UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 8-K/A

(Amendment No. 1)

 


 

CURRENT REPORT

 

Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported)

 

April 5, 2006

 

TC PipeLines, LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

000-26091

 

52-2135448

(State or other jurisdiction
of incorporation)

 

(Commission File
Number)

 

(IRS Employer
Identification No.)

 

110 Turnpike Road, Suite 203
Westborough, Massachusetts

 

01581

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code

 

(508) 871-7046

 

Not Applicable

(Former name or former address if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o                                    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o                                    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o                                    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o                                    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 



 

Explanatory Note

 

This Current Report on Form 8-K/A is being filed to amend the Current Report on Form 8-K filed by TC PipeLines, LP (the “Partnership”) on April 11, 2006 to provide the financial statements and pro forma financial information required by Items 9.01 (a) and (b) of Form 8-K.

 

Item 9.01. Financial Statements and Exhibits.

 

(a)                                  Financial Statements of Businesses Acquired.

 

(1)  The audited financial statements of Northern Border Pipeline Company as of December 31, 2005 and December 31, 2004 and for each of the three years in the period ended December 31, 2005 and the related report of its independent public accounting firm are filed as Exhibit 99.2 to this Form 8-K/A and incorporated herein by reference.

 

(2)  The unaudited interim financial statements of Northern Border Pipeline Company as of and for the three month period ended March 31, 2006 and March 31, 2005 are filed as Exhibit 99.3 to this Form 8-K/A and incorporated herein by reference.

 

(b)                                 Pro Forma Financial Information.

 

The unaudited pro forma combined financial information for the year ended December 31, 2005 and as of and for the three month period ended March 31, 2006 are furnished as Exhibit 99.4 to this Form 8-K/A and incorporated herein by reference.

 

(d)                                 Exhibits.

 

2.1                                 Partnership Interest Purchase and Sale Agreement dated as of December 31, 2005 by and between Northern Border Intermediate Limited Partnership and TC PipeLines Intermediate Limited Partnership (incorporated by reference to Exhibit 2.1 to the Partnership’s Current Report on Form 8-K filed February 15, 2006).*

 

23.1                           Consent of KPMG LLP with respect to the financial statements of Northern Border Pipeline Company.

 

99.1                           Press Release dated April 6, 2006.†

 

99.2                           Audited financial statements of Northern Border Pipeline Company as of December 31, 2005 and December 31, 2004 and for each of the three years in the period ended December 31, 2005.

 

99.3                           Unaudited interim financial statements of Northern Border Pipeline Company as of and for the three month period ended March 31, 2006 and March 31, 2005.

 

2



 

99.4                           Unaudited pro forma combined financial information for the year ended December 31, 2005 and as of and for the three month period ended March 31, 2006.

 


*  The schedules and exhibits to this agreement, as set forth in the Table of Contents of the agreement, have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Partnership agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.

 

†  Previously filed.

 

3



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

TC PipeLines, LP

 

 

by: TC PipeLines GP, Inc.,

 

 

its general partner

 

 

 

 

 

 

 

 

By:

/s/ Amy W. Leong

 

 

 

 

Amy W. Leong

 

 

 

 

Controller

 

Dated: May 31, 2006

 

 

 

4



 

Exhibit No.

 

Description

 

 

 

2.1

 

Partnership Interest Purchase and Sale Agreement dated as of December 31, 2005 by and between Northern Border Intermediate Limited Partnership and TC PipeLines Intermediate Limited Partnership (incorporated by reference to Exhibit 2.1 to the Partnership’s Current Report on Form 8-K filed February 15, 2006).*

 

 

 

23.1

 

Consent of KPMG LLP with respect to the financial statements of Northern Border Pipeline Company.

 

 

 

99.1

 

Press Release dated April 6, 2006.†

 

 

 

99.2

 

Audited financial statements of Northern Border Pipeline Company as of December 31, 2005 and December 31, 2004 and for each of the three years in the period ended December 31, 2005.

 

 

 

99.3

 

Unaudited interim financial statements of Northern Border Pipeline Company as of and for the three month period ended March 31, 2006 and March 31, 2005.

 

 

 

99.4

 

Unaudited pro forma combined financial information for the year ended December 31, 2005 and as of and for the three month period ended March 31, 2006.

 


*  The schedules and exhibits to this agreement, as set forth in the Table of Contents of the agreement, have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Partnership agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.

 

†  Previously filed.

 

5


Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

The Board of Directors
TC PipeLines GP, Inc., General Partner of TC PipeLines, LP:

 

We consent to the incorporation by reference in the registration statement (No. 333-121537) on Form S-3 of TC PipeLines, LP of our report dated March 2, 2006 with respect to the balance sheets of Northern Border Pipeline Company as of December 31, 2005 and 2004, and the related statements of income, comprehensive income, cash flows, and changes in partners’ equity for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedule, which report appears in the December 31, 2005 annual report on Form 10-K of TC PipeLines, LP.

 

/s/ KPMG LLP

 

 

 

Omaha, Nebraska
May 30, 2006

 


Exhibit 99.2

 

AUDITED FINANCIAL STATEMENTS OF NORTHERN BORDER PIPELINE COMPANY

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Northern Border Pipeline Company

 

We have audited the accompanying balance sheets of Northern Border Pipeline Company (the Company) as of December 31, 2005 and 2004, and the related statements of income, comprehensive income, cash flows, and changes in partners’ equity for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Border Pipeline Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ KPMG LLP

 

 

 

 

Omaha, Nebraska

March 2, 2006

 



 

NORTHERN BORDER PIPELINE COMPANY

BALANCE SHEET

(In Thousands)

 

 

 

December 31

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

22,039

 

$

20,355

 

Accounts receivables (net of allowance for doubtful accounts of $4,208 in 2004)

 

38,252

 

32,559

 

Related party receivables

 

2,294

 

1,311

 

Materials and supplies, at cost

 

3,566

 

3,409

 

Prepaid expenses and other

 

1,540

 

1,688

 

Total current assets

 

67,691

 

59,322

 

Property, plant and equipment:

 

 

 

 

 

In service natural gas transmission plant

 

2,463,555

 

2,446,369

 

Construction work in progress

 

13,260

 

2,768

 

Total property, plant and equipment

 

2,476,815

 

2,449,137

 

Less: Accumulated provision for depreciation and amortization

 

960,740

 

903,664

 

Property, plant and equipment, net

 

1,516,075

 

1,545,473

 

Other assets:

 

 

 

 

 

Unamortized debt expense

 

3,434

 

3,837

 

Regulatory asset

 

13,853

 

11,807

 

Other

 

3,645

 

4,549

 

Total other assets

 

20,932

 

20,193

 

Total assets

 

$

1,604,698

 

$

1,624,988

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

10,550

 

4,058

 

Related party payables

 

3,555

 

5,286

 

Accrued taxes other than income

 

27,637

 

27,113

 

Accrued interest

 

11,525

 

11,365

 

Other

 

2,755

 

1,640

 

Total current liabilities

 

56,022

 

49,462

 

Long-term debt

 

628,916

 

603,860

 

Reserves and deferred credits

 

4,775

 

4,526

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Partners’ equity

 

 

 

 

 

Partners’ capital

 

912,723

 

963,378

 

Accumulated other comprehensive income

 

2,262

 

3,762

 

Total partners’ equity

 

914,985

 

967,140

 

Total liabilities and partners’ equity

 

$

1,604,698

 

$

1,624,988

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF INCOME

(In Thousands)

 

 

 

Year Ended December 31

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

321,651

 

$

329,115

 

$

324,185

 

Operating expenses

 

 

 

 

 

 

 

Operations and maintenance

 

39,506

 

33,763

 

43,791

 

Depreciation and amortization

 

58,052

 

58,375

 

57,779

 

Taxes other than income

 

31,345

 

29,368

 

29,634

 

Operating expenses

 

128,903

 

121,506

 

131,204

 

Operating income

 

192,748

 

207,609

 

192,981

 

Interest expense

 

 

 

 

 

 

 

Interest expense

 

42,792

 

41,374

 

44,903

 

Interest expense capitalized

 

(157

)

(18

)

(46

)

Interest expense, net

 

42,635

 

41,356

 

44,857

 

Other income (expense)

 

 

 

 

 

 

 

Allowance for equity funds used during construction

 

269

 

31

 

53

 

Other income

 

2,396

 

2,552

 

1,373

 

Other expense

 

(532

)

(2,059

)

(1,350

)

Other income (expense), net

 

2,133

 

524

 

76

 

Net income to partners

 

$

152,246

 

$

166,777

 

$

148,200

 

 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF COMPREHENSIVE INCOME

(In Thousands)

 

 

 

Year Ended December 31

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Net income to partners

 

$

152,246

 

$

166,777

 

$

148,200

 

Other comprehensive income:

 

 

 

 

 

 

 

Change associated with current period hedging transactions

 

(1,500

)

(1,440

)

(1,556

)

Total comprehensive income

 

$

150,746

 

$

165,337

 

$

146,644

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF CASH FLOWS

(In Thousands)

 

 

 

Year Ended December 31

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income to partners

 

$

152,246

 

$

166,777

 

$

148,200

 

Adjustments to reconcile net income to partners to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

58,404

 

58,740

 

58,144

 

Provisions for regulatory refunds

 

 

 

261

 

Regulatory refunds paid

 

 

 

(10,261

)

Allowance for equity funds used during construction

 

(269

)

(31

)

(53

)

Reserves and deferred credits

 

(665

)

(546

)

1,001

 

Changes in components of working capital

 

(127

)

(12,611

)

(3,551

)

Other

 

(3,128

)

(6,180

)

(471

)

Total adjustments

 

54,215

 

39,372

 

45,070

 

Net cash provided by operating activities

 

206,461

 

206,149

 

193,270

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment, net

 

(28,555

)

(10,569

)

(12,918

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Equity contributions from partners

 

 

205,000

 

 

Distributions to partners

 

(202,901

)

(205,635

)

(153,978

)

Issuance of long-term debt

 

136,000

 

107,000

 

142,000

 

Retirement of long-term debt

 

(109,000

)

(313,000

)

(165,000

)

Proceeds upon termination of derivatives

 

 

7,575

 

 

Debt reacquisition costs

 

 

(4,897

)

 

Long-term debt financing costs

 

(321

)

 

 

Net cash used in financing activities

 

(176,222

)

(203,957

)

(176,978

)

Net change in cash and cash equivalents

 

1,684

 

(8,377

)

3,374

 

Cash and cash equivalents at beginning of year

 

20,355

 

28,732

 

25,358

 

Cash and cash equivalents at end of year

 

$

22,039

 

$

20,355

 

$

28,732

 

 

 

 

 

 

 

 

 

Changes in components of working capital:

 

 

 

 

 

 

 

Accounts receivable

 

$

(6,677

)

$

(2,969

)

$

(4,908

)

Materials and supplies

 

(157

)

697

 

(97

)

Prepaid expenses and other

 

149

 

578

 

(422

)

Accounts payable

 

5,874

 

(9,731

)

3,758

 

Accrued taxes other than income

 

524

 

(1,834

)

573

 

Accrued interest

 

160

 

648

 

(2,455

)

 

 

 

 

 

 

 

 

Total

 

$

(127

)

$

(12,611

)

$

(3,551

)

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF CHANGES IN PARTNERS’ EQUITY

(In Thousands)

 

 

 

TC PipeLines
Intermediate
Limited
Partnership

 

Northern Border
Intermediate
Limited
Partnership

 

Accumulated
Other
Comprehensive
Income

 

Total Partners’
Equity

 

 

 

 

 

 

 

 

 

 

 

Partners’ Equity at December 31, 2002

 

240,904

 

562,110

 

6,758

 

809,772

 

Net income to partners

 

44,460

 

103,740

 

 

148,200

 

Change associated with current period hedging transactions

 

 

 

(1,556

)

(1,556

)

Distributions paid

 

(46,193

)

(107,785

)

 

(153,978

)

Partners’ Equity at December 31, 2003

 

239,171

 

558,065

 

5,202

 

802,438

 

Net income to partners

 

50,033

 

116,744

 

 

166,777

 

Change associated with current period hedging transactions

 

 

 

(1,440

)

(1,440

)

Equity contributions received

 

61,500

 

143,500

 

 

205,000

 

Distributions paid

 

(61,690

)

(143,945

)

 

(205,635

)

Partners’ Equity at December 31, 2004

 

289,014

 

674,364

 

3,762

 

967,140

 

Net income to partners

 

45,674

 

106,572

 

 

152,246

 

Change associated with current period hedging transactions

 

 

 

(1,500

)

(1,500

)

Distributions paid

 

(60,870

)

(142,031

)

 

(202,901

)

Partners’ Equity at December 31, 2005

 

$

273,818

 

$

638,905

 

$

2,262

 

$

914,985

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

NOTES TO FINANCIAL STATEMENTS

 

1.                               ORGANIZATION AND MANAGEMENT

 

Northern Border Pipeline Company (Northern Border Pipeline) is a Texas general partnership formed in 1978. The ownership percentages of the partners in Northern Border Pipelines’ partners at December 31, 2005 and 2004 are as follows:

 

 

 

Ownership

 

Partner

 

Percentage

 

Northern Border Intermediate Limited Partnership

 

70

%

TC PipeLines Intermediate Limited Partnership

 

30

%

 

Northern Border Pipeline owns a 1,249-mile natural gas transmission pipeline system extending from the United States-Canadian border near Port of Morgan, Montana, to a terminus near North Hayden, Indiana.

 

Northern Border Pipeline is managed by a Management Committee that includes three representatives from Northern Border Intermediate Limited Partnership (Northern Border ILP) and one representative from TC PipeLines Intermediate Limited Partnership (TC PipeLines). Northern Border ILP’s representatives are selected by its general partners, Northern Plains Natural Gas Company, LLC (Northern Plains), a wholly-owned subsidiary of ONEOK, Inc. (ONEOK), Pan Border Gas Company, LLC (Pan Border), a wholly-owned subsidiary of Northern Plains, and Northwest Border Pipeline Company (Northwest Border), a wholly-owned subsidiary of TransCanada PipeLines Limited, which is a subsidiary of TransCanada Corporation (TransCanada), an affiliate of TC PipeLines, and have 35%, 22.75% and 12.25%, respectively, of the voting interest on the Management Committee. The representative designated by TC PipeLines votes the remaining 30% interest.

 

In November 2004, ONEOK purchased Northern Plains and Pan Border from CCE Holdings, LLC (CCE Holdings). CCE Holdings, a joint venture between Southern Union Company and GE Commercial Finance Energy Financial, purchased Northern Plains and Pan Border as part of its acquisition of CrossCountry Energy LLC (CrossCountry) from Enron Corp.

 

On March 31, 2004, Enron Corp. (Enron) transferred its ownership interest in Northern Plains and Pan Border to CrossCountry. In addition, CrossCountry and Enron entered into a transition services agreement pursuant to which Enron would provide to CrossCountry, on an interim, transitional basis, various services, including but not limited to (i) information technology services, (ii) accounting system usage rights and administrative support and (iii) payroll, employee benefits and administrative services. In turn, these services are provided to Northern Border Pipeline through Northern Plains.

 

The day-to-day management of Northern Border Pipeline’s affairs is the responsibility of Northern Plains, as defined by an operating agreement between Northern Border Pipeline and Northern Plains. Northern Border Pipeline is charged for the salaries, benefits and expenses of Northern Plains. As part of the closing, ONEOK and CCE Holdings entered into a transition services agreement referred to as the “Northern Border Transition Services Agreement” covering certain transition services by and among ONEOK, CCE Holdings and Enron for a period of six months. Certain of the services previously provided by Enron are now being provided by ONEOK. For the years ended December 31, 2005, 2004, and 2003, Northern Border Pipeline’s charges from Northern Plains and its current and former affiliates totaled approximately $20.1  million, $18.3 million and $25.6 million, respectively. See Note 12 for a discussion of Northern Border Pipeline’s previous relationships with Enron and developments involving Enron.

 

2.                               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make assumptions and use estimates that affect the reported amounts of assets,

 



 

liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities during the reporting period. Actual results could differ from these estimates if the underlying assumptions are incorrect.

 

Government Regulation

Northern Border Pipeline is subject to regulation by the Federal Energy Regulatory Commission (FERC). Northern Border Pipeline’s accounting policies conform to Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” Accordingly, certain assets that result from the regulated ratemaking process are reflected on the balance sheet as regulatory assets.

 

At December 31, 2005 and 2004, Northern Border Pipeline has reflected regulatory assets, which are currently being recovered or are expected to be recovered from its shippers, of approximately $13.9 million and $11.8 million respectively, on the balance sheet. Northern Border Pipeline is recovering these regulatory assets from its shippers over varying time periods up to 44 years.

 

The following table presents a summary of regulatory assets, net of amortization, at December 31, 2005 and 2004.

 

 

 

December 31

 

 

 

2005

 

2004

 

 

 

(In thousands)

 

Fort peck lease option costs

 

$

4,402

 

$

1,887

 

Unamortized loss on reacquired debt

 

1,503

 

2,630

 

Pipeline extension project

 

7,106

 

7,290

 

Other

 

842

 

 

Total regulatory assets

 

$

13,853

 

$

11,807

 

 

Northern Border Pipeline continually assesses the potential recovery of its regulatory assets based on such factors as regulatory changes and the impact of competition to determine the probability of future recovery of these assets. Northern Border Pipeline believes the recovery of the existing regulatory assets is probable. If Northern Border Pipeline determines future recovery is no longer probable, it would be required to write off the regulatory assets at that time.

 

Revenue Recognition

Northern Border Pipeline transports gas for shippers under a tariff regulated by the FERC. The tariff specifies the calculation of amounts to be paid by shippers and the general terms and conditions of transportation service on Northern Border Pipeline’s pipeline system. Northern Border Pipeline recognizes revenue according to each transportation contract for transportation service that is provided to its customers. Customers with firm service transportation agreements pay a reservation fee for capacity on the pipeline system known as a demand charge regardless of whether the shipper actually utilizes its reserved capacity. Firm service transportation customers also pay a fee based on the volume of natural gas transported. Customers with interruptible service transportation agreements may utilize available capacity on Northern Border Pipeline’s pipeline system; however, service is subject to interruption if capacity if required for customers with firm service transportation agreements. Interruptible service customers are assessed a fee based only on the volume of natural gas transported. An allowance for doubtful accounts is recorded in situations where collectibility is not reasonably assured. Northern Border Pipeline does not own the gas that it transports, and therefore does not assume the related natural gas commodity risk.

 

Income Taxes

Income taxes are the responsibility of the partners and are not reflected in these financial statements. However, Northern Border Pipeline’s FERC tariff establishes the method of accounting for and calculating income taxes and requires Northern Border Pipeline to reflect in its rates the income taxes which would have been paid or accrued if Northern Border Pipeline were organized during the period as a corporation. As a result, for purposes of determining transportation rates in calculating the return allowed by the FERC,

 



 

Partners’ capital and rate base are reduced by the amount equivalent to the net accumulated deferred income taxes. Such amounts were approximately $360 million and $355 million at December 31, 2005 and 2004, respectively, and are primarily related to accelerated depreciation and other plant-related differences.

 

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these investments.

 

Property, Plant and Equipment and Related Depreciation and Amortization

Property, plant and equipment is stated at original cost. During periods of construction, Northern Border Pipeline is permitted to capitalize an allowance for funds used during construction, which represents the estimated costs of funds used for construction purposes. The original cost of property retired is charged to accumulated depreciation and amortization, net of salvage and cost of removal. No retirement gain or loss is included in income except in the case of retirements or sales of entire regulated operating units.

 

Maintenance and repairs are charged to operations in the period incurred. The provision for depreciation and amortization of the transmission line is an integral part of Northern Border Pipeline’s FERC tariff. The effective depreciation rate applied to Northern Border Pipeline’s transmission plant is 2.25%. Composite rates are applied to all other functional groups of property having similar economic characteristics.

 

Natural Gas Imbalances

Natural gas imbalances occur when the actual amount of natural gas delivered from or received by a pipeline system or storage facility differs from the contractual amount of natural gas to be delivered or received. Northern Border Pipeline values these imbalances due to or from shippers and operators at an appropriate index price. Imbalances are made up in-kind, subject to the terms of Northern Border Pipeline’s tariff.

 

Imbalances due from others are reported on the balance sheet as accounts receivable. Imbalances owed to others are reported on the balance sheet as accounts payable. In addition, all imbalances are classified as current.

 

Risk Management

Northern Border Pipeline uses financial instruments in the management of its interest rate exposure. A control environment has been established which includes policies and procedures for risk assessment and the approval, reporting and monitoring of financial instrument activities. Northern Border Pipeline does not use these instruments for trading purposes. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138, requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at their fair value. Northern Border Pipeline determines the fair value of a derivative instrument by the present value of its future cash flows based on market prices from third party sources. Northern Border Pipeline records changes in the derivative’s fair value currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires Northern Boarder Pipeline to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. See Note 7 for a discussion of Northern Border Pipeline’s derivative instruments and hedging activities.

 

Unamortized debt premium, discount and expense

Northern Border Pipeline amortizes premiums, discounts and expenses incurred in connection with the issuance of long-term debt consistent with the terms of the respective debt instruments.

 

Operating Leases

Northern Border Pipeline has non-cancelable operating leases for office space and rights-of-way. Northern Border Pipeline records rent expense over the lease terms it becomes payable. If operating leases include

 



 

escalating rental payments, Northern Border Pipeline determines the cumulative rental payments anticipated and recognize rent expense on a straight-line basis over the term of the lease.

 

Impairment of Long-Lived Assets

Northern Border Pipeline assesses its long-lived assets for impairment based on SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Loved Assets.”  A long-lived asset is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may exceed its fair value. Fair values are based on the sum of the undiscounted future cash flows expected to result from the use an eventual disposition of the assets

 

Contingencies

Northern Border Pipeline’s accounting for contingencies covers a variety of business activities including contingencies for legal exposures and environmental exposures. Northern Border Pipeline accrues these contingencies when its assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be reasonably estimated in accordance with SFAS No. 5, “Accounting for Contingencies.”  Northern Border Pipeline bases its estimates on currently available facts and its estimate of the ultimate outcome or resolution. Actual results may differ from Northern Border Pipeline’s estimates resulting in an impact, positive, or negative, on earnings.

 

Reclassifications

Certain reclassifications have been made to the financial statements for prior years to conform with the current year presentation.

 

3.                               ASSET RETIREMENT OBLIGATIONS

 

Effective January 1, 2003, Northern Border Pipeline adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.”   SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation during the period in which the liability is incurred, if a reasonable estimate of fair value can be made.  Effective December 31, 2005, Northern Border Pipeline adopted FASB Interpretation (FIN) 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of SFAS No. 143.”  FIN 47 clarifies the term “conditional asset retirement obligation,” as used in SFAS No. 143 and the circumstances under which an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Northern Border Pipelinehas determined that asset retirement obligations exist for certain of its transmission assets; however, the fair value of the obligations cannot be determined because the end of the transmission system life is not determinable with the degree of accuracy necessary to currently establish a liability for the obligations.

 

4.                               RATES AND REGULATORY ISSUES

 

The FERC regulates the rates and charges for transportation in interstate commerce. Natural gas companies may not charge rates that have been determined to be unjust and reasonable by the FERC. Generally, rates for interstate pipelines are based on the cost of service including recovery of and a return on the pipeline’s actual prudent historical cost investment. The rates and terms and conditions for service are found in each pipeline’s FERC-approved tariff. Under its tariff, an interstate pipeline is allowed to charge for its services on the basis of stated transportation rates. Transportation rates are established periodically in FERC proceedings known as rate cases. The tariff also allows the interstate pipeline to provide services under negotiated and discounted rates.

 

As required by the provisions of the settlement of Northern Border Pipeline’s last rate case, on November 1, 2005, it filed a rate case with the FERC. The rate case filing proposes, among other things, a 7.8% increase in Northern Border Pipeline’s revenue requirement; a change to its rate design approach with a supply zone and market area utilizing a fixed rate and a dekatherm-mile rate, respectively; a compressor usage surcharge primarily to recover costs and implementation of a short-term, firm-service rate structure on a prospective basis. Also included in the filing is the continuation of the inclusion of income taxes in the calculation of Northern Border Pipeline’s rates.

 



 

On December 1, 2005, the FERC issued an order in which the proposed changes were suspended until May 1, 2006, at which time the new rates would be collected subject to refund until final resolution of the rate case. Northern Border Pipeline expects the FERC will set issues for hearing, and unless it is able to reach a settlement with the FERC staff and its customers, final resolution of this matter may not occur until 2007. A t this time, Northern Border Pipeline can give no assurance as to the outcome on any of these issues.

 

In February 2003, Northern Border Pipeline filed to amend its FERC tariff to clarify the definition of company use gas, which is gas supplied by its shippers for its operations. Northern Border Pipeline has included in its retention of company use gas, quantities that were equivalent to the cost of electric power at its electric-driven compressor stations during the period of June 2001 through January 2003. On March 27, 2003, the FERC issued an order rejecting Northern Border Pipeline’s proposed tariff sheet revision and requiring funds with interest within 90 days of the order. Northern Border Pipeline made refunds to its shippers of $10.3 million in May 2003.

 

5.                               TRANSPORTATION SERVICE AGREEMENTS

 

Operating revenues are collected pursuant to the FERC tariff through firm transportation service agreements. The firm service agreements extend for various terms with termination dates that range from December 2005 to December 2013. Northern Border Pipeline also has interruptible transportation service agreements and other transportation service agreements with numerous shippers. Under the capacity release provisions of Northern Border Pipeline’s FERC tariff, shippers are allowed to release all or part of their capacity either permanently for the full term of the contract or temporarily. A temporary capacity release does not relieve the original contract shipper from its payment obligations if the replacement shipper fails to pay for the capacity temporarily released to it.

 

At December 31, 2005, Northern Border Pipeline’s largest shippers, BP Canada Energy Marketing Corp. (BP Canada) and Nexen Marketing, USA Inc. (Nexen), were obligated for approximately 20% and 12% of design capacity, respectively. The BP Canada and Nexen firm service agreements extend for various terms with termination dates from March 2006 to February 2012 and December 2005 to December 2010, respectively.

 

For the year ended December 31, 2005, shippers providing significant operating revenues were BP Canada, Nexen, EnCana Marketing U.S.A. Inc. (EnCana) and Cargill Inc. (Cargill) with revenues of $56.1 million, $38.1 million, $37.9 million and $34.1 million, respectively. For the year ended December 31, 2004, shippers providing significant operating revenues were BP Canada and EnCana with revenues of $65.6 million and $56.3 million, respectively. For the year ended December 31, 2003, Northern Border Pipeline’s significant shippers were BP Canada, EnCana, and Pan-Alberta Gas (U.S) Inc. (Pan Alberta) with operating revenues of $54.7 million, $32.9 million and $45.5 million, respectively.

 

At December 31, 2005 and 2004, Northern Border Pipeline had contracted firm capacity held by one shipper affiliated with one of its general partners. ONEOK Energy Services Company LP (ONEOK Energy Services), a subsidiary of ONEOK, holds firm service agreements representing approximately 3% of design capacity at December 31, 2005. The firm service agreements with ONEOK Energy Services extend for various terms with termination dates that range from February 2006 to March 2009. ONEOK Energy Services became affiliated with Northern Border Pipeline on November 17, 2004, in connection with ONEOK’s purchase of Northern Plains. Revenues from ONEOK Energy Services for 2005 and the period from the date of affiliation to December 31, 2004 was $7.7 million and $1.1 million, respectively. At December 31, 2005 and 2004, Northern Border Pipeline had outstanding receivables from ONEOK Energy Services of $0.9 million and $0.8 million, respectively. In 2003, there was no operating revenue from Northern Border Pipeline’s affiliates.

 



 

6.                               CREDIT FACILITIES AND LONG-TERM DEBT

 

Detailed information on long-term debt is as follows:

 

 

 

December 31,

 

 

 

2005

 

2004

 

 

 

(In thousands)

 

 

 

 

 

 

 

2005 Pipeline Credit Agreement - average 5.11% at December 31, 2005, due 2010

 

$

27,000

 

$

 

1999 Pipeline Senior Notes - 7.75%, due 2009

 

200,000

 

200,000

 

2001 Pipeline Senior Notes - 7.50%, due 2021

 

250,000

 

250,000

 

2002 Pipeline Senior Notes - 6.25%, due 2007

 

150,000

 

150,000

 

Unamortized debt premium

 

1,916

 

3,860

 

 

 

 

 

 

 

Long-term debt

 

$

628,916

 

$

603,860

 

 

Northern Border Pipeline has entered into revolving credit facilities that are used for capital expenditures, acquisitions and general business purposes and for refinancing existing indebtedness. Northern Border Pipeline entered into a $175 million five-year credit agreement (2005 Pipeline Credit Agreement) with certain financial institutions in May 2005. At Northern Border Pipeline’s option, the interest rate on the outstanding borrowings may be the lender’s base rate or the London Interbank Offered Rate (LIBOR) plus a spread that is based on its long-term unsecured debt ratings. The 2005 Pipeline Credit Agreement permits Northern Border Pipeline to specify the portion of the borrowings to be covered by specific interest rate options and to specify the interest rate period. Northern Border Pipeline is required to pay a fee on the principal commitment amount of $175 million.

 

On December 1, 2004, Northern Border Pipeline redeemed $75 million of the 6.25% Senior Notes due 2007 (2002 Pipeline Senior Notes. In connection with the redemption, Northern Border Pipeline was required to pay a premium of $4.8 million, incurred a $0.4 million loss related to the unamortized debt costs and discount associated with the debt and received $2.5 million from the termination of interest rate swaps associated with the debt (see Note 7). The net loss of $2.7 million from the redemption is recorded as a loss on reacquired debt and amortized to interest expense over the remaining life of the 2002 Pipeline Senior Notes. During the years ended December 31, 2005 and 2004, Northern Border Pipeline amortized approximately $1.1 million and $0.1 million, respectively, to interest expense. At December 31, 2005 and 2004, the net unamortized loss on reacquired debt was $1.5 million and $2.6 million, respectively, which is recorded in regulatory assets on the balance sheet.

 

Interest paid, net of amounts capitalized, during the years ended December 31, 2005, 2004 and 2003 was $44.1 million, $41.1 million and $47.8 million, respectively.

 

Aggregate required repayments of long-term debt for the next five years are $150 million in 2007, $200 million in 2009 and $27 million in 2010. Aggregate required repayments of long-term debt thereafter total $250 million. There are no required repayment obligations for 2006 or 2008.

 

Certain of Northern Border Pipeline’s long-term debt and credit arrangements contain requirements as to the maintenance of minimum partners’ capital and debt to capitalization ratios, leverage ratios and interest coverage ratios that restrict the incurrence of other indebtedness by Northern Border Pipeline and also place certain restrictions on distributions to its partners. The 2005 Pipeline Credit Agreement requires the maintenance of a ratio of EBITDA (net income plus interest expense, income taxes and depreciation and amortization) to interest expense of greater than 3 to 1. The 2005 Pipeline Credit Agreement also requires the maintenance of the ratio of indebtedness to adjusted EBITDA (EBITDA adjusted for pro forma operating results of acquisitions made during the year) of no more than 4.5 to 1. Pursuant to the 2005 Pipeline Credit Agreement, if one or more acquisitions are consummated in which the aggregate purchase price is $25 million or more, the allowable ratio of indebtedness to adjusted EBITDA is increased to 5 to 1 for two calendar quarters following the acquisition. Upon any breach of these covenants, amounts

 



 

outstanding under the2005 Pipeline Agreement may become due and payable immediately. At December 31, 2005, Northern Border Pipeline was in compliance with its financial covenants.

 

The following estimated fair values of financial instruments represent the amount at which each instrument could be exchanged in a current transaction between willing parties. Based on quoted market prices for similar issues with similar terms and remaining maturities, the estimated fair value of the aggregate of the 1999 Pipeline Senior Notes, 2001 Pipeline Senior Notes and 2002 Pipeline Senior Notes was approximately $637 million and $652 million at December 31, 2005 and 2004, respectively. Northern Border Pipeline presently intends to maintain the current schedule of maturities for the 1999 Pipeline Senior Notes, the 2001 Pipeline Senior Notes and the 2002 Pipeline Senior Notes, which will result in no gains or losses on their respective repayments. The fair value of Northern Border Pipeline’s variable rate debt approximates the carrying value since the interest rates are periodically adjusted to reflect current market conditions.

 

7.                               DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Prior to the anticipated issuance of fixed rate debt, Northern Border Pipeline entered into forward starting interest rate swap agreements. The interest rate swap agreements were designated as cash flow hedges as they hedge the fluctuations in Treasury rates and spreads between the execution date of the swap agreements and the issuance of the fixed rate debt. The notional amount of the interest rate swap agreements did not exceed the expected principal amount of fixed rate debt to be issued. Upon issuance of the fixed rate debt, the swap agreements were terminated and the proceeds received or amounts paid to terminate the swap agreements were recorded in accumulated other comprehensive income and amortized to interest expense over the term of the debt.

 

During the years ended December 31, 2005, 2004, and 2003, respectively, Northern Border Pipeline amortized approximately $1.5 million, $1.4 million, and $1.6 million related to the terminated interest rate swap agreements as a reduction to interest expense from accumulated other comprehensive income. Northern Border Pipeline expects to amortize approximately $1.6 million as a reduction to interest expense in 2006.

 

In November 2004, Northern Border Pipeline terminated its interest rate swap agreements with notional amounts of $225 million and received $7.5 million. Of the total proceeds, $2.5 million related to the redemption of $75 million  of the 2002 Pipeline Senior Notes (see Note 6). The remaining $5.0 million is recorded in long-term debt with such amount amortized to interest expense over the remaining life of the interest rate swap agreements. During the years ended December 31, 2005 and 2004, Northern Border Pipeline amortized approximately $2.1 million and $0.2 million, respectively, as a reduction to interest expense. Northern Border Pipeline expects to amortize approximately $2.1 million as a reduction of interest expense in 2006 for these agreements.

 

8.                               COMMITMENTS AND CONTINGENCIES

 

Operating Leases

Future minimum lease payments under non-cancelable operating leases on office space and rights-of-way are as follows (in thousands):

 

Year ending December 31,

 

 

 

2006

 

$

2,511

 

2007

 

2,511

 

2008

 

2,511

 

2009

 

2,511

 

2010

 

2,186

 

Thereafter

 

64,849

 

 

 

$

77,079

 

 



 

Expenses incurred related to these lease obligations for the years ended December 31, 2005, 2004 and 2003 were $0.6 million, $0.6 million, and $0.7 million, respectively.

 

Cash Balance Plan

As further discussed in Note 12, on December 31, 2003, Enron filed a motion seeking approval of the Bankruptcy Court to provide additional funding to, and for authority to terminate the Enron Corp. Cash Balance Plan and certain other defined benefit plans. Northern Border Pipeline recorded estimated charges associated with the termination of the Cash Balance Plan of $3.1 million in 2003. In 2004, Northern Border Pipeline reduced its expense by $3.1 million, since it determined it is no longer liable for termination costs of the Cash Balance Plan (see Note 11).

 

Capital Expenditures

Total capital expenditures for 2006 are estimated to be $23 million. Funds required to meet the capital expenditures for 2006 are anticipated to be provided primarily by borrowings under the 2005 Pipeline Credit Agreement, contributions from Northern Border Pipeline’s partners and operating cash flows.

 

Environmental Matters

Northern Border Pipeline is not aware of any material contingent liabilities with respect to compliance with applicable environmental laws and regulations.

 

Other

On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation (Tribes) filed a lawsuit in Tribal Court against Northern Border Pipeline to collect more than $3.0 million in back taxes, together with interest and penalties. The lawsuit related to a utilities tax on certain of Northern Border Pipeline’s properties within the Fort Peck Indian Reservation. The Tribes and Northern Border Pipeline, through a mediation process, reached a settlement with respect to pipeline right-of-way lease and taxation issues documented through an Option Agreement and Expanded Facilities Lease executed in August 2004. The settlement grants to Northern Border Pipeline, among other things: (i) an option to renew the pipeline right-of-way lease upon agreed terms and conditions on or before April 1, 2011, for a term of 25 years with a renewal right for an additional 25 years; (ii) a right to use additional tribal lands for expanded facilities; and (iii) release and satisfaction of all tribal taxes against Northern Border Pipeline. In consideration of this option and other benefits, Northern Border Pipeline paid a lump sum amount of $7.4 million and will make additional annual option payments of approximately $1.5 million thereafter through March 31, 2011. Of the amount paid in 2004, $1.0 million was determined to be a settlement of previously accrued property taxes. The remainder has been recorded in other assets on the balance sheet. Northern Border Pipeline will seek regulatory recovery from the settlement in its pending rate case.

 

Various legal actions that have arisen in the ordinary course of business are pending. Northern Border Pipeline believes that the resolution of these issues will not have a material adverse impact on its results of operations or financial position.

 

9.                               CASH DISTRIBUTION POLICY

 

The Northern Border Pipeline’s partnership agreement provides that distributions to its partners are to be made on a pro rata basis according to each partner’s capital account balance. The Northern Border Pipeline Management Committee determines the amount and timing of such distributions. Any changes to, or suspension of, Northern Border Pipeline’s cash distribution policy requires the unanimous approval of its Management Committee. In December 2003, Northern Border Pipeline’s Management Committee voted to (i) issue equity cash calls to its partners in the total amount of $130 million in early 2004 and $90 million in 2007; (ii) fund future growth capital expenditures with 50% equity capital contributions from its partners; and (iii) change its cash distribution policy. Effective January 1, 2004, cash distributions are equal to 100% of distributable cash flow as determined from Northern Border Pipeline’s financial statements based upon

 



 

earnings before interest, taxes, depreciation and amortization less interest expense and maintenance capital expenditures. On November 30, 2004, Northern Border Pipeline issued an equity cash call to its partners in the total amount of $75 million, which was utilized to repay existing bank debt. This equity contribution will reduce the previously approved 2007 equity cash call from $90 million to $15 million.

 

10.                         QUARTERLY FINANCIAL DATA (Unaudited)

 

 

 

Operating
Revenues

 

Operating
Income

 

Net Income
to Partners

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

First Quarter

 

$

82,825

 

$

51,035

 

$

40,631

 

Second Quarter

 

69,786

 

38,781

 

28,763

 

Third Quarter

 

89,008

 

55,767

 

46,177

 

Fourth Quarter

 

80,032

 

47,165

 

36,675

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

First Quarter

 

$

83,307

 

$

51,819

 

$

41,757

 

Second Quarter

 

81,532

 

50,836

 

41,597

 

Third Quarter

 

81,609

 

47,894

 

37,580

 

Fourth Quarter

 

82,667

 

57,060

 

46,143

 

 

11.                         OTHER INCOME (EXPENSE)

 

Other income (expense) on the statement of income includes such items as investment income, nonoperating revenues and expenses, and nonrecurring other income and expense items. For the years ended December 31, 2005, 2004 and 2003, other income included income from interconnections constructed of $0.2 million, $0.7 million and $0.1 million, respectively. Other income for 2005 also included an adjustment to allowance for doubtful accounts of $0.4 million. Other income for 2004 also included an adjustment to reserves previously established of $0.4 million. Other expense for the year ended December 31, 2004, included approximately $0.6 million due to reserves established for costs associated with a potential future project and $0.5 million of bad debt expense. For the year ended December 31, 2003, other expense included $0.6 million for a repayment of amounts previously received for vacated microwave frequency bands.

 

12.                         RELATIONSHIPS WITH ENRON

 

In December 2001, Enron and certain of its subsidiaries filed voluntary petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court. Until November 17, 2004, Northern Plains and Pan Border were subsidiaries of Enron. Northern Plains and Pan Border were not among the Enron companies filing for Chapter 11 protection.

 

Enron North America Corp. (Enron North America), a wholly owned subsidiary of Enron that is in bankruptcy, was a party to transportation contracts which obligated Enron North America to pay for 3.5% of Northern Border Pipeline’s capacity. Through the bankruptcy court proceeding in 2002, Enron North America rejected and terminated all of its firm transportation contracts on Northern Border Pipeline. Northern Border Pipeline had previously fully reserved for amounts invoiced to Enron North America. Since Enron guaranteed the obligations of Enron North America under those contacts, Northern Border Pipeline filed claims against both Enron North America and Enron for damages in the bankruptcy proceedings. As a result of a settlement agreement between Enron North America, Enron and Northern Border Pipeline, each of Enron North America and Enron have agreed to allow Northern Border Pipeline’s claim of approximately $20.6 million. In 2004, Northern Border Pipeline adjusted its allowance for doubtful accounts to reflect an estimated recovery of $1.1 million for the claims. In June 2005, Northern Border Pipeline executed term sheets with a third party for the sale of its bankruptcy claims for transportation contracts and associated guarantees held against Enron and Enron North America. Proceeds from the sale of the claims were $11.1 million. In the second quarter of 2005, Northern Border Pipeline made an adjustment

 



 

to its allowance for doubtful accounts of $0.6 million to reflect the agreement for the sale. In the third quarter of 2005, Northern Border Pipeline recognized revenue of $9.4 million as a result of the sale.

 

On December 31, 2003, Enron filed a motion seeking approval of the Bankruptcy Court to provide additional funding to, and for authority to terminate, the Cash Balance Plan and certain other defined benefit plans of Enron’s affiliates (the Plans) in ‘standard terminations’ within the meaning of Section 4041 of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

 

Northern Plains was considered a member of Enron’s ERISA controlled group of corporations. As of December 31, 2003, approximately $3.1 million was estimated for Northern Border Pipeline’s proportionate allocation of Northern Plains’ proportionate share of the up to $200 million estimated termination costs for the Plans authorized by the Bankruptcy Court order. Since under the operating agreement with Northern Plains, these costs could be the Northern Border Pipeline’s responsibility, $3.1 million was accrued to satisfy claims of reimbursement for these termination costs.

 

As a result of further evaluation and negotiation of Enron’s proposed allocation of the termination costs, Northern Plains advised Northern Border Pipeline that no claim of reimbursement of the termination costs would be made, resulting in an adjustment in reserves during 2004 of $3.1 million for the termination costs. Pursuant to the agreement whereby ONEOK purchase Northern Plains and NBP Services, the purchase price under the agreements was deemed to include all contributions which otherwise would have been allocable to Northern Plains.

 

13                            ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment,” which requires companies to expense the fair value of share-based payments and includes changes related to the expense calculation for share-based payments. Northern Plains also adopted SFAS No. 123R as of January 1, 2006, and will charge Northern Border Pipeline for its proportionate share of the expense recorded by Northern Plains. The impact of adopting SFAS No. 123R does not have a material impact on Northern Border Pipeline’s results of operations or financial position.

 

In June 2005, the FERC issued guidance describing how FERC-regulated companies should account for costs associated with implementing the pipeline integrity management requirements of the U.S. Department of Transportation’s Office of Pipeline Safety. Under the guidance, costs to 1) prepare a plan to implement the program, 2) identify high consequence areas, 3) develop and maintain a record keeping system and 4) inspect, test and report on the condition of affected pipeline segments to determine the need for repairs or replacements, are required to be expensed. Costs of modifying pipelines to permit in-line inspections, certain costs associated with developing or enhancing computer software and costs associated with remedial and mitigation actions to correct an identified condition can be capitalized. The guidance is effective January 1, 2006, to be applied prospectively. The effect of adopting this order is not expected to be material to Northern Border Pipeline’s results of operations or financial position.

 

14.                         SUBSEQUENT EVENTS

 

Northern Border Pipeline makes distributions to it general partners approximately one month following the end of the quarter. A cash distribution of approximately $45 million was declared and paid on February 1, 2006, for the fourth quarter of 2005.

 

On February 14, 2006, Northern Border Pipeline’s general partners entered into a Partnership Interest Purchase and Sale Agreement (PIPA) dated as of December 31, 2005, under which Northern Border Partners, L.P.(Northern Border Partners), parent company of Northern Border ILP, agreed to sell a 20% partnership interest in Northern Border Pipeline to TC PipeLines in exchange for an aggregate cash amount

 



 

of $300 million and the assumption of certain liabilities and obligations. The PIPA contains customary and other closing conditions that, if not satisfied or waived, would result in the sale not occurring.

 

Upon closing of the sale of the 20% partnership interest several things will occur including: (1) Northern Border Pipeline’s general partners will amend its partnership agreement, the Northern Border Pipeline Company General Partnership Agreement,  to modify certain governance and operating terms; (2) TC PipeLines will appoint a new Management Committee chairman and other members of the Management Committee may change; (3) Northern Border Pipeline’s current operator, Northern Plains or one of its affiliates, will enter into a transition services agreement with TransCanada or one of its affiliates, for reimbursement of all transitional support expenses incurred for the period from closing until April 1, 2007; (4) Northern Border Pipeline will enter into a pipeline operating agreement with an affiliate of TransCanada, under which the affiliate of TransCanada will become Northern Border Pipeline’s operator; and (5) Northern Border Pipeline will adopt certain changes to its cash distribution policy related to financial ratio targets and capital contributions.

 



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE

 

Northern Border Pipeline Company:

 

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of Northern Border Pipeline Company as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005 included in this Form 10-K, and have issued our report thereon dated March 2, 2006.

 

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of Northern Border Pipeline Company listed in Item 15 of Part IV of this Form 10-K is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

 

/s/ KPMG LLP

 

 

 

 

 

Omaha, Nebraska

March 2, 2006

 



 

NORTHERN BORDER PIPELINE COMPANY

 

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

 

 

 

 

 

Additions

 

Deductions

 

 

 

 

 

Balance at

 

Charged to

 

Charged

 

For Purpose For

 

 

 

 

 

Beginning

 

Costs and

 

to Other

 

Which Reserves

 

Balance at

 

Description

 

of Year

 

Expenses

 

Accounts

 

Were Created

 

End of Year

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for regulatory issues

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

1,955

 

$

25

 

$

 

$

1,350

 

$

630

 

2004

 

$

6,315

 

$

640

 

$

 

$

5,000

 

$

1,955

 

2003

 

$

12,294

 

$

4,282

 

$

 

$

10,261

 

$

6,315

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

4,208

 

$

172

 

$

 

$

4,380

 

$

 

2004

 

$

4,815

 

$

523

 

$

 

$

1,130

 

$

4,208

 

2003

 

$

4,805

 

$

10

 

$

 

$

 

$

4,815

 

 


Exhibit 99.3

 

UNAUDITED INTERIM FINANCIAL STATEMENTS OF

NORTHERN BORDER PIPELINE COMPANY

 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF INCOME

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

(In thousands)

 

 

 

 

 

 

 

Operating revenue

 

$

79,827

 

$

82,825

 

Operating expenses:

 

 

 

 

 

Operations and maintenance

 

9,458

 

9,569

 

Depreciation and amortization

 

14,566

 

14,368

 

Taxes other than income

 

8,106

 

7,853

 

Operating expenses

 

32,130

 

31,790

 

Operating income

 

47,697

 

51,035

 

Interest expense

 

10,689

 

10,583

 

Other income (expense):

 

 

 

 

 

Other income

 

437

 

332

 

Other expense

 

(92

)

(153

)

Other income, net

 

345

 

179

 

Net income to partners

 

$

37,353

 

$

40,631

 

 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

(In thousands)

 

 

 

 

 

 

 

Net income to partners

 

$

37,353

 

$

40,631

 

Other comprehensive income:

 

 

 

 

 

Changes associated with current period hedging transactions

 

(389

)

(365

)

Total comprehensive income

 

$

36,964

 

$

40,266

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

BALANCE SHEET

(Unaudited)

 

 

 

March 31,
2006

 

December 31,
2005

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,065

 

$

22,039

 

Accounts receivable

 

29,883

 

40,546

 

Materials and supplies, at cost

 

3,601

 

3,566

 

Prepaid expenses and other

 

912

 

1,540

 

Total current assets

 

49,461

 

67,691

 

Property, plant and equipment:

 

 

 

 

 

Natural gas transmission plant

 

2,486,367

 

2,476,815

 

Less: Accumulated provision for depreciation and amortization

 

974,879

 

960,740

 

Property, plant and equipment, net

 

1,511,488

 

1,516,075

 

Other assets:

 

 

 

 

 

Unamortized debt expense

 

3,267

 

3,434

 

Regulatory assets

 

14,588

 

13,853

 

Other

 

4,740

 

3,645

 

Total other assets

 

22,595

 

20,932

 

Total assets

 

$

1,583,544

 

$

1,604,698

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

7,000

 

$

27,000

 

Accounts payable

 

9,963

 

14,105

 

Accrued taxes other than income

 

26,769

 

27,637

 

Accrued interest

 

14,574

 

11,525

 

Other

 

1,454

 

2,755

 

Total current liabilities

 

59,760

 

83,022

 

Long-term debt, net of current maturities

 

601,448

 

601,916

 

Reserves and deferred credits

 

5,064

 

4,775

 

Commitments and contingencies (Note 4)

 

 

 

 

 

Partners’ equity:

 

 

 

 

 

Partners’ capital

 

915,399

 

912,723

 

Accumulated other comprehensive income

 

1,873

 

2,262

 

Total partners’ equity

 

917,272

 

914,985

 

Total liabilities and partners’ equity

 

$

1,583,544

 

$

1,604,698

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

(In thousands)

 

 

 

 

 

 

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income to partners

 

$

37,353

 

$

40,631

 

Adjustments to reconcile net income to partners to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

14,658

 

14,456

 

Reserves and deferred credits

 

(333

)

(140

)

Changes in components of working capital

 

7,993

 

6,545

 

Other

 

(2,062

)

(1,967

)

Total adjustments

 

20,256

 

18,894

 

Net cash provided by operating activities

 

57,609

 

59,525

 

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures for property, plant and equipment

 

(9,906

)

(4,684

)

Net cash used in investing activities

 

(9,906

)

(4,684

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

Equity contributions from partners

 

10,330

 

 

Distributions to partners

 

(45,007

)

(54,098

)

Issuance of long-term debt

 

21,000

 

13,000

 

Retirement of long-term debt

 

(41,000

)

(8,000

)

Net cash used in financing activities

 

(54,677

)

(49,098

)

Net change in cash and cash equivalents

 

(6,974

)

5,743

 

Cash and cash equivalents at beginning of period

 

22,039

 

20,355

 

Cash and cash equivalents at end of period

 

$

15,065

 

$

26,098

 

 

 

 

 

 

 

Supplemental disclosures for cash flow information:

 

 

 

 

 

Cash paid for interest, net of amount capitalized

 

$

8,047

 

$

7,830

 

 

 

 

 

 

 

Changes in components of working capital:

 

 

 

 

 

Accounts receivable

 

$

10,663

 

$

1,689

 

Materials and supplies

 

(35

)

(60

)

Prepaid expenses and other

 

627

 

684

 

Accounts payable and other current liabilities

 

(5,443

)

1,251

 

Accrued taxes other than income

 

(868

)

(190

)

Accrued interest

 

3,049

 

3,171

 

Total

 

$

7,993

 

$

6,545

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

STATEMENT OF CHANGES IN PARTNERS’ EQUITY

(Unaudited)

 

 

 

TC PipeLines
Intermediate
Limited
Partnership

 

Northern
Border
Intermediate
Limited
Partnership

 

Accumulated
Other
Comprehensive
Income

 

Total Partners’
Equity

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Partners’ equity at December 31, 2005

 

$

273,818

 

$

638,905

 

$

2,262

 

$

914,985

 

Net income to partners

 

11,206

 

26,147

 

 

37,353

 

Changes associated with current period hedging transactions

 

 

 

(389

)

(389

)

Equity contributions received

 

3,099

 

7,231

 

 

10,330

 

Distributions paid

 

(13,502

)

(31,505

)

 

(45,007

)

Partners’ equity at March 31, 2006

 

$

274,621

 

$

640,778

 

$

1,873

 

$

917,272

 

 

The accompanying notes are an integral part of these financial statements.

 



 

NORTHERN BORDER PIPELINE COMPANY

NOTES TO FINANCIAL STATEMENTS

 

1.             BASIS OF PRESENTATION

 

In this report, references to “we,” “us” or “our” collectively refer to Northern Border Pipeline Company.

 

We prepared the financial statements included herein without audit pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) are condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

 

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions, with respect to values or conditions which cannot be known with certainty, that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates are reasonable, actual results could differ from our estimates. There has been no change to our critical accounting policies and estimates during the first quarter ended March 31, 2006. Information about our critical accounting policies and estimates is included in Note 2 of the Financial Statements in our annual report on Form 10-K for the year ended December 31, 2005.

 

Certain reclassifications were made to the 2005 financial statements to conform to the current year presentation.

 

2.             DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We utilize financial instruments to reduce our market risk exposure to interest rate fluctuations and achieve a more predictable cash flow. We follow established policies and procedures to assess risk and approve, monitor and report our financial instrument activities. We do not use these instruments for trading purposes. As of March 31, 2006, there were no outstanding interest rate swap agreements.

 

We record in accumulated other comprehensive income amounts related to terminated interest rate swap agreements for cash flow hedges and amortize these amounts to interest expense over the term of the hedged debt. During the three months ended March 31, 2006, we amortized approximately $0.4 million related to terminated interest rate swap agreements as a reduction to interest expense from accumulated other comprehensive income. We expect to amortize approximately $0.4 million in each of the remaining quarters of 2006.

 

We record in long-term debt amounts received or paid related to terminated interest rate swap agreements for fair value hedges and amortize these amounts to interest expense over the remaining life of the interest rate swap agreement. During the three months ended March 31, 2006, we amortized approximately $0.5 million as a reduction to interest expense. We expect to amortize approximately $0.5 million in each of the remaining quarters of 2006.

 



 

3.             RATES AND REGULATORY ISSUES

 

As required by the provisions of the settlement of our last rate case, on November 1, 2005, we filed a rate case with the Federal Energy Regulatory Commission (FERC). In December 2005, the FERC issued an order that identified issues that were raised in the proceeding, accepted the proposed rates but suspended their effectiveness until May 1, 2006, at which time the new rates will be collected subject to refund until final resolution of the rate case. Information about our regulatory proceedings is included in Note 4 of the Financial Statements in our annual report on Form 10-K for the year ended December 31, 2005.

 

4.             COMMITMENTS AND CONTINGENCIES

 

Various legal actions that have arisen in the ordinary course of business are pending. We believe that the resolution of these issues will not have a material adverse impact on our results of operations or financial position.

 

5.             ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires companies to expense the fair value of share-based payments and includes changes related to the expense calculation for share-based payments. Northern Plains adopted SFAS No. 123R as of January 1, 2006, and will charge us for our proportionate share of the expense recorded by Northern Plains. The impact of adopting SFAS No. 123R does not have a material impact on our results of operations or financial position.

 

6.             SUBSEQUENT EVENTS

 

We make distributions to our general partners approximately one month following the end of the quarter. A cash distribution of approximately $48.6 million was declared and paid on May 1, 2006, for the first quarter of 2006.

 

In April 2006, Northern Border Partners completed the sale of a 20% partnership interest in us to TC PipeLines under the Partnership Interest Purchase and Sale Agreement dated as of December 31, 2005. Northern Border Partners and TC PipeLines each now own a 50% interest in us. As a result of the transaction, our General Partnership Agreement was amended and restated effective April 6, 2006. The major provisions adopted or changed are identified in Item 2 of our Form 10Q for the quarterly period ended March 31, 2006.

 

In April 2006, we entered into an Operating Agreement with an affiliate of TransCanada. Under the new Operating Agreement, the TransCanada affiliate will become our operator effective April 1, 2007.

 


Exhibit 99.4

 

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

On April 6, 2006, TC PipeLines Intermediate Limited Partnership, a wholly-owned subsidiary of TC PipeLines, LP (the “Partnership”), completed the acquisition of an additional 20% general partnership interest in Northern Border Pipeline Company (“NBPL”) from Northern Border Intermediate Limited Partnership, a wholly-owned subsidiary of Northern Border Partners, L.P. (“NBP”)(1) for approximately $297 million in cash plus up to $10 million in transaction costs payable to a subsidiary of TransCanada Corporation. The Partnership also indirectly assumed approximately $120 million of debt of NBPL. As a result of the transaction, the Partnership’s interest in NBPL increased from 30% to 50% and NBP’s interest in NBPL decreased from 70% to 50%. The Partnership borrowed $307 million under its $310 million unsecured credit facility to pay the purchase price for the acquisition and $10 million in transaction costs payable in connection with the acquisition.

 

The following pro forma condensed balance sheet as of March 31, 2006 has been prepared as if the acquisition of the additional 20% general partnership interest in NBPL occurred on March 31, 2006. The following pro forma statements of income for the year ended December 31, 2005 and for the three month period ended March 31, 2006 have been prepared as if the acquisition occurred on January 1, 2005, the beginning of the 2005 fiscal year. The financial statements are based on currently available information and certain estimates and assumptions that we believe are reasonable.

 

The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of the consolidated results of operations of the Partnership in future periods or as it would have been had the acquisition occurred on January 1, 2005. The unaudited pro forma financial information should be read in conjunction with the historical financial statements of the Partnership, and the related notes thereto, which are included in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as well as NBPL’s historical financial statements and the related notes thereto, which are presented in Exhibits 99.2 and 99.3 in this Current Report on Form 8-K.

 

The following significant estimates and assumptions have been used in preparation of the unaudited pro forma financial information:

 

                  The acquisition transactions were completed at a purchase price of $307 million.

                  The acquisition was financed with a bridge loan at an all-in rate of 5.90% per annum. The bridge loan matures on March 31, 2008.

                  The difference between the purchase price and the underlying book cost of the assets was recorded as part of the investment in Northern Border Pipeline.

                  TC PipeLines, LP continued to account for its interest in NBPL using equity method of accounting.

 


(1)     On May 22, 2006 Northern Border Partners, L.P. changed its name to ONEOK Partners, L.P.

 



 

TC PipeLines, LP

Pro Forma Condensed Balance Sheet

March 31, 2006

(millions of dollars)

 

 

 

 

Pro Forma

 

Pro Forma

 

 

 

TC PipeLines, LP

 

Adjustments

 

TC PipeLines, LP

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

1.8

 

 

1.8

 

Investment in Northern Border Pipeline

 

276.7

 

307.0

 

583.7

 

Investment in Tuscarora

 

38.7

 

 

38.7

 

 

 

317.2

 

307.0

 

624.2

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accrued liabilities

 

0.5

 

 

0.5

 

Current portion of long-term debt

 

13.5

 

 

13.5

 

Long-term debt

 

 

307.0

 

307.0

 

Partners’ equity

 

303.2

 

 

303.2

 

 

 

317.2

 

307.0

 

624.2

 

 

TC PipeLines, LP

Pro Forma Condensed Statement of Income

Year ended December 31, 2005

(millions of dollars except per unit amounts)

 

 

 

 

Pro Forma

 

Pro Forma

 

 

 

TC PipeLines, LP

 

Adjustments

 

TC PipeLines, LP

 

 

 

 

 

(unaudited)

 

(unaudited)

 

Equity income from Investment in Northern Border Pipeline

 

45.7

 

29.4

 

75.1

 

Equity income from Investment in Tuscarora

 

7.5

 

 

7.5

 

General and administrative expenses

 

(2.0

)

 

(2.0

)

Financial charges

 

(1.0

)

(17.3

)

(18.3

)

Net income

 

50.2

 

12.1

 

62.3

 

Net income per unit

 

$

2.70

 

$

0.69

 

$

3.39

 

Units outstanding (millions)

 

17.5

 

17.5

 

17.5

 

 

TC PipeLines, LP

Pro Forma Condensed Statement of Income

Three Months ended March 31, 2006

(millions of dollars except per unit amounts)

 

 

 

 

Pro Forma

 

Pro Forma

 

 

 

TC PipeLines, LP

 

Adjustments

 

TC PipeLines, LP

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Equity income from Investment in Northern Border Pipeline

 

11.2

 

7.2

 

18.4

 

Equity income from Investment in Tuscarora

 

2.0

 

 

2.0

 

General and administrative expenses

 

(0.6

)

 

(0.6

)

Financial charges

 

(0.2

)

(4.1

)

(4.3

)

Net income

 

12.4

 

3.1

 

15.5

 

Net income per unit

 

$

0.67

 

$

0.17

 

$

0.84

 

Units outstanding (millions)

 

17.5

 

17.5

 

17.5