As filed with the Securities and Exchange Commission on September 16, 1997
Registration No. 333-30657
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_________________
NORTHERN BORDER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 93-1120873
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
_________________
1400 Smith Street, Houston, Texas 77002
Telephone No. (713) 853-6161
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_________________
A. H. Davis
NBP Services Corporation
1400 Smith Street
Houston, Texas 77002
(713) 853-6941
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________
Approximate date of commencement of proposed sale to the
public: From time to time after the effective date of this
Registration Statement as determined in light of market
conditions and other factors.
If the only securities being registered on this Form are
being offered pursuant to dividend or interest reinvestment
plans, please check the following box. [ ]
If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment
plans, please check the following box. [X]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
[ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
_________________
The registrant hereby amends this registration
statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further
amendment which specifically states that this registration
statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this
registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
NORTHERN BORDER PARTNERS, L.P.
125,357 Common Units
Representing Limited Partner Interests
_____________
This Prospectus relates to up to 125,357 Common Units
representing limited partner interests in Northern Border
Partners, L.P., a Delaware limited partnership (the
"Partnership"), which may be offered from time to time by
certain unitholders named herein (the "Selling Unitholders").
The Partnership has been advised that the Common Units being
offered hereby may be sold from time to time by or on behalf
of the Selling Unitholders in non-underwritten distributions
on the New York Stock Exchange at prices prevailing on the New
York Stock Exchange at the time of sale. The Partnership will
not receive the proceeds of any such sale. See "Plan of
Distribution."
The Partnership's Common Units are listed on the New York
Stock Exchange under the symbol "NBP". On September 12, 1997,
the last reported sales price of the Common Units on the New
York Stock Exchange was $32.4375 per Common Unit.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
_____________
The date of this Prospectus is September __, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
No dealer, salesman or other person has been authorized to
give any information or to make any representation not contained
in, or incorporated by reference in, this Prospectus, and, if
given or made, such information or representation must not be
relied upon as having been authorized by the Partnership or the
Selling Unitholders. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any
implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in
the affairs of the Partnership since such date.
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements
of the Securities Exchange Act of 1934 (the "Exchange Act"), and
in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the following
Regional Offices of the Commission: Midwest Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can also be
obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates or from the site maintained by the Commission on
the Internet World Wide Web at http://www.sec.gov. The
Partnership's Common Units are listed on the New York Stock
Exchange, and reports, proxy statements and other information
concerning the Partnership can be inspected and copied at the
offices of such exchange at 20 Broad Street, New York, New York
10005.
This Prospectus constitutes a part of a Registration
Statement on Form S-3 (together with all amendments and exhibits
thereto, the "Registration Statement") filed by the Partnership
with the Commission under the Securities Act with respect to the
Common Units offered hereby. This Prospectus does not contain
all of the information set forth in such Registration Statement,
certain parts of which are omitted in accordance with the rules
and regulations of the Commission. Reference is made to such
Registration Statement and to the exhibits relating thereto for
further information with respect to the Partnership and the
Common Units offered hereby. Any statements contained herein
concerning the provisions of any document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission
or incorporated by reference herein are not necessarily complete,
and in each instance reference is made to the copy of such
document so filed for a more complete description of the matter
involved. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the
Partnership (File No. 1-12202) pursuant to Section 13(a) of the
Exchange Act are incorporated herein by reference as of their
respective dates:
(a) Annual Report on Form 10-K for the year ended
December 31, 1996; and
(b) Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
Each document filed by the Partnership pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the
offering of the Common Units pursuant hereto shall be deemed to
be incorporated herein by reference and to be a part hereof from
the date of filing of such document. Any statement contained
herein or in a document all or a portion of which is incorporated
or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Partnership will provide without charge to each person
to whom a copy of this Prospectus is delivered, on the request of
any such person, a copy of any or all of the foregoing documents
incorporated herein by reference other than exhibits to such
documents (unless such exhibits are specifically incorporated by
reference into the documents that this Prospectus incorporates).
Written or telephone requests for such copies should be directed
to Secretary Division, Northern Border Partners, L.P., at its
principal executive offices, 1400 Smith Street, Houston, Texas
77002 (telephone: 713-853-6161).
BUSINESS
General
Northern Border Partners, L.P. through a subsidiary limited
partnership, Northern Border Intermediate Limited Partnership,
collectively referred to herein as "Partnership", owns a 70%
general partner interest in Northern Border Pipeline Company, a
Texas general partnership ("Northern Border Pipeline"). The
remaining general partner interests in Northern Border Pipeline
are owned by TransCanada Border PipeLine Ltd. (6%) and TransCan
Northern Ltd. (24%), both of which are wholly-owned subsidiaries
of TransCanada PipeLines Limited ("TransCanada"). Northern
Plains Natural Gas Company ("Northern Plains"), Pan Border Gas
Company ("Pan Border") and Northwest Border Pipeline Company
("Northwest Border") serve as the General Partners of the
Partnership. Northern Plains is a wholly-owned subsidiary of
Enron Corp., Pan Border is a wholly-owned subsidiary of Duke
Energy Corporation and Northwest Border is a wholly-owned
subsidiary of The Williams Companies, Inc. The General Partners
hold an aggregate 2% general partner interest in the Partnership.
The General Partners also own in the aggregate an effective 24%
subordinated limited partner interest ("Subordinated Units") in
the Partnership. The combined general and limited partner
interests in the Partnership of Northern Plains, Pan Border and
Northwest Border are 13.0%, 8.5% and 4.5%, respectively.
Northern Border Pipeline owns a 969-mile U.S. interstate
pipeline system (the "Pipeline System") that transports natural
gas from the Montana-Saskatchewan border near Port of Morgan,
Montana, to interconnecting pipelines in the State of Iowa. The
Pipeline System has pipeline access to natural gas reserves in
the provinces of Alberta, British Columbia and Saskatchewan, as
well as the Williston Basin in the United States. The Pipeline
System also has access to production of synthetic gas from the
Great Plains Coal Gasification Project in North Dakota.
Management of Northern Border Pipeline is overseen by the
Northern Border Management Committee, which is comprised of three
representatives from the Partnership (one selected by each
General Partner) and one representative from the TransCanada
subsidiaries. The Pipeline System is operated by Northern Plains
pursuant to an operating agreement. Northern Plains employs
approximately 170 individuals to operate the Pipeline System.
These employees are located at the operating headquarters in
Omaha, Nebraska, and at locations along the pipeline route.
Northern Border Pipeline's revenues are derived from
agreements for the receipt and delivery of gas at points along
the Pipeline System as specified in each shipper's individual
transportation contract. Northern Border Pipeline transports gas
for shippers under a tariff regulated by the Federal Energy
Regulatory Commission ("FERC").
As a result of acquisitions during 1996 and 1997, the
Partnership has an ownership position of 71.75% in Black Mesa
Holdings, Inc. Black Mesa Holdings, Inc., through its wholly-
owned subsidiary, Black Mesa Pipeline Company, owns a 273-mile,
18-inch diameter coal slurry pipeline which originates at a coal
mine in Kayenta, Arizona. The pipeline traverses westward
through northern Arizona to the 1,500 megawatt Mohave Power
Station located in Laughlin, Nevada. The pipeline is operated by
Williams Technologies, Inc., a wholly-owned subsidiary of the
Partnership which was acquired in May, 1997.
The Pipeline System
The 822-mile portion of the Pipeline System from the
Canadian border to Ventura, Iowa, was completed and placed in
service in 1982. It was built to transport large quantities of
natural gas through large diameter, high operating pressure pipe.
At its northern end, the Pipeline System is connected to the
Foothills Pipe Lines (Sask.) Ltd. system in Canada, which in turn
is connected to the gathering systems of NOVA Gas Transmission
Ltd. in Alberta and of Transgas Limited in Saskatchewan. The
Pipeline System also connects with the 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. In the
Pipeline System's southern portion, it interconnects with the
pipeline facilities of an Enron subsidiary, Northern Natural Gas
Company near Ventura, Iowa, and of Natural Gas Pipeline Company
of America ("NGPL") near Harper, Iowa.
There are seven existing compressor stations on the Pipeline
System. Other facilities include three pipeline field offices
and warehouses, five measurement stations and 39 microwave tower
sites. There have been two expansions of the Pipeline System
since it was placed in service in 1982. An additional compressor
station was added in 1991 and an expansion and extension project
was completed and placed in service on November 1, 1992. This
1992 project entailed the construction of four compressor
stations and the acquisition of approximately 147 miles of a 30-
inch diameter pipeline beginning at an interconnect with the
original system near Ventura, Iowa and terminating near Harper,
Iowa where it interconnects with the facilities of NGPL. As a
result of the two expansions, the throughput capacity of the
Pipeline System increased by 463 million cubic feet per day
("MMCFD") to 1,675 MMCFD.
Demand For Transportation Capacity
Based upon existing contracts and capacity, 100% of the
Pipeline System's firm capacity (at current compression) is
contractually committed through October 2001. At the present
time, 6% of the firm capacity (based on annual cost of service
obligations) is contracted by interstate pipelines, 91% by
producers/marketers, and 3% by local distribution companies
(LDCs).
In 1996, approximately 87% of the natural gas transported by
the Pipeline System was produced in the Western Canadian
Sedimentary Basin located in the provinces of Alberta, British
Columbia and Saskatchewan. The Pipeline System's share of
Canadian gas exported to the United States was approximately 20%
in 1996.
Northern Border Pipeline is currently pursuing opportunities
to further increase its capacity. On October 13, 1995, Northern
Border Pipeline filed with the FERC its application, which
amended the application previously filed on February 2, 1995,
seeking a certificate of public convenience and necessity to
extend and expand its existing system ("The Chicago Project").
The estimated cost of the facilities proposed to be constructed
was approximately $800 million in 1995 dollars. New receipts
into the Pipeline System are estimated to be 700 MMCFD with 648
MMCFD proposed to be transported through the pipeline extension
and 516 MMCFD proposed to be delivered at Harper, Iowa for
transport by NGPL on its pipeline. Northern Border Pipeline's
filing included executed precedent agreements for the proposed
capacity and support for "rolled in" ratemaking treatment which
involves the determination that the rates and charges are based
on all the facilities' costs combined with the existing
facilities, and the proposed and contracted capacity.
NGPL filed on October 18, 1995 a companion application with
the FERC requesting authority to construct and operate certain
facilities needed to increase its pipeline system capacity to
accommodate the new deliveries at Harper, Iowa from Northern
Border Pipeline.
On September 4, 1996, Northern Border Pipeline filed an
amendment to its application to reflect limited facility
modifications which among other things, reduced environmental
impacts and project costs. The facilities proposed to be
constructed are as follows: (a) 224 miles of 36-inch pipeline
from Harper, Iowa, to Manhattan, Illinois; (b) 19 miles of 30-
inch pipeline from the end of the 36-inch pipeline to two
interconnects with Peoples Gas Light and Coke; (c) 147 miles of
36-inch pipeline loop; and (d) addition of 303,500 horsepower of
compression to eight new stations and five existing stations.
With this amendment, The Chicago Project costs are expected to be
approximately $793 million in 1995 dollars ($837 million as
estimated with projected inflation), and is expected to be ready
for service in November 1998.
Funds required to meet The Chicago Project capital
expenditures for 1997 and 1998 are expected to be provided
primarily by a $550 million three-year revolving credit facility
of Northern Border Pipeline, a planned $200 million debt facility
of the Partnership, equity contributions from the TransCanada
subsidiaries and internal sources.
In August 1997, the FERC issued certificates of public
convenience and necessity authorizing construction and operation
of The Chicago Project facilities and NGPL's proposed downstream
facilities. The certificate for The Chicago Project facilities
also authorized Northern Border Pipeline's requested "rolled-in"
ratemaking determination. Northern Border Pipeline has accepted
the certificate. Requests for rehearing have been filed by five
parties requesting the Commission to reconsider the rolled-in
rate determination for the Harper to Chicago segment and certain
routing determinations. The Commission must act within 30 days
and has in fact issued an order which grants the Commission
additional time to consider these requests.
FERC Regulation
General
Northern Border Pipeline is subject to extensive regulation
by the FERC as a "natural gas company" under the Natural Gas Act
(the "NGA"). Under the NGA and the Natural Gas Policy Act, the
FERC has jurisdiction over Northern Border Pipeline with respect
to virtually all aspects of its business, including
transportation of 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, the initiation and
discontinuation of services, and certain other matters.
Cost of Service Tariff
Northern Border Pipeline's firm transportation shippers
contract to pay for an allocable share of the Pipeline System's
capacity. During any given month, all such shippers pay a
uniform charge per dekatherm-mile of capacity contracted,
calculated under a cost of service tariff. The shippers'
obligations to pay their allocable share of the cost of service
is not dependent upon the volumes actually shipped. Northern
Border Pipeline may not charge or collect more than its cost of
service pursuant to its tariff on file with the FERC.
Northern Border Pipeline also provides interruptible
transportation service. The maximum rate charged to
interruptible shippers is calculated from cost of service
estimate on the basis of contracted capacity. All revenue from
the interruptible transportation service is credited back to the
firm shippers' accounts.
In November 1995, Northern Border Pipeline filed a rate case
in compliance with its FERC tariff for the determination of its
allowed equity rate of return. In this proceeding, Northern
Border Pipeline proposed, among other items, to increase its
allowed equity rate of return from 12.75% to 14.25%. Pursuant to
a December 1995 FERC order, Northern Border Pipeline began
collecting the proposed increase in rate of return on equity
effective June 1, 1996, subject to refund. After reaching a
settlement accord with a majority of its shippers, on October 15,
1996, Northern Border Pipeline filed for FERC approval of a
Stipulation and Agreement ("Stipulation") to settle its rate
case. The Stipulation would allow Northern Border Pipeline to
retain its 12.75% equity rate of return through September 30,
1996, and a 12% rate beginning October 1, 1996. In addition, the
depreciation rates applied to Northern Border Pipeline's gross
transmission plant would be reduced effective June 1, 1996, from
3.6% to 2.7%.
Another issue addressed in the Stipulation was the allowance
for income taxes. The FERC had previously ruled in a case
involving Lakehead Pipe Line Company L.P. that an income tax
allowance would not be allowed with respect to income
attributable to the limited partnership interests held by
individuals. During the rate case proceeding, Northern Border
Pipeline filed testimony regarding what it believed to be the
proper application of this FERC ruling to its circumstances.
Under the Stipulation, in connection with the completion of The
Chicago Project, Northern Border Pipeline would implement a new
depreciation schedule with an extended depreciable life, a
capital project cost containment mechanism and a $31 million
settlement adjustment mechanism. The settlement adjustment
mechanism would effectively reduce the allowed return on rate
base. On November 19, 1996, the Stipulation was certified by an
Administrative Law Judge to the FERC for review and approval. In
August 1997, Northern Border Pipeline received FERC approval of
the Stipulation. Northern Border Pipeline anticipates it will
make the refunds to its shippers in the fourth quarter of 1997.
SELLING UNITHOLDERS
In May, 1997 the Partnership acquired from the Selling
Unitholders all of the outstanding shares of Williams
Technologies, Inc. in exchange for Common Units. The following
table sets forth the name of each Selling Unitholder, the number
of Common Units which may be regarded as beneficially owned by
such Selling Unitholder, and the number of Common Units being
offered hereby by such Selling Unitholder.
<TABLE>
<CAPTION>
Number of Units Number of Units
Selling Unitholder Beneficially Owned Offered
<S> <C> <C>
David R. Williams, Jr.
Trustee of the David
R. Williams, Jr. Trust
dated 12/23/66 2,693 2,693
Rachel K.W. Zebrowski 40,888 40,888
Pauline W. Lampshire 40,888 40,888
David R. Williams, III 40,888 40,888
</TABLE>
The Common Units being offered hereby are owned by the
Selling Unitholders, who acquired them from the Partnership
pursuant to transactions exempt from the registration
requirements of the Securities Act.
DESCRIPTION OF THE COMMON UNITS
Generally, the Common Units and the Subordinated Units
represent limited partner interests in the Partnership, which
entitle the holders thereof to participate in Partnership
distributions and exercise the rights or privileges available to
limited partners under the Amended and Restated Partnership
Agreement of the Partnership. The Subordinated Units are a
separate class of interests in the Partnership, and their rights
to participate in distributions differ from those rights of the
holders of Common Units.
The primary objective of the Partnership is to generate cash
from Partnership operations and to distribute Available Cash to
its partners in the manner described herein. "Available Cash"
generally means, with respect to any calendar quarter, the sum of
all of the cash received by the Partnership from all sources,
adjusted for cash disbursements and net changes to cash reserves.
The Partnership Policy Committee's decisions regarding
amounts to be placed in or released from cash reserves will have
a direct impact on the amount of Available Cash because increases
and decreases in cash reserves are taken into account in
computing Available Cash. The Partnership Policy Committee may,
in its reasonable discretion (subject to certain limits),
determine the amounts to be placed in or released from cash
reserves each quarter.
Cash distributions will be characterized as either
distributions of Cash from Operations or Cash from Interim
Capital Transactions. This distinction affects the amounts
distributed to Unitholders relative to the General Partners, and
under certain circumstances it determines whether holders of
Subordinated Units receive any distributions.
Cash from Operations generally refers to the cash balance of
the Partnership on the date the Partnership commences operations,
plus all cash generated by the operations of the Partnership's
businesses (which consists primarily of cash distributions to the
Partnership by Northern Border Pipeline attributable to
operations of the Pipeline System), after deducting related cash
expenditures, cash reserves, debt service and certain other
items.
For any given quarter, Available Cash will be distributed to
the General Partners and to the holders of Common Units, and it
may also be distributed to the holders of Subordinated Units
depending upon the amount of Available Cash for the quarter,
amounts distributed in prior quarters and other factors discussed
below.
The Partnership will make distributions to its partners with
respect to each calendar quarter prior to liquidation of the
Partnership in an amount equal to 100% of its Available Cash for
such quarter. The distribution of Available Cash that constitutes
Cash from Operations with respect to each calendar quarter during
the Subordination Period is subject to the rights of the holders
of the Common Units to receive the Minimum Quarterly Distribution
($0.55 per Unit), plus any Common Unit Arrearages, prior to any
distribution of Available Cash to holders of Subordinated Units
with respect to such quarter. The terms "Subordination Period"
and "Common Unit Arrearages" are defined in the Amended and
Restated Agreement of Limited Partnership. Common Units will not
accrue Common Unit Arrearages for any quarter after the
Subordination Period, and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
The Subordination Period extends from October 1, 1993 until
the Conversion Date. The "Conversion Date" is the date on
which the first of any one of the following occurs:
the first day of any calendar quarter that occurs on or
after January 1, 1999 and prior to January 1, 2004 and
on which both of the following tests are met: (i)
cumulative capital expenditures by the Partnership
(directly or through its 70% interest in Northern
Border Pipeline) subsequent to October 1, 1993 and
prior to such day equal or exceed $248 million, and
(ii) the Partnership has distributed the Minimum
Quarterly Distribution on all Common Units and
Subordinated Units for each of the eight consecutive
calendar quarters immediately prior to such day;
the first day of any calendar quarter that occurs on or
after January 1, 2004 and on which the following tests
are met: (i) cumulative capital expenditures by the
Partnership (directly or through its 70% interest in
Northern Border Pipeline) subsequent to October 1, 1993
and prior to such day equal or exceed $248 million and
(ii) there are no Common Unit Arrearages; and
the first day of any calendar quarter that occurs on or
after January 1, 2004 and on which the following test
is met: the Partnership has distributed the Minimum
Quarterly Distribution on all Common Units and
Subordinated Units for each of the 20 consecutive
calendar quarters immediately prior to such day.
In addition, the Partnership Agreement contains provisions
intended to discourage a person or group from attempting to
remove the General Partners as general partners of the
Partnership or otherwise change management of the Partnership.
Among them is a provision that if a General Partner is removed
other than for cause the Subordination Period will end.
As of the end of the Subordination Period, each Subordinated
Unit will convert into a Common Unit and will participate pro
rata with other outstanding Common Units in all cash
distributions on Common Units.
The transfer agent and registrar for the Common Units is
First Chicago Trust Company of New York.
TAX CONSIDERATIONS
This section is a summary of certain federal income tax
considerations that may be relevant to prospective Unitholders
and, to the extent set forth below under "Tax
Considerations-Legal Opinions and Advice," represents the opinion
of Vinson & Elkins L.L.P., counsel to the Partnership
("Counsel"), insofar as it relates to matters of law and legal
conclusions. This section is based upon current provisions of
the Internal Revenue Code of 1986, as amended ("Code"), existing
and proposed regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change.
Subsequent changes may cause the tax consequences to vary
substantially from the consequences described below. Unless the
context otherwise requires, references in this section to
"Partnership" are references to both the Partnership and the
Northern Border Intermediate Limited Partnership (The
"Intermediate Partnership").
No attempt has been made in the following discussion to
comment on all federal income tax matters affecting the
Partnership or the Unitholders. Moreover, the discussion focuses
on Unitholders who are individual citizens or residents of the
United States and has only limited application to corporations,
estates, trusts or non-resident aliens. Accordingly, each
prospective Unitholder should consult, and should depend on, his
own tax advisor in analyzing the federal, state, local and
foreign tax consequences of the purchase, ownership or
disposition of Common Units.
Legal Opinions and Advice
Counsel has expressed its opinion that, based on the
representations and subject to the qualifications set forth in
the detailed discussion that follows, for federal income tax
purposes (i) the Partnership (including the Intermediate
Partnership) and Northern Border Pipeline each will be treated as
a partnership, and (ii) owners of Common Units (with certain
exceptions, as described in "-Limited Partners Status" below)
will be treated as partners of the Partnership (but not the
Intermediate Partnership). In addition, all statements as to
matters of law and legal conclusions contained in this section,
unless otherwise noted, reflect the opinion of Counsel. Counsel
has also advised the Partnership that, based on current law, the
following general description of the principal federal income tax
consequences that should arise from the purchase, ownership and
disposition of Common Units, insofar as it relates to matters of
law and legal conclusions, addresses all material tax
consequences to Unitholders who are individual citizens or
residents of the United States.
No ruling has been requested from the Internal Revenue
Service (the "IRS") with respect to the foregoing issues or any
other matter affecting the Partnership or the Unitholders. An
opinion of counsel represents only such counsel's best legal
judgment and does not bind the IRS or the courts. Thus, no
assurance can be provided that the opinions and statements set
forth herein would be sustained by a court if contested by the
IRS. The costs of any contest with the IRS will be borne
directly or indirectly by the Unitholders and the General
Partners. Furthermore, no assurance can be given that the
treatment of the Partnership or an investment therein will not be
significantly modified by future legislative or administrative
changes or court decisions. Any such modification may or may not
be retroactively applied.
Recent Tax Legislation
Congress recently enacted, and the President signed into law
on August 5, 1997, the Taxpayer Relief Act of 1997 (the "TRA of
1997"). The new legislation contains several provisions which
have an impact on the Partnership and its Partners. The TRA of
1997 generally reduces the maximum capital gains rate for an
individual from 28% to 20%. In addition, the TRA of 1997 would
alter the tax reporting system and the deficiency collection
system applicable to large partnerships and would make certain
additional changes to the treatment of large partnerships, such
as the Partnership. These provisions are intended to simplify the
administration of the tax rules governing such entities. The
application of some of these new provisions are optional and the
Partnership Policy Committee has not determined whether the
Partnership will elect to have these provisions apply to the
Partnership and its Partners.
Partnership Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner is required to take
into account his allocable share of items of income, gain, loss,
deduction and credit of the Partnership in computing his federal
income tax liability, regardless of whether cash distributions
are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed
is in excess of the partner's adjusted basis in his partnership
interest.
Pursuant to Treasury Regulations 301.7701-1, 301.7702-1 and
301.7701-3, effective January 1, 1997 (the "Check-the-Box
Regulations"), an entity in existence on January 1, 1997, will
generally retain its current classification for federal income
tax purposes. As of January 1, 1997, the Partnership and
Northern Border Pipeline were each classified and taxed as a
partnership. Pursuant to the Check-the-Box Regulations this
prior classification will be respected for all periods prior to
January 1, 1997, if (1) the entity had a reasonable basis for the
claimed classification; (2) the entity recognized the federal tax
consequences of any change in classification within five years
prior to January 1, 1997; and (3) the entity was not notified
prior to May 8, 1996, that the entity classification was under
examination. Based on these regulations and the applicable
federal income tax law, Counsel has opined that the Partnership
and Northern Border Pipeline each will be classified as a
partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain
factual representations and covenants made by the Partnership and
the General Partners, including:
(a) Neither the Partnership nor Northern Border
Pipeline will elect to be treated as an association taxable
as a corporation;
(b) A representation and covenant of the Partnership
that, the Partnership has been and will be operated in
accordance with all applicable partnership statutes and the
Partnership Agreement and in the manner described herein;
(c) A representation and covenant of the Partnership
that, except as otherwise required by Section 704 of the
Code and regulations promulgated thereunder, the General
Partners have had and will have, in the aggregate, an
interest in each material item of income, gain, loss,
deduction or credit of the Partnership and the Intermediate
Partnership equal to at least 1% at all times during the
existence of the Partnership and the Intermediate
Partnership;
(d) A representation and covenant of the General
Partners that the General Partners have and will maintain,
in the aggregate, a minimum capital account balance in the
Partnership and in the Intermediate Partnership equal to 1%
of the total positive capital account balances of the
Partnership and the Intermediate Partnership;
(e) A representation and covenant of the Partnership
that, for each taxable year, less than 10% of the gross
income of the Partnership has been and will be derived from
sources other than (i) the exploration, development,
production, processing, refining, transportation or
marketing of any mineral or natural resource, including oil,
gas or products thereof and naturally occurring carbon
dioxide or (ii) other items of "qualifying income" within
the meaning of Section 7704(d) of the Code; and
(f) A representation and covenant of the Partnership
that Northern Border Pipeline is organized and will be
operated in accordance with the Texas Uniform Partnership
Act and the Northern Border Pipeline Partnership Agreement.
Counsel's opinion as to the partnership classification of
the Partnership in the event of a change in the general partners
is based upon the assumption that the new general partners will
satisfy the foregoing representations and covenants.
Section 7704 of the Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations.
However, an exception (the "Natural Resource Exception") exists
with respect to publicly-traded partnerships 90% or more of the
gross income of which for every taxable year consists of
"qualifying income." "Qualifying income" includes income and
gains derived from the transportation of natural gas. Other
types of "qualifying income" include interest, dividends, gains
from the sale of real property and gains from the sale or other
disposition of capital assets held for the production of income
that otherwise constitutes "qualifying income." The Partnership
has represented that in excess of 90% of its gross income has
been and will be derived from fees and charges for transporting
(through the Pipeline System) natural gas. Based upon that
representation, Counsel is of the opinion that the Partnership's
gross income derived from these sources constitutes "qualifying
income."
If the Partnership fails to meet the Natural Resource
Exception (other than a failure determined by the IRS to be
inadvertent which is cured within a reasonable time after
discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly-
formed corporation (on the first day of the year in which it
fails to meet the Natural Resource Exception) in return for stock
in such corporation, and then distributed such stock to the
partners in liquidation of their interests in the Partnership.
This contribution and liquidation should be tax-free to
Unitholders and the Partnership, so long as the Partnership, at
such time, does not have liabilities in excess of the basis of
its assets. Thereafter, the Partnership would be treated as a
corporation for federal income tax purposes.
If the Partnership were treated as an association or
otherwise taxable as a corporation in any taxable year, as a
result of a failure to meet the Natural Resource Exception or
otherwise, its items of income, gain, loss, deduction and credit
would be reflected only on its tax return rather than being
passed through to the Unitholders, and its net income would be
taxed at the entity level at corporate rates. In addition, any
distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's
current or accumulated earnings and profits), in the absence of
earnings and profits as a nontaxable return of capital (to the
extent of the Unitholder's basis in his Common Units) or taxable
capital gain (after the Unitholder's basis in the Common Units is
reduced to zero). Accordingly, treatment of either the
Partnership or the Intermediate Partnership as an association
taxable as a corporation would result in a material reduction in
a Unitholder's cash flow and after-tax return.
The discussion below is based on the assumption that the
Partnership will be classified as a partnership for federal
income tax purposes.
Limited Partner Status
Unitholders who have become limited partners will be treated
as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership
interests who have not been admitted to a partnership as
partners, but who have the capacity to exercise substantial
dominion and control over the assigned partnership interests,
will be treated as partners for federal income tax purposes. On
the basis of this ruling, except as otherwise described herein,
Counsel is of the opinion that (a) assignees who have executed
and delivered Transfer Applications, and are awaiting admission
as limited partners and (b) Unitholders whose Common Units are
held in street name or by another nominee and who have the right
to direct the nominee in the exercise of all substantive rights
attendant to the ownership of their Common Units will be treated
as partners of the Partnership for federal income tax purposes.
As this ruling does not extend, on its facts, to assignees of
Common Units who are entitled to execute and deliver Transfer
Applications and thereby become entitled to direct the exercise
of attendant rights, but who fail to execute and deliver Transfer
Applications, Counsel's opinion does not extend to these persons.
Income, gain, deductions, losses or credits would not appear to
be reportable by such a Unitholder, and any cash distributions
received by such a Unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax
advisors with respect to their status as partners in the
Partnership for federal income tax purposes. A purchaser or
other transferee of Common Units who does not execute and deliver
a Transfer Application may not receive certain federal income tax
information or reports furnished to record holders of Common
Units unless the Common Units are held in a nominee or street
name account and the nominee or broker has executed and delivered
a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have
been transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to such
Common Units for federal income tax purposes. See "Tax
Considerations-Tax Treatment of Operations-Treatment of Short
Sales."
Tax Consequences of Unit Ownership
Flow-through of Taxable Income
No federal income tax will be paid by the Partnership.
Instead, each Unitholder will be required to report on his income
tax return his allocable share of the income, gains, losses and
deductions of the Partnership without regard to whether
corresponding cash distributions are received by such Unitholder.
Consequently, a Unitholder may be allocated income from the
Partnership although he has not received a cash distribution in
respect of such income.
Treatment of Partnership Distributions
Distributions by the Partnership to a Unitholder generally
will not be taxable to the Unitholder for federal income tax
purposes to the extent of his basis in his Common Units
immediately before the distribution. Cash distributions in
excess of a Unitholder's basis generally will be considered to be
gain from the sale or exchange of the Common Units, taxable in
accordance with the rules described under "Tax
Considerations-Disposition of Common Units." Any reduction in a
Unitholder's share of the Partnership's liabilities for which no
partner, including the General Partners, bears the economic risk
of loss ("nonrecourse liabilities") will be treated as a
distribution of cash to such Unitholder.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will
be the amount paid for the Common Unit plus his share of
Partnership nonrecourse liabilities. The initial tax basis for a
Common Unit will be increased by the Unitholder's share of
Partnership income and by any increase in the Unitholder's share
of Partnership nonrecourse liabilities. The basis for a Common
Unit will be decreased (but not below zero) by distributions from
the Partnership, including any decrease in the Unitholder's share
of Partnership nonrecourse liabilities, by the Unitholder's share
of Partnership losses and by the Unitholder's share of
expenditures of the Partnership that are not deductible in
computing its taxable income and are not required to be
capitalized. A Unitholder's share of nonrecourse liabilities
will be generally based on the Unitholder's share of the
Partnership's profits.
Limitations on Deductibility of Partnership Losses
To the extent losses are incurred by the Partnership, a
Unitholder's share of deductions for the losses will be limited
to the tax basis of the Unitholder's Units or, in the case of an
individual Unitholder or a corporate Unitholder if more than 50%
in the value of its stock is owned directly or indirectly by five
or fewer individuals or certain tax-exempt organizations, to the
amount which the Unitholder is considered to be "at risk" with
respect to the Partnership's activities, if that is less than the
Unitholder's basis. A Unitholder must recapture losses deducted
in previous years to the extent that Partnership distributions
cause the Unitholder's at risk amount to be less than zero at the
end of any taxable year. Losses disallowed to a Unitholder or
recaptured as a result of these limitations will carry forward
and will be allowable to the extent that the Unitholder's basis
or at risk amount (whichever is the limiting factor) is
increased.
In general, a Unitholder will be at risk to the extent of
the purchase price of his Units, but this will be less than the
Unitholder's basis for his Units by the amount of the
Unitholder's share of any nonrecourse liabilities of the
Partnership. A Unitholder's at risk amount will increase or
decrease as the basis of the Unitholder's Units increases or
decreases except that changes in nonrecourse liabilities of the
Partnership will not increase or decrease the at risk amount.
The passive loss limitations generally provide that
individuals, estates, trusts and certain closely held
corporations and personal service corporations can only deduct
losses from passive activities (generally, activities in which
the taxpayer does not materially participate) that are not in
excess of the taxpayer's income from such passive activities or
investments. The passive loss limitations are to be applied
separately with respect to each publicly-traded partnership.
Consequently, the losses generated by the Partnership, if any,
will only be available to offset future income generated by the
Partnership and will not be available to offset income from other
passive activities or investments (including other publicly-
traded partnerships) or salary or active business income.
Passive losses which are not deductible because they exceed the
Unitholder's income generated by the Partnership may be deducted
in full when the Unitholder disposes of his entire investment in
the Partnership in a fully taxable transaction to an unrelated
party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules
and the basis limitation.
A Unitholder's share of net income from the Partnership may
be offset by any suspended passive losses from the Partnership,
but it may not be offset by any other current or carryover losses
from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that
Treasury Regulations will be issued which characterize net
passive income from a publicly-traded partnership as investment
income for purposes of the limitations on the deductibility of
investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment
interest expense" is generally limited to the amount of such
taxpayer's "net investment income." As noted, a Unitholder's net
passive income from the Partnership will be treated as investment
income for this purpose. In addition, the Unitholder's share of
the Partnership's portfolio income will be treated as investment
income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment,
(ii) a partnership's interest expense attributed to portfolio
income and (iii) the portion of interest expense incurred to
purchase or carry an interest in a passive activity to the extent
attributable to portfolio income. The computation of a
Unitholder's investment interest expense will take into account
interest on any margin account borrowing or other loan incurred
to purchase or carry a Unit to the extent attributable to
portfolio income of the Partnership. Net investment income
includes gross income from property held for investment, gain
attributable to the disposition of property held for investment
and amounts treated as portfolio income pursuant to the passive
loss rules less deductible expenses (other than interest)
directly connected with the production of investment income.
Allocation of Partnership Income, Gain, Loss and Deduction
The Partnership Agreement provides that a capital account be
maintained for each partner, that the capital accounts generally
be maintained in accordance with the applicable tax accounting
principles set forth in applicable Treasury Regulations and that
all allocations to a partner be reflected by an appropriate
increase or decrease in his capital account. Distributions upon
liquidation of the Partnership generally are to be made in
accordance with positive capital account balances.
In general, if the Partnership has a net profit, items of
income, gain, loss and deduction will be allocated among the
General Partners and the Unitholders in accordance with their
respective percentage interests in the Partnership. A class of
Unitholders that receives more cash than another class, on a per
Unit basis, with respect to a year, will be allocated additional
income equal to that excess. If the Partnership has a net loss,
items of income, gain, loss and deduction will generally be
allocated for both book and tax purposes (1) first, to the
General Partners and the Unitholders in accordance with their
respective Percentage Interests to the extent of their positive
capital accounts and (2) second, to the General Partners.
Notwithstanding the above, as required by Section 704(c) of
the Code, certain items of Partnership income, deduction, gain
and loss will be specially allocated to account for the
difference between the tax basis and fair market value of
property contributed to the Partnership ("Contributed Property").
In addition, certain items of recapture income will be allocated
to the extent possible to the partner allocated the deduction
giving rise to the treatment of such gain as recapture income in
order to minimize the recognition of ordinary income by some
Unitholders, but these allocations may not be respected. If
these allocations of recapture income are not respected, the
amount of the income or gain allocated to a Unitholder will not
change but instead a change in the character of the income
allocated to a Unitholder would result. Finally, although the
Partnership does not expect that its operations will result in
the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of Partnership income and
gain will be allocated in an amount and manner sufficient to
eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of
partnership income, gain, loss, deduction or credit, other than
an allocation required by Section 704(c) of the Code to eliminate
the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and
"tax" capital account (credited with the tax basis of Contributed
Property) (the "Book-Tax Disparity"), will generally be given
effect for federal income tax purposes in determining a partner's
distributive share of an item of income, gain, loss or deduction
only if the allocation has substantial economic effect. In any
other case, a partner's distributive share of an item will be
determined on the basis of the partner's interest in the
partnership, which will be determined by taking into account all
the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners
in economic profits and losses, the interests of the partners in
cash flow and other non-liquidating distributions and rights of
the partners to distributions of capital upon liquidation.
Under the Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount
of any such item recognized by that partnership in a particular
taxable period. This rule, often referred to as the "ceiling
limitation," is not expected to have significant application to
allocations with respect to Contributed Property and thus, is not
expected to prevent the Unitholders from receiving allocations of
depreciation, gain or loss from such properties equal to that
which they would have received had such properties actually had a
basis equal to fair market value at the outset. However, to the
extent the ceiling limitation is or becomes applicable, the
Partnership Agreement requires that certain items of income and
deduction be allocated in a way designed to effectively "cure"
this problem and eliminate the impact of the ceiling limitations.
Such allocations will not have substantial economic effect
because they will not be reflected in the capital accounts of the
Unitholders.
The legislative history of Section 704(c) states that
Congress anticipated that Regulations would permit partners to
agree to a more rapid elimination of Book-Tax Disparities than
required provided there is no tax avoidance potential. Further,
under recently enacted final Regulations under Section 704(c),
allocations similar to the curative allocations would be allowed.
However, since the final Regulations are not applicable to the
Partnership, Counsel is unable to opine on the validity of the
curative allocations.
Counsel is of the opinion that, with the exception of
curative allocations and the allocation of recapture income
discussed above, allocations under the Partnership Agreement will
be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or
deduction. There are, however, uncertainties in the Regulations
relating to allocations of partnership income, and investors
should be aware that some of the allocations in the Partnership
Agreement may be successfully challenged by the IRS.
Tax Treatment of Operations
Accounting Method and Taxable Year
The Partnership will use the calendar year as its taxable
year and will adopt the accrual method of accounting for federal
income tax purposes.
Initial Tax Basis, Depreciation and Amortization
The tax basis established for the various assets of the
Partnership will be used for purposes of computing depreciation
and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. The Partnership assets initially had
an aggregate tax basis equal to the sum of each Unitholder's tax
basis in his Units and the tax basis of the General Partners in
their respective general partner interests and Subordinated
Units.
The Partnership allocated the aggregate tax basis among the
Partnership's assets based upon their relative fair market
values. Any amount in excess of the fair market values of
specific tangible and intangible assets will constitute goodwill,
which is subject to amortization over 15 years.
The IRS may (i) challenge either the fair market values or
the useful lives assigned to such assets or (ii) seek to
characterize intangible assets as goodwill. If any such
challenge or characterization were successful, the deductions
allocated to a Unitholder in respect of such assets would be
reduced, and a Unitholder's share of taxable income from the
Partnership would be increased accordingly. Any such increase
could be material.
To the extent allowable, the General Partners may elect to
use the depreciation and cost recovery methods that will result
in the largest depreciation deductions in the early years of the
Partnership. Property subsequently acquired or constructed by
the Partnership may be depreciated using accelerated methods
permitted by the Code.
If the Partnership disposes of depreciable property by sale,
foreclosure, or otherwise, all or a portion of any gain
(determined by reference to the amount of depreciation previously
deducted and the nature of the property) may be subject to the
recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner who has taken cost recovery or
depreciation deductions with respect to property owned by the
Partnership may be required to recapture such deductions upon a
sale of his interest in the Partnership. See "Tax
Considerations-Allocation of Partnership Income, Gain, Loss and
Deduction" and "Tax Considerations-Disposition of Common
Units-Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be
amortized over any period selected by the Partnership not shorter
than 60 months. The costs incurred in promoting the issuance of
Units must be capitalized and cannot be deducted currently,
ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as
organization expenses, which may be amortized, and as syndication
expenses which may not be amortized.
Section 754 Election
The Partnership previously made the election permitted by
Section 754 of the Code, which election is irrevocable without
the consent of the IRS. The election generally permits a
purchaser of Common Units to adjust his share of the basis in the
Partnership's properties ("inside basis") pursuant to Section
743(b) of the Code to fair market value (as reflected by his Unit
price). See "Tax Considerations-Allocation of Partnership
Income, Gain, Loss and Deduction." The Section 743(b) adjustment
is attributed solely to a purchaser of Common Units and is not
added to the bases of the Partnership's assets associated with
all of the Unitholders. (For purposes of this discussion, a
partner's inside basis in the Partnership's assets will be
considered to have two components: (1) his share of the
Partnership's actual basis in such assets ("Common Basis") and
(2) his Section 743(b) adjustment allocated to each such asset.)
Proposed Treasury Regulation Section 1.168-2(n) generally
requires the Section 743(b) adjustment attributable to recovery
property to be depreciated as if the total amount of such
adjustment were attributable to newly-acquired recovery property
placed in service when the transfer occurs. Similarly, the
legislative history of Section 197 indicates that the 743(b)
adjustment attributable to amortizable intangible assets under
Section 197 should be treated as a newly-acquired asset placed in
service in the month when the transfer occurs. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment
attributable to property subject to depreciation under Section
167 of the Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either
the straight-line method or the 150% declining balance method.
The Partnership intends to utilize the 150% declining balance
method on such property. The depreciation method and useful
lives associated with the Section 743(b) adjustment, therefore,
may differ from the method and useful lives generally used to
depreciate the Common Bases in such properties. Pursuant to the
Partnership Agreement, the General Partners are authorized to
adopt a convention to preserve the uniformity of Units even if
such convention is not consistent with Treasury Regulation
Section 1.167(c)-1(a)(6) or the legislative history of Section
197. See "Tax Considerations-Uniformity of Units."
Although Counsel is unable to opine as to the validity of
such an approach, the Partnership intends to depreciate the
portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property (to the extent
of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the Common Basis
of such property, despite its inconsistency with proposed
Treasury Regulation Section 1.168-2(n), Treasury Regulation
Section 1.167(c)-1(a)(6) or the legislative history of Section
197. If the Partnership determines that such position cannot
reasonably be taken, the Partnership may adopt a depreciation or
amortization convention under which all purchasers acquiring
Units in the same month would receive depreciation or
amortization, whether attributable to Common Basis or Section
743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's property. Such
an aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to
certain Unitholders. See "Tax Considerations-Uniformity of
Units."
The allocation of the Section 743(b) adjustment must be made
in accordance with the principles of Section 1060 of the Code.
Based on these principles, the IRS may seek to reallocate some or
all of any Section 743(b) adjustment not so allocated by the
Partnership to goodwill. Alternatively, it is possible that the
IRS may seek to treat the portion of such Section 743(b)
adjustment attributable to the Underwriter's discount as if
allocable to a non-deductible syndication cost.
A Section 754 election is advantageous if the transferee's
basis in his Units is higher than such Units' share of the
aggregate basis to the Partnership of the Partnership's assets
immediately prior to the transfer. In such case, pursuant to the
election, the transferee would take a new and higher basis in his
share of the Partnership's assets for purposes of calculating,
among other items, his depreciation deductions and his share of
any gain or loss on a sale of the Partnership's assets.
Conversely, a Section 754 election is disadvantageous if the
transferee's basis in such Units is lower than such Units' share
of the aggregate basis of the Partnership's assets immediately
prior to the transfer. Thus, the amount which a Unitholder will
be able to obtain upon the sale of his Common Units may be
affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are
complex and will be made by the Partnership on the basis of
certain assumptions as to the value of Partnership assets and
other matters. There is no assurance that the determinations
made by the Partnership will not be successfully challenged by
the IRS and that the deductions attributable to them will not be
disallowed or reduced. Should the IRS require a different basis
adjustment to be made, and should, in the General Partners'
opinion, the expense of compliance exceed the benefit of the
election, the General Partners may seek permission from the IRS
to revoke the Section 754 election for the Partnership. If such
permission is granted, a purchaser of Units subsequent to such
revocation probably will incur increased tax liability.
Alternative Minimum Tax
Each Unitholder will be required to take into account his
distributive share of any items of Partnership income, gain or
loss for purposes of the alternative minimum tax. A portion of
the Partnership's depreciation deductions may be treated as an
item of tax preference for this purpose.
A Unitholder's alternative minimum taxable income derived
from the Partnership may be higher than his share of Partnership
net income because the Partnership may use more accelerated
methods of depreciation for purposes of computing federal taxable
income or loss. The minimum tax rate for individuals is 26% on
the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and to 28% on any additional
alterative minimum taxable income. Prospective Unitholders
should consult with their tax advisors as to the impact of an
investment in Common Units on their liability of the alternative
minimum tax.
Valuation of Partnership Property
The federal income tax consequences of the acquisition,
ownership and disposition of Units will depend in part on
estimates by the Partnership of the relative fair market values,
and determinations of the initial tax basis, of the assets of the
Partnership. Although the Partnership may from time to time
consult with professional appraisers with respect to valuation
matters, many of the relative fair market value estimates will be
made solely by the Partnership. These estimates are subject to
challenge and will not be binding on the IRS or the courts. In
the event the determinations of fair market value are
subsequently found to be incorrect, the character and amount of
items of income, gain, loss, deductions or credits previously
reported by Unitholders might change, and Unitholders might be
required to amend their previously filed tax returns or to file
claims for refunds.
Treatment of Short Sales
It would appear that a Unitholder whose Units are loaned to
a "short seller" to cover a short sale of Units would be
considered as having transferred beneficial ownership of those
Units and would, thus, no longer be a partner with respect to
those Units during the period of the loan. As a result, during
this period, any Partnership income, gain, deduction, loss or
credit with respect to those Units would appear not to be
reportable by the Unitholder, any cash distributions received by
the Unitholder with respect to those Units would be fully taxable
and all of such distributions would appear to be treated as
ordinary income. The IRS may also contend that a loan of Units to
a "short seller" constitutes a taxable exchange. If this
contention were successfully made, the lending Unitholder may be
required to recognize gain or loss. Unitholders desiring to
assure their status as partners should modify their brokerage
account agreements, if any, to prohibit their brokers from
borrowing their Units.
Disposition of Common Units
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to
the difference between the amount realized and the Unitholder's
tax basis for the Units sold. A Unitholder's amount realized
will be measured by the sum of the cash or the fair market value
of other property received plus his share of Partnership
nonrecourse liabilities. Since the amount realized includes a
Unitholder's share of Partnership nonrecourse liabilities, the
gain recognized on the sale of Units may result in a tax
liability in excess of any cash received from such sale.
Gain or loss recognized by a Unitholder (other than a
"dealer" in Units) on the sale or exchange of a Unit held for
more than twelve months will generally be taxable as long-term
capital gain or loss. A substantial portion of this gain or
loss, however, will be separately computed and taxed as ordinary
income or loss under section 751 of the Code to the extent
attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to inventory owned by the
Partnership. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture.
Ordinary income attributable to unrealized receivables, inventory
and deprecation recapture may exceed net taxable gain realized
upon the sale of the Unit and may be recognized even if there is
a net taxable gain realized upon the sale of the Unit. Any loss
recognized on the sale of units will generally be a capital loss.
Thus, a Unitholder may recognize both ordinary income and a
capital loss upon a disposition of units. Net capital loss may
offset no more than $3,000 of ordinary income in the case of
individuals and may only be used to offset capital gain in the
case of a corporation.
The IRS has ruled that a partner acquiring interests in a
partnership in separate transactions at different prices must
maintain an aggregate adjusted tax basis in a single partnership
interest and that, upon sale or other disposition of some of the
interests, a portion of such aggregate tax basis must be
allocated to the interests sold on the basis of some equitable
apportionment method. The ruling is unclear as to how the
holding period is affected by this aggregation concept. If this
ruling is applicable to the holders of Common Units, the
aggregation of tax bases of a Common Unitholder effectively
prohibits him from choosing among Common Units with varying
amounts of unrealized gain or loss as would be possible in a
stock transaction. Thus, the ruling may result in an
acceleration of gain or deferral of loss on a sale of a portion
of a Unitholder's Common Units. It is not clear whether the
ruling applies to publicly-traded partnerships, such as the
Partnership, the interests in which are evidenced by separate
interests, and accordingly Counsel is unable to opine as to the
effect such ruling will have on the Unitholders. A Unitholder
considering the purchase of additional Common Units or a sale of
Common Units purchased at differing prices should consult his tax
advisor as to the possible consequences of such ruling.
Allocations between Transferors and Transferees
In general, the Partnership's taxable income and losses will
be determined annually and will be prorated on a monthly basis
and subsequently apportioned among the Unitholders in proportion
to the number of Units owned by them as of the close of business
on the last day of the preceding month. However, gain or loss
realized on a sale or other disposition of Partnership assets
other than in the ordinary course of business shall be allocated
among the Unitholders of record as of the opening of the New York
Stock Exchange on the first business day of the month in which
such gain or loss is recognized. As a result of this monthly
allocation, a Unitholder transferring Units in the open market
may be allocated income, gain, loss, deduction, and credit
accrued after the transfer.
The use of the monthly conventions discussed above may not
be permitted by existing Treasury Regulations and, accordingly,
Counsel is unable to opine on the validity of the method of
allocating income and deductions between the transferors and the
transferees of Common Units. If a monthly convention is not
allowed by the Treasury Regulations (or only applies to transfers
of less than all of the Unitholder's interest), taxable income or
losses of the Partnership might be reallocated among the
Unitholders. The Partnership is authorized to revise its method
of allocation between transferors and transferees (as well as
among partners whose interests otherwise vary during a taxable
period) to conform to a method permitted by future Treasury
Regulations.
A Unitholder who owns Units at any time during a quarter and
who disposes of such Units prior to the record date set for a
distribution with respect to such quarter will be allocated items
of Partnership income and gain attributable to such quarter
during which such Units were owned but will not be entitled to
receive such cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to
notify the Partnership in writing of such sale or exchange within
30 days of the sale or exchange and in any event no later than
January 15 of the year following the calendar year in which the
sale or exchange occurred. The Partnership is required to notify
the IRS of such transaction and to furnish certain information to
the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual
who is a citizen of the United States and who effects such sale
through a broker. Additionally, a transferor and a transferee of
a Unit will be required to furnish statements to the IRS, filed
with their income tax returns for the taxable year in which the
sale or exchange occurred, which set forth the amount of the
consideration received for such Unit that is allocated to
goodwill or going concern value of the Partnership. Failure to
satisfy such reporting obligations may lead to the imposition of
substantial penalties.
Constructive Termination
The Partnership and the Intermediate Partnership will be
considered to have been terminated if there is a sale or exchange
of 50% or more of the total interests in Partnership capital and
profits within a 12-month period. A constructive termination
results in the closing of a partnership's taxable year for all
partners. Such a termination could result in the non-uniformity
of Units for federal income tax purposes. A constructive
termination of the Partnership will cause a termination of the
Intermediate Partnership. Such a termination could also result
in penalties or loss of basis adjustments under Section 754 of
the Code if the Partnership were unable to determine that the
termination had occurred.
In the case of a Unitholder reporting on a fiscal year other
than a calendar year, the closing of a tax year of the
Partnership may result in more than 12 months' taxable income or
loss of the Partnership being includable in its taxable income
for the year of termination. In addition, each Unitholder will
realize taxable gain to the extent that any money constructively
distributed to him (including any net reduction in his share of
partnership nonrecourse liabilities) exceeds the adjusted basis
on his Units. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the
Code, must be made subsequent to the constructive termination. A
constructive termination would also result in a deferral of
Partnership deductions for depreciation. In addition, a
termination might either accelerate the application of or subject
the Partnership to any tax legislation enacted with effective
dates after the closing of the offering made hereby.
Entity-Level Collections
If the Partnership is required under applicable law to pay
any federal, state or local income tax on behalf of any
Unitholder, any General Partner or any former Unitholder, the
Partnership Policy Committee is authorized to pay such taxes from
Partnership funds. Such payments, if made, will be deemed
current distributions of cash to the Unitholders and the General
Partners. The General Partners are authorized to amend the
Partnership Agreement in the manner necessary to maintain
uniformity of intrinsic tax characteristics of Units and to
adjust subsequent distributions so that after giving effect to
such deemed distributions, the priority and characterization of
distributions otherwise applicable under the Partnership
Agreement is maintained as nearly as is practicable. Payments by
the Partnership as described above could give rise to an
overpayment of tax on behalf of an individual partner in which
event, the partner could file a claim for credit or refund.
Uniformity of Units
Since the Partnership cannot match transferors and
transferees of Common Units, uniformity of the economic and tax
characteristics of the Common Units to a purchaser of such Common
Units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both
statutory and regulatory, could be substantially diminished. A
lack of uniformity can result from a literal application of
Proposed Treasury Regulation Section 1.168-2(n) and Treasury
Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 and from the application of the "ceiling limitation"
on the Partnership's ability to make allocations to eliminate
Book-Tax Disparities attributable to Contributed Properties and
Partnership property that has been revalued and reflected in the
partners' capital accounts ("Adjusted Properties"). Any such non-
uniformity could have a negative impact on the value of a
Unitholder's interest in the Partnership.
The Partnership intends to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property or Adjusted Property (to the
extent of any unamortized Book-Tax Disparity) using the rate of
depreciation derived from the depreciation method and useful life
applied to the Common Basis of such property, despite its
inconsistency with Proposed Treasury Regulation Section 1.168-
2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) or the
legislative history of Section 197. See "Tax Considerations-Tax
Treatment of Operations-Section 754 Election." If the
Partnership determines that such a position cannot reasonably be
taken, the Partnership may adopt depreciation and amortization
conventions under which all purchasers acquiring Common Units in
the same month would receive depreciation and amortization
deductions, whether attributable to common basis or
Section 743(b) basis, based upon the same applicable rate as if
they had purchased a direct interest in the Partnership's
property. If such an aggregate approach is adopted, it may
result in lower annual depreciation and amortization deductions
than would otherwise be allowable to certain Unitholders and risk
the loss of depreciation and amortization deductions not taken in
the year that such deductions are otherwise allowable. This
convention will not be adopted if the Partnership determines that
the loss of depreciation and amortization deductions will have a
material adverse effect on the Unitholders. If the Partnership
chooses not to utilize this aggregate method, the Partnership may
use any other reasonable depreciation and amortization convention
to preserve the uniformity of the intrinsic tax characteristics
of any Common Units that would not have a material adverse effect
on the Unitholders. The IRS may challenge any method of
depreciating or amortizing the Section 743(b) adjustment
described in this paragraph. If such a challenge were to be
sustained, the uniformity of Common Units might be affected.
Items of income and deduction will be specially allocated in
a manner that is intended to preserve the uniformity of intrinsic
tax characteristics among all Units, despite the application of
the "ceiling limitation" to Contributed Properties and Adjusted
Properties. Such special allocations will be made solely for
federal income tax purposes. See "Tax Considerations-Tax
Consequences of Unit Ownership" and "Tax
Considerations-Allocation of Partnership Income, Gain, Loss and
Deduction."
The capital accounts underlying the Common Units will likely
differ, perhaps materially, from the capital accounts underlying
the Subordinated Units. The Partnership Agreement contains a
method by which the Partnership may cause the capital accounts
underlying the Common Units to equal the capital accounts
underlying the Subordinated Units following the end of the
Subordination Period. The Partnership must be reasonably
assured, based on advice of counsel, that the Common Units and
Subordinated Units share the same intrinsic economic and federal
income tax characteristics in all material respects, before the
Subordinated Units and Common Units will be treated as a single
class of Units.
Tax-Exempt Organizations and Certain Other Investors
Ownership of Units by employee benefit plans, other tax-
exempt organizations, nonresident aliens, foreign corporations,
other foreign persons and regulated investment companies raises
issues unique to such persons and, as described below, may have
substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt
from federal income tax (including individual retirement accounts
and other retirement plans) are subject to federal income tax on
unrelated business taxable income. Virtually all of the taxable
income derived by such an organization from the ownership of a
Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
Regulated investment companies are required to derive 90% or
more of their gross income from interest, dividends, gains from
the sale of stocks or securities or foreign currency or certain
related sources. It is not anticipated that any significant
amount of the Partnership's gross income will qualify as such
income.
Non-resident aliens and foreign corporations, trusts or
estates which acquire Units will be considered to be engaged in
business in the United States on account of ownership of Units
and as a consequence will be required to file federal tax returns
in respect of their distributive shares of Partnership income,
gain, loss deduction or credit and pay federal income tax at
regular rates on such income. Generally, a partnership is
required to pay a withholding tax on the portion of the
partnership's income which is effectively connected with the
conduct of a United States trade or business and which is
allocable to the foreign partners, regardless of whether any
actual distributions have been made to such partners. However,
under rules applicable to publicly-traded partnerships, the
Partnership will withhold at the rate of 39.6% on actual cash
distributions made quarterly to foreign Unitholders. Each
foreign Unitholder must obtain a taxpayer identification number
from the IRS and submit that number to the Transfer Agent of the
Partnership on a Form W-8 in order to obtain credit for the taxes
withheld. Subsequent adoption of Treasury Regulations or the
issuance of other administrative pronouncements may require the
Partnership to change these procedures.
Because a foreign corporation which owns Units will be
treated as engaged in a United States trade or business, such a
Unitholder may be subject to United States branch profits tax at
a rate of 30%, in addition to regular federal income tax, on its
allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net
equity") which are effectively connected with the conduct of a
United States trade or business. Such a tax may be reduced or
eliminated by an income tax treaty between the United States and
the country with respect to which the foreign corporate
Unitholder is a "qualified resident."
Assuming that the Units are regularly traded on an
established securities market, a foreign Unitholder who sells or
otherwise disposes of a Unit and who has not held more than 5% in
value of the Units at any time during the five-year period ending
on the date of the disposition will not be subject to federal
income tax on gain realized on the disposition that is
attributable to real property held by the Partnership, but
(regardless of a foreign Unitholder's percentage interest in the
Partnership or whether Units are regularly traded) such
Unitholder may be subject to federal income tax on any gain
realized on the disposition that is treated as effectively
connected with a United States trade or business of the foreign
Unitholder. A foreign Unitholder will be subject to federal
income tax on gain attributable to real property held by the
Partnership if the holder held more than 5% in value of the Units
during the five-year period ending on the date of the disposition
or if the Units were not regularly traded on an established
securities market at the time of the disposition.
Administrative Matters
Partnership Information Returns and Audit Procedures
The Partnership intends to furnish to each Unitholder within
90 days after the close of each Partnership taxable year, certain
tax information, including a Schedule K-1, which sets forth each
Unitholder's allocable share of the Partnership's income, gain,
loss, deduction and credit. In preparing this information, which
will generally not be reviewed by counsel, the Partnership will
use various accounting and reporting conventions, some of which
have been mentioned in the previous discussion, to determine the
respective Unitholders' allocable share of income, gain, loss,
deduction and credits. There is no assurance that any such
conventions will yield a result which conforms to the
requirements of the Code, regulations or administrative
interpretations of the IRS. The Partnership cannot assure
prospective Unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions
are impermissible.
The federal income tax information returns filed by the
Partnership may be audited by the IRS. Adjustments resulting
from any such audit may require each Unitholder to file an
amended tax return, and possibly may result in an audit of the
Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Partnership as well as
Partnership items.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of administrative
adjustments by the IRS and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss, deduction
and credit are determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with
the partners. The Code provides for one partner to be designated
as the "Tax Matters Partner" for these purposes. The Partnership
Agreement appoints Northern Plains as the Tax Matters Partner.
The Tax Matters Partner will make certain elections on
behalf of the Partnership and Unitholders and can extend the
statute of limitations for assessment of tax deficiencies against
Unitholders with respect to Partnership items. The Tax Matters
Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless
such Unitholder elects, by filing a statement with the IRS, not
to give such authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review (to which all the
Unitholders are bound) of a final Partnership administrative
adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any Unitholder having at
least 1% interest in the profits of the Partnership and by the
Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go
forward, and each Unitholder with an interest in the outcome may
participate.
A Unitholder must file a statement with the IRS identifying
the treatment of any item on its federal income tax return that
is not consistent with the treatment of the item on the
Partnership's return to avoid the requirement that all items be
treated consistently on both returns. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder
to substantial penalties. Under the TRA of 1997, partners in
electing large partnerships would be required to treat all
partnership items in a manner consistent with the partnership
return.
Under the TRA of 1997, each partner of an electing large
partnership must take into account separately his share of the
following items, determined at the partnership level: (1)
taxable income or loss from passive loss limitation activities;
(2) taxable income or loss from other activities (such as
portfolio income or loss); (3) net capital gains to the extent
allocable to passive loss limitation activities and other
activities; (4) a net alternative minimum tax adjustment
separately computed for passive loss limitation activities and
other activities; (5) general credits; (6) low-income housing
credit; (7) rehabilitation credit; (8) tax-exempt interest;
(9) foreign income taxes; (10) credit for producing fuel from a
nonconventional source and (11) any other items the Secretary of
the Treasury deems appropriate.
The TRA of 1997 also made a number of changes to the tax
compliance and administrative rules relating to electing large
partnerships. One provision requires that each partner in an
electing large partnership take into account his share of any
adjustments to partnership items in the year such adjustments are
made. If the election is not made, adjustments relating to
partnership items for a previous taxable year are taken into
account by those persons who were partners in the previous
taxable year. Alternatively, under the TRA of 1997 a partnership
could elect to or, in some circumstances, could be required to,
directly pay the tax resulting from any such adjustments. In
either case, therefore, Unitholders could bear significant
economic burdens associated with tax adjustments relating to
periods predating their acquisition of Units.
Although the Tax Matters Partner is weighing the advantages
and disadvantages to the Partnership and the Partners of the
Partnership's being treated as an "electing large partnership"
under the TRA of 1997, no decision has been made at this time.
Nominee Reporting
Persons who hold an interest in the Partnership as a nominee
for another person are required to furnish to the Partnership
(a) the name, address and taxpayer identification number of the
beneficial owners and the nominee; (b) whether the beneficial
owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-
owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity; (c) the amount and description of
Units held, acquired or transferred for the beneficial owners;
and (d) certain information including the dates of acquisitions
and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether
they are United States persons and certain information on Units
they acquire, hold or transfer for their own account. A penalty
of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such
information to the Partnership. The nominee is required to
supply the beneficial owner of the Units with the information
furnished to the Partnership.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the
Secretary of the Treasury. The temporary Treasury Regulations
interpreting the tax shelter registration provisions of the Code
are extremely broad. It is arguable that the Partnership is not
subject to the registration requirement on the basis that (i) it
does not constitute a tax shelter or (ii) it constitutes a
projected income investment exempt from registration. However,
the Partnership has registered as a tax shelter with the IRS
because of the absence of assurance that the Partnership will not
be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is
required and not undertaken. ISSUANCE OF THE REGISTRATION NUMBER
DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR THE
CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY
THE IRS. The Partnership's tax shelter registration number is
93271000031. A Unitholder who sells or otherwise transfers a
Unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the
transferor of a Common Unit to furnish such registration number
to the transferee is $100 for each such failure. The Unitholders
must disclose the tax shelter registration number of the
Partnership on Form 8271 to be attached to the tax return on
which any deduction, loss, credit or other benefit generated by
the Partnership is claimed or income of the Partnership is
included. A Unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for
such failure, will be subject to a $50 penalty for each such
failure. Any penalties discussed herein are not deductible for
federal income tax purposes.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion
of an underpayment of tax which is attributable to one or more of
certain listed causes, including substantial understatements of
income tax and substantial valuation misstatements, is imposed by
the Code. No penalty will be imposed, however, with respect to
any portion of an underpayment if it is shown that there was a
reasonable cause for such portion and that the taxpayer acted in
good faith with respect to such portion.
A substantial understatement of income tax in any taxable
year exists if the amount of the understatement exceeds the
greater of 10% of the tax required to be shown on the return for
the taxable year or $5,000 ($10,000 for most corporations). The
amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on
the return (i) with respect to which there is, or was,
"substantial authority" or (ii) as to which there is a reasonable
basis and the pertinent facts of such position are disclosed on
the return. Certain more stringent rules apply to "tax
shelters," a term that does not appear to include the
Partnership. If any Partnership item of income, gain, loss,
deduction or credit included in the distributive shares of
Unitholders might result in such an "understatement" of income
for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the
Partnership will make a reasonable effort to furnish sufficient
information for Unitholders to make adequate disclosure on their
returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of
any property (or the adjusted basis of any property) claimed on a
tax return is 200% or more of the amount determined to be the
correct amount of such valuation or adjusted basis. No penalty
is imposed unless the portion of the underpayment attributable to
a substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 400%
or more than the correct valuation, the penalty imposed increases
to 40%.
Other Taxes
Prospective investors should consider state and local tax
consequences of an investment in the Partnership. The Partnership
owns property or is doing business in Arizona, Illinois, Iowa,
Minnesota, Montana, Nebraska, North Dakota, Oklahoma, South
Dakota and Texas. A Unitholder will likely be required to file
state income tax returns and/or to pay such taxes in most of such
states and may be subject to penalties for failure to comply with
such requirements. Some of the states require that a partnership
withhold a percentage of income from amounts that are to be
distributed to a partner that is not a resident of the state.
The amounts withheld, which may be greater or less than a
particular partner's income tax liability to the state, generally
do not relieve the non-resident partner from the obligation to
file a state income tax return. Amounts withheld will be treated
as if distributed to Unitholders for purposes of determining the
amounts distributed by the Partnership. Based on current law and
its estimate of future Partnership operations, the Partnership
anticipates that any amounts required to be withheld will not be
material. In addition, an obligation to file tax returns or to
pay taxes may arise in other states.
It is the responsibility of each prospective Unitholder to
investigate the legal and tax consequences, under the laws of
pertinent states or localities, of his investment in the
Partnership. Further, it is the responsibility of each
Unitholder to file all state and local, as well as federal, tax
returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state and local tax consequences of an
investment in the Partnership.
PLAN OF DISTRIBUTION
The Partnership has been advised that the Common Units being
offered hereby may be sold by or on behalf of each of the Selling
Unitholders in non-underwritten distributions on the New York
Stock Exchange at prices prevailing on the New York Stock
Exchange at the time of sale. The Partnership will not receive
the proceeds of such sale.
VALIDITY OF COMMON UNITS
The validity of the Common Units offered hereby will be
passed upon for the Partnership by Vinson & Elkins, LLP.
EXPERTS
The consolidated financial statements included in the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996, incorporated by reference in this Prospectus,
have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto.
The consolidated financial statements referred to above and such
report have been incorporated by reference herein in reliance
upon the authority of said firm as experts in accounting and
auditing in giving said report.
<PAGE>
TABLE OF CONTENTS
Page
Prospectus
Available Information 2
Incorporation of Certain
Documents by Reference 3
Business 3
Selling Unitholders 7
Description of Common Units 8
Tax Considerations 10
Plan of Distribution 31 NORTHERN BORDER
PARTNERS, L.P.
Validity of Common Units 31
Experts 31
________________
PROSPECTUS
________________
125,357 Common Units
Representing Limited
Partner Interests
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth those expenses to be incurred
by the Partnership in connection with the issuance and
distribution of the securities being registered. Except for the
Securities and Exchange Commission registration fee, all amounts
shown are estimates.
<TABLE>
<S> <C>
Filing Fee for Registration Statement $ 1,102.00
Legal Fees and Expenses $ 6,000.00
Accounting Fees and Expenses $ 4,600.00
Transfer Agent's Fees and Expenses $ -
Blue Sky Fees and Expenses $ -
Miscellaneous $ 5,400.00
Total $ 17,102.00
</TABLE>
Item 15. Indemnification of Officers, General Partners and
Policy Committee Members.
The Amended and Restated Agreement of Limited Partnership
contains the following provisions relating to indemnification of
Officers, General Partners and Partnership Policy Committee Members:
6.8 Indemnification.
(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement,
each General Partner, the members of the Partnership
Policy Committee, any Departing Partner, any Person who
is or was an officer or director of the Partnership, a
General Partner or any Departing Partner and all other
Indemnitees shall be indemnified and held harmless by
the Partnership from and against any and all losses,
claims, damages, liabilities, joint or several,
expenses (including, without limitation, legal fees and
expenses), judgments, fines, penalties, interest,
settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in
which any Indemnitee may be involved, or is threatened
to be involved, as a party or otherwise, by reason of
its status as (i) a General Partner, a member of the
Partnership Policy Committee, a Departing Partner or
any of their Affiliates, (ii) an officer, director,
employee, partner, agent or trustee of the Partnership,
a General Partner, any Departing Partner or any of
their Affiliates or (iii) a Person serving at the
request of the Partnership in another entity in a
similar capacity, provided, that in each case the
Indemnitee acted in good faith and in a manner which
such Indemnitee believed to be in, or not opposed to,
the best interests of the Partnership and, with respect
to any criminal proceeding, had no reasonable cause to
believe its conduct was unlawful; provided, further, no
indemnification pursuant to this Section 6.8 shall be
available to the General Partners with respect to their
obligations incurred pursuant to the Indemnity
Agreement, the Underwriting Agreement or the Conveyance
Agreement (other than obligations incurred by the
General Partners on behalf of the Partnership or the
Intermediate Partnership). The termination of any
action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo
contendere, or its equivalent, shall not create a
presumption that the Indemnitee acted in a manner
contrary to that specified above. Any indemnification
pursuant to this Section 6.8 shall be made only out of
the assets of the Partnership, it being agreed that the
General Partners shall not be personally liable for
such indemnification and shall have no obligation to
contribute or loan any monies or property to the
Partnership to enable it to effectuate such
indemnification.
(b) To the fullest extent permitted by law, expenses
(including, without limitation, legal fees and
expenses) incurred by an Indemnitee who is indemnified
pursuant to Section 6.8(a) in defending any claim,
demand, action, suit or proceeding shall, from time to
time, be advanced by the Partnership prior to the final
disposition of such claim, demand, action, suit or
proceeding upon receipt by the Partnership of an
undertaking by or on behalf of the Indemnitee to repay
such amount if it shall be determined that the
Indemnitee is not entitled to be indemnified as
authorized in this Section 6.8.
(c) The indemnification provided by this Section 6.8 shall
be in addition to any other rights to which an
Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding
Units, as a matter of law or otherwise, both as to
actions in the Indemnitee's capacity as (i) a General
Partner, a member of the Partnership Policy Committee,
a Departing Partner or an Affiliate thereof, (ii) an
officer, director, employee, partner, agent or trustee
of the Partnership, a General Partner, any Departing
Partner or an Affiliate thereof or (iii) a Person
serving at the request of the Partnership in another
entity in a similar capacity, and as to actions in any
other capacity (including, without limitation, any
capacity under the underwriting Agreement), and shall
continue as to an Indemnitee who has ceased to serve in
such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the
Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse
the General Partners or their Affiliates for the cost
of) insurance, on behalf of the General Partners, the
members of the Partnership Policy Committee and such
other Persons as the Partnership Policy Committee shall
determine, against any liability that may be asserted
against or expense that may be incurred by such Person
in connection with the Partnership's activities,
regardless of whether the Partnership would have the
power to indemnify such Person against such liability
under the provisions of this Agreement.
(e) For purposes of this Section 6.8, the Partnership shall
be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the
performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by,
it to the plan or participants or beneficiaries of the
plan; excise taxes assessed on an Indemnitee with
respect to an employee benefit plan pursuant to
applicable law shall constitute "fines" within the
meaning of Section 6.8(a); and action taken or omitted
by it with respect to an employee benefit plan in the
performance of its duties for a purpose reasonably
believed by it to be in the interest of the
participants and beneficiaries of the plan shall be
deemed to be for a purpose which is in, or not opposed
to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the
indemnification provisions set forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 6.8 because the
Indemnitee had an interest in the transaction with
respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of
this Agreement.
(h) The provisions of this Section 6.8 are for the benefit
of the Indemnitees, their heirs, successors, assigns
and administrators and shall not be deemed to create
any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section
6.8 or any provision hereof shall in any manner
terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the
Partnership, nor the obligation of the Partnership to
indemnity any such Indemnitee under and in accordance
with the provisions of this Section 6.8 as in effect
immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating
to matters occurring, in whole or in part, prior to
such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
Item 16. Exhibits.
*3 - Form of Amended and Restated Agreement
of Limited Partnership of Northern Border
Partners, L.P. (Exhibit 3.1 to the Partnership's
Form S-1 Registration Statement, Registration No.
33-66158 ("Form S-1")).
**5 - Opinion of Vinson & Elkins, LLP, as to the
validity of the Common Units.
**8 - Tax Opinion of Vinson & Elkins, LLP.
*10(a) - Form of Amended and Restated Agreement of
Limited Partnership of Northern Border
Intermediate Limited Partnership (Exhibit 10.1 to
Form S-1).
*10(b) - Northern Border Pipeline Company General
Partnership Agreement between Northern Plains
Natural Gas Company, Northwest Border Pipeline
Company, Pan Border Gas Company, TransCanada
Border PipeLine Ltd. and TransCan Northern Ltd.,
effective March 9, 1978, as amended (Exhibit 10.2
to Form S-1).
+23(a) - Consent of Arthur Andersen LLP.
23(b) - The consents of Vinson & Elkins, LLP,
are contained in its opinions filed as Exhibits 5
and 8 hereto.
_______________
* Incorporated by reference as indicated.
** Filed with this amendment.
+ Previously filed.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required in Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in
periodic reports filed by the Partnership pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the
Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering; and
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the Partnership's
annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions described under Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
S-3 and has duly caused this Registration Statement or amendment
to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 16th day of September, 1997.
NORTHERN BORDER PARTNERS, L.P.
(A Delaware Limited Partnership)
By: LARRY L. DEROIN
Larry L. DeRoin
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement or amendment has been signed by the
following persons in the capacities indicated and on the 16th day
of September, 1997.
Signature Title
LARRY L. DEROIN Chief Executive Officer
Larry L. Deroin and Chairman of the Partnership Policy
Committee
(Principal Executive Officer)
GEORGE L. MAZANEC Member of Partnership
George L. Mazanec Policy Committee
BRIAN E. O'NEILL Member of Partnership
Brian E. O'Neill Policy Committee
JERRY L. PETERS Chief Financial and
Jerry L. Peters Accounting Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
*3 - Form of Amended and Restated Agreement
of Limited Partnership of Northern Border
Partners, L.P. (Exhibit 3.1 to the Partnership's
Form S-1 Registration Statement, Registration No.
33-66158 ("Form S-1")).
**5 - Opinion of Vinson & Elkins, LLP, as to the
validity of the Common Units.
**8 - Tax Opinion of Vinson & Elkins, LLP.
*10(a) - Form of Amended and Restated Agreement of
Limited Partnership of Northern Border
Intermediate Limited Partnership (Exhibit 10.1 to
Form S-1).
*10(b) - Northern Border Pipeline Company General
Partnership Agreement between Northern Plains
Natural Gas Company, Northwest Border Pipeline
Company, Pan Border Gas Company, TransCanada
Border PipeLine Ltd. and TransCan Northern Ltd.,
effective March 9, 1978, as amended (Exhibit 10.2
to Form S-1).
+23(a) - Consent of Arthur Andersen LLP.
23(b) - The consent of Vinson & Elkins, LLP, is
contained in its form of opinion filed as Exhibit
5 hereto.
* Incorporated by reference.
** Filed with this amendment.
+ Previously filed.
<PAGE>
EXHIBIT 5
September 16, 1997
Northern Border Partners, L.P.
1400 Smith Street
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel to Northern Border Partners, L.P.,
a Delaware limited partnership (the "Partnership"), in connection
with the offer by certain selling shareholders of 125,357 units
representing common limited partner interests in the Partnership
(the "Common Units") pursuant to a Registration Statement on Form
S-3 (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933. We have
examined the Registration Statement, the Amended and Restated
Agreement of Limited Partnership of the Partnership, a form of
which has been filed as an exhibit to the Registration Statement
(the "Partnership Agreement"), the Certificate of Limited
Partnership of Northern Border Partners, L.P. (the "Certificate")
filed with the Secretary of State of Delaware pursuant to the
Delaware Revised Uniform Limited Partnership Act in connection
with the formation of the Partnership and such other documents as
we have deemed necessary or appropriate for purposes of this
opinion. In addition, we have reviewed certain certificates of
officers of the general partners of the Partnership and of public
officials, and we have relied on such certificates with respect
to certain factual matters that we have not independently
established.
Based upon the foregoing and subject to the limitations and
assumptions set forth herein, we are of the opinion that:
l. The Partnership has been duly formed and is validly
existing as a limited partnership under the Delaware Revised
Uniform Limited Partnership Act; and
2. All of the Common Units offered by means of the
Registration Statement have been duly authorized by the
Partnership Agreement and are legally issued, fully paid and non-
assessable, except as such non-assessability may be affected by
the matters set forth in the registration statement of the
Partnership on Form S-1 (File No. 33-66158) under the captions
"The Partnership Agreement - Status as Limited Partner or
Assignee" and "The Partnership Agreement - Limited Liability."
The opinions expressed herein are qualified in the following
respects:
(A) We have assumed, without independent verification,
that the certificates for the Common Units conform
to the specimens thereof examined by us and have
been duly countersigned by a transfer agent and
duly registered by a registrar of the Units.
(B) We have assumed that (i) each document submitted
to us for review is accurate and complete, each
such document that is an original is authentic,
each such document that is a copy conforms to an
authentic original and all signatures on each such
document are genuine, and (ii) each certificate
from governmental officials reviewed by us is
accurate, complete and authentic, and all official
public records are accurate and complete.
(C) This opinion is limited in all respects to federal
laws and the Delaware Revised Uniform Limited
Partnership Act.
We are rendering this opinion as of the time the
Registration Statement becomes effective. We hereby consent to
the use of our name in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration
Statement. This consent does not constitute an admission that we
are "experts" within the meaning of such term as used in the
Securities Act of 1933, as amended.
Very truly yours,
Vinson & Elkins L.L.P.
<PAGE>
EXHIBIT 8
September 16, 1997
Northern Border Partners, L.P.
1400 Smith Street
Houston, Texas 77002
Gentlemen:
We have acted as counsel to Northern Border Partners, L.P.,
a Delaware limited partnership (the "Partnership"), in connection
with the offer and sale of 125,357 units representing limited
partner interests in the Partnership (the "Common Units")
pursuant to a Registration Statement, as amended, on Form S-3
(the "Registration Statement") originally filed with the
Securities and Exchange Commission under the Securities Act of
1933 on July 2, 1997. Capitalized terms not defined herein shall
have the meanings ascribed to them in the Partnership Agreement,
the form of which has been filed as an exhibit to the
Registration Statement.
The Partnership owns a 70% general partner interest in
Northern Border Pipeline Company ("Northern Border Pipeline"), a
Texas general partnership engaged in pipeline transportation of
natural gas. The Partnership's interest in Northern Border
Pipeline is held through the Northern Border Intermediate Limited
Partnership, a Delaware limited partnership (the "Intermediate
Partnership"). Unless the context otherwise requires, references
to Partnership are references to both the Partnership and the
Intermediate Partnership.
You have requested our opinion that (i) each of the
Partnership and Northern Border Pipeline will be classified as a
partnership for federal income tax purposes and (ii) each Limited
Partner and each beneficial owner of Common Units will be treated
as a partner of the Partnership for federal income tax purposes.
In addition, you have asked us to review the description of the
principal federal income tax consequences that should arise from
the purchase, ownership and disposition of Common Units found in
the "Tax Considerations" section of the Registration Statement.
In connection with the foregoing request, the Partnership
and the General Partners have made the following representations
with respect to the Partnership and Northern Border Pipeline:
(a) Neither the Partnership nor Northern Border
Pipeline will elect to be treated as an association taxable
as a corporation;
(b) The Partnership has been and will continue to be
operated in accordance with (i) all applicable partnership
statutes, (ii) the Partnership Agreement, and (iii) the
description thereof in the Registration Statement;
(c) Except as otherwise required by section 704 of the
Code and regulations promulgated thereunder, the General
Partners will have, in the aggregate, an interest in each
material item of income, gain, loss, deduction or credit of
the Partnership equal to at least 1% at all times during the
existence of the Partnership;
(d) The General Partners will maintain, in the
aggregate, a minimum capital account balance in the
Partnership equal to 1% of the total positive capital
account balances of the Partnership;
(e) For each taxable year, less than 10% of the gross
income of the Partnership will be derived from sources other
than (i) the exploration, development, production,
processing, refining, transportation or marketing of any
mineral or natural resource including oil, gas or products
thereof, and naturally occurring carbon dioxide or (ii)
other items of "qualifying income" within the meaning of
section 7704(d) of the Code.
(f) Northern Border Pipeline has been and will
continue to be operated in accordance with the Texas Uniform
Partnership Act and the Northern Border Pipeline partnership
agreement.
Based upon the foregoing representations and covenants, the
General Partners' continued participation (or the participation
of another party satisfying the foregoing representations and
covenants) as general partners of the Partnership and the Code,
existing regulations thereunder, published rulings and judicial
decisions currently outstanding, it is our opinion that (i) each
of the Partnership and Northern Border Pipeline will be
classified as a partnership for federal income tax purposes, and
(ii) each Limited Partner and each beneficial owner of Common
Units will be treated as a partner of the Partnership for federal
income tax purposes. As used in this opinion, the term
"beneficial owner of Common Units" refers to (a) the assignees of
Common Units who have executed and delivered Transfer
Applications and are awaiting admission as Limited Partners, and
(b) Unitholders whose Common Units are held in street name or by
another nominee and who have the right to direct the nominee in
the exercise of all substantive rights attendant to the ownership
of their Common Units.
In addition, we have reviewed the description of the
principal federal income tax consequences of the purchase,
ownership and disposition of Common Units contained in the "Tax
Considerations" section of the Registration Statement and, except
as otherwise noted therein, all statements contained in such
description relating to matters of law and legal conclusions
reflect our opinion.
Finally, based on our review of the Registration Statement,
we have concluded that the "Tax Considerations" section of the
Registration Statement addresses all material tax consequences to
Unitholders who are individual citizens or residents of the
United States.
We are rendering this opinion as of the time the
Registration Statement becomes effective. We hereby consent to
the use of our name in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration
Statement. This consent does not constitute an admission that we
are "experts" within the meaning of such term as used in the
Securities Act of 1933.
Very truly yours,
VINSON & ELKINS L.L.P.
