continued under the terms of our partnership agreement,
our business and affairs will be wound up and our assets liquidated in an
orderly manner. Any amounts remaining upon satisfaction of our obligations to
our creditors will be distributed to the partners in accordance with the
positive balances in their particular capital accounts.
67
<PAGE> 67
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC set forth in no action
letters issued to third parties, we believe that you may transfer new notes
issued under the exchange offer in exchange for existing notes unless you are:
- our "affiliate" within the meaning of Rule 405 under the Securities Act;
- a broker-dealer that acquired existing notes directly from us; or
- a broker-dealer that acquired existing notes as a result of market-making
or other trading activities,
provided that you acquire the new notes in the ordinary course of your business
and you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of the new notes. Broker-dealers receiving new notes in the exchange offer will
be subject to a prospectus delivery requirement with respect to resales of the
new notes.
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the
existing notes, with this prospectus. Pursuant to the registration rights
agreement, we have agreed to permit participating broker-dealers to use this
prospectus in connection with the resale of new notes.
If you wish to exchange your existing notes for new notes in the exchange
offer, you will be required to make certain representations to us as set forth
in "The Exchange Offer -- Exchange Terms" and "-- Procedures for Tendering
Existing Notes -- Other Matters" and in the letter of transmittal. In addition,
if you are a broker-dealer who receives new notes for your own account in
exchange for existing notes that were acquired by you as a result of
market-making activities or other trading activities, you will be required to
acknowledge that you will deliver a prospectus in connection with any resale by
you of those new notes. See "The Exchange Offer -- Resale of New Notes."
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers who receive new notes for their own account in
the exchange offer may sell them from time to time in one or more transactions
in the over-the-counter market:
- in negotiated transactions;
- through the writing of options on the new notes or a combination of such
methods of resale;
- at market prices prevailing at the time of resale; or
- at prices related to the prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account pursuant to the exchange
offer and any broker or dealer that participates in a distribution of new notes
may be deemed to be an "underwriter" within the meaning of the Securities Act,
and any profit on any resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the existing notes, including any broker-dealers, against certain
liabilities, including liabilities under the Securities Act, as set forth in the
registration rights agreement.
68
<PAGE> 68
LEGAL MATTERS
The validity of the new notes offered will be passed upon for us by Chapman
and Cutler, Chicago, Illinois.
EXPERTS
Our balance sheet as of December 31, 1998 and 1997, and the related
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 1998, included in this
prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
RELIANCE ON INFORMATION
The information contained in this prospectus was obtained from us and other
sources believed by us to be reliable.
You should rely only on the information contained in this document or any
supplement and any information incorporated by reference in this document or any
supplement. We have not authorized anyone to provide you with any information
that is different. If you receive any unauthorized information, you must not
rely on it. You should disregard anything we said in an earlier document that is
inconsistent with what is in this prospectus.
You should not assume that the information in this document or any
supplement is current as of any date other than the date on the front page of
this prospectus. This document is not an offer to sell nor is it seeking an
offer to buy these securities in any state or jurisdiction where the offer or
sale is not permitted.
FORWARD LOOKING STATEMENTS
Statements in this prospectus that are not historical information are
forward looking statements. Such forward looking statements include:
- the discussions under "Business -- Competition" and elsewhere regarding
our efforts to pursue opportunities to further increase the capacity of
our pipeline system;
- the discussion under "Business -- Shippers" regarding potential contract
extensions;
- the discussion under "Business -- FERC Regulation -- Cost of service
tariff" regarding a project cost containment mechanism related to The
Chicago Project; and
- the discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Although we believe that our expectations regarding future events are based
on reasonable assumptions within the bounds of our knowledge of our business, we
can give no assurance that our goals will be achieved or that our expectations
regarding future developments will be realized. Important factors that could
cause actual results to differ materially from those in the forward looking
statements include:
- future demand for natural gas;
- availability of economic western Canadian natural gas;
- industry conditions;
- natural gas, political and regulatory developments that impact FERC
proceedings;
- our success in sustaining our positions in such proceedings, or the
success of intervenors in opposing our positions;
- our ability to replace our rate base as it is depreciated and amortized;
69
<PAGE> 69
- competitive developments by Canadian and U.S. natural gas transmission
companies;
- political and regulatory developments in the U.S. and Canada;
- conditions of the capital markets and equity markets; and
- our ability to successfully implement our plan for addressing Year 2000
issues during the periods covered by the forward looking statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-4 with the SEC. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the exhibits attached to the registration
statement, including exhibits filed with it, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the regional offices of the SEC. Please call the SEC at
1-800-SEC-0330 for more information on the public reference rooms. You may also
obtain copies of these materials from the public reference facilities of the
SEC, at prescribed rates. The SEC maintains a Web site (http:/www.sec.gov) that
contains reports, proxy and information statements and other information
regarding all registrants that file electronically with the SEC, and that would
include any filings we make with the SEC.
As of the effectiveness of the registration statement of which this
prospectus forms a part, we will be obligated to file quarterly and annual
reports with the SEC in accordance with Sections 13 and 15 of the Exchange Act.
In addition, pursuant to the indenture, we will be required to provide the same
information that we file with the SEC to the trustee. Holders of notes may
obtain this information either from publicly available filings, as described
above, or from the trustee. Our annual reports filed with the SEC and provided
to the trustee will contain audited financial statements, with the audit report
included therein.
70
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheet -- September 30, 1999 (unaudited)............. F-2
Statement of Income -- Nine months ended September 30, 1999
and 1998 (unaudited)...................................... F-3
Statement of Cash Flows -- Nine months ended September 30,
1999 and 1998 (unaudited)................................. F-4
Statement of Changes in Partners' Capital -- Nine months
ended September 30, 1999 (unaudited)...................... F-5
Notes to Financial Statements (unaudited)................... F-6
Report of Independent Public Accountants.................... F-9
Balance Sheet -- December 31, 1998 and 1997................. F-10
Statement of Income -- Years ended December 31, 1998, 1997
and 1996.................................................. F-11
Statement of Cash Flows -- Years ended December 31, 1998,
1997 and 1996............................................. F-12
Statement of Changes in Partners' Capital -- Years ended
December 31, 1998, 1997 and 1996.......................... F-13
Notes to Financial Statements............................... F-14
</TABLE>
F-1
<PAGE> 71
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
<S> <C>
ASSETS
- ------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents................................. $ 20,558
Accounts receivable....................................... 27,365
Materials and supplies, at cost........................... 3,660
----------
Total current assets.............................. 51,583
----------
NATURAL GAS TRANSMISSION PLANT
In service................................................ 2,362,054
Construction work in progress............................. 3,457
----------
Total property, plant and equipment............... 2,365,511
Less: Accumulated provision for depreciation and
amortization........................................... 626,399
----------
Net property, plant and equipment................. 1,739,112
----------
OTHER ASSETS................................................ 14,519
----------
Total assets...................................... $1,805,214
==========
LIABILITIES AND PARTNERS' CAPITAL
- ------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 66,000
Accounts payable.......................................... 20,171
Accrued taxes other than income........................... 24,624
Accrued interest.......................................... 8,171
Over recovered cost of service............................ 7,124
----------
Total current liabilities......................... 126,090
----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 834,757
----------
RESERVES AND DEFERRED CREDITS............................... 10,468
----------
PARTNERS' CAPITAL........................................... 833,899
----------
Total liabilities and partners' capital........... $1,805,214
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 72
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING REVENUES.......................................... $220,582 $145,476
-------- --------
OPERATING EXPENSES
Operations and maintenance................................ 27,806 21,581
Depreciation and amortization............................. 38,806 30,060
Taxes other than income................................... 21,894 17,267
Regulatory credit......................................... -- (4,709)
-------- --------
Operating expenses................................ 88,506 64,199
-------- --------
OPERATING INCOME............................................ 132,076 81,277
-------- --------
INTEREST EXPENSE
Interest expense.......................................... 44,401 30,422
Interest expense capitalized.............................. (54) (12,022)
-------- --------
Interest expense, net............................. 44,347 18,400
-------- --------
OTHER INCOME
Allowance for equity funds used during construction....... 59 7,921
Other income, net......................................... 587 1,253
-------- --------
Other income...................................... 646 9,174
-------- --------
NET INCOME TO PARTNERS...................................... $ 88,375 $ 72,051
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 73
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners.................................... $ 88,375 $ 72,051
--------- ---------
Adjustments to reconcile net income to partners to net
cash provided by operating activities:
Depreciation and amortization.......................... 38,841 30,071
Allowance for equity funds used during construction.... (59) (7,921)
Regulatory credit...................................... -- (4,807)
Changes in components of working capital............... 5,351 (6,267)
Other.................................................. 776 263
--------- ---------
Total adjustments................................. 44,909 11,339
--------- ---------
Net cash provided by operating activities.............. 133,284 83,390
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment,
net.................................................... (89,562) (484,219)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners............................... -- 197,000
Distributions to partners................................. (97,914) (61,205)
Issuance of long-term debt, net........................... 281,026 265,000
Retirement of long-term debt.............................. (255,000) --
--------- ---------
Proceeds received upon termination of interest rate
forward agreements..................................... 12,896 --
Long-term debt financing costs............................ (1,561) --
Net cash provided by (used in) financing activities....... (60,553) 400,795
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (16,831) (34)
Cash and cash equivalents -- beginning of period............ 37,389 19,986
--------- ---------
Cash and cash equivalents -- end of period.................. $ 20,558 $ 19,952
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amount capitalized).............. $ 47,811 $ 22,224
========= =========
Changes in components of working capital:
Accounts receivable.................................... (8,461) 1,316
Materials and supplies................................. (300) (147)
Accounts payable....................................... 3,003 1,488
Accrued taxes other than income........................ 4,796 1,155
Accrued interest....................................... (3,592) (4,097)
Over/under recovered cost of service................... 9,905 (5,982)
--------- ---------
Total............................................. $ 5,351 $ (6,267)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 74
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NORTHERN
TC PIPELINES BORDER
TRANSCANADA TRANSCAN INTERMEDIATE INTERMEDIATE TOTAL
BORDER NORTHERN LIMITED LIMITED PARTNERS'
PIPELINE LTD. LTD. PARTNERSHIP PARTNERSHIP CAPITAL
------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Partners' Capital at December 31,
1998................................ $ 50,606 $ 202,425 $ -- $590,407 $843,438
Net income to partners.............. 2,930 11,715 11,868 61,862 88,375
Distributions paid.................. (5,206) (20,819) (3,349) (68,540) (97,914)
Ownership transfer.................. (48,330) (193,321) 241,651 -- --
-------- --------- -------- -------- --------
Partners' Capital at September 30,
1999.............................. $ -- $ -- $250,170 $583,729 $833,899
======== ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 75
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted principles have been
condensed or omitted, pursuant to such regulations. However, 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.
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Income taxes are the responsibility of the partners and are not
reflected in these financial statements. However, the Northern Border Pipeline
tariff establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $311.3 million and $300.0 million as of September 30, 1999 and
December 31, 1998, respectively, and are primarily related to accelerated
depreciation and other plant-related differences.
3. Accounts payable shown on the accompanying balance sheet includes
approximately $10.5 million and $37.4 million at September 30, 1999 and December
31, 1998, respectively, 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 (The Chicago Project). These costs are
recorded in natural gas transmission plant in service on the accompanying
balance sheet and are excluded from the changes in accounts payable and capital
expenditures for property, plant and equipment, net on the accompanying
statement of cash flows. As the project costs are paid, they are reflected as
capital expenditures for property, plant and equipment, net on the statement of
cash flows.
4. In August 1999, Northern Border Pipeline completed a private offering of
$200 million of 7.75% Senior Notes due 2009 (Existing Notes). Also in August
1999, Northern Border Pipeline received approximately $12.9 million from the
termination of interest rate forward agreements, which is included in long-term
debt on the balance sheet and is being amortized against interest expense over
the life of the Existing Notes. The interest rate forward agreements, which had
an aggregate notional amount of $150 million, had been executed in September
1998 to hedge the interest rate on a planned issuance of fixed rate debt in
1999. The proceeds from the private offering, net of debt discounts and issuance
costs, and the termination of the interest rate forward agreements were used to
reduce existing indebtedness under a June 1997 credit agreement.
5. 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. The amended application reflects
estimated capital expenditures of approximately $126 million.
F-6
<PAGE> 76
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In September 1999, the FERC issued a policy statement on certification and
pricing of new construction projects. The policy statement announces a
preference for pricing new construction incrementally, as contrasted to a
presumption in favor of rolled-in pricing once certain conditions were met.
Since the amended application for Project 2000 was filed based upon rolled-in
rate treatment, Northern Border Pipeline is uncertain at this time how
implementation of this policy statement may impact Project 2000.
6. Northern Border Pipeline filed a rate proceeding with the FERC in May
1999 for a redetermination of its allowed equity rate of return. In this
proceeding, Northern Border Pipeline proposed, among other things, to increase
its allowed equity rate of return. The total annual cost of service increase due
to Northern Border Pipeline's proposed changes is approximately $30 million. A
number of Northern Border Pipeline's shippers and competing pipelines have filed
interventions and protests. In June 1999, the FERC issued an order in which the
proposed changes were suspended until December 1, 1999, after which the proposed
changes will be implemented with subsequent billings subject to refund. The June
order and a subsequent clarification issued by the FERC in August 1999 set for
hearing not only Northern Border Pipeline's proposed changes but also several
issues raised by intervenors including the appropriateness of Northern Border
Pipeline's cost of service tariff, rolled-in rate treatment of The Chicago
Project, capital project cost containment mechanism amount recorded for The
Chicago Project (see Note 7), depreciation schedule and creditworthiness
standards. A procedural schedule has been established which provides for the
hearing to commence in July 2000. At this time, Northern Border Pipeline can
give no assurance as to the outcome on any of these issues.
7. As agreed to in a Stipulation and Agreement (Stipulation) to settle its
November 1995 rate case, 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 to be $897 million, with the
final construction cost estimated to be $894 million. Thus, Northern Border
Pipeline's notification to the FERC and its shippers in its June 1999 report
reflects the conclusion that there is a $3 million addition to rate base as a
result of the PCCM. The Stipulation requires the calculation of the PCCM to be
reviewed by an independent national accounting firm. The independent accountants
completed their examination of Northern Border Pipeline's PCCM calculation in
October 1999. The independent accountants concluded Northern Border Pipeline had
complied, in all material respects, with the requirements of the Stipulation
related to the PCCM. Northern Border Pipeline filed its June 1999 report and the
independent accountants' report in its current rate case proceeding discussed
previously. Although Northern Border Pipeline believes the computation has been
made in accordance with the terms of the Stipulation, it is unable to predict at
this time whether any adjustments will be required. Later developments may
prevent recovery of amounts originally calculated under the PCCM, which may
result in a non-cash charge to write down transmission plant and that charge
could be material to the operating results of Northern Border Pipeline.
F-7
<PAGE> 77
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. Effective May 28, 1999, TransCanada Border PipeLine Ltd. and TransCan
Northern Ltd. transferred their combined 30% ownership interest in Northern
Border Pipeline to TC PipeLines Intermediate Limited Partnership. In accordance
with the partnership agreement, net income and distributions were prorated at
the effective date of the ownership transfer. The partners' capital balance for
TransCanada Border PipeLine Ltd. and TransCan Northern Ltd. at June 30, 1999,
represents the amount of distribution that was paid August 3, 1999.
9. Northern Border Pipeline makes distributions to its general partners
approximately one month following the end of the quarter. The distribution
computed for the third quarter of 1999 of approximately $29.2 million was paid
November 2, 1999.
F-8
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of
Northern Border Pipeline Company:
We have audited the accompanying balance sheet of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 1998 and 1997, and the related
statements of income, cash flows and changes in partners' capital for each of
the three years in the period ended December 31, 1998. 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 each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
January 19, 1999
F-9
<PAGE> 79
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents................................. $ 37,389 $ 19,986
Accounts receivable....................................... 16,434 15,557
Related party receivables................................. 2,470 1,780
Materials and supplies, at cost........................... 3,360 3,677
Under recovered cost of service........................... 2,781 --
---------- ----------
Total current assets.............................. 62,434 41,000
---------- ----------
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
---------- ----------
OTHER ASSETS................................................ 13,932 5,230
---------- ----------
Total assets...................................... $1,790,889 $1,147,120
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ------------------------------------------------------------
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
---------- ----------
LONG-TERM DEBT.............................................. 862,000 459,000
---------- ----------
RESERVES AND DEFERRED CREDITS............................... 9,818 9,828
---------- ----------
PARTNERS' CAPITAL........................................... 843,438 581,412
---------- ----------
Total liabilities and partners' capital........... $1,790,889 $1,147,120
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 80
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Operating revenues........................................ $196,600 $226,019 $214,103
Provision for rate refunds................................ -- (39,969) (12,160)
-------- -------- --------
Operating revenues, net........................... 196,600 186,050 201,943
-------- -------- --------
OPERATING EXPENSES
Operations and maintenance................................ 29,447 28,522 26,974
Depreciation and amortization............................. 40,989 38,708 46,979
Taxes other than income................................... 21,381 22,393 24,390
Regulatory credit......................................... (8,878) -- --
-------- -------- --------
Operating expenses................................ 82,939 89,623 98,343
-------- -------- --------
OPERATING INCOME............................................ 113,661 96,427 103,600
-------- -------- --------
INTEREST EXPENSE
Interest expense.......................................... 44,542 33,020 33,117
Interest expense capitalized.............................. (19,001) (3,660) (447)
-------- -------- --------
Interest expense, net............................. 25,541 29,360 32,670
-------- -------- --------
OTHER INCOME
Allowance for equity funds used during construction....... 10,237 1,400 396
Other income, net......................................... 1,874 4,305 2,517
-------- -------- --------
Other income...................................... 12,111 5,705 2,913
-------- -------- --------
NET INCOME TO PARTNERS...................................... $100,231 $ 72,772 $ 73,843
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 81
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners................................... $ 100,231 $ 72,772 $ 73,843
--------- --------- ---------
Adjustments to reconcile net income to partners to net
cash provided by operating activities:
Depreciation and amortization......................... 41,005 38,715 47,010
Allowance for equity funds used during construction... (10,237) (1,400) (396)
Regulatory credit..................................... (9,105) -- --
Provision for billings subject to refund.............. -- 40,403 12,227
Refunds to shippers................................... -- (52,630) --
Changes in components of working capital.............. (18,471) 16,389 5,452
Other................................................. 354 1,079 (1,328)
--------- --------- ---------
Total adjustments................................ 3,546 42,556 62,965
--------- --------- ---------
Net cash provided by operating activities............. 103,777 115,328 136,808
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment,
net................................................... (651,169) (152,070) (18,597)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners.............................. 223,000 81,000 --
Distributions to partners................................ (61,205) (99,322) (102,845)
Issuance of long-term debt............................... 403,000 209,000 --
Retirement of long-term debt............................. -- (127,500) (32,500)
Borrowings on (repayment of) note payable................ -- (10,000) 10,000
Long-term debt financing costs........................... -- (744) --
--------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 564,795 52,434 (125,345)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................... 17,403 15,692 (7,134)
Cash and cash equivalents -- beginning of period......... 19,986 4,294 11,428
--------- --------- ---------
Cash and cash equivalents -- end of period............... $ 37,389 $ 19,986 $ 4,294
========= ========= =========
Changes in components of working capital:
Accounts receivable................................... $ (1,567) $ 1,927 $ 931
Materials and supplies................................ 317 170 218
Accounts payable...................................... (10,769) 14,587 1,673
Accrued taxes other than income....................... (466) (674) 1,065
Accrued interest...................................... 1,396 14 (163)
Over/under recovered cost of service.................. (7,382) 365 1,728
--------- --------- ---------
Total............................................ $ (18,471) $ 16,389 $ 5,452
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 82
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(In Thousands)
<TABLE>
<CAPTION>
NORTHERN
BORDER
TRANSCANADA TRANSCAN INTERMEDIATE TOTAL
BORDER NORTHERN LIMITED PARTNERS'
PIPELINE LTD. LTD. PARTNERSHIP CAPITAL
------------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Partners' Capital at December 31, 1995......... $ 88,954 $ 77,835 $389,175 $ 555,964
Net income to partners......................... 11,237 10,916 51,690 73,843
Distributions paid............................. (13,936) (16,917) (71,992) (102,845)
Ownership transfer............................. (54,637) 54,637 -- --
-------- -------- -------- ---------
Partners' Capital at December 31, 1996......... 31,618 126,471 368,873 526,962
Net income to partners......................... 4,366 17,466 50,940 72,772
Contributions received......................... 4,860 19,440 56,700 81,000
Distributions paid............................. (5,959) (23,838) (69,525) (99,322)
-------- -------- -------- ---------
Partners' Capital at December 31, 1997......... 34,885 139,539 406,988 581,412
Net income to partners......................... 6,014 24,055 70,162 100,231
Contributions received......................... 13,380 53,520 156,100 223,000
Distributions paid............................. (3,673) (14,689) (42,843) (61,205)
-------- -------- -------- ---------
Partners' Capital at December 31, 1998......... $ 50,606 $202,425 $590,407 $ 843,438
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 83
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, 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).
Net income and distributions are allocated based on ownership percentages.
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 Statement of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation." Accordingly, certain assets that
result from the regulated ratemaking process are recorded that would not be
recorded under generally accepted accounting principles for nonregulated
entities. At December 31, 1998 and 1997, Northern Border Pipeline has reflected
regulatory assets of approximately $12.8 million and $3.9 million, respectively,
in Other Assets on the balance sheet. 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
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 statement 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
F-14
<PAGE> 84
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
cost of service deferral is included with Other Assets on the balance sheet 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. The remaining asset of approximately $3.9 million
relates to costs recorded for previous expansions and extensions of the pipeline
system. Northern Border Pipeline will seek recovery of these amounts in its next
rate proceeding.
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.
(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 statement 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 1998, 1997 and 1996 was 2.5%, 2.5% and 3.1%, respectively (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.
(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
F-15
<PAGE> 85
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 to the contracted capacity of PAGUS, including
10.5% guaranteed by Northern Natural Gas Company, a wholly-owned subsidiary of
Enron. Northern Natural Gas Company does not hold an ownership interest in
Northern Border Pipeline or any of its partner companies. 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, 1997 and 1996 were $87.3 million, $86.8 million and $95.7 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
F-16
<PAGE> 86
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS -- (CONTINUED)
affiliated firm service agreements and interruptible service contracts for the
years ended December 31, 1998, 1997 and 1996 were $22.4 million, $20.2 million
and $21.4 million, respectively.
4. CREDIT FACILITIES AND LONG-TERM DEBT
Detailed information on long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(THOUSANDS OF DOLLARS) 1998 1997
- ---------------------- -------- --------
<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.
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, 1997 and 1996 was $23.8 million, $29.0 million and $31.9 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
F-17
<PAGE> 87
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CREDIT FACILITIES AND LONG-TERM DEBT-- (CONTINUED)
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.
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
F-18
<PAGE> 88
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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.
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-19
<PAGE> 89
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, ANY INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES IN ANY CIRCUMSTANCES IN WHICH THIS OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS
PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF NORTHERN BORDER PIPELINE COMPANY SINCE THE DATE
OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- --------------------------------------------------------------------------------
NORTHERN BORDER PIPELINE COMPANY
OFFER TO EXCHANGE UP TO $200,000,000 OF
7.75% SENIOR NOTES DUE 2009, SERIES A
FOR ANY AND ALL OUTSTANDING
7.75% SENIOR NOTES DUE 2009
---------------------------
PROSPECTUS
JANUARY 12, 2000
---------------------------
- --------------------------------------------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATIONS. UNTIL APRIL 11, 2000, ALL DEALERS
THAT EFFECT TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND REGARDING THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
