AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
REGISTRATION NO. 333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TC PIPELINES, LP
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 4922 52-2135448
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
FOUR GREENSPOINT PLAZA
16945 NORTHCHASE DRIVE
HOUSTON, TEXAS 77060
(281) 539-4500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
KENNETH R. BLACKMAN, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
(212) 859-8000
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
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PLEASE SEND COPIES OF COMMUNICATIONS TO:
KENNETH R. BLACKMAN, ESQ. MICHAEL ROSENWASSER, ESQ.
CRAIG F. MILLER, ESQ. JONATHAN P. CRAMER, ESQ.
Fried, Frank, Harris, Shriver & Jacobson Andrews & Kurth L.L.P.
One New York Plaza 805 Third Avenue
New York, New York 10004 New York, New York 10022
(212) 859-8000 (212) 850-2800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER UNIT (2) OFFERING PRICE REGISTRATION FEE
Common units representing limited partner
interests................................. 17,986,000 $20.25 $364,216,500 $101,253
(1) Includes common units issuable upon exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED DECEMBER , 1998.
[LOGO]
15,640,000 Common Units
TC PIPELINES, LP
Representing Limited Partner Interests
------------
This is an initial public offering of common units representing limited
partner interests in TC PipeLines, LP. TC PipeLines was recently formed to
acquire, own and participate in the management of United States-based pipeline
assets. TC PipeLines will own a 30% general partner interest in Northern Border
Pipeline Company, a Texas general partnership engaged in pipeline transportation
of natural gas. All of the 15,640,000 common units are being sold by TC
PipeLines.
TC PipeLines intends, to the extent there is sufficient cash available from
operations, to distribute to each holder of common units a minimum quarterly
distribution of at least $0.375 per common unit per quarter or $1.50 per common
unit on an annualized basis. TC PipeLines' general partner has broad discretion
in making cash distributions and establishing reserves. During a subordination
period, which generally will not end prior to March 31, 2004, TC PipeLines will
pay such minimum quarterly distribution to holders of common units before any
distributions will be paid on our subordinated limited partner interests.
Prior to the offering, there has been no public market for the common units.
It is currently estimated that the initial public offering price per common unit
will be between $ and $ . TC PipeLines intends to list the common units on
the New York Stock Exchange under the symbol " ".
SEE "RISK FACTORS" ON PAGE 27 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING COMMON UNITS.
Those risks include the following:
- TC PipeLines' cash flow and performance are dependent upon the cash flow
of Northern Border Pipeline, which has a limited number of major
customers, all of which have long-term contracts and are affected by
regulatory decisions of the Federal Energy Regulatory Commission.
- TC PipeLines' cash distributions to unitholders are not guaranteed, will
depend on future cash distributions from Northern Border Pipeline and will
be affected by the funding of reserves, expenditures and other matters.
(CONTINUED ON PAGE II)
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Per
Common Unit Total
-------------- -----------
Initial public offering price......................... $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to TC PipeLines............ $ $
The underwriters may, under certain circumstances, purchase up to an
additional 2,346,000 common units from TC PipeLines at the initial public
offering price less the underwriting discount.
----------------
The underwriters expect to deliver the common units against payment in New
York, New York on , 1999.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
----------------
Prospectus dated , 1999.
- TC PipeLines' future performance will depend in part on the successful
completion of projects by Northern Border Pipeline.
- TC PipeLines may be unable to control certain major decisions by Northern
Border Pipeline's management committee.
- Potential conflicts of interest could arise as a result of the General
Partner's relationship with TransCanada PipeLines Limited, its parent
corporation (which is also in the natural gas transmission business), on
the one hand, and TC PipeLines or any of TC PipeLines' other partners, on
the other hand. The General Partner's affiliates, including TransCanada,
are permitted to compete with TC PipeLines.
- The Partnership Agreement limits the liability and reduces the fiduciary
duties of the General Partner.
- The federal income tax benefits of an investment in TC PipeLines depend on
the classification of TC PipeLines as a partnership for federal income tax
purposes. TC PipeLines will not obtain a ruling from the IRS on this or
any other matter.
------------------
TC PipeLines intends to furnish to its unitholders annual reports containing
audited financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year of
TC PipeLines.
------------------
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors and other factors noted
throughout this prospectus, including certain risks and uncertainties, could
cause our actual results to differ materially from those contained in any
forward-looking statement.
ii
TABLE OF CONTENTS
PROSPECTUS SUMMARY.................................................................... 1
TC PipeLines, LP.................................................................... 1
Northern Border Pipeline System..................................................... 1
Business Strategy and Competitive Strengths......................................... 2
TransCanada PipeLines Limited....................................................... 4
The Transactions.................................................................... 5
Summary Pro Forma Financial Data of the Partnership................................. 7
Summary Historical Financial and Operating Data of Northern Border Pipeline......... 8
Summary of Risk Factors............................................................. 9
Cash Available for Distribution..................................................... 14
Partnership Structure and Management................................................ 16
Ownership Chart..................................................................... 17
The Offering........................................................................ 18
Summary of Tax Considerations....................................................... 24
RISK FACTORS.......................................................................... 27
Risks Inherent in the Partnership's Business........................................ 27
Risks Inherent in an Investment in the Partnership.................................. 32
Conflicts of Interest and Fiduciary Responsibilities................................ 36
Tax Risks........................................................................... 38
THE TRANSACTIONS...................................................................... 42
USE OF PROCEEDS....................................................................... 43
PRO FORMA CAPITALIZATION.............................................................. 44
DILUTION.............................................................................. 45
CASH DISTRIBUTION POLICY.............................................................. 46
General............................................................................. 46
Quarterly Distributions of Available Cash........................................... 47
Distributions from Operating Surplus During Subordination Period.................... 48
Distributions from Operating Surplus After Subordination Period..................... 49
Incentive Distribution Rights--Hypothetical Annualized Yield........................ 49
Distributions from Capital Surplus.................................................. 50
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels......... 51
Distributions of Cash Upon Liquidation.............................................. 52
CASH AVAILABLE FOR DISTRIBUTION....................................................... 54
SELECTED PRO FORMA FINANCIAL DATA OF THE PARTNERSHIP.................................. 56
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF NORTHERN BORDER PIPELINE.......... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 58
Pro Forma Financial Condition and Results of Operations of the Partnership.......... 58
Results of Operations of Northern Border Pipeline................................... 58
Liquidity and Capital Resources of Northern Border Pipeline......................... 60
Description of Indebtedness of Northern Border Pipeline............................. 61
Interest Rate Risk Management of Northern Border Pipeline........................... 63
Project Cost Containment Mechanism.................................................. 63
Recent Developments................................................................. 64
Year 2000........................................................................... 64
MARKET OVERVIEW....................................................................... 66
BUSINESS OF THE PARTNERSHIP........................................................... 68
iii
Business Strategy and Competitive Strengths of the Partnership...................... 68
BUSINESS OF NORTHERN BORDER PIPELINE.................................................. 70
Structure........................................................................... 70
General............................................................................. 70
The Pipeline System................................................................. 70
The Chicago Project................................................................. 71
Project 2000........................................................................ 72
Competition......................................................................... 72
Shippers............................................................................ 72
FERC Regulation..................................................................... 73
Environmental and Safety Matters.................................................... 76
Properties.......................................................................... 76
Litigation.......................................................................... 77
How to Obtain Other Information About the Partnership............................... 78
MANAGEMENT............................................................................ 79
Partnership Management.............................................................. 79
Directors and Executive Officers of the General Partner............................. 80
Reimbursement of Expenses of the General Partner and Its Affiliates................. 81
Executive Compensation.............................................................. 81
Compensation of Directors........................................................... 81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 82
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES.................................. 83
Conflicts of Interest............................................................... 83
Fiduciary and Other Duties.......................................................... 86
DESCRIPTION OF THE COMMON UNITS....................................................... 88
The Units........................................................................... 88
Transfer Agent and Registrar........................................................ 89
Transfer of Common Units............................................................ 89
DESCRIPTION OF THE SUBORDINATED UNITS................................................. 91
Conversion of Subordinated Units.................................................... 91
Limited Voting Rights............................................................... 91
Distributions Upon Liquidation...................................................... 92
THE PARTNERSHIP AGREEMENT............................................................. 93
Organization and Duration........................................................... 93
Purpose............................................................................. 93
Power of Attorney................................................................... 93
Capital Contributions............................................................... 94
Limited Liability................................................................... 94
Issuance of Additional Securities................................................... 95
Amendment of Partnership Agreement.................................................. 95
Merger, Sale or Other Disposition of Assets......................................... 97
Termination and Dissolution......................................................... 97
Liquidation and Distribution of Proceeds............................................ 98
Withdrawal or Removal of the General Partner........................................ 98
Transfer of General Partner Interest and Incentive Distribution Rights.............. 99
TransCanada Ownership of General Partner............................................ 100
Change of Management Provisions..................................................... 100
Limited Call Right.................................................................. 100
Meetings; Voting.................................................................... 101
Status as Limited Partner or Assignee............................................... 101
Non-Citizen Assignees; Redemption................................................... 102
iv
Indemnification..................................................................... 102
Books and Reports................................................................... 103
Right to Inspect Partnership Books and Records...................................... 103
Registration Rights................................................................. 103
UNITS ELIGIBLE FOR FUTURE SALE........................................................ 104
NORTHERN BORDER PIPELINE PARTNERSHIP AGREEMENT........................................ 106
Organization and Partners........................................................... 106
Purpose............................................................................. 106
Management and Voting............................................................... 106
Operator............................................................................ 108
Cash Distribution Policy............................................................ 108
Audit and Compensation Committee.................................................... 109
Allocation of Income, Gain, Loss and Deduction...................................... 109
Transfer of Interest................................................................ 109
Additional Capital Requirements..................................................... 109
Change to Corporate Form............................................................ 109
Withdrawal of General Partners...................................................... 110
Indemnification..................................................................... 110
Termination and Dissolution......................................................... 110
Liquidation and Distribution of Proceeds............................................ 110
TAX CONSIDERATIONS.................................................................... 111
Legal Opinions and Advice........................................................... 111
Tax Rates........................................................................... 112
Partnership Status.................................................................. 112
Limited Partner Status.............................................................. 113
Tax Consequences of Unit Ownership.................................................. 114
Allocation of Partnership Income, Gain, Loss and Deduction.......................... 116
Tax Treatment of Operations......................................................... 117
Disposition of Common Units......................................................... 120
Uniformity of Units................................................................. 123
Tax-Exempt Organizations and Certain Other Investors................................ 124
Administrative Matters.............................................................. 125
State, Local and Other Tax Considerations........................................... 127
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS............................... 128
VALIDITY OF THE COMMON UNITS.......................................................... 129
EXPERTS............................................................................... 129
UNDERWRITING.......................................................................... U-1
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Appendix A--Form of Agreement of Limited Partnership.................................. A-1
Appendix B--Form of Application for Transfer of Common Units.......................... B-1
Appendix C--Glossary of Certain Terms................................................. C-1
Appendix D--Pro Forma Available Cash from Operating Surplus........................... D-1
v
GUIDE TO READING THIS PROSPECTUS
The following should help you understand some of the conventions and defined
terms used in this prospectus:
- Periodically throughout this prospectus, we refer to ourselves, TC
PipeLines, LP, as "we," "us", "TC PipeLines" or "the Partnership."
Generally we refer to ourselves as "we" or "us" when discussing operations
(such as "We were recently formed to acquire a 30% general partner
interest in Northern Border Pipeline Company"), and as "the Partnership"
when discussing our entity or its structure (such as "The Partnership
conducts its operations through the Intermediate Partnership"). In
addition, as the context requires, references to "we", "us" and "the
Partnership" include TC PipeLines Intermediate Limited Partnership, our
subsidiary partnership (the "Intermediate Partnership").
- "Northern Border Pipeline" means Northern Border Pipeline Company, a Texas
general partnership engaged in pipeline transportation of natural gas.
- For ease of reference, a Glossary of certain terms used in this prospectus
is included as Appendix C to this prospectus. Capitalized terms not
otherwise defined have the meanings given in the Glossary.
- Unless otherwise specified, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
- Unless otherwise specified, references in this prospectus to "$" or
"dollars" are to United States dollars.
vi
PROSPECTUS SUMMARY
THE SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN THE COMMON UNITS. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
TC PIPELINES, LP
We were recently formed to acquire, own and participate in the management of
United States-based pipeline assets. We will own a 30% interest in Northern
Border Pipeline Company ("Northern Border Pipeline"). TC PipeLines GP, Inc., a
newly formed corporation and a wholly owned subsidiary of TransCanada PipeLines
Limited ("TransCanada"), serves as our General Partner (the "General Partner"),
and will manage and operate our activities.
Northern Border Pipeline owns a 1,213-mile United States interstate pipeline
system (the "Pipeline System") that transports natural gas from the
Montana-Saskatchewan border to natural gas markets in the midwestern United
States. The Pipeline System was initially constructed in 1982 with capacity
additions to the Pipeline System in 1991, 1992 and 1998. The Chicago Project,
completed in late 1998, increased the Pipeline System's receipt capacity by
41.8% to its current capacity of 2,375 million cubic feet per day ("MMcfd"). In
1997, Northern Border Pipeline transported 18.7% of the total amount of Canadian
natural gas shipped to United States markets.
In 1997, approximately 87% of the natural gas transported by the Pipeline
System was produced in the Western Canadian Sedimentary Basin ("WCSB") located
in the provinces of Alberta, British Columbia and Saskatchewan. As of December
31, 1997, the WCSB had remaining established reserves of natural gas of 61
trillion cubic feet ("Tcf").
Northern Border Pipeline generates revenue from agreements with shippers for
the receipt and delivery of natural gas at points along the Pipeline System.
Northern Border Pipeline transports natural gas under a cost of service tariff
regulated by the United States Federal Energy Regulatory Commission ("FERC")
under which shippers are required to pay transportation costs whether or not
they use any capacity. As a result of the long-term nature of its shipper
contracts, the financial results of Northern Border Pipeline are not immediately
affected by reductions in capacity utilization. Furthermore, Northern Border
Pipeline does not own the natural gas that it transports and therefore it does
not assume any natural gas commodity price risk.
NORTHERN BORDER PIPELINE SYSTEM
Northern Border Pipeline transports natural gas from the
Montana-Saskatchewan border near Port of Morgan, Montana, to interconnecting
pipelines in the upper midwest of the United States. The Pipeline System has
pipeline access to natural gas reserves in both the WCSB in Canada and the
Williston Basin in the United States. Interconnecting pipeline facilities
provide Northern Border Pipeline shippers access to markets in the Midwest,
including Chicago. Access beyond Chicago to markets throughout the United States
is provided by transportation, displacement and exchange arrangements by third
parties. Northern Border Pipeline's capacity utilization was an average of 102%
of summer design capacity during 1997.
Natural gas produced in Canada and delivered to Northern Border Pipeline has
increased from 483.4 billion cubic feet ("Bcf") in 1993 to 543.6 Bcf in 1997.
Transportation capacity has been increased by up to 700 MMcfd as a result of the
Chicago Project becoming operational in late 1998.
The first segment of the Pipeline System, which extends from the Canadian
border to Ventura, Iowa, was completed and placed in service in 1982. In 1991,
an additional
1
compressor station was added to the Pipeline System. In 1992, Northern Border
Pipeline acquired and placed in service a 147-mile pipeline extension which
terminates near Harper, Iowa. As a result of these 1991 and 1992 projects, the
throughput capacity of the Pipeline System increased by 463 MMcfd to 1,675
MMcfd.
There were seven compressor stations on the Pipeline System as of December
31, 1997. Other facilities included three pipeline field offices and warehouses,
six major measurement stations and 39 microwave tower sites.
The Chicago Project, completed in December 1998, extended the Pipeline
System from Harper, Iowa to Manhattan, Illinois near Chicago, and expanded the
Pipeline System's capacity. New contracts with shippers entered into in
connection with the Chicago Project provide for additional receipts into the
Pipeline System of 700 MMcfd of natural gas. As a result of the Chicago Project,
total receipt capacity on the Pipeline System is 2,375 MMcfd. The Chicago
Project includes 243 miles of new pipeline and 147 miles of pipeline loop, as
well as the installation of additional compression facilities. In connection
with the Chicago Project, Northern Border Pipeline added eight new compressor
stations and upgraded five existing compressor stations.
Interconnecting pipeline facilities provide Northern Border Pipeline's
shippers with flexible access to end markets. The interconnect at Ventura, Iowa
functions as a large market center, where natural gas volumes transported on the
Pipeline System are sold, traded and received for transport to significant
consuming markets in the Midwest and to interconnecting pipeline facilities
destined for other markets. The interconnect at Harper, Iowa with Natural Gas
Pipeline Company of America ("NGPL") and the Chicago Project extension to
Manhattan, Illinois also provide access for natural gas transported through the
Pipeline System to Chicago and other midwest markets and to interconnecting
pipeline facilities destined for other markets.
The Pipeline System is operated by Northern Plains Natural Gas Company
("Northern Plains"), a wholly owned subsidiary of Enron Corp. ("Enron").
Management of Northern Border Pipeline is overseen by a four-member management
committee (the "Northern Border Pipeline Management Committee"). We designate
one representative to the Northern Border Pipeline Management Committee with 30%
voting power and the general partners of Northern Border Partners L.P. ("NBP"),
a publicly traded partnership that is not affiliated with us, designate three
representatives having an aggregate 70% voting power.
BUSINESS STRATEGY AND COMPETITIVE STRENGTHS
The Partnership was created to acquire, own and participate in the
management and growth of United States-based pipeline assets.
We believe that the continuing growth in demand for natural gas is driving
the need for new pipeline capacity in North America. The Pipeline System's
Chicago Project is an example of a project built to transport Canadian natural
gas to growing markets. With increasing volumes of natural gas expected to reach
the northern midwest market during 1999 to 2001 and with the growth of markets
in the northeastern United States, we believe that there will be a need to
transport increasing volumes of natural gas between these two regions.
We intend to capitalize on these opportunities by facilitating the flow of
natural gas to the growing natural gas consuming markets in the United States.
By participating in selected expansions and targeted acquisitions we will seek
to leverage the strategic location and capability of the Pipeline System. Our
strategy is designed to generate increasing amounts of cash from operations to
distribute to our unitholders.
2
Key elements of our business strategy are to:
- SERVE GROWING MARKETS FOR NATURAL GAS IN THE UNITED STATES. Natural gas
consumption in the United States northeast markets increased by 18.8% from
1994 to 1997 and we expect these markets to grow at approximately 3.5% per
year at least until 2003. We anticipate acquiring ownership interests in
and enhancing transmission pathways which serve these regional demands for
natural gas.
- PURSUE STRATEGIC ACQUISITIONS. We will seek to acquire significant
ownership positions in fully operating pipeline transmission assets in the
United States. We will concentrate on acquiring ownership positions in
pipeline transmission assets that complement our existing asset to serve
growing markets for natural gas in the United States.
- CREATE VALUE BY ESTABLISHING CROSS-COUNTRY ROUTES. Through our
participation in extensions of the Pipeline System and through
acquisitions by the Partnership we envision establishing cross-country
routes for natural gas transmission. By facilitating cross-country routes
we would create a wider range of end-market options for shippers in order
to enhance the value of our existing asset and our future acquisitions.
- APPLY TRANSCANADA'S EXPERTISE TO EFFICIENTLY MANAGE ASSETS. We will use
the combined experience of our management and our affiliate TransCanada to
efficiently manage existing and newly acquired assets.
- CAPITALIZE ON NON-GAS OPPORTUNITIES. We believe that opportunities may
exist to acquire ownership interests in non-natural gas transmission
assets that will complement our other assets throughout the United States.
We believe we are well positioned to execute our strategy due to the
following strengths:
- RELATIONSHIP WITH TRANSCANADA. We believe that one of TransCanada's
strengths is the identification, development and construction of new
natural gas transmission pipelines. Due to our relationship with
TransCanada, these transmission assets may provide acquisition
opportunities for us.
- ACCESS TO PUBLIC CAPITAL. Our competitive advantage relative to large
corporate energy services companies (including TransCanada) arises from
our ability to access public capital with a structure that allows us to
distribute a greater portion of cash from operations.
- EXPERIENCED MANAGEMENT RESOURCES. In addition to the experienced
management of the General Partner, TransCanada will make available the
services of its management who have substantial experience in and
understanding of the natural gas transmission business, knowledge of
Canadian and United States regulatory matters and a demonstrated ability
to operate pipeline transmission assets in an efficient and profitable
manner.
- STRATEGICALLY LOCATED AND COST COMPETITIVE EXISTING PIPELINE ASSETS. The
Pipeline System links historically increasing natural gas production in
western Canada with the United States interstate pipeline system. We
believe that the interconnections with other interstate natural gas
transmission systems as well as the cost competitiveness of its tariffs
have made Northern Border Pipeline an attractive transportation option for
shippers.
- STABLE CASH FLOW FROM OPERATIONS. Pipeline transportation of natural gas
in a regulated environment is a relatively stable business well suited to
our strategy.
3
TRANSCANADA PIPELINES LIMITED
Our General Partner is a 100% wholly owned subsidiary of TransCanada.
TransCanada has extensive operations in four principal lines of business: energy
transmission, energy marketing, energy processing and international energy
services.
On the basis of market capitalization, TransCanada is one of the largest
energy services companies in North America. It is the largest carrier of natural
gas in North America by volume and operates the longest and most extensive
pipeline network in Canada. As of December 31, 1997, it transported
approximately 81% of all Canadian natural gas production, which represented 18%
of all North American natural gas production. Through the Canadian Mainline and
the Alberta System, TransCanada owns and operates natural gas transmission
systems with approximately 22,700 miles of pipeline. TransCanada extends its
reach in North America through various ownership interests in approximately
5,560 miles of natural gas and crude oil pipelines.
For the nine months ended September 30, 1998, TransCanada had revenues of
Cdn.$13 billion and net income from continuing operations of Cdn.$475 million.
As of September 30, 1998, TransCanada had assets of Cdn.$25 billion.
TransCanada's common shares trade primarily on the Toronto, Montreal and the New
York stock exchanges under the symbol TRP.
ENERGY TRANSMISSION
CANADIAN MAINLINE
TransCanada owns and operates a 9,005-mile natural gas transmission system
in Canada (the "Canadian Mainline"). The Canadian Mainline is a high pressure
pipeline which transports natural gas from western Canada to large, diverse
markets in eastern Canada and in the northeastern and midwestern United States.
Beginning at the Alberta-Saskatchewan border, the Canadian Mainline crosses the
provinces of Saskatchewan, Manitoba and Ontario and ends at the Quebec-Vermont
border. The Canadian Mainline also connects with other pipelines that deliver
natural gas to Canada and the United States.
ALBERTA SYSTEM
TransCanada owns and operates the Alberta System, which collects and
transports natural gas for use in Alberta and for delivery to connecting
pipelines (including the Canadian Mainline) at the Alberta border for delivery
to eastern Canada and export to the United States.
NORTH AMERICAN PIPELINE INVESTMENTS
TransCanada has ownership interests in other North American pipeline
systems. These interests include:
- a 50% interest in the Great Lakes System beginning at the Canada-United
States border near Emerson, Manitoba and extending through the United
States to Sarnia, Ontario;
- a 29% interest in the Iroquois System beginning at the Canada-United
States border near Iroquois, Ontario, extending through the states of New
York and Connecticut and ending in Long Island, New York;
- a 50% interest in Tuscarora Pipeline extending from Malin, Oregon to Reno,
Nevada;
- a 50% interest in Trans Quebec & Maritimes Pipeline extending from
Montreal to Quebec City, in the province of Quebec;
- a 69.5% interest in the Foothills (Sask.) System beginning at the Alberta-
Saskatchewan border near Empress, Alberta and extending to the Pipeline
System;
- a 74.5% interest in the Foothills (Alta.) System located within the
province of Alberta and connecting with the Foothills (Sask.) and the
Foothills (South B.C.) Systems;
4
- a 74.5% interest in the Foothills (South B.C.) System extending from the
Alberta-British Columbia border to the British Columbia-Idaho border;
- a 100% interest in the Alberta Natural Gas System extending from Alberta's
western border through British Columbia to the United States border;
- a 50% interest in Express Pipeline, a crude oil pipeline extending from
Hardisty, Alberta and ending near Wood River, Illinois; and
- a 21.4% interest in the Portland System, which is currently under
construction, extending from the Canada-United States border near
Pittsburg, New Hampshire and ending near Dracut, Massachusetts.
As discussed under "Business of the Partnership--Business Strategy and
Competitive Strengths of the Partnership", TransCanada's various United States
pipeline assets may provide opportunities for our growth through acquisitions.
OTHER BUSINESSES
TransCanada has a substantial energy commodity marketing business in North
America. Its diversified energy marketing business includes the marketing of
natural gas, natural gas liquids, crude oil, refined products and electricity.
TransCanada markets these energy commodities in both Canada and the United
States and provides a range of supply, storage and transportation services to
its customers.
TransCanada's energy processing operations consist of the processing of
hydrocarbons into other forms of energy and products in Canada and the United
States. The processing assets include natural gas gathering and processing
facilities, extraction plants, two specialty chemicals operations and
independent power plants, including a 70% interest in the Ocean State Power
generation plant.
TransCanada also invests in energy transmission and power generation
operations and investigates and develops energy-related business opportunities
outside of Canada and the United States.
THE TRANSACTIONS
We estimate that the net proceeds to the Partnership from the sale of common
units offered through this prospectus will be approximately $285 million
(assuming an initial public offering price of $19.50 per common unit and after
deducting underwriting discounts and commissions but before deducting expenses
incurred in connection with the offering). Concurrently with the closing of the
offering, the following transactions (the "Transactions") will take place:
- TransCan Northern Ltd. and TransCanada Border PipeLine Ltd. (the
"TransCanada Subsidiaries") will contribute their combined 30% general
partner interest in Northern Border Pipeline to the Partnership in
exchange for, in the case of TransCanada Border PipeLine Ltd., a number of
common units (which will not be outstanding after the Transactions), and,
in the case of TransCan Northern Ltd., (1) a number of common units (which
will not be outstanding after the Transactions), (2) 3,960,000
subordinated units, (3) a 2% combined general partner interest in the
Partnership and the Intermediate Partnership, (4) the Incentive
Distribution Rights, and (5) the Partnership's assumption of approximately
$135 million of indebtedness associated with the asset contributed by
TransCan Northern Ltd.;
- the Partnership will use a portion of the net proceeds of the offering to
repay the approximately $135 million of assumed indebtedness and to pay
expenses incurred in connection with the offering;
5
- the Partnership will use the remainder of the net proceeds to redeem all
of the common units issued to the TransCanada Subsidiaries; and
- TransCan Northern Ltd. will transfer its subordinated units, Incentive
Distribution Rights and general partner interest to the General Partner.
After giving effect to these transactions, the TransCanada Subsidiaries will
not own any direct interests in the Partnership, and the General Partner will
not own any common units but will own 3,960,000 subordinated units, the
Incentive Distribution Rights and the general partner interests.
The asset conveyed to the Partnership by the TransCanada Subsidiaries
constitutes all of the initial assets of the Partnership. Prior to the offering,
there has been no public market for the common units of the Partnership. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the common units.
We will use the net proceeds from any exercise of the underwriters'
over-allotment option to redeem subordinated units from the General Partner on a
one-for-one basis equal to the number of common units issued upon the exercise
of such option.
Concurrently with the closing of the offering, the Intermediate Partnership,
as borrower, will enter into a $ million unsecured revolving credit facility
(the "Revolving Credit Facility"), with TransCanada PipeLine USA Ltd. (a wholly
owned subsidiary of TransCanada), as lender. We may borrow up to $ million
from time to time under the Revolving Credit Facility to fund capital
expenditures, fund capital contributions to Northern Border Pipeline and for
working capital and other general business purposes, including enabling the
Partnership to make distributions on the units.
6
SUMMARY PRO FORMA FINANCIAL DATA OF THE PARTNERSHIP
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
(thousands of dollars,
except per unit amounts)
INCOME STATEMENT DATA:
Equity income from investment in Northern Border Pipeline
(1)..................................................... 21,615 21,832
General and administrative expenses....................... (900) (1,200)
-------------- --------------
Net income to partners.................................... 20,715 20,632
-------------- --------------
-------------- --------------
Net income per unit (1)................................... $ 1.04 $ 1.03
-------------- --------------
-------------- --------------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline (2)................ 236,777
Total assets.............................................. 236,778
Partners' capital
General partner (3)..................................... 4,737
Common units (3)........................................ 185,159
Subordinated units (3).................................. 46,882
--------------
236,778
--------------
--------------
- - ------------------------------
(1) Pro forma equity income represents 30% of the net income of Northern Border
Pipeline. The General Partner's allocation of pro forma net income is based
on an aggregate 2% interest in the Partnership, which has been deducted
before calculating the pro forma net income per unit. The computation of pro
forma net income per unit assumes that 15,640,000 common units and 3,960,000
subordinated units are outstanding at all times during the periods
presented.
(2) The pro forma investment balance as of September 30, 1998 represents the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCan Northern Ltd. and TransCanada
Border PipeLine Ltd. as of that date. The balance also equates to 30% of the
net assets of Northern Border Pipeline as of September 30, 1998.
(3) Pro forma partners' capital is allocated 2% to the General Partner, 78.2% to
common unitholders and 19.8% to subordinated unitholders.
For a more complete description of the assumptions used in preparing the
Summary Pro Forma Financial Data of the Partnership, see Notes to TC PipeLines,
LP Pro Forma Financial Statements, included elsewhere in this prospectus.
7
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF
NORTHERN BORDER PIPELINE
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)
----------- ----------- ---------- ----------- ---------- ------------ ------------
(UNAUDITED)
(thousands of dollars, except operating data)
INCOME STATEMENT DATA:
Operating revenues, net...... 145,476 140,369 186,050 201,943 206,497 211,580 205,242
Operations and maintenance... 16,872 21,027 28,522 26,974 25,573 27,682 25,793
Depreciation and
amortization............... 30,060 28,988 38,708 46,979 47,081 41,959 39,539
Taxes other than income...... 17,267 17,793 22,393 24,390 23,886 24,438 21,393
----------- ----------- ---------- ----------- ---------- ------------ ------------
Operating income........... 81,277 72,561 96,427 103,600 109,957 117,501 118,517
Interest expense............. (30,422) (24,162) (33,020) (33,117) (35,205) (38,424) (40,671)
Other income (expense)....... 21,196 4,955 9,365 3,360 (217) (1,919) (2,440)
----------- ----------- ---------- ----------- ---------- ------------ ------------
Net income................. 72,051 53,354 72,772 73,843 74,535 77,158 75,406
----------- ----------- ---------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ----------- ---------- ------------ ------------
CASH FLOW DATA:
Net cash provided by
operating activities....... 83,390 121,604 115,328 136,808 127,429 121,679 118,333
Capital expenditures......... 484,219 69,773 152,070 18,597 8,310 3,086 1,268
Distributions to partners.... 61,205 99,322 99,322 102,845 98,517 87,509 90,036
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment.................. 1,602,862 998,361 1,100,890 937,859 957,587 983,843 1,015,567
Total assets................. 1,653,804 1,043,262 1,147,120 974,137 1,011,361 1,063,210 1,097,383
Long-term debt, including
current maturities......... 724,000 410,000 459,000 377,500 410,000 445,000 470,000
Partners' capital............ 789,258 520,994 581,412 526,962 555,964 579,946 590,297
OPERATING DATA (UNAUDITED):
Natural gas delivered
(MMcf)..................... 463,209 471,695 633,280 633,908 615,133 597,898 570,469
Average throughput (MMcfd)... 1,733 1,761 1,770 1,764 1,720 1,663 1,592
- - ------------------------
(1) Certain figures have been reclassified to conform with the presentation used
in the audited financial statements for the year ended December 31, 1997.
8
SUMMARY OF RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP WILL
BE SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN
A SIMILAR BUSINESS. YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS IN EVALUATING AN
INVESTMENT IN THE COMMON UNITS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
- - - Our cash flow and performance are dependent upon the cash flow of Northern
Border Pipeline, which has a limited number of major customers, all of which
have entered into long-term contracts which require customers to pay
regardless of whether they transport natural gas. As a result, Northern Border
Pipeline's ability to make distributions will depend upon the ability of its
customers to pay and not upon the amount of natural gas transported. The
failure of these customers to perform under their contracts or the exercise by
these customers of contractual termination rights could have an adverse effect
on Northern Border Pipeline's cash flow and financial condition, unless
Northern Border Pipeline reallocates costs to other shippers (subject to FERC
approval) or obtains contracts to replace their current contracts or it
otherwise obtains shipper commitments that replace the lost revenues.
- - - Cash distributions are not guaranteed and may fluctuate with our performance.
Our cash flow is dependent upon transportation contracts entered into by
Northern Border Pipeline with shippers on the Pipeline System. Cash
distributions will also be affected by the funding of reserves, expenditures
and other matters, some of which may be beyond our control. Our ability to
distribute cash may be limited during the existence of any events of default
under the terms of the debt of Northern Border Pipeline or any debt of the
Partnership.
- - - Northern Border Pipeline is subject to extensive regulation by the FERC.
Revenues from the Pipeline System are determined in accordance with a cost of
service form of tariff approved by the FERC. We cannot give any assurance that
the FERC will continue to permit Northern Border Pipeline to use this form of
tariff. Northern Border Pipeline is required to file a rate proceeding with
the FERC by May 31, 1999. A reduction in the FERC-approved return on equity
(currently 12.0%), a reduction in its rate base, the exclusion of cost of
service amounts or any other adverse change would adversely affect the amount
of cash available for distribution to you.
- - - Our future performance may depend on Northern Border Pipeline's successful
completion of projects that will be included in its rate base. In order to
avoid a reduction in the level of cash available for distributions to its
partners (and, consequently, cash potentially available for distribution by us
to you), based on its current FERC-approved tariff, Northern Border Pipeline
must maintain or increase its rate base through projects that maintain or add
to existing pipeline facilities. Northern Border Pipeline's ability to
complete such replacements or additions is subject, among other things, to
numerous business, economic, regulatory, competitive and political
uncertainties beyond its control and there is no assurance that such projects
will be completed.
- - - The FERC may not permit Northern Border Pipeline to include certain costs
associated with the Chicago Project in its rate base. In such case, Northern
Border Pipeline would not be able to recover such costs from its shippers and
cash available for distribution to you would be adversely affected.
- - - The long-term financial conditions of both Northern Border Pipeline and the
Partnership are dependent on the continued availability of western Canadian
natural gas for export to the United States. We believe that substantial
additional natural gas reserves
9
remain to be discovered, developed and produced in western Canada. These
natural gas reserve prospects may require significant capital expenditures by
others for exploration and development drilling, as well as the installation
of production, gathering, storage, transportation and other facilities that
permit gas to be produced and delivered to pipelines that interconnect with
the Pipeline System. Low prices for natural gas, regulatory limitations or the
lack of available capital for such projects could adversely affect the
development of additional reserves and production, gathering, storage,
transportation and other facilities in this area. We cannot give any
assurances as to the timing of discovery or development of additional natural
gas reserves or their availability to interconnect with the Pipeline System.
- - - Northern Border Pipeline faces competition from planned and existing pipeline
systems with respect to its transportation services.
- - - Northern Border Pipeline is required to comply with various affirmative and
negative covenants in the loan documents relating to its debt, including a
restriction on making distributions to the partners of Northern Border
Pipeline if an event of default exists or would exist upon making such
distribution.
- - - In connection with our acquisition strategy, we cannot give any assurances
that, among other things: (1) we will be able to identify attractive
acquisition candidates; (2) we will be able to obtain necessary financing on
acceptable terms; (3) any acquisitions will not be dilutive to earnings and
distributions; and (4) any additional debt incurred to finance an acquisition
will not affect our ability to make distributions to you. Our acquisition
strategy also involves numerous risks including: (1) difficulties inherent in
the integration of operations and systems, (2) the diversion of management's
attention from other business concerns, and (3) the potential loss of key
employees of acquired businesses.
- - - Northern Border Pipeline's operations are subject to certain operational
hazards and unforseen interruptions, such as natural disasters, adverse
weather, accidents or other events beyond our General Partner's control.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
- - - NBP (which is unaffiliated with us) controls 70% of the voting power of the
Northern Border Pipeline Management Committee. Therefore, except as to matters
requiring unanimity, NBP has the power to approve a particular matter by
majority vote despite the fact that our representative voted against such
project or other matter. NBP has three general partners, two affiliated with
Enron, and one affiliated with The Williams Companies, Inc. ("Williams").
- - - Voting rights of the unitholders are limited. As a result of such limited
voting rights, unitholders will not have the ability to participate in
Partnership governance to the same degree as holders of capital stock in a
corporation.
- - - Our General Partner will manage and operate the Partnership. Unitholders will
have no right to elect our General Partner on an annual or other continuing
basis, and the General Partner generally may not be removed except pursuant to
the vote of the holders of at least 66 2/3% of the outstanding units,
including units owned by the General Partner and its affiliates. As a result,
unitholders will have limited say in matters affecting the operation of the
Partnership, and if such holders are in disagreement with the decisions of the
General Partner, they may remove our General Partner only as provided in the
Partnership Agreement.
- - - Certain change of management provisions in the Partnership Agreement are
intended to discourage a person or group from attempting to remove our General
Partner or otherwise change management of the Partnership.
10
- - - In establishing the terms of the offering, including the number and initial
offering price of the common units, the number of common units and
subordinated units to be received by the General Partner and its affiliates
and the Minimum Quarterly Distribution, we have relied on certain assumptions
concerning our future operations. Although we believe our assumptions are
within a range of reasonableness, whether the assumptions are realized is not,
in many cases, within our control and cannot be predicted with any degree of
certainty. If our assumptions are not realized, the actual Available Cash from
Operating Surplus that we generate could be substantially less than that
currently expected and may be less in any quarter than that required to make
the Minimum Quarterly Distribution. See "Cash Available for Distribution".
- - - The Partnership may sell additional limited partner interests, diluting
existing unitholders' interests, subject to limited restrictions.
- - - The assumed initial public offering price of $19.50 per unit exceeds pro forma
tangible net book value of $11.84 per unit. You will incur immediate and
substantial dilution of $7.66 per common unit.
- - - Prior to the offering there has been no public market for the common units.
- - - If 20% or less of the common units are held by persons other than our General
Partner and its affiliates, our General Partner will have the right to
purchase all, but not less than all, of the remaining common units held by
such unaffiliated persons at the then current market price.
- - - In limited circumstances, the business and assets of Northern Border Pipeline
may be transferred to a corporation without the vote or consent of
unitholders. See "Northern Border Pipeline Partnership Agreement-- Change to
Corporate Form". We believe that it is unlikely that circumstances requiring
such a transfer will occur. However, a transfer to corporate form would result
in Northern Border Pipeline being subject to corporate income taxes and would
likely be materially adverse to its (and, therefore, our) results of
operations and financial condition.
- - - If the Partnership were deemed to be an unregistered "investment company"
under the Investment Company Act of 1940, as amended (the "1940 Act"), its
contracts may be voidable and its offers of securities may be subject to
rescission, as well as other materially adverse consequences. While we believe
that the Partnership is not an investment company under the 1940 Act, there is
a risk that a court could reach a contrary conclusion.
- - - We do not presently have sufficient stand-alone management resources to
operate without services to be provided by TransCanada and are largely
dependent upon TransCanada to pursue our business plan as described under
"Business of the Partnership--Business Strategy and Competitive Strengths of
the Partnership".
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
- - - Since our General Partner is related to both TransCanada and to us (its
directors and officers have fiduciary duties to TransCanada and it has
fiduciary duties to us), conflicts of interest between us and TransCanada may
arise from time to time. The following situations, among others, could give
rise to conflicts of interest:
- our General Partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings and reserves, which can
impact the amount of cash that is distributed by us to our unitholders
and to our General Partner;
- our General Partner may take actions on behalf of the Partnership that
have the effect of enabling our General Partner or its affiliates to
receive repayment of amounts outstanding under the Revolving Credit
Facility, distributions on their own units or Incentive Distribution
Rights or
11
hastening the expiration of the Subordination Period or the conversion of
their subordinated units into common units;
- certain officers of our General Partner, who will provide services to us,
will also devote significant time to the businesses of our General
Partner's affiliates and will be compensated by these affiliates for the
services rendered to them; and
- our General Partner would negotiate the terms of any asset acquisition
from TransCanada, subject to approval by the Conflicts Committee
consisting of the unaffiliated directors of the General Partner.
- - - Also, our General Partner is permitted to resolve conflicts of interest by
considering the interests of all the parties to the conflict. Therefore, our
General Partner can consider the interests of TransCanada if a conflict of
interest arises.
- - - You have agreed in the Partnership Agreement to limit the liability and reduce
the fiduciary duties of our General Partner to the unitholders. The
Partnership Agreement also restricts the remedies available to unitholders for
actions that might otherwise constitute breaches of fiduciary duty. Holders of
common units are deemed to have consented to certain actions and conflicts of
interest that might otherwise be deemed a breach of fiduciary or other duties
under applicable state law.
- - - Affiliates of the General Partner currently engage in and in the future are
expected to continue to engage in other businesses or activities, including
those that might be in direct competition with the Partnership. By purchasing
a common unit, you effectively consent to such actions and the Partnership
Agreement does not prohibit such actions.
TAX RISKS
- - - The availability to you of the federal income tax benefits of an investment in
the Partnership depends, in large part, on the classification of the
Partnership as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting the Partnership. We have, however, received an opinion
from the law firm of Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations) that we will be classified as a
partnership for federal income tax purposes. You should be aware that opinions
of counsel are based on certain factual assumptions and are not binding on the
IRS or any court.
- - - You will be required to pay income taxes on your allocable share of the
Partnership's income, whether or not you receive cash distributions from the
Partnership.
- - - Distributions to you in excess of the taxable income allocated to you would
reduce your tax basis, with the result that you may recognize a substantial
taxable gain upon a sale of your units, even if the sale price is less than
the original cost. Some part of that gain will likely be ordinary income.
- - - Investment in common units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans)
from the ownership of a common unit will be unrelated business taxable income
and thus will be taxable to such a unitholder.
- - - In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by the
Partnership will generally only be available to offset future income generated
by the Partnership and cannot be used to offset income from other activities,
including other passive activities or investments. Passive losses which are
not deductible because they exceed the unitholder's income generated by the
Partnership may be deducted in full when
12
the unitholder disposes of his entire investment in the Partnership in a fully
taxable transaction to an unrelated party.
- - - The General Partner has applied to register the Partnership as a "tax shelter"
with the Secretary of the Treasury. We cannot give any assurance that the
Partnership will not be audited by the IRS or that tax adjustments will not be
made. Any adjustments in the Partnership's tax returns will lead to
adjustments in your tax return and may lead to audits of your tax return and
adjustments of items unrelated to the Partnership.
- - - The Partnership will adopt certain depreciation and amortization conventions
that do not conform with all aspects of certain proposed and final Treasury
regulations. A successful challenge to those conventions by the IRS could (1)
adversely affect the amount of tax benefits available to a purchaser of common
units, (2) affect the timing of such tax benefits or the amount of gain from
the sale of common units, (3) have a negative impact on the value of the
common units or (4) result in audit adjustments to the tax returns of
unitholders.
- - - You will likely be required to file state and local income tax returns and pay
state and local income taxes in some or all of the various jurisdictions in
which the Partnership does business or owns property. The Partnership will
initially own property or do business in Illinois, Iowa, Minnesota, Nebraska,
North Dakota, South Dakota and Texas of which states only Texas and South
Dakota do not currently impose a personal income tax.
See "Risk Factors", "Cash Distribution Policy", "Cash Available for
Distribution", "Conflicts of Interest and Fiduciary Responsibilities", "The
Partnership Agreement" and "Tax Considerations" for a more detailed description
of these and other risk factors and conflicts of interest that should be
considered in evaluating an investment in the common units.
13
CASH AVAILABLE FOR DISTRIBUTION
We believe that we should have sufficient Available Cash from our Operating
Surplus (including borrowings under the Revolving Credit Facility) to enable us
to distribute the Minimum Quarterly Distribution on the common units and
subordinated units to be outstanding immediately after the consummation of the
offering with respect to each quarter at least through the quarter ending March
31, 2002. Available Cash for any quarter will consist generally of all cash on
hand at the end of such quarter, as adjusted for reserves. The definition of
Available Cash is set forth in the Glossary. Operating Surplus generally
consists of cash generated from operations after deducting related expenditures
and other items, plus $ million. Our belief is based on a number of
assumptions, including the assumptions that:
- there will be no significant changes in Canadian law or export policy that
would adversely affect the levels of imports of Canadian natural gas into
the United States;
- there will be no significant changes in FERC regulation, including the
ratemaking methodology, which generally allows Northern Border Pipeline to
recover its costs and earn a 12.0% return on equity with a deemed income
tax cost recovery component;
- the project cost containment mechanism, which was instituted to allocate
the risks of the levels of capital costs associated with the Chicago
Project between Northern Border Pipeline and its shippers, results in
Northern Border Pipeline being allowed to include in its rate base the
entire cost of construction of the Chicago Project;
- Northern Border Pipeline's Project 2000 achieves an in-service date on or
before November 1, 2000. See "Business of Northern Border
Pipeline--Project 2000";
- Northern Border Pipeline's debt/equity capitalization remains at
approximately its current ratio;
- business, economic, regulatory, political and competitive conditions will
not change substantially; and
- ongoing maintenance capital expenditures and/or capital contributions to
Northern Border Pipeline will be funded through a combination of cash
reserved by us and/or short-term financings by us.
Although we believe these assumptions are within a range of reasonableness,
whether they are realized is not, in a number of cases, within our control and
cannot be predicted with any degree of certainty. In the event that our
assumptions are not realized, the actual Available Cash from our Operating
Surplus could be substantially less than that currently expected and could,
therefore, be insufficient to permit us to make cash distributions at the levels
described above. In addition, the terms of Northern Border Pipeline's
indebtedness will restrict the ability of Northern Border Pipeline to distribute
cash to its general partners (including the Intermediate Partnership) in the
event of a default under the terms of such indebtedness. Accordingly, we can
give no assurance that we will make distributions of the Minimum Quarterly
Distribution or any other amounts. See "Risk Factors--Risks Inherent in an
Investment in the Partnership", "Cash Available for Distribution" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". We do not intend to update the expression of belief set forth
above.
We will need $30.0 million of Available Cash from our Operating Surplus to
distribute the Minimum Quarterly Distribution for four quarters on the common
units and the subordinated units and make the related distribution on the
combined 2% general partner interest (approximately $23.5 million for the common
units, approximately $5.9 million for the subordinated units and approximately
14
$0.6 million for the combined 2% general partner interest). These amounts for
three quarters would be $22.5 million in total (approximately $17.6 million for
the common units, approximately $4.4 million for the subordinated units and
approximately $0.5 million for the combined general partner interest). If the
Transactions to be consummated at the closing of the offering had been completed
on January 1, 1997, pro forma Available Cash from our Operating Surplus
generated during 1997 would have been approximately $28.6 million. The amount of
pro forma Available Cash from our Operating Surplus generated for the nine
months ended September 30, 1998 would have been approximately $17.5 million.
These amounts would not have been sufficient to allow us to distribute the
Minimum Quarterly Distribution on the common units and the subordinated units
and the related distribution on the general partner interest with respect to
such periods by approximately $1.4 million for 1997 and approximately $5.0
million for the nine months ended September 30, 1998.
The amounts of pro forma Available Cash from Operating Surplus set forth
above were derived from the pro forma financial statements of the Partnership
and the historical financial statements of Northern Border Pipeline in the
manner set forth in Appendix D. The pro forma adjustments are based upon
currently available information and certain estimates and assumptions. The pro
forma financial statements do not purport to present our results of operations
of the Partnership had the Transactions actually been completed as of the dates
indicated. Furthermore, Available Cash from Operating Surplus as defined in the
Partnership Agreement is a cash accounting concept, while our pro forma
financial statements and Northern Border Pipeline's historical financial
statements have been prepared on an accrual basis. As a consequence, the amount
of pro forma Available Cash from Operating Surplus shown above should be viewed
only as a general indication of the amount of Available Cash from Operating
Surplus that we might have generated had the Partnership been formed in earlier
periods. For definitions of Available Cash and Operating Surplus, see the
Glossary.
15
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Intermediate Partnership will own our 30% general partner interest in
Northern Border Pipeline and the Intermediate Partnership or a similar entity
will own any other operating assets that we may acquire. Upon consummation of
the Transactions, the Partnership will own a 98.9899% limited partner interest
in the Intermediate Partnership and our General Partner will own a 1% general
partner interest in the Partnership and a 1.0101% general partner interest in
the Intermediate Partnership. The General Partner, therefore, will own an
aggregate 2% general partner interest in the Partnership and the Intermediate
Partnership on a combined basis.
Following the offering, the executives who currently manage TransCanada's
investment in Northern Border Pipeline will manage and operate our business as
the executives of our General Partner or its affiliates. Our General Partner
will not receive any management fee or other compensation in connection with its
management of the Partnership, but will be reimbursed for all direct and
indirect expenses incurred on behalf of the Partnership (including wages,
salaries, incentive compensation and the cost of employee benefit plans paid or
provided to employees, officers and directors of our General Partner) and all
other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by our General Partner and its affiliates in
connection with the operation of the Partnership's business.
TransCanada has agreed with the underwriters of the offering that it will
retain beneficial ownership of our General Partner until both (1) TransCanada
(or an affiliate) is no longer providing the Revolving Credit Facility and (2)
six months after such time as none of the officers of our General Partner are
directors, officers or employees of TransCanada or its other affiliates.
Conflicts of interest may arise between our General Partner and its
affiliates, including TransCanada, on the one hand, and the Partnership, the
Intermediate Partnership and the unitholders, on the other, including conflicts
relating to the compensation of the directors, officers and employees of our
General Partner and the determination of fees and expenses that are allocable to
the Partnership. Our General Partner will have a conflicts committee (the
"Conflicts Committee"), consisting of two independent members of its board of
directors, that will be available at our General Partner's discretion to review
matters involving conflicts of interest. See "Management" and "Conflicts of
Interest and Fiduciary Responsibilities".
Our principal executive offices are located at Four Greenspoint Plaza, 16945
Northchase Drive, Houston, Texas 77060 and our phone number is (281) 539-4500.
The following chart depicts the organization and ownership of the
Partnership, the Intermediate Partnership and Northern Border Pipeline after
giving effect to the consummation of the Transactions, including the sale of the
common units offered hereby, and assuming that the underwriters' over-allotment
option is not exercised. The percentages reflected in the organization chart
represent the approximate ownership interest in each of the Partnership and the
Intermediate Partnership individually and not on an aggregate basis. Except for
the organization chart, the ownership percentages referred to in this prospectus
reflect the approximate effective ownership interest of the unitholders in the
Partnership and the Intermediate Partnership on a combined basis. The 2%
ownership of the General Partner referred to in this prospectus reflects the
approximate effective ownership interest of our General Partner in the
Partnership and the Intermediate Partnership on a combined basis.
16
[Ownership Chart]
- - ------------------------
(1) Northern Border Intermediate Limited Partnership, a subsidiary of Northern
Border Partners, L.P., is not affiliated with us.
17
THE OFFERING
Securities Offered................ 15,640,000 common units (17,986,000 common units if the
underwriters' over-allotment option is exercised in
full).
Units to Be Outstanding After the
Offering........................ 15,640,000 common units and 3,960,000 subordinated
units, representing an aggregate 78.2% and 19.8% limited
partner interest in the Partnership, respectively. If
the underwriters' over-allotment option is exercised in
full, 2,346,000 additional common units will be issued
by the Partnership. The net proceeds from any exercise
of the underwriters' over-allotment option will be used
to redeem subordinated units from the General Partner on
a one-for-one basis. Accordingly, if the underwriters'
over-allotment option is exercised in full 17,986,000
common units and 1,614,000 subordinated units,
representing an aggregate 89.9% and 8.1% limited partner
interest in the Partnership, respectively, will be
outstanding.
Distributions of Available Cash... - Available Cash will generally be distributed 98% to
unitholders and 2% to the General Partner within 45
days after the end of each quarter. The first
distribution to the unitholders will be made within
45 days after the quarter ending March 31, 1999. The
Minimum Quarterly Distribution for the period from
the closing of the offering through March 31, 1999
will be adjusted downward based on the actual length
of such period.
- If distributions of Available Cash from our Operating
Surplus exceed the Minimum Quarterly Distribution and
certain other specified target levels ("Target
Distribution Levels"), the General Partner will
receive a percentage of such excess distributions
that will increase to up to 50% of the excess
distributions above the highest Target Distribution
Level. See "Cash Distribution Policy-- Incentive
Distribution Rights--Hypothetical Annualized Yield".
Distributions to Common and
Subordinated Unitholders........ - We intend, to the extent there is sufficient
Available Cash from our Operating Surplus, to distribute
to each holder of common units at least the Minimum
Quarterly Distribution of $0.375 per common unit per
quarter. The Minimum Quarterly Distribution is not
guaranteed and is subject to adjustment as described
under "Cash Distribution Policy--Adjustment of
Minimum Quarterly Distribution and Target
Distribution Levels".
- With respect to each quarter during the Subordination
Period, which will generally not end prior to March
31, 2004, the common unitholders will generally have
the right to receive the Minimum Quarterly
Distribution, plus any arrearages thereon ("Common
Unit Arrearages"),
18
and our General Partner will have the right to
receive the related distribution on its general
partner interest, before any distribution of
Available Cash from our Operating Surplus is made to
the subordinated unitholders. This subordination
feature will enhance our ability to distribute the
Minimum Quarterly Distribution on the common units
during the Subordination Period.
- Subordinated units will not accrue distribution
arrearages. Upon expiration of the Subordination
Period, common units will no longer accrue
distribution arrearages. See "Cash Distribution
Policy".
Subordination Period.............. - The Subordination Period will generally extend from
the closing of the offering until the first day of any
quarter beginning after March 31, 2004, provided that
certain financial tests have been satisfied.
Generally, these tests will have been satisfied when
we have paid from our Operating Surplus, and
generated from our Adjusted Operating Surplus, the
Minimum Quarterly Distribution on all units and the
general partner interest for each of the three
preceding four-quarter periods.
- Upon expiration of the Subordination Period, all
remaining subordinated units will convert into common
units on a one-for-one basis and will thereafter
participate pro rata with the other common units in
distributions of Available Cash. See "Cash
Distribution Policy--Distributions from Operating
Surplus during Subordination Period".
Early Conversion of Subordinated
Units........................... - If the tests for conversion set forth above have been
met for any quarter ending on or after March 31, 2002,
one-third of the subordinated units will convert into
common units. If such tests have been met for any
quarter ending on or after March 31, 2003, an
additional one-third of the subordinated units will
convert into common units.
- The early conversion of the second one-third of
subordinated units may not occur until at least one
year following the early conversion of the first
one-third of subordinated units. See "Cash
Distribution Policy-- Distributions from Operating
Surplus during Subordination Period".
Incentive Distribution Rights..... - If quarterly distributions of Available Cash exceed
the Target Distribution Levels, our General Partner will
receive distributions which are generally equal to
15%, then 25% and then 50% of the distributions of
Available Cash that exceed such Target Distribution
Levels.
- The Target Distribution Levels are based on the
amounts of Available Cash from our Operating Surplus
distributed
19
with respect to a given quarter that exceed
distributions made with respect to the Minimum
Quarterly Distribution and Common Unit Arrearages, if
any. See "Cash Distribution Policy--Incentive
Distribution Rights-- Hypothetical Annualized Yield".
The rights to distributions described above that are
in excess of the General Partner's combined 2%
interest are referred to as "Incentive Distribution
Rights".
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............. - The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that unitholders receive
distributions of Available Cash from our Capital
Surplus (generally, cash generated by certain
borrowings or sales of assets) or legislation is
enacted or existing law is modified or interpreted by
the relevant governmental authority in a manner that
causes us to be treated as an association taxable as
a corporation or otherwise taxable as an entity for
federal, state or local income tax purposes.
- If, as a result of distributions of Available Cash
from our Capital Surplus, the unitholders receive a full
return of the initial public offering price of the
common units and any unpaid Common Unit Arrearages,
the distributions of Available Cash payable to the
General Partner will increase to 50% of all amounts
distributed thereafter. See "Cash Distribution
Policy--General", "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels".
Partnership's Ability to Issue
Additional Units................ Our Partnership Agreement generally authorizes us to
issue an unlimited number of additional limited partner
interests of the Partnership for such consideration and
on such terms and conditions as shall be established by
our General Partner in its sole discretion without the
approval of the unitholders. During the Subordination
Period, however, we cannot, without the approval of a
Unit Majority, issue:
(1) equity securities ranking prior or senior to the
common units on distributions, or
(2) an aggregate of more than 9,400,000 common units
(which number excludes common units issued upon
exercise of the underwriters' over-allotment option,
upon conversion of subordinated units, pursuant to
employee benefit plans or in connection with the
making of certain acquisitions or capital
improvements that are accretive to our cash flow on
a per unit basis), or an equivalent number of
securities ranking on a parity with the common
units.
20
A Unit Majority means, during the Subordination Period,
at least a majority of the outstanding common units
(excluding common units held by our General Partner and
its affiliates), voting as a class, and at least a
majority of the outstanding subordinated units, voting
as a class, and, after the Subordination Period, at
least a majority of the outstanding common units. See
"The Partnership Agreement--Issuance of Additional
Securities".
Limited Call Right................ If at any time 20% or less of the outstanding common
units are held by persons other than our General Partner
and its affiliates, the General Partner may purchase all
of the remaining common units at a price generally equal
to the then current market price of the common units.
See "The Partnership Agreement--Limited Call Right".
Limited Voting Rights............. Unitholders will not have voting rights except with
respect to the following matters, for which our
Partnership Agreement in most cases requires the
approval of a Unit Majority and in some cases requires
approval by the holders of a greater percentage of
units:
- a sale or exchange of all or substantially all of our
assets;
- the removal or the withdrawal of the General Partner;
- the election of a successor General Partner;
- a dissolution or reconstitution of the Partnership;
- a merger of the Partnership;
- issuance of limited partner interests in certain
limited circumstances;
- approval of certain actions of our General Partner
(including the transfer by our General Partner of its
general partner interest or Incentive Distribution
Rights under certain circumstances); and
- certain amendments to the Partnership Agreement,
including any amendment that would cause us to be
treated as an association taxable as a corporation.
Holders of subordinated units will generally vote as a
class separate from the holders of common units. Under
our Partnership Agreement, the General Partner generally
will be permitted to effect amendments to the
Partnership Agreement that do not materially adversely
affect unitholders. See "The Partnership Agreement".
Loss of Voting Rights in Certain
Circumstances................... Any person or group (other than the General Partner and
its affiliates or a direct transferee of the General
Partner or its affiliates) that acquires beneficial
ownership of 20% or more of the common units will lose
its voting rights with respect to all of its common
units. See "The Partnership Agreement--Change of
Management Provisions".
21
Removal and Withdrawal of Our
General Partner................. - Subject to certain conditions, our General Partner
may be removed upon the approval of the holders of at
least 66 2/3% of the outstanding units (including
units held by our General Partner and its affiliates)
and the election of a successor general partner by
the vote of the holders of a Unit Majority. A meeting
of holders of the common units may be called only by
our General Partner or by the holders of 20% or more
of the outstanding common units.
- Our General Partner has agreed not to voluntarily
withdraw as general partner of the Partnership and
the Intermediate Partnership prior to March 31, 2009,
subject to limited exceptions, without obtaining the
approval of at least a majority of the outstanding
common units (excluding common units held by the
General Partner and its affiliates) and furnishing an
Opinion of Counsel (as defined in the Glossary). See
"The Partnership Agreement--Withdrawal or Removal of
the General Partner" and "--Meetings; Voting".
Consequences of Removal of Our
General Partner in Certain
Circumstances................... If our General Partner is removed other than for Cause
(as defined in the Glossary):
- the Subordination Period will end and all outstanding
subordinated units will immediately convert into
common units on a one-for-one basis;
- any existing Common Unit Arrearages will be
extinguished; and
- our General Partner will have the right to convert
its general partner interest (and its Incentive
Distribution Rights) into common units or to receive
cash in exchange for such interests.
See "The Partnership Agreement--Change of Management
Provisions".
Distributions Upon Liquidation.... If we liquidate during the Subordination Period, under
certain circumstances holders of outstanding common
units will be entitled to receive more per unit in
liquidating distributions than holders of outstanding
subordinated units. The per unit difference will be
dependent upon the amount of gain or loss recognized by
us in liquidating our assets and will be limited to the
Unrecovered Capital of a common unit and any Common Unit
Arrearages. Following conversion of the subordinated
units into common units, all units will be treated the
same upon liquidation of the Partnership. See "Cash
Distribution Policy--Distributions of Cash Upon
Liquidation".
22
Use of Proceeds................... We estimate that the net proceeds we will receive from
the sale of common units offered through this prospectus
will be approximately $285 million, after deducting
underwriting discounts and commissions but before
deducting expenses incurred in connection with the
offering. The net proceeds of the offering will be
applied to:
- repay approximately $135 million of assumed
indebtedness owed to affiliates of TransCanada;
- pay expenses incurred in connection with the
offering; and
- redeem common units from the TransCanada Subsidiaries
to be issued in connection with the Transactions.
We will use the net proceeds from any exercise of the
underwriters' over-allotment option to redeem
subordinated units from our General Partner on a
one-for-one basis equal to the number of common units
issued upon the exercise of such option. Accordingly, we
will retain none of the net proceeds of the offering.
See "Use of Proceeds".
Listing........................... We intend to apply to list the common units on the New
York Stock Exchange (the "NYSE").
NYSE Symbol....................... " ".
23
SUMMARY OF TAX CONSIDERATIONS
THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP WILL DEPEND IN PART
ON YOUR OWN TAX CIRCUMSTANCES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR ABOUT THE
UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
COMMON UNITS.
THE FOLLOWING IS A BRIEF SUMMARY OF MATERIAL TAX CONSEQUENCES OF OWNING AND
DISPOSING OF COMMON UNITS. THE FOLLOWING DISCUSSION, INSOFAR AS IT RELATES TO
UNITED STATES FEDERAL INCOME TAX LAWS, IS BASED UPON THE OPINION OF FRIED,
FRANK, HARRIS, SHRIVER & JACOBSON (A PARTNERSHIP INCLUDING PROFESSIONAL
CORPORATIONS), SPECIAL COUNSEL TO THE GENERAL PARTNER AND THE PARTNERSHIP
("COUNSEL"). THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DISCUSSION IN "TAX
CONSIDERATIONS", PARTICULARLY THE QUALIFICATIONS ON THE OPINIONS OF COUNSEL
DESCRIBED THEREIN.
PARTNERSHIP STATUS; CASH DISTRIBUTIONS
In the opinion of Counsel, we will be classified for federal income tax
purposes as a partnership, and the beneficial owners of common units will
generally be considered our partners. Accordingly, we will pay no federal income
taxes, and you will be required to report on your federal income tax return your
share of the Partnership's income, gains, losses and deductions. In general,
cash distributions to you will be taxable only if, and to the extent that, they
exceed the tax basis in your common units.
PARTNERSHIP ALLOCATIONS
In general, our income and loss will be allocated to the General Partner and
the unitholders for each taxable year in accordance with their respective
percentage interests in the Partnership, as determined annually and prorated on
a monthly basis and subsequently apportioned among the General Partner and the
unitholders of record as of the opening of the first business day of the month
to which they relate, even though unitholders may dispose of their units during
the month in question. At any time and to the extent that distributions are made
on the common units and not on the subordinated units, or that distributions
pursuant to the Incentive Distribution Rights are made to the General Partner,
gross income will be allocated to the recipients to the extent of such
distributions. You will be required to take into account, in determining your
federal income tax liability, your share of income generated by us for each
taxable year of the Partnership ending within or with your taxable year even if
cash distributions are not made to you. As a consequence, your share of our
taxable income (and possibly the income tax payable by you with respect to such
income) may exceed the cash actually distributed to you.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
We estimate that if you purchase common units in the offering and hold them
through December 31, 2002 you will be allocated, on a cumulative basis, an
amount of federal taxable income for such period that will be approximately %
of the cash distributed with respect to that period. We anticipate that after
the taxable year ending December 31, 2002, the ratio of taxable income to cash
distributions to holders of common units will increase. These estimates are
based upon the assumptions that gross income from operations will approximate
the amount required to make the Minimum Quarterly Distribution with respect to
all units and other assumptions with respect to capital expenditures, cash flow
and anticipated cash distributions. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory, competitive and
political uncertainties which are beyond our control. Further, the estimates are
based on current tax law and certain tax reporting positions that we intend to
adopt and with which the IRS could disagree. Accordingly, no assurance can be
given that the estimates will prove to be correct. The actual percentages could
be higher or lower than as described above and any differences could be
material. See "Tax Considerations--Tax Consequences
24
of Unit Ownership--Ratio of Taxable Income to Distributions," and "--Tax
Treatment of Operations".
BASIS OF COMMON UNITS
Your initial tax basis for a common unit purchased in the offering will
generally be the amount paid for the common unit plus your share of our
nonrecourse liabilities. Your basis will generally be increased by your share of
our income and decreased by your share of our losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), our losses will only be available to
offset our future income and cannot be used to offset income from other
activities, including passive activities or investments, salary, or active
business income. Any losses unused by virtue of the passive loss rules may be
fully deducted when you dispose of all of your common units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
We intend to make the election provided for by Section 754 of the Internal
Revenue Code of 1986 (the "Code"), which will generally result in holders of
common units being allocated income and deductions calculated by reference to
the portion of their purchase price attributable to each of our assets.
DISPOSITION OF COMMON UNITS
If you sell common units you will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
common units. Thus, distributions of cash from us to you in excess of the income
allocated to you will, in effect, become taxable income if you sell the common
units at a price greater than your adjusted tax basis even if the price is less
than your original cost. A substantial portion of the amount realized (whether
or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a unitholder resides or in which we do business
or own property. Although an analysis of those various taxes is not presented
here, you should consider their potential impact on your investment in the
Partnership. The Partnership will initially own property or do business in
Illinois, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota and
Texas. Of those states, only Texas and South Dakota do not currently impose a
personal income tax. In certain states, tax losses may not produce a tax benefit
in the year incurred (if, for example, we have no income from sources within
that state) and also may not be available to offset income in subsequent taxable
years. Some states may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to you. Withholding, the amount of which
may be more or less than a particular unitholder's income tax liability owed to
the state, may not relieve the nonresident unitholder from the obligation to
file an income tax return. Amounts withheld may be treated as if distributed to
unitholders for purposes of determining the amounts distributed by us. Based on
current law and our estimate of our future operations, we anticipate that any
amounts required to be withheld will not be material.
It is your responsibility to investigate the legal and tax consequences,
under the laws of pertinent states and localities, of investment in the
Partnership. Accordingly, you should consult, and must depend upon, your own tax
counsel or other advisor with regard to those matters. Further, it is your
responsibility to file all United States federal, state and local tax returns
that may be required of you. Counsel has not rendered an opinion on the state or
25
local tax consequences of an investment in the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in common units by tax-exempt organizations (including IRAs
and other retirement plans), regulated investment companies (mutual funds) and
foreign persons raises issues unique to such persons. Virtually all of the
Partnership income allocated to a unitholder which is a tax-exempt organization
will be unrelated business taxable income and thus will be taxable to such
unitholder. Furthermore, no significant amount of our gross income will be
qualifying income for purposes of determining whether a unitholder will qualify
as a regulated investment company, and a unitholder who is a nonresident alien,
foreign corporation or other foreign person will be regarded as being engaged in
a trade or business in the United States as a result of ownership of a common
unit and, thus, will be required to file federal income tax returns and to pay
tax on such unitholder's share of our taxable income. Furthermore, distributions
to foreign unitholders will be subject to federal income tax withholding. See
"Tax Considerations--Tax-Exempt Organizations and Certain Other Investors".
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that we are not subject to this
registration requirement. Nevertheless, the General Partner has applied to
register us as a tax shelter with the Secretary of the Treasury. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
See "Tax Considerations--Administrative Matters-- Registration as a Tax
Shelter".
26
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP WILL
BE SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN
A SIMILAR BUSINESS. YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS IN EVALUATING AN
INVESTMENT IN THE COMMON UNITS. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE
NOT THE ONLY ONES FACING OUR PARTNERSHIP. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE THE TRADING PRICES OF OUR COMMON UNITS COULD DECLINE AND YOU MAY LOSE
ALL OR PART OF YOUR INVESTMENT.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
OUR CASH FLOW AND PERFORMANCE ARE DEPENDENT UPON A LIMITED NUMBER OF MAJOR
SHIPPERS OF NORTHERN BORDER PIPELINE, ALL OF WHICH HAVE LONG-TERM CONTRACTS
Northern Border Pipeline has a limited number of major shippers, all of
which have long-term contracts. If any shippers either fail to perform their
contractual obligations or exercise their contractual termination rights,
Northern Border Pipeline's cash flows and financial condition could be adversely
affected. As a result, the cash available for distribution by us to you could be
adversely affected.
All of the firm capacity of the Pipeline System is contractually committed
through October 2001. Over 90% of the Pipeline System's contracted capacity is
committed through September 2003. We cannot give any assurances that Northern
Border Pipeline will be able to renew or replace these contracts. The renewal or
replacement of the existing long-term transportation contracts with customers of
Northern Border Pipeline will depend on a number of factors beyond our control,
including:
- the supply of natural gas in Canada and the United States;
- competition from alternative sources of supply in the United States;
- competition from other pipelines; and
- the price of, and demand for, natural gas in markets served by the
Pipeline System.
Two of Northern Border Pipeline's customers were responsible for
approximately half of its total revenue in 1997. Its largest customer,
Pan-Alberta Gas U.S., Inc. ("PAGUS"), accounted for approximately 46% of total
revenue in 1997 and TransCanada accounted for approximately 7% of total revenue
in 1997. While no other single customer of Northern Border Pipeline accounted
for more than 5% of total revenue in 1997, approximately 93% of total revenue
was derived from Northern Border Pipeline's 20 largest customers.
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE
Although we will distribute all of our Available Cash, we can give no
assurances regarding the amounts of Available Cash that we will generate. At the
start, we will derive all of our cash flow from our 30% general partner interest
in Northern Border Pipeline. The actual amounts of Available Cash will depend
upon numerous factors relating to both our and Northern Border Pipeline's
businesses which may be beyond our control, including, generally, profitability
of operations, required principal and interest payments on any debt, the cost of
acquisitions (including related debt service payments), our issuance of debt and
equity securities, fluctuations in working capital, capital expenditures,
adjustments in reserves, prevailing economic conditions and financial, business
and other factors. The following factors will also influence the cash
distributions:
- the tariff and transportation charges to be collected by Northern Border
Pipeline for transportation services on the Pipeline System;
27
- the amount of cash distributed to us by Northern Border Pipeline;
- the amount of cash set aside by us; and
- the amount of any cash required to be contributed by us to Northern Border
Pipeline.
Under certain circumstances, the application of Northern Border Pipeline's
cash distribution policy could result in a reduced distribution to its partners,
including us, in any particular quarter. For example, in the fourth quarter of
1997 Northern Border Pipeline made no cash distributions to its partners as a
result of a rate refund to shippers. This rate refund resulted from a FERC
mandated retroactive adjustment to Northern Border Pipeline's depreciation
schedule. See "Business of Northern Border Pipeline--FERC Regulation-- Cost of
Service Tariff" and "Northern Border Pipeline Partnership Agreement--Cash
Distribution Policy".
Cash distributions are dependent primarily on our cash flow, including from
our reserves, and not on our profitability, which is affected by non-cash items.
Therefore, cash distributions may be made during periods when we record losses
and may not be made during periods when we record profits. Our Partnership
Agreement gives our General Partner discretion in establishing reserves for the
proper conduct of our business that will affect the amount of Available Cash.
We will need $30.0 million of Available Cash from our Operating Surplus to
distribute the Minimum Quarterly Distribution for four quarters on the common
units and the subordinated units and make the related distribution on the
combined 2% general partner interest (approximately $23.5 million for the common
units, approximately $5.9 million for the subordinated units and approximately
$0.6 million for the combined 2% general partner interest). These amounts for
three quarters will be $22.5 million in total (approximately $17.6 million for
the common units, approximately $4.4 million for the subordinated units and
approximately $0.5 million for the combined general partner interest). If the
Transactions to be consummated at the closing of the offering had been completed
on January 1, 1997 pro forma Available Cash from Operating Surplus generated
during 1997 would have been approximately $28.6 million. The amount of pro forma
Available Cash from Operating Surplus generated for the nine month period ended
September 30, 1998 would have been approximately $17.5 million. These amounts
would not have been sufficient to allow the Partnership to distribute the
Minimum Quarterly Distribution on the common units and the subordinated units
and the related distribution on the general partner interest with respect to
such periods by approximately $1.4 million for 1997 and approximately $5.0
million for the nine months ended September 30, 1998.
OUR DISTRIBUTIONS TO YOU WILL DEPEND UPON THE ABILITY OF NORTHERN BORDER
PIPELINE'S CUSTOMERS TO PAY
The transportation contracts in place with respect to the Pipeline System
are contracts which require customers to pay regardless of whether they
transport natural gas. As a result, Northern Border Pipeline's profitability and
its ability to make distributions will depend upon the ability of its customers
to pay and not upon the amount of natural gas transported. Because demand for
natural gas is subject to numerous factors outside our control, we cannot give
any assurances regarding such demand in the future. We cannot predict the impact
of future economic conditions, fuel conservation measures, alternate fuel
requirements, government regulations or technological advances in fuel economy
and energy generation devices, all of which could reduce the demand for
transportation of natural gas and the ability of Northern Border Pipeline's
customers to pay. A failure to pay by any of these shippers may decrease
Northern Border Pipeline's cash flow and distributions to the Partnership and,
consequently, our cash distributions to you.
28
NO ASSURANCE THAT THE PRESENT FORM OF TARIFF WILL BE MAINTAINED; UNCERTAIN
REGULATORY STANDARD
Northern Border Pipeline is subject to extensive regulation by the FERC. The
FERC's regulatory authority extends to such matters as:
- Northern Border Pipeline's cost of service form of tariff;
- Northern Border Pipeline's allowed rate of return on equity;
- the services that Northern Border Pipeline is permitted to perform or
abandon;
- the ability of Northern Border Pipeline to seek recovery of various
categories of costs; and
- the acquisition, construction and disposition of pipeline facilities by
Northern Border Pipeline.
We cannot give any assurances that the FERC will continue to permit Northern
Border Pipeline to use the present form of tariff. Northern Border Pipeline is
required to file a rate proceeding with the FERC by May 31, 1999. Under FERC
regulations, customers are allowed to contest Northern Border Pipeline's rates
or rate structure and terms and conditions of service. A reduction in the
FERC-allowed rate of return on equity (currently 12.0%) or any other adverse
change, such as the exclusion of cost of service amounts, would adversely affect
the amount of cash available for distribution to you. See "Business of Northern
Border Pipeline--FERC Regulation--Cost of Service Tariff".
Given the extent of regulation of Northern Border Pipeline by the FERC and
the possibility for additional changes to regulations, we cannot give any
assurances regarding the likely federal regulations under which Northern Border
Pipeline will operate in the future, nor do we know the effect such regulation
will have on Northern Border Pipeline's or our financial positions, results of
operations and cash flows or whether our cash flow will be adequate to make
distributions to you.
OUR FUTURE PERFORMANCE MAY DEPEND ON NORTHERN BORDER PIPELINE'S SUCCESSFUL
COMPLETION OF PROJECTS
Northern Border Pipeline reflects the Pipeline System in its financial
statements in various accounts collectively referred to as "rate base". Northern
Border Pipeline is generally allowed to collect from its customers a return on
the net book value of the regulated rate base as well as recover that rate base
through depreciation. The amount Northern Border Pipeline may collect from
customers decreases as the rate base decreases through annual depreciation
charges. In order to avoid a reduction in the level of cash available for
distributions to its partners (and, consequently, cash potentially available for
distribution by us to you), based on its current FERC-approved tariff, Northern
Border Pipeline must maintain or increase its rate base through projects that
maintain or add to existing pipeline facilities. These projects will depend
upon, among other things:
- sufficient demand for natural gas;
- an adequate supply of proved natural gas reserves;
- transportation capacity both upstream and downstream of the Pipeline
System;
- the execution of natural gas transportation contracts;
- the approval of any expansion or extension of the Pipeline System by the
Northern Border Pipeline Management Committee (or in certain cases, a
ruling from an arbitrator), see "Northern Border Pipeline Partnership
Agreement";
- obtaining financing for such projects; and
- receipt and acceptance of necessary regulatory approvals.
Northern Border Pipeline's ability to complete such projects is also
subject, among other things, to numerous business, economic,
29
regulatory, competitive and political uncertainties beyond its control, and
there is no assurance that such projects will be completed.
NORTHERN BORDER PIPELINE MAY NOT BE ABLE TO INCLUDE CERTAIN COSTS ASSOCIATED
WITH THE CHICAGO PROJECT IN ITS RATE BASE
The FERC may not permit Northern Border Pipeline to include certain costs
associated with construction of the Chicago Project in its rate base. In such
case, Northern Border Pipeline would not be able to recover such costs from its
shippers and cash available for distribution to you would be adversely affected.
As part of the settlement of Northern Border Pipeline's 1995 rate case with
the FERC, a Project Cost Containment Mechanism ("PCCM") was instituted to
allocate the risks of the capital costs associated with the Chicago Project
between Northern Border Pipeline and its shippers. The PCCM amount is determined
by comparing the final cost of the Chicago Project to the budgeted cost. The
settlement agreement required the budgeted cost for the Chicago Project, which
had been initially filed with the FERC for approximately $839 million, to be
adjusted for the effects of inflation and for costs attributable to changes in
project scope, as defined by the agreement. The budgeted cost of the Chicago
Project, as adjusted for the effects of inflation and project scope changes, has
been estimated as of the project's in-service date to be $889 million. Northern
Border Pipeline's initial notification to the FERC and its shippers reflects the
conclusion that there would be no adjustment to rate base related to the PCCM.
Northern Border Pipeline is obligated by the settlement agreement to update its
calculation of the PCCM six-months after the project's in-service date. The
settlement agreement requires the calculation of the PCCM to be reviewed by an
independent national accounting firm. Although the General Partner believes the
initial computation has been completed pursuant to the terms of the settlement
agreement, it is unable to make a definitive determination at this time whether
any adjustments will be required. Should subsequent developments cause costs not
to be recovered pursuant to the PCCM a non-cash charge to write down
transmission plant may result and such charge could be material to the operating
results of the Partnership. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Project Cost Containment
Mechanism".
DEPENDENCE OF PIPELINE SYSTEM UPON THE AVAILABILITY OF CANADIAN NATURAL GAS
The long-term financial conditions of Northern Border Pipeline and the
Partnership are dependent on the continued availability of western Canadian
natural gas for import into the United States. The willingness of Canadian
producers and marketers to export natural gas to the United States is to some
extent dependent upon relative prices for natural gas in United States and
Canadian markets. We believe that substantial additional natural gas reserves
remain to be discovered, developed and produced in western Canada. These natural
gas reserve prospects may require significant capital expenditures by others for
exploration and development drilling and the installation of production,
gathering, storage, transportation and other facilities that permit natural gas
to be produced and delivered to pipelines that interconnect with the Pipeline
System. Low prices for natural gas, regulatory limitations, or the lack of
available capital for such projects could adversely affect the development of
additional reserves and production, gathering, storage and pipeline transmission
and import and export of natural gas supplies. We cannot give any assurances as
to the timing of discovery or development of additional natural gas reserves or
their availability to interconnect with the Pipeline System.
THE PIPELINE SYSTEM MIGHT BE USED LESS IF DEMAND FOR NATURAL GAS DECREASES
Northern Border Pipeline's business depends in part on the level of demand
for western Canadian natural gas in the markets the Pipeline System serves. The
volumes of natural gas delivered to markets the Pipeline System serves from
sources other than
30
western Canada affects the demand for western Canadian natural gas and the
demand for the use of the Pipeline System. Levels of demand for western Canadian
natural gas also influence the ability and willingness of shippers to use the
Pipeline System to meet demand.
A variety of factors could cause the demand for natural gas to fall in the
markets that the Pipeline System serves. These factors include:
- economic conditions;
- fuel conservation measures;
- alternative fuel requirements;
- government regulation; and
- technological advances in fuel economy and energy generation devices.
We cannot predict whether or how these or other factors will affect demand
for the use of the Pipeline System. If the Pipeline System is used less over the
long term, we may have lower revenues and less cash to distribute to you.
COMPETITION FROM OTHER PLANNED AND EXISTING PIPELINES
Other pipeline systems that transport natural gas serve the same markets
served by the Pipeline System. As a result, Northern Border Pipeline faces
competition from such pipeline systems with respect to its transportation
services.
The Alliance Pipeline, which recently received regulatory approval will, if
constructed, compete directly with Northern Border Pipeline in the
transportation of natural gas from the WCSB to markets in the midwest United
States.
TransCanada owns and operates a pipeline system which transports natural gas
from the same natural gas reserves in western Canada that are used by Northern
Border Pipeline's customers.
Natural gas is also produced in the United States and transported by
competing unaffiliated pipeline systems to the same destinations as natural gas
transported by the Pipeline System.
NORTHERN BORDER PIPELINE'S INDEBTEDNESS MAY LIMIT ITS ABILITY TO MAKE
DISTRIBUTIONS TO THE PARTNERSHIP AND MAY AFFECT ITS OPERATIONS
As of September 30, 1998, Northern Border Pipeline's total long-term
indebtedness was $724 million, representing approximately 48% of Northern Border
Pipeline's total capitalization (defined as total long-term debt plus total
partners' capital). Its leverage may (1) adversely affect its ability to finance
its future operations and capital needs, (2) limit its ability to pursue
acquisitions, expansion plans and other business opportunities and (3) make its
results of operations more susceptible to adverse economic or operating
conditions. Furthermore, the payment of principal and interest on Northern
Border Pipeline's indebtedness will reduce the cash available for distribution
to its partners (including us) and, therefore, on your units. As of September
30, 1998, Northern Border Pipeline had $276 million of unused borrowing capacity
under its revolving credit facility. Future borrowings, whether under Northern
Border Pipeline's credit facility or otherwise, could result in a significant
increase in Northern Border Pipeline's leverage.
In addition, Northern Border Pipeline is prohibited from making cash
distributions during an event of default under its indebtedness. Furthermore,
various limitations in Northern Border Pipeline's indebtedness that limit its
ability to incur indebtedness and to engage in certain transactions could reduce
its ability to capitalize on business opportunities that arise in the course of
its business. Any subsequent refinancing of its existing indebtedness or any new
indebtedness could have similar or greater restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Partnership--Capital Resources, Liquidity and Financial Condition".
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RISK OF ENVIRONMENTAL AND SAFETY COSTS AND LIABILITIES
Northern Border Pipeline's operations are subject to federal and state laws
and regulations relating to environmental protection and operational safety.
Although we believe that Northern Border Pipeline's operations are in general
compliance in all material respects with applicable environmental and safety
regulations, risks of substantial costs and liabilities are inherent in pipeline
operations, and we cannot give any assurances that such costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from Northern Border Pipeline's operations, could result in substantial costs
and liabilities to Northern Border Pipeline. If Northern Border Pipeline is not
able to recover such resulting costs, your cash distributions could be adversely
affected.
RISKS OF ACQUISITION STRATEGY
There can be no assurance that we will identify attractive acquisition
candidates in the future, that we will be able to acquire such assets on
economically acceptable terms, that any acquisitions will not be dilutive to
earnings and operating surplus or that any additional debt incurred to finance
an acquisition will not affect our ability to make distributions to you.
Our acquisition strategy involves numerous risks, including difficulties
inherent in the integration of operations and systems, the diversion of
management's attention from other business concerns and the potential loss of
key employees of acquired businesses. In addition, future acquisitions also may
involve the expenditure of significant funds. Depending upon the nature, size
and timing of future acquisitions, the Partnership may be required to secure
additional financing. There is no assurance that such additional financing will
be available to us on acceptable terms.
NORTHERN BORDER PIPELINE'S OPERATIONS WILL BE SUBJECT TO CERTAIN OPERATIONAL
HAZARDS AND UNFORESEEN INTERRUPTIONS
Northern Border Pipeline's operations are subject to certain operational
hazards and unforeseen interruptions, such as natural disasters, adverse
weather, accidents or other events beyond our General Partner's control. A
casualty occurrence might result in a loss of equipment or life, as well as
injury and extensive property or environmental damage.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
MAJORITY CONTROL OF NORTHERN BORDER PIPELINE MANAGEMENT COMMITTEE BY NBP MAY
LIMIT OUR ABILITY TO INFLUENCE NORTHERN BORDER PIPELINE COMPANY
The Partnership owns a 30% general partner interest in Northern Border
Pipeline. The remaining 70% general partner interest in Northern Border Pipeline
is currently owned by NBP, a publicly traded limited partnership (which is not
affiliated with us). The general partners of NBP are Northern Plains, Pan Border
Gas Company ("Pan Border"), and Northwest Border Pipeline Company ("Northwest
Border"). Northern Plains and Pan Border are wholly owned subsidiaries of Enron.
Management of Northern Border Pipeline is overseen by the four-member
Northern Border Pipeline Management Committee. Our Partnership controls 30% of
the voting power of the Northern Border Pipeline Management Committee and has
the right to designate one member. NBP controls 70% of the voting power of the
Northern Border Pipeline Management Committee and has the right to designate
three members. NBP has allocated its voting power on the Northern Border
Pipeline Management Committee among its own general partners pro rata in
accordance with their relative general partner interests in NBP. As a result,
the 70% voting power of NBP's representatives on the Northern Border Pipeline
Management Committee is allocated as follows: 35% to Northern Plains, 22.75% to
Pan Border and 12.25% to Northwest Border.
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Each of Northern Plains, Pan Border and Northwest Border has the right to
designate one member of the Northern Border Pipeline Management Committee. Enron
(through Northern Plains and Pan Border) controls 57.75% of the voting power of
the Northern Border Pipeline Management Committee and has the right to designate
two of its members. Therefore, except as to any matters requiring unanimity,
Enron has the power to approve a particular matter requiring a majority vote
despite the fact that our representative may vote against such project or other
matter. Conversely, with respect to any matter requiring a majority vote Enron
may disapprove a particular matter despite the fact that our representative may
vote in favor of such matter. See "Northern Border Pipeline Partnership
Agreement--Management and Voting".
YOUR VOTING RIGHTS ARE LIMITED; REMOVAL OF THE GENERAL PARTNER IS DIFFICULT
The General Partner will manage and operate the Partnership. Unlike the
holders of common stock in a corporation, you will have only limited voting
rights on matters affecting our business. You will have no right to elect our
General Partner on an annual or other continuing basis, and our General Partner
may not be removed except pursuant to the vote of the holders of at least
66 2/3% of the outstanding units (including units owned by the General Partner
and its affiliates) and upon the election of a successor general partner by the
vote of the holders of a Unit Majority. The ownership of an aggregate of 20.2%
(8.2% upon exercise of the underwriters' over-allotment option in full) of the
outstanding units by our General Partner and its affiliates has the practical
effect of making our General Partner's removal difficult. In addition, the
Partnership Agreement contains certain provisions that may have the effect of
discouraging a person or group from attempting to remove our General Partner or
otherwise change the management of the Partnership. If our General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and units held by our General Partner and its affiliates are not
voted in favor of such removal: (1) the Subordination Period will end and all
outstanding subordinated units will immediately convert into common units on a
one-for-one basis, (2) any existing Common Unit Arrearages will be extinguished
and (3) our General Partner will have the right to convert its general partner
interests (and its Incentive Distribution Rights) into common units or to
receive cash in exchange for such interests. The effect of these provisions may
be to diminish the price at which the common units will trade under certain
circumstances.
The Partnership Agreement also contains provisions limiting the ability of
unitholders to call meetings of unitholders or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability to
influence the manner or direction of management. All matters (other than removal
of the General Partner) requiring the approval of the unitholders during the
Subordination Period must first be proposed by our General Partner. Further, if
any person or group (other than our General Partner or its affiliates or a
direct transferee of General Partner or its affiliates) acquires beneficial
ownership of 20% or more of any class of units then outstanding, such person or
group will lose voting rights with respect to all of its units. As a result, you
will have limited influence on matters affecting our operations, and third
parties may find it difficult to attempt to gain control of us, or influence our
activities. See "The Partnership Agreement--Withdrawal or Removal of the General
Partner" and "--Change of Management Provisions".
PARTNERSHIP ASSUMPTIONS CONCERNING FUTURE OPERATIONS MAY NOT BE REALIZED
In establishing the terms of the offering, including the number and initial
offering price of the common units, the number of subordinated units to be
received by the General Partner and its affiliates and the Minimum Quarterly
Distribution, we have relied on certain assumptions concerning our future
operations. See "Cash Available for Distribution".
33
Although we believe our assumptions are within a range of reasonableness,
whether the assumptions are realized is not, in many cases, within our control
and cannot be predicted with any degree of certainty. In the event that our
assumptions are not realized, the actual Available Cash from Operating Surplus
that we generate could be substantially less than that currently expected and
may be less in any quarter than that required to make the Minimum Quarterly
Distribution. See "Cash Available for Distribution".
WE MAY ISSUE ADDITIONAL COMMON UNITS THEREBY DILUTING EXISTING UNITHOLDERS'
INTERESTS
Our General Partner can cause the Partnership to issue additional common
units, without the approval of unitholders, in the following circumstances:
- upon exercise of the underwriters' over-allotment option
- upon conversion of the subordinated units
- pursuant to employee benefit plans
- upon conversion of the general partner interests and Incentive
Distribution Rights into common units as a result of the withdrawal of our
General Partner; or
- in connection with the Partnership making certain acquisitions or capital
improvements that are accretive to our cash flow on a per-unit basis.
In addition, during the Subordination Period, our General Partner has broad
discretion, without the approval of the unitholders, to cause the Partnership to
issue up to an additional 9,400,000 common units or an equivalent number of
securities ranking on a parity with the common units. After the end of the
Subordination Period, we may issue an unlimited number of limited partner
interests of any type without the approval of the unitholders. Based on the
circumstances of each case, the issuance of additional common units or
securities ranking senior to or on a parity with the common units may dilute the
value of the interests of the then-existing holders of common units in the net
assets of the Partnership, dilute the interests of unitholders in distributions
by the Partnership and, if issued during the Subordination Period, reduce the
support provided by the subordination feature of the subordinated units. The
Partnership Agreement does not give the unitholders the right to approve the
issuance by the Partnership of equity securities ranking junior to the common
units at any time.
ISSUANCE OF ADDITIONAL COMMON UNITS, INCLUDING UPON CONVERSION OF SUBORDINATED
UNITS, WILL INCREASE RISK THAT WE WILL BE UNABLE TO PAY THE FULL MINIMUM
QUARTERLY DISTRIBUTION ON ALL COMMON UNITS
Our ability to pay the full Minimum Quarterly Distribution on all the common
units may be reduced by any increase in the number of outstanding common units,
whether as a result of the conversion of subordinated units, upon the conversion
of the general partner interests and the Incentive Distribution Rights or as a
result of the withdrawal of the General Partner or future issuances of common
units. Any of these actions will increase the percentage of the aggregate
Minimum Quarterly Distribution payable to the common unitholders and decrease
the percentage of the aggregate Minimum Quarterly Distribution payable to the
subordinated unitholders, which will in turn have the effect of:
- reducing the amount of support provided by the subordination feature of
the subordinated units; and
- increasing the risk that the Partnership will be unable to pay the Minimum
Quarterly Distribution in full on all the common units.
PURCHASERS OF COMMON UNITS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The assumed initial public offering price of $19.50 per unit exceeds pro
forma tangible net book value of $11.84 per unit. You will incur immediate and
substantial dilution of $7.66 per common unit. See "Dilution".
34
COST REIMBURSEMENTS DUE TO OUR GENERAL PARTNER MAY BE SUBSTANTIAL
Prior to making any distribution on the common units, we will reimburse our
General Partner and its affiliates (including officers and directors of the
General Partner) for all expenses incurred by our General Partner and its
affiliates on our behalf (including wages, salaries, incentive compensation and
the cost of employee benefit plans paid or provided to employees, officers and
directors of the General Partner), which expenses will be determined by our
General Partner in its sole discretion. In addition, our General Partner and its
affiliates may provide us services for which we will be charged reasonable fees
as determined by the General Partner. The reimbursement of such expenses and the
payment of any such fees could adversely affect our ability to make
distributions.
LACK OF PUBLIC MARKET FOR COMMON UNITS; POSSIBLE INABILITY TO RESELL AT INITIAL
PUBLIC OFFERING PRICE
Prior to the offering, there has been no public market for the common units.
We are applying to list the common units for trading on the NYSE. We do not know
the extent to which investor interest will lead to the development of a trading
market or how liquid that market might be. The initial public offering price for
the common units will be determined through negotiations between our General
Partner and the representatives of the underwriters. Investors may not be able
to resell their common units at or above the initial public offering price. See
"Underwriting".
OUR GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO THE COMMON
UNITS
If 20% or less of the common units are held by persons other than our
General Partner and its affiliates, the General Partner will have the right,
which it may assign to any of its affiliates or the Partnership, to acquire all,
but not less than all, of the remaining common units held by such unaffiliated
persons at a price generally equal to the then-current market price of the
common units. As a consequence, you may be required to sell your common units at
a time when you may not desire to sell them or at a price that is less than the
price you would desire to receive upon such sale. You may also incur a tax
liability upon such sale. See "The Partnership Agreement--Limited Call Right".
YOU MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES; LIABILITY FOR
RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were to be determined that (1) the Partnership had been
conducting business in any state without compliance with the applicable limited
partnership statute, or (2) the right or the exercise of the right by the
unitholders as a group to remove or replace our General Partner, to approve
certain amendments to the Partnership Agreement or to take other action pursuant
to the Partnership Agreement constituted participation in the "control" of the
Partnership's business, then you could be held liable in certain circumstances
for the Partnership's obligations to the same extent as a general partner. In
addition, under certain circumstances a unitholder may be liable to the
Partnership for the amount of a distribution for a period of three years from
the date of the distribution. See "The Partnership Agreement-- Limited
Liability" for a discussion of the limitations on liability and the implications
thereof to a unitholder.
UNITHOLDERS HAVE NOT BEEN REPRESENTED BY COUNSEL
Unitholders, other than the General Partner, have not been represented by
counsel in connection with the offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein or in
establishing the terms of the offering.
WITHOUT THE CONSENT OF EACH UNITHOLDER, NORTHERN BORDER PIPELINE MIGHT BE
CONVERTED INTO A CORPORATION
35
If it becomes unlawful to conduct the business of Northern Border Pipeline
and certain other conditions are satisfied, the business and assets of Northern
Border Pipeline will automatically be transferred to a corporation without the
vote or consent of unitholders. Therefore, you would not receive a proxy or
consent solicitation statement in connection with such transaction. However, we
believe that it is unlikely that circumstances requiring such an automatic
transfer will occur. A transfer to corporate form would result in Northern
Border Pipeline being subject to corporate income taxes and would be likely to
be materially adverse to its (and, therefore, our) results of operations and
financial condition.
In addition, Northern Border Pipeline may transfer its business and assets
to a corporation upon the approval of partners owning at least two-thirds in
interest. Since NBP holds 70% of the voting power of Northern Border Pipeline,
it could vote its interest in favor of a transfer of Northern Border Pipeline's
business and assets to a corporation. General partners of Northern Border
Pipeline (including those who did not consent to such a transaction) would be
bound by the terms of any such transaction receiving the requisite unitholder
vote and, under current law, would have no statutory dissenters' appraisal
rights in connection with the transaction. Our Partnership Agreement prohibits
our representative on the Northern Border Pipeline Management Committee from
approving such a transaction by Northern Border Pipeline without the prior
approval of the holders of at least 66 2/3% of the units outstanding during the
Subordination Period or a majority of units outstanding thereafter. We have no
present intention of proposing any such transaction.
RISKS RELATED TO THE INVESTMENT COMPANY ACT OF 1940
If the Partnership were deemed to be an unregistered "investment company"
under the Investment Company Act of 1940, as amended (the "1940 Act"), its
contracts may be voidable and its offers of securities may be subject to
rescission, as well as other materially adverse consequences.
The sole asset of the Partnership immediately after the offering will
consist of a 30% general partner interest in Northern Border Pipeline. The
Partnership could be deemed to be an "investment company" under the 1940 Act if
the 30% general partner interest constitutes an "investment security", as
defined in the 1940 Act. If the Partnership were deemed to be an "investment
company", then it would be required to be registered as an investment company
under the 1940 Act. In that case, there would be a substantial risk that the
Partnership would be in violation of the 1940 Act because of the practical
inability to register under the 1940 Act. The Partnership believes that it is
not an investment company under the 1940 Act. This belief is based upon the
Partnership's determination that the 30% general partner interest it holds is
not an "investment security" for purposes of the 1940 Act. This determination is
based upon, among other things, the Partnership's role as a general partner of,
and participation in the management of the affairs of, Northern Border Pipeline
(and the assumption that Northern Border Pipeline does not convert to corporate
form). There is, however, a risk that a court could reach a contrary conclusion.
DEPENDENCE UPON TRANSCANADA FOR MANAGEMENT
We do not presently have sufficient stand-alone management resources to
operate without services to be provided by TransCanada and are largely dependent
upon TransCanada to pursue our business plan as described under "Business of the
Partnership--Business Strategy and Competitive Strengths of the Partnership".
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
OUR GENERAL PARTNER MAY HAVE CONFLICTS OF INTEREST
Since our General Partner is related to both TransCanada and to us (its
directors and
36
officers have fiduciary duties to TransCanada and it has fiduciary duties to
us), conflicts of interest between us and TransCanada may arise from time to
time. The following situations could give rise to conflicts of interest:
- the General Partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings and reserves, which can impact
the amount of cash that is distributed by us to our unitholders and to the
General Partner;
- the General Partner may take actions on behalf of the Partnership that
have the effect of enabling the General Partner or its affiliates to
receive repayment of amounts outstanding under the Revolving Credit
Facility, distributions on their own units or Incentive Distribution
Rights or hastening the expiration of the Subordination Period or the
conversion of their subordinated units into common units;
- the General Partner determines whether to issue additional units or other
equity securities or whether to purchase outstanding units;
- the General Partner controls payments to TransCanada for any services
rendered for our benefit;
- the General Partner determines which costs are reimbursable by us;
- the General Partner controls the enforcement of obligations owed to us by
the General Partner;
- the General Partner would negotiate the terms of any asset acquisition
from TransCanada, subject to approval by the Conflicts Committee
consisting of the directors of the General Partner not affiliated with
TransCanada;
- the General Partner decides whether to retain separate counsel,
accountants or others to perform services for us;
- certain officers of the General Partner, who will provide us services,
will also devote significant time to the businesses of the General
Partner's affiliates and will be compensated by these affiliates for the
services rendered to them; and
- the General Partner is not restricted from causing the Partnership to pay
the General Partner or its affiliates for any services rendered on terms
that are fair and reasonable to the Partnership or entering into
additional contractual arrangements with any of such entities on behalf of
the Partnership.
Also, our Partnership Agreement allows the General Partner to resolve
conflicts of interest by considering the interests of all the parties to the
conflict. Therefore, the General Partner can consider the interests of
TransCanada if a conflict of interest arises.
OUR PARTNERSHIP AGREEMENT RESTRICTS THE GENERAL PARTNER'S FIDUCIARY DUTIES
The General Partner generally has a fiduciary duty to us and to our
unitholders. As a result, the General Partner must exercise good faith and
integrity in handling our assets and affairs. However, Delaware law allows
Delaware limited partnerships to modify the fiduciary duties of their general
partners. Our Partnership Agreement limits the fiduciary duties of the General
Partner to us and to our unitholders and restricts the remedies available to
unitholders for actions taken by the General Partner that might otherwise
constitute breaches of fiduciary duty. In addition, by purchasing a common unit
you effectively consent to certain actions and conflicts of interest that might
otherwise be deemed a breach of fiduciary or other duties under state law. The
General Partner will not be in breach of its obligations under the Partnership
Agreement or its duties to the Partnership and the unitholders if the resolution
of such conflict is fair and reasonable to the Partnership. These modifications
of the standards of fiduciary duty may make it much more difficult for a
unitholder to successfully challenge the actions of or failure to act by the
General Partner as being in breach of a fiduciary duty. See
37
"Conflicts of Interest and Fiduciary Responsibilities".
GENERAL PARTNER'S RIGHT TO CALL FOR AND PURCHASE UNITS
The Partnership Agreement provides that it will not constitute a breach of
the General Partner's fiduciary duties to the Partnership if the General Partner
exercises its right to call for and purchase units or assigns such right to one
of its affiliates or the Partnership. See "The Partnership Agreement--Limited
Call Right".
COMPETITION FROM THE GENERAL PARTNER'S AFFILIATES
Affiliates of the General Partner, including TransCanada, currently engage
and in the future are expected to continue to engage in other businesses or
activities, including those that might be in direct competition with the
Partnership. See "Business of the Partnership--Business Strategy and Competitive
Strengths of the Partnership". By purchasing a common unit, you effectively
consent to such action and the Partnership Agreement does not prohibit such
actions.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to us, the limited
partners or assignees for errors of judgment or for any acts or omissions if the
General Partner and such other persons acted in good faith. In addition, we are
required to indemnify the General Partner, its affiliates and their respective
officers, directors, employees, agents and trustees to the fullest extent
permitted by law against liabilities, costs and expenses incurred by the General
Partner or such other persons, if the General Partner or such persons acted in
good faith and in a manner they reasonably believed to be in, or (in the case of
a person other than a General Partner) not opposed to, our best interests and,
with respect to any criminal proceedings, had no reasonable cause to believe the
conduct was unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been tested
in a court of law, and the General Partner has not obtained an opinion of
counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities-- Conflicts of
Interest".
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of common units, see "Tax Considerations".
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a unitholder of the federal income tax benefits of an
investment in the Partnership depends, in large part, on the classification of
the Partnership as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting the Partnership. We have, however, received an opinion
from the law firm of Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations) that we will be classified as a partnership
for federal income tax purposes. You should be aware that opinions of counsel
are based on certain factual assumptions and are not binding on the IRS or any
court. See "Tax Considerations--Partnership Status".
If we were classified as an association taxable as a corporation for federal
income tax purposes, we would pay tax on our income at corporate rates
(currently 35%), distributions would generally be taxed again to the unitholders
as corporate distributions, and no income, gains, losses, deductions or credits
would flow through to the unitholders. Because
38
a tax would be imposed upon the Partnership as an entity, the cash available for
distribution to you would be substantially reduced. Treatment of the Partnership
as an association taxable as a corporation or otherwise as a taxable entity
would result in a material reduction in the anticipated cash flow and after-tax
return to the unitholders and thus would likely result in a substantial
reduction in the value of the common units.
We cannot provide any assurances that the law will not be changed so as to
cause the Partnership to be treated as an association taxable as a corporation
for federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity-level taxation for federal, state or local income tax purposes,
certain provisions of the Partnership Agreement relating to the distributions
will be subject to change including a decrease in the Minimum Quarterly
Distribution and the Target Distribution Levels. See "Cash Distribution Policy".
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
We have not requested a ruling from the IRS with respect to classification
of the Partnership as a partnership for federal income tax purposes or any other
matter affecting the Partnership. Accordingly, the IRS may adopt positions that
differ from our counsel's conclusions expressed herein or from the positions
taken by the Partnership. It may be necessary to resort to administrative or
court proceedings in an effort to sustain some or all of our counsel's
conclusions or the positions taken by the Partnership, and some or all of such
conclusions or positions ultimately may not be sustained. Any such contest with
the IRS may materially and adversely impact the market for the common units and
the price at which the common units trade. In addition, the costs of any contest
with the IRS will be borne directly or indirectly by some or all of the
unitholders and the General Partner.
RISK OF TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
You will be required to pay federal income taxes and, in certain cases,
state and local income taxes on your allocable share of the Partnership's
income, whether or not you receive cash distributions from the Partnership. We
cannot assure that you will receive cash distributions equal to your allocable
share of taxable income from the Partnership or even the tax liability to you
resulting from that income. Further, you may incur a tax liability, in excess of
the amount of cash received, upon the sale of your common units. See "Tax
Considerations--Tax Consequences of Unit Ownership" and "--Disposition of Common
Units".
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN EXPECTED
Upon the sale of common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in such common units.
Thus, prior Partnership distributions in excess of cumulative net taxable income
in respect of a common unit which decreased your tax basis in such common unit
will, in effect, become taxable income if the common unit is sold at a price
greater than your tax basis in such common units, even if the price is less than
your original cost. A substantial portion of the amount realized (whether or not
representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions to be used by the Partnership, you
could realize more gain on the sale of units than would be the case under such
conventions without the benefit of decreased income in prior years.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in common units by certain tax-exempt entities, regulated
investment companies (mutual funds) and foreign persons
39
raises issues unique to such persons. For example, virtually all of the taxable
income derived by most organizations exempt from federal income tax (including
IRAs and other retirement plans) from the ownership of a common unit will be
unrelated business taxable income and thus will be taxable to such unitholder.
Very little of the Partnership's income will be qualifying income to a regulated
investment company. Distributions to foreign persons will be subject to
withholding. See "Tax Considerations--Tax-Exempt Organizations and Certain Other
Investors".
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by the
Partnership will generally only be available to offset future income generated
by the Partnership and cannot be used to offset income from other activities,
including other passive activities or investments, 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. Net passive income from the
Partnership may be offset by unused Partnership losses carried over from prior
years, but not by losses from other passive activities, including losses from
other publicly traded partnerships. See "Tax Considerations--Tax Consequences of
Unit Ownership--Limitations on Deductibility of Partnership Losses".
TAX SHELTER REGISTRATION COULD INCREASE RISK OF POTENTIAL IRS AUDIT
Our General Partner has applied to register the Partnership as a "tax
shelter" with the Secretary of the Treasury. We cannot give any assurance that
the Partnership will not be audited by the IRS or that tax adjustments will not
be made. The rights of a unitholder owning less than a 1% interest in the
Partnership to participate in the income tax audit process are very limited.
Further, any adjustments in the Partnership's tax returns will lead to
adjustments in the unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to the Partnership.
Each unitholder would bear the cost of any expenses incurred in connection with
an examination of his personal tax return.
POSSIBLE LOSS OF TAX BENEFITS RELATING TO NON-UNIFORMITY OF COMMON UNITS AND
NONCONFORMING DEPRECIATION CONVENTIONS
Because 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 common units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to you or could
affect the timing of such tax benefits or the amount of gain from your sale of
common units and could have a negative impact on the value of the common units
or result in audit adjustments to your tax returns. See "Tax
Considerations--Uniformity of Units".
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will likely be subject to other
taxes, such as state and local taxes, unincorporated business taxes and estate,
inheritance or intangible taxes that are imposed by the various jurisdictions in
which the Partnership does business or owns property. You will likely be
required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which the
Partnership does business or owns property and may be subject to penalties for
failure to comply with those requirements. The Partnership will initially own
assets or do business in Illinois, Iowa, Minnesota, Montana, Nebraska, North
Dakota, South Dakota and Texas. Of these states, only Texas and South Dakota do
not currently impose a personal
40
income tax. It is your responsibility to file all required United States
federal, state and local tax returns. Counsel has not rendered an opinion on the
state or local tax consequences of an investment in the Partnership. See "Tax
Considerations--State, Local and Other Tax Considerations".
REPORTING OF PARTNERSHIP TAX INFORMATION AND RISK OF AUDITS
The Partnership will furnish you with a Schedule K-1 that sets forth your
share of Partnership income, gains, losses and deductions. In preparing these
schedules, the Partnership will use various accounting and reporting conventions
and adopt various depreciation and amortization methods. We cannot give any
assurances that these schedules will yield a result that conforms to statutory
or regulatory requirements or to administrative pronouncements of the IRS.
Further, the Partnership's tax return may be audited, and any such audit could
result in an audit of your individual tax return as well as increased
liabilities for taxes because of adjustments resulting from the audit.
41
THE TRANSACTIONS
We estimate that the net proceeds we will receive from the sale of common
units offered through this prospectus will be approximately $285 million
(assuming an initial public offering price of $19.50 per common unit and after
deducting underwriting discounts and commissions but before deducting expenses
incurred in connection with the offering). Concurrent with the closing of the
offering, the following transactions will take place:
- the TransCanada Subsidiaries will contribute their combined 30% general
partner interest in Northern Border Pipeline to the Partnership in
exchange for, in the case of TransCanada Border PipeLine Ltd., a number of
common units (which will not be outstanding after the Transactions, and,
in the case of TransCan Northern Ltd., (1) a number of common units (which
will not be outstanding after the Transactions), (2) 3,960,000
subordinated units, (3) a 2% combined general partner interest in the
Partnership and the Intermediate Partnership, (4) the Incentive
Distribution Rights, and (5) the Partnership's assumption of approximately
$135 million of indebtedness associated with the asset contributed by
TransCan Northern Ltd.;
- the Partnership will use a portion of the net proceeds of the offering to
repay the approximately $135 million of assumed indebtedness and to pay
expenses incurred in connection with the offering;
- the Partnership will use the remainder of the net proceeds of the offering
to redeem all of the common units issued to the TransCanada Subsidiaries;
and
- TransCan Northern Ltd. will transfer its subordinated units, Incentive
Distribution Rights and general partner interests to the General Partner.
After giving effect to these transactions, the TransCanada Subsidiaries will
not own any direct interests in the Partnership, and the General Partner will
not own any common units but will own 3,960,000 subordinated units, the
Incentive Distribution Rights and the general partner interests.
The asset conveyed to the Partnership by the TransCanada Subsidiaries
constitutes all of the initial assets of the Partnership. Prior to the offering,
there has been no public market for the common units of the Partnership. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the common units.
We will use the net proceeds from any exercise of the underwriters'
over-allotment option to redeem subordinated units from our General Partner on a
one-for-one basis equal to the number of common units issued upon the exercise
of such option.
Concurrently with the closing of the offering, the Intermediate Partnership,
as borrower, and TransCanada PipeLine USA Ltd. (a wholly owned subsidiary of
TransCanada), as lender will enter into the $ million unsecured Revolving
Credit Facility. We may borrow up to $ million from time to time under the
Revolving Credit Facility to fund capital expenditures, fund capital
contributions to Northern Border Pipeline and for working capital and other
general business purposes, including enabling the Partnership to make
distributions on the units.
42
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of common
units offered through this prospectus will be approximately $285 million,
assuming an initial public offering price of $19.50 per common unit, and after
deducting underwriting discounts and commissions but before deducting expenses
incurred in connection with the offering. The net proceeds of the offering will
be applied to:
- repay approximately $135 million of assumed indebtedness owed to
affiliates of TransCanada. Such indebtedness consists of (i) an $81.2
million loan bearing interest at 7.58% with a fixed repayment schedule
ending on December 2, 2006, and (ii) a $53.5 million demand loan bearing
interest at 8.5% which is subordinated to the loan described in (i).
- pay expenses incurred in connection with the offering (estimated to be
approximately $3.0 million); and
- redeem common units from the TransCanada Subsidiaries to be issued in
connection with the Transactions.
We will use the net proceeds from any exercise of the underwriters'
over-allotment option to redeem subordinated units from our General Partner on a
one-for-one basis equal to the number of common units issued upon the exercise
of such option.
Accordingly, we will retain none of the net proceeds of the offering.
43
PRO FORMA CAPITALIZATION
The following table sets forth (1) the capitalization of the Partnership as
of September 30, 1998, (2) the pro forma adjustments required to reflect the
Transactions, including the sale of common units offered hereby (at an assumed
initial public offering price of $19.50 per common unit) and the application of
the net proceeds therefrom as described in "Use of Proceeds" and (3) the pro
forma capitalization of the Partnership as of September 30, 1998. In each case,
the table assumes that the underwriters' over-allotment option is not exercised.
The table is derived from and should be read in conjunction with the pro forma
and historical financial statements and notes thereto included elsewhere in this
prospectus.
PRO FORMA PRO FORMA
TC PIPELINES, LP ADJUSTMENTS(A) TC PIPELINES, LP
--------------------- ------------------- ---------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(thousands of dollars)
Long-term debt, including current maturities....... -- 134,770(b) --
(134,770)(d)
Partners' capital
General partner.................................. -- 1(a) 4,737
4,736(b)
Common units..................................... -- 50,389(b) 185,159
282,156(c)
(147,386)(d)
Subordinated units............................... -- 46,882(b) 46,882
---------- ---------- ----------
Total partners' capital.......................... -- 236,778 236,778
---------- ---------- ----------
Total capitalization........................... -- 236,778 236,778
---------- ---------- ----------
---------- ---------- ----------
- - ------------------------
(a) Upon formation, cash amounting to $1,000 is deposited into the Partnership
in exchange for an initial general partner interest.
(b) As contemplated in the offering, the investment in Northern Border Pipeline
is conveyed to the Partnership by the TransCanada Subsidiaries in exchange
for a number of common units (which will not be outstanding after the
Transactions), 3,960,000 subordinated units, a 2% combined general
partnership interest in the Partnership and the Intermediate Partnership,
the right to receive incentive distributions, and the Partnership's
assumption of approximately $135 million of indebtedness associated with the
investment.
(c) Net proceeds to the Partnership from the sale of common units are expected
to be approximately $282 million, after deducting underwriting discounts and
commissions and expenses of the offering estimated to be approximately $23
million.
(d) The Partnership will use a portion of the proceeds to repay the
approximately $135 million of assumed indebtedness. The remainder of the net
proceeds will be used to redeem all of the common units issued to TransCan
Northern Ltd. and TransCanada Border PipeLine Ltd.
For a more complete discussion of the assumptions on which the pro forma
capitalization table is based, see the Notes to Pro Forma Financial Statements
of the Partnership included elsewhere in this prospectus.
44
DILUTION
On a pro forma basis as of September 30, 1998 after giving effect to the
Transactions, the tangible net book value of the Partnership's assets would have
been approximately $237 million or $11.84 per common unit (assuming an initial
public offering price of $19.50 per common unit). Purchasers of common units in
the offering will experience substantial and immediate dilution in tangible net
book value per common unit for financial accounting purposes, as illustrated in
the following table:
Assumed initial public offering price per common unit.............. $ 19.50
Less: Pro forma tangible net book value per common unit after the
offering (1)..................................................... $ 11.84
---------
Immediate dilution in tangible net book value per common unit to
new investors.................................................... $ 7.66
---------
---------
- - ------------------------
(1) Determined by dividing the total number of units (15,640,000 common units,
3,960,000 subordinated units and the 2% general partner interest having
dilutive effect equivalent to 400,000 units) to be outstanding after the
offering made hereby into the pro forma tangible net book value of the
Partnership, after giving effect to the application of the net proceeds of
the offering.
The following table sets forth the number of units that will be issued by
the Partnership and the total consideration to the Partnership contributed by
the General Partner and its affili-ates in respect of their units and by the
purchasers of common units in this offering upon the consummation of the
Transactions:
UNITS ACQUIRED TOTAL CONSIDERATION
-------------------------- -----------------------------
NUMBER PERCENT AMOUNT PERCENT
------------- ----------- ---------------- -----------
General Partner and its
affiliates(1)(2)....................... 4,360,000 21.8% $ 102,007,000 25.1%
New investors............................ 15,640,000 78.2 304,980,000 74.9
------------- --- ---------------- ---
Total.................................... 20,000,000 100 $ 406,987,000 100
------------- --- ---------------- ---
------------- --- ---------------- ---
- - ------------------------------
(1) Upon the consummation of the Transactions, the General Partner and its
affiliates will own an aggregate 3,960,000 subordinated units and a 2%
general partner interest in the Partnership having a dilutive effect
equivalent to 400,000 units.
(2) The assets and liabilities contributed and sold by the TransCanada
Subsidiaries will be recorded at historical cost in accordance with
generally accepted accounting principles. Book value of the consideration
provided by the TransCanada Subsidiaries as of September 30, 1998 is $102
million.
45
CASH DISTRIBUTION POLICY
GENERAL
AVAILABLE CASH
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
General Partner to (1) provide for the proper conduct of the Partnership's
business, (2) comply with applicable law or any Partnership debt instrument or
other agreement, or (3) provide funds for distributions to unitholders and the
General Partner in respect of any one or more of the next four quarters.
OPERATING SURPLUS AND CAPITAL SURPLUS
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of subordinated units receive any
distributions. See "--Quarterly Distributions of Available Cash".
Operating Surplus is defined in the Glossary and refers generally to (1) the
cash balance of the Partnership on the date the Partnership commences
operations, plus $ million, plus all cash receipts of the Partnership from
its operations since the closing of the Transactions (excluding cash
constituting Capital Surplus), less (2) all Partnership operating expenses, debt
service payments (including reserves therefor but not including payments
required in connection with the sale of assets or any refinancing with the
proceeds of new indebtedness or an equity offering), maintenance capital
expenditures and reserves established for future Partnership operations, in each
case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than Working Capital Borrowings), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus as of the end of the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
common unit in an aggregate amount per common unit equal to the initial public
offering price of the common units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Partnership does not anticipate that there will
be significant distributions from Capital Surplus.
SUBORDINATED UNITS
The subordinated units that will be issued to the General Partner are
entitled to receive the Minimum Quarterly Distribution only after the common
units have received the Minimum Quarterly Distribution plus any arrearages
thereon. The subordinated units are not entitled to arrearages. Upon expiration
of the Subordination Period, which will generally not occur prior to March 31,
2004, the subordinated units will convert into common
46
units on a one-for-one basis and will thereafter participate pro rata with the
other common units in distributions of Available Cash. The subordinated units
are also subordinated to the common units upon liquidation and have fewer voting
rights than the common units.
INCENTIVE DISTRIBUTION RIGHTS
Incentive Distribution Rights represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the Minimum Quarterly Distribution and the Target Distribution Levels have
been achieved. The Incentive Distribution Rights are held by the General
Partner. The Target Distribution Levels are based on the amounts of Available
Cash from Operating Surplus distributed in excess of the payments made with
respect to the Minimum Quarterly Distribution and Common Unit Arrearages, if
any, and the related 2% distribution to the General Partner.
EFFECT OF ISSUANCE OF ADDITIONAL UNITS
Subject to the limitations described under "The Partnership
Agreement--Issuance of Additional Securities", the Partnership has the authority
to issue additional common units or other equity securities of the Partnership
for such consideration and on such terms and conditions as are established by
the General Partner in its sole discretion and without the approval of the
unitholders. It is possible that the Partnership will fund acquisitions through
the issuance of additional common units or other equity securities of the
Partnership. Holders of any additional common units issued by the Partnership
will be entitled to share equally with the then-existing holders of common units
in distributions of Available Cash by the Partnership. In addition, the issuance
of additional partnership interests may dilute the value of the interests of the
then-existing holders of common units in the net assets of the Partnership. The
General Partner will be required to make an additional capital contribution to
the Partnership or the Intermediate Partnership (other than in connection with
the exercise of the underwriters' over-allotment option) in connection with the
issuance of additional partnership interests.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
quarter of the Partnership prior to its liquidation in an amount equal to 100%
of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within approximately 45 days after the end
of each quarter, commencing with the quarter ending March 31, 1999, to holders
of record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of the offering
through March 31, 1999 will be adjusted downward based on the actual length of
such period. The Minimum Quarterly Distribution and the Target Distribution
Levels are also subject to certain other adjustments as described below under
"--Distributions from Capital Surplus" and "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels".
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of common units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
subordinated units. This subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly Distribution on the common units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the common units. Upon expiration
of the Subordination Period, all subordinated units will be converted on a
one-for-one basis into common units and will participate pro rata with all other
common units in future distributions of Available Cash. Under certain
circumstances, up to 66 2/3% of the subordinated units may convert into common
units prior to the expiration of the Subordination Period. Common units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period
47
and subordinated units will not accrue any arrearages with respect to
distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of the
offering until the first day of any quarter beginning after March 31, 2004 in
respect of which (1) distributions of Available Cash from Operating Surplus on
the common units and the subordinated units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
common units and subordinated units during such periods, (2) the Adjusted
Operating Surplus generated during each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the common units and subordinated units
that were outstanding on a fully diluted basis and the related distribution on
the general partner interests in the Partnership and the Intermediate
Partnership during such periods, and (3) there are no outstanding Common Unit
Arrearages.
Prior to the end of the Subordination Period, a portion of the subordinated
units will convert into common units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any quarter
ending on or after (a) March 31, 2002 with respect to one-third of the
subordinated units (1,320,000 subordinated units) and (b) March 31, 2003 with
respect to one-third of the subordinated units (1,320,000 subordinated units) in
respect of which (1) distributions of Available Cash from Operating Surplus on
the common units and the subordinated units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
common units and subordinated units during such periods, (2) the Adjusted
Operating Surplus generated during each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the common units and subordinated units
that were outstanding on a fully diluted basis and the related distribution on
the general partner interests in the Partnership during such periods, and (3)
there are no outstanding Common Unit Arrearages; provided, however, that the
early conversion of the second one-third of subordinated units may not occur
until at least one year following the early conversion of the first one-third of
subordinated units.
Upon expiration of the Subordination Period, all remaining subordinated
units will convert into common units on a one-for-one basis and will thereafter
participate, pro rata, with the other common units in distributions of Available
Cash. In addition, if the General Partner is removed as general partner of the
Partnership under circumstances where Cause does not exist and units held by the
General Partner and its affiliates are not voted in favor of such removal, (1)
the Subordination Period will end and all outstanding subordinated units will
immediately convert into common units on a one-for-one basis, (2) any existing
Common Unit Arrearages will be extinguished, and (3) the General Partner will
have the right to convert its general partner interest (and the Incentive
Distribution Rights) into common units or to receive cash in exchange for such
interest.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in Working
Capital Borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in Working
Capital Borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to
48
the difference between (1) the Operating Surplus determined at the end of such
period and (2) the Operating Surplus determined at the beginning of such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
First, 98% to the common units, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each outstanding common unit an
amount equal to the Minimum Quarterly Distribution for such quarter;
Second, 98% to the common units, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each outstanding common unit an
amount equal to any Common Unit Arrearages accrued and unpaid with respect to
any prior quarters during the Subordination Period;
Third, 98% to the subordinated units, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
subordinated unit an amount equal to the Minimum Quarterly Distribution for such
quarter; and
Thereafter, in the manner described in "--Incentive Distribution
Rights--Hypothetical Annualized Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Partnership and the Intermediate
Partnership of the General Partner on a combined basis (exclusive of its or any
of its affiliates' interest as holders of the units). The General Partner will
own a 1% general partner interest in the Partnership and a 1.0101% general
partner interest in the Intermediate Partnership. With respect to any common
unit, the term "Common Unit Arrearages" refers to the amount by which the
Minimum Quarterly Distribution in any quarter during the Subordination Period
exceeds the distribution of Available Cash from Operating Surplus actually made
for such quarter on a common unit issued in the offering, cumulative for such
quarter and all prior quarters during the Subordination Period. Common Unit
Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
First, 98% to all units, pro rata, and 2% to the General Partner, until
there has been distributed in respect of each unit an amount equal to the
Minimum Quarterly Distribution for such quarter; and
Thereafter, in the manner described in "--Incentive Distribution
Rights--Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTION RIGHTS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the common and subordinated unitholders in an amount equal to the
Minimum Quarterly Distribution on all units and to the common unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the unitholders and the General Partner in the following manner:
First, 98% to all units, pro rata, and 2% to the General Partner, until the
unitholders have received (in addition to any distributions to common
unitholders to eliminate Common Unit Arrearages) a total of $0.3945 for such
quarter in respect of each outstanding unit (the "First Target Distribution");
Second, 85% to all units, pro rata, and 15% to the General Partner, until
the unitholders have received (in addition to any distributions to common
unitholders to eliminate Common Unit Arrearages) a total of $0.46625 for such
quarter in respect of each
49
outstanding unit (the "Second Target Distribution");
Third, 75% to all units, pro rata, and 25% to the General Partner, until the
unitholders have received (in addition to any distributions to common
unitholders to eliminate Common Unit Arrearages) a total of $0.60975 for such
quarter in respect of each outstanding unit (the "Third Target Distribution");
and
Thereafter, 50% to all units, pro rata, and 50% to the General Partner.
The distributions to the General Partner set forth above (other than in its
capacity a holder of Units) that are in excess of its aggregate 2% general
partner interest represent the Incentive Distribution Rights. The right to
receive Incentive Distribution Rights is not part of the general partner
interest and may be transferred separately from such interests, subject to
certain restrictions. See "The Partnership Agreement--Transfer of General
Partner Interest and Incentive Distribution Rights".
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the unitholders and the General
Partner up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis by dividing each level of
distribution by the assumed initial public offering price of $19.50 per common
unit. The calculations are also based on the assumption that the quarterly
distribution amounts shown do not include any Common Unit Arrearages. The
amounts set forth under "Marginal Percentage Interest in Distributions" in the
table below are the percentage interests of the General Partner and the
unitholders in any Available Cash from Operating Surplus distributed up to and
including the corresponding amount in the column "Quarterly Distribution Amount
per Common Unit". The percentage interests shown for the unitholders and the
General Partner for the Minimum Quarterly Distribution are also applicable to
quarterly distribution amounts that are less than the Minimum Quarterly
Distribution.
MARGINAL PERCENTAGE INTEREST IN
QUARTERLY
DISTRIBUTION DISTRIBUTIONS
AMOUNT PER HYPOTHETICAL --------------------------------
COMMON UNIT ANNUALIZED GENERAL
(ANNUALIZED) YIELD(1) UNITHOLDERS PARTNER
---------------- ---------------- ----------------- -------------
Minimum Quarterly Distribution....................... $1.500 7.69% 98% 2%
First Target Distribution............................ 1.578 8.09 98 2
Second Target Distribution........................... 1.865 9.56 85 15
Third Target Distribution............................ 2.439 12.51 75 25
Thereafter........................................... above $ 2.439 above 12.51% 50 50
- - ------------------------------
(1) Calculated on a pre-tax basis by dividing each level of distribution
(annualized) by the assumed initial offering price of $19.50 per common
unit.
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made in the following manner:
First, 98% to all units, pro rata, and 2% to the General Partner, until the
Partnership has distributed, in respect of each outstanding common unit issued
in the offering, Available Cash from Capital Surplus in an aggregate amount per
common unit equal to the Initial Unit Price;
Second, 98% to the common units, pro rata, and 2% to the General Partner,
until the Partnership has distributed, in respect of each outstanding common
unit, Available Cash from Capital Surplus in an aggregate amount equal to any
unpaid Common Unit Arrearages with respect to such common unit; and
50
Thereafter, all distributions of Available Cash from Capital Surplus will be
distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution Levels
will be adjusted downward by multiplying each such amount by a fraction, the
numerator of which is the Unrecovered Capital of the common units immediately
after giving effect to such repayment and the denominator of which is the
Unrecovered Capital of the common units immediately prior to such repayment.
This adjustment to the Minimum Quarterly Distribution may make it more likely
that subordinated units will be converted into common units (whether pursuant to
the termination of the Subordination Period or to the provisions permitting
early conversion of some subordinated units) and may accelerate the dates at
which such conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the common units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled thereafter to receive 50%
of all distributions of Available Cash in its capacities as General Partner and
as holder of the Incentive Distribution Rights (in addition to any distributions
to which they may be entitled as holders of units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY
DISTRIBUTION AND TARGET
DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels, the
Unrecovered Capital, the number of additional common units issuable during the
Subordination Period without a unitholder vote, the number of common units
issuable upon conversion of the subordinated units and other amounts calculated
on a per unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of common units
(whether effected by a distribution payable in common units or otherwise), but
not by reason of the issuance of additional common units for cash or property.
For example, in the event of a two-for-one split of the common units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the common units would each
be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and the Target
Distribution Levels would be reduced to an amount equal to the product of (1)
the Minimum Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (2) one minus the sum of (x) the maximum effective
federal income tax rate to which the Partnership is then subject as an entity
plus (y) any increase that results from such legislation in the effective
overall state and local income tax rate to which the Partnership is subject as
an entity for the taxable year in which such event occurs (after taking into
account the benefit of any deduction allowable
51
for federal income tax purposes with respect to the payment of state and local
income taxes). For example, assuming the Partnership was not previously subject
to state and local income tax, if the Partnership were to become taxable as an
entity for federal income tax purposes and the Partnership became subject to a
maximum marginal federal, and effective state and local, income tax rate of 38%,
then the Minimum Quarterly Distribution and the Target Distribution Levels would
each be reduced to 62% of the amount thereof immediately prior to such
adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The proceeds of such liquidation will, first, be applied to the
payment of creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
unitholders and the General Partner in accordance with their respective capital
account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding subordinated units
upon the liquidation of the Partnership, to the extent required to permit common
unitholders to receive their Unrecovered Capital plus any unpaid Common Unit
Arrearages. Thus, net losses recognized upon liquidation of the Partnership will
be allocated to the holders of the subordinated units to the extent of their
capital account balances before any loss is allocated to the holders of the
common units, and net gains recognized upon liquidation will be allocated first
to restore negative balances in the capital account of the General Partner and
any unitholders and then to the common unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid Common Unit Arrearages.
However, no assurance can be given that there will be sufficient gain upon
liquidation of the Partnership to enable the holders of common units to fully
recover all of such amounts, even though there may be cash available for
distribution to the holders of subordinated units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is included as Appendix A to this prospectus. If the
liquidation of the Partnership occurs before the end of the Subordination
Period, any net gain (or unrealized gain attributable to assets distributed in
kind) will be allocated to the partners as follows:
First, to the General Partner and the holders of units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
Second, 98% to the common units, pro rata, and 2% to the General
Partner, until the capital account for each common unit is equal to the sum
of (1) the Unrecovered Capital in respect of such common unit, (2) the
amount of the Minimum Quarterly Distribution for the quarter during which
liquidation of the Partnership occurs and (3) any unpaid Common Unit
Arrearages in respect of such common unit;
Third, 98% to the subordinated units, pro rata, and 2% to the General
Partner, until the capital account for each subordinated unit is equal to
the sum of (1) the Unrecovered Capital in respect of such subordinated unit
and (2) the amount of the Minimum Quarterly Distribution for the quarter
during which the liquidation of the Partnership occurs;
Fourth, 98% to all units, pro rata, and 2% to the General Partner, until
there has been allocated under this paragraph an amount per unit equal to
(1) the sum of the excess of the First Target Distribution per unit over the
Minimum Quarterly Distribution per unit for each quarter of the
Partnership's existence, less (2) the cumulative amount per unit of any
distributions of
52
Available Cash from Operating Surplus in excess of the Minimum Quarterly
Distribution per unit that were distributed 98% to the units, pro rata, and
2% to the General Partner for each quarter of the Partnership's existence;
Fifth, 85% to all units, pro rata, and 15% to the General Partner, until
there has been allocated under this paragraph an amount per unit equal to
(1) the sum of the excess of the Second Target Distribution per unit over
the First Target Distribution per unit for each quarter of the Partnership's
existence, less (2) the cumulative amount per unit of any distributions of
Available Cash from Operating Surplus in excess of the First Target
Distribution per unit that was distributed 85% to the units, pro rata, and
15% to the General Partner for each quarter of the Partnership's existence;
Sixth, 75% to all units, pro rata, and 25% to the General Partner, until
there has been allocated under this paragraph an amount per unit equal to
(1) the sum of the excess of the Third Target Distribution per unit over the
Second Target Distribution per unit for each quarter of the Partnership's
existence, less (2) the cumulative amount per unit of any distributions of
Available Cash from Operating Surplus in excess of the Second Target
Distribution per unit that was distributed 75% to the units, pro rata, and
25% to the General Partner for each quarter of the Partnership's existence;
and
Thereafter, 50% to all units, pro rata, and 50% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between common units and subordinated units will disappear, so that clauses (1)
and (3) of paragraph second above and all of paragraph third above will no
longer be applicable.
Upon liquidation of the Partnership, any loss will generally be allocated to
the General Partner and the unitholders as follows:
First, 98% to holders of subordinated units in proportion to the
positive balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the holders of the subordinated units
have been reduced to zero;
Second, 98% to the holders of common units in proportion to the positive
balances in their respective capital accounts and 2% to the General Partner,
until the capital accounts of the common unitholders have been reduced to
zero; and
Thereafter, 100% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between common units and subordinated units will disappear, so that all of
paragraph first above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time the Partnership issues additional interests in the Partnership or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the unitholders and the General Partner
in the same manner as gain or loss is allocated upon liquidation. In the event
that positive interim adjustments are made to the capital accounts, any
subsequent negative adjustments to the capital accounts resulting from the
issuance of additional interests in the Partnership, distributions of property
by the Partnership, or upon liquidation of the Partnership, will be allocated in
a manner which results, to the extent possible, in the capital account balances
of the General Partner equaling the amount which would have been the General
Partner's capital account balances if no prior positive adjustments to the
capital accounts had been made.
53
CASH AVAILABLE FOR DISTRIBUTION
We believe that we should have sufficient Available Cash from our Operating
Surplus (including borrowings under the Revolving Credit Facility) to enable us
to distribute the Minimum Quarterly Distribution on the common units and
subordinated units to be outstanding immediately after the consummation of the
offering with respect to each quarter at least through the quarter ending March
31, 2002. Available Cash for any quarter will consist generally of all cash on
hand at the end of such quarter, as adjusted for reserves. The definition of
Available Cash is set forth in the Glossary. Operating Surplus generally
consists of cash generated from operations after deducting related expenditures
and other items, plus $ million. Our belief is based on a number of
assumptions, including the assumptions that:
- there will be no significant changes in Canadian law or export policy that
would adversely impact the levels of imports of Canadian natural gas into
the United States;
- there will be no significant changes in FERC regulation, including the
ratemaking methodology, which generally allows Northern Border Pipeline to
recover its costs and earn a 12.0% return on equity with a deemed income
tax cost recovery component;
- the project cost containment mechanism, which was instituted to allocate
the risks of the levels of capital costs associated with the Chicago
Project between Northern Border Pipeline and its shippers, results in
Northern Border Pipeline being allowed to include in its rate base the
entire cost of construction of the Chicago Project;
- Northern Border Pipeline's Project 2000 achieves an in-service date on or
before November 1, 2000. See "Business of Northern Border
Pipeline--Project 2000";
- Northern Border Pipeline's debt/equity capitalization remains at
approximately its current ratio;
- business, economic, regulatory, political and competitive conditions will
not change substantially; and
- ongoing maintenance capital expenditures and/or capital contibution to
Northern Border Pipeline will be funded through a combination of cash
reserved by us and/or short-term financings by us.
Although we believe such assumptions are within a range of reasonableness,
whether the assumptions are realized is not, in a number of cases, within our
control and cannot be predicted with any degree of certainty. In the event that
our assumptions are not realized, the actual Available Cash from Operating
Surplus that we generate could be substantially less than that currently
expected and could, therefore, be insufficient to permit us to make cash
distributions at the levels described above. In addition, the terms of Northern
Border Pipeline's indebtedness will restrict the ability of Northern Border
Pipeline to distribute cash to its general partners (including the Intermediate
Partnership) in the event of a default under the terms of such indebtedness.
Accordingly, no assurance can be given that distributions of the Minimum
Quarterly Distribution or any other amounts will be made. See "Risk
Factors--Risks Inherent in an Investment in the Partnership", "Cash Distribution
Policy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". We do not intend to update the expression of belief set
forth above.
We will need $30.0 million of Available Cash from our Operating Surplus to
distribute the Minimum Quarterly Distribution for four quarters on the common
units and the subordinated units and to make the related distribution on the
combined 2% general partner interest (approximately $23.5 million for the common
units, approximately $5.9 million for the subordinated units and approximately
$0.6 million for the combined 2% general partner interest). These amounts for
three quarters would be $22.5 million in total (approximately
54
$17.6 million for the common units, approximately $4.4 million for the
subordinated units and approximately $0.5 million for the combined general
partner interest). If the Transactions had been completed on January 1, 1997,
pro forma Available Cash from Operating Surplus generated during 1997 would have
been approximately $28.6 million. The amount of pro forma Available Cash from
Operating Surplus generated for the nine months ended September 30, 1998 would
have been approximately $17.5 million. These amounts would not have been
sufficient to allow the Partnership to distribute the Minimum Quarterly
Distribution on the common units and the subordinated units and the related
distribution on the general partner interest with respect to such periods by
approximately $1.4 million for 1997 and approximately $5.0 million for the nine
months ended September 30, 1998.
The amounts of pro forma Available Cash from Operating Surplus set forth
above were derived from the pro forma financial statements of the Partnership
and historical financial statements of Northern Border Pipeline in the manner
set forth in Appendix D. The pro forma adjustments are based upon currently
available information and certain estimates and assumptions. The pro forma
financial statements do not purport to present our results of operations had the
Transactions actually been completed as of the dates indicated. Furthermore,
Available Cash from Operating Surplus as defined in the Partnership Agreement is
a cash accounting concept, while our pro forma financial statements and Northern
Border Pipeline's historical financial statements have been prepared on an
accrual basis. As a consequence, the amount of pro forma Available Cash from
Operating Surplus shown above should only be viewed as a general indication of
the amount of Available Cash from Operating Surplus that we might have generated
had the Partnership been formed in earlier periods. For definitions of Available
Cash and Operating Surplus, see the Glossary.
55
SELECTED PRO FORMA FINANCIAL DATA OF THE PARTNERSHIP
The following unaudited Selected Pro Forma Financial Data as of and for the
nine months ended September 30, 1998 and for the year ended December 31, 1997 is
derived from the Partnership's Pro Forma Financial Statements appearing
elsewhere in this prospectus. For the purpose of this pro forma financial data,
it is assumed that the Partnership will be in a position to exercise significant
influence over Northern Border Pipeline and the investment is accounted for
using the equity method of accounting. The pro forma financial data is based on
currently available information and certain estimates and assumptions, and
therefore the actual financial data will differ from the pro forma financial
data. For a more complete discussion of the assumptions used in preparing the
Selected Pro Forma Financial Data, see Notes to TC PipeLines, LP Pro Forma
Financial Statements appearing elsewhere in this prospectus. The following
information should not be deemed indicative of future operating results for the
Partnership.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
(thousands of dollars, except per
unit amounts)
INCOME STATEMENT DATA:
Equity income from investment in Northern Border Pipeline(1)............. 21,615 21,832
General and administrative expenses...................................... (900) (1,200)
---------- -----------------
Net income to partners................................................. 20,715 20,632
---------- -----------------
---------- -----------------
Net income per unit(1)................................................. $ 1.04 $ 1.03
---------- -----------------
---------- -----------------
BALANCE SHEET DATA (AT PERIOD END):
Investment in Northern Border Pipeline(2)................................ 236,777
Total assets............................................................. 236,778
Partners' capital
General Partner(3)..................................................... 4,737
Common units(3)........................................................ 185,159
Subordinated units(3).................................................. 46,882
----------
236,778
----------
----------
- - ------------------------
(1) Pro forma equity income represents 30% of the net income of Northern Border
Pipeline. The General Partner's allocation of pro forma net income is based
on an aggregate 2% interest in the Partnership, which has been deducted
before calculating the pro forma net income per unit. The computation of pro
forma net income per unit assumes that 15,640,000 common units and 3,960,000
subordinated units are outstanding at all times during the periods
presented.
(2) The pro forma investment balance as of September 30, 1998 represents the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the financial records of TransCan Northern Ltd. and TransCanada
Border PipeLine Ltd. as at that date. The balance also equates to 30% of the
net assets of Northern Border Pipeline as at September 30, 1998.
(3) Pro forma partners' capital is allocated 2% to the General Partner, 78.2% to
the common unitholders and 19.8% to subordinated unitholders.
56
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
NORTHERN BORDER PIPELINE
The selected financial information below for Northern Border Pipeline as of
and for the years ended December 31, 1997, 1996 and 1995 is derived from the
audited financial statements of Northern Border Pipeline and the financial
information below for Northern Border Pipeline as of and for the nine months
ended September 30, 1998 and 1997 is derived from the unaudited financial
statements of Northern Border Pipeline. In addition, the financial information
below for Northern Border Pipeline as of and for the years ended December 31,
1994 and 1993 is derived from the audited financial statements of Northern
Border Pipeline, reclassified to conform with the presentation used in the
audited financial statements for the year ended December 31, 1997. The operating
data for all periods presented is derived from the records of Northern Border
Pipeline. Management of Northern Border Pipeline has reported that it is of the
opinion that the unaudited financial statements reflect all adjustments which
are necessary for a fair statement of results of the interim periods. The
Selected Historical Financial and Operating Data below should be read in
conjunction with the financial statements of Northern Border Pipeline, included
elsewhere in this prospectus, and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)
----------- ----------- ---------- ----------- ---------- ------------ ------------
(UNAUDITED)
(thousands of dollars, except operating data)
INCOME STATEMENT DATA:
Operating revenues, net...... 145,476 140,369 186,050 201,943 206,497 211,580 205,242
Operations and maintenance... 16,872 21,027 28,522 26,974 25,573 27,682 25,793
Depreciation and
amortization............... 30,060 28,988 38,708 46,979 47,081 41,959 39,539
Taxes other than income...... 17,267 17,793 22,393 24,390 23,886 24,438 21,393
----------- ----------- ---------- ----------- ---------- ------------ ------------
Operating income........... 81,277 72,561 96,427 103,600 109,957 117,501 118,517
Interest expense............. (30,422) (24,162) (33,020) (33,117) (35,205) (38,424) (40,671)
Other income (expense)....... 21,196 4,955 9,365 3,360 (217) (1,919) (2,440)
----------- ----------- ---------- ----------- ---------- ------------ ------------
Net income................. 72,051 53,354 72,772 73,843 74,535 77,158 75,406
----------- ----------- ---------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ----------- ---------- ------------ ------------
CASH FLOW DATA:
Net cash provided by
operating activities....... 83,390 121,604 115,328 136,808 127,429 121,679 118,333
Capital expenditures......... 484,219 69,773 152,070 18,597 8,310 3,086 1,268
Distributions to partners.... 61,205 99,322 99,322 102,845 98,517 87,509 90,036
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment.................. 1,602,862 998,361 1,100,890 937,859 957,587 983,843 1,015,567
Total assets................. 1,653,804 1,043,262 1,147,120 974,137 1,011,361 1,063,210 1,097,383
Long-term debt, including
current maturities......... 724,000 410,000 459,000 377,500 410,000 445,000 470,000
Partners' capital............ 789,258 520,994 581,412 526,962 555,964 579,946 590,297
OPERATING DATA (UNAUDITED):
Natural gas delivered
(MMcf)..................... 463,209 471,695 633,280 633,908 615,133 597,898 570,469
Average throughput (MMcfd)... 1,733 1,761 1,770 1,764 1,720 1,663 1,592
- - ------------------------
(1) Certain figures have been reclassified to conform with the presentation used
in the audited financial statements for the year ended December 31, 1997.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE PRO FORMA FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE PARTNERSHIP SHOULD BE READ IN CONJUNCTION WITH THE
PARTNERSHIP'S PRO FORMA FINANCIAL STATEMENTS AND NOTES THERETO AND THE
HISTORICAL RESULTS OF OPERATIONS FOR NORTHERN BORDER PIPELINE SHOULD BE READ IN
CONJUNCTION WITH NORTHERN BORDER PIPELINE'S HISTORICAL FINANCIAL STATEMENTS AND
NOTES THERETO. FOR MORE DETAILED INFORMATION REGARDING THE BASIS OF PRESENTATION
OF THE FOLLOWING FINANCIAL INFORMATION, SEE THE NOTES TO EACH OF THE PRO FORMA
AND HISTORICAL FINANCIAL STATEMENTS, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE PARTNERSHIP
Upon the closing of the offering, the Partnership will own a 30% general
partner interest in Northern Border Pipeline. The Partnership will account for
this interest using the equity method of accounting. The Partnership's
investment initially will be recorded at the combined carrying values of the
investment in Northern Border Pipeline as reflected in the financial records of
the TransCanada Subsidiaries as of that date. In accordance with the equity
method of accounting, the future carrying value of this investment will be
adjusted to include the Partnership's 30% share of earnings or losses of
Northern Border Pipeline. Any distributions received or receivable by the
Partnership from Northern Border Pipeline will reduce the future carrying value
of the investment and additional contributions to Northern Border Pipeline will
increase the carrying value of the investment.
The Partnership's results of operations after the closing of the offering is
expected to be influenced by and to reflect the same factors that influence the
financial results of Northern Border Pipeline until such time as the Partnership
owns additional assets.
In connection with the Transactions, the Intermediate Partnership will enter
into the $ million unsecured Revolving Credit Facility with TransCanada
PipeLine USA Ltd., a wholly owned subsidiary of TransCanada. The purpose of the
Revolving Credit Facility is to provide borrowings to fund capital expenditures,
to fund capital contributions to Northern Border Pipeline and for working
capital and other general business purposes, including distributions on the
units.
The Partnership expects that Northern Border Pipeline will request capital
contributions in aggregate of approximately $20 million from the Partnership in
1999 and 2000. The Partnership expects to fund these capital contributions from
cash reserves and/or drawings under the Revolving Credit Facility.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Operating revenue increased $5.1 million (4%) for the nine months ended
September 30, 1998, as compared to the same period in 1997 due primarily to
returns on higher levels of invested equity.
Operations and maintenance expense decreased $4.1 million (20%) for the nine
months ended September 30, 1998, as compared to the same period in 1997
primarily due to a regulatory credit recorded in 1998. During the construction
of the Chicago Project, Northern Border Pipeline has placed certain new
facilities into service to maintain natural gas flow at firm contracted capacity
while existing facilities are being modified. The regulatory credit of
approximately $4.7 million, recorded in the nine months ended September 30,
1998, offsets the increase in cost of service for the new facilities placed in
service to date. Northern Border Pipeline is allowed to recover the regulatory
credit from its shippers over a ten-year period commencing with the in-service
date of the Chicago Project.
Depreciation and amortization expense increased $1.1 million (4%) for the
nine months ended September 30, 1998, as compared to
58
the same period in 1997 primarily due to facilities that were placed in service
in 1998.
Interest expense increased $6.3 million (26%) for the nine months ended
September 30, 1998, as compared to the same period in 1997 due primarily to an
increase in average debt outstanding, reflecting amounts borrowed to finance a
portion of the capital expenditures for the Chicago Project.
Other income increased $16.2 million (328%) for the nine months ended
September 30, 1998, as compared to the same period in 1997. The increase was
primarily due to a $17.3 million increase in the debt and equity allowance for
funds used during construction ("AFUDC"). Equity AFUDC is a regulatory allowance
that represents the capitalization of the allowed equity return associated with
a construction program. The increase in AFUDC primarily relates to Northern
Border Pipeline's expenditures for the Chicago Project. (See "--Liquidity and
Capital Resources of Northern Border Pipeline--Cash Flows from Investing
Activities"). Other income for 1997 included $2.8 million received by Northern
Border Pipeline for vacating certain microwave frequency bands.
1997 COMPARED TO 1996
Operating revenue decreased $15.9 million (8%) for the year ended December
31, 1997, as compared to the results for the comparable period in 1996 due
primarily to lower depreciation and amortization expense, taxes other than
income and return on a lower rate base. These lower recoveries were partially
offset by higher operations and maintenance expense recoveries. Additionally, in
accordance with the Stipulation and Agreement ("Stipulation") approved by the
FERC to settle Northern Border Pipeline's November 1995 rate case, the allowed
equity rate of return was 12.75% through September 30, 1996 and 12.0%
thereafter.
Operations and maintenance expense increased $1.5 million (6%) for the year
ended December 31, 1997, from the comparable period in 1996 due primarily to
higher administrative expenses.
Depreciation and amortization expense decreased $8.3 million (18%) for the
year ended December 31, 1997, as compared to the same period in 1996. In
accordance with the terms of the Stipulation, filed with the FERC in 1996 and
approved in August 1997, the depreciation rate applied to Northern Border
Pipeline's gross transmission plant was 2.5% for 1997. The average depreciation
rate applied to gross transmission plant for the year ended December 31, 1996
was 3.1%.
Taxes other than income decreased $2.0 million (8%) for the year ended
December 31, 1997, as compared to the results for the same period in 1996 due
primarily to lower property tax assessments received in various states where the
Pipeline System operates.
Interest expense for the year ended December 31, 1997 was not significantly
different from the results for the same period in 1996.
Other income increased $6.0 million (179%) for the year ended December 31,
1997, as compared to the same period in 1996. The increase was primarily due to
$4.8 million received by Northern Border Pipeline for vacating certain microwave
frequency bands and a $4.2 million increase in AFUDC. The increase in AFUDC
primarily relates to Northern Border Pipeline's expenditures for the Chicago
Project (See "--Liquidity and Capital Resources of Northern Border
Pipeline--Cash Flows from Investing Activities").
1996 COMPARED TO 1995
Operating revenue decreased $4.6 million (2%) for the year ended December
31, 1996, as compared to the results for the comparable period in 1995, due
primarily to equity returns on a lower rate base and lower interest expense.
These lower recoveries were partially offset by higher operations and
maintenance expense recoveries. Operating revenue for 1996 reflect the terms of
the Stipulation filed by Northern Border Pipeline for FERC approval, which was
subsequently approved by the FERC in 1997, to settle its November 1995 rate
case.
59
Operations and maintenance expense increased $1.4 million (5%) for the year
ended December 31, 1996, from the comparable period in 1995 due primarily to
expenses incurred in conjunction with Northern Border Pipeline's November 1995
rate case proceeding as well as higher administrative expenses.
Depreciation and amortization expense remained constant for the year ended
December 31, 1996, as compared to the results for the same period in 1995.
Depreciation and amortization expense for 1996 is reduced approximately $7.4
million from the level authorized in Northern Border Pipeline's FERC tariff to
reflect the Stipulation discussed above, which results in an average
depreciation rate for transmission plant of 3.1% for the year ended December 31,
1996 which matches the rate used in 1995. In accordance with the terms of the
Stipulation, the depreciation rate applied to Northern Border Pipeline's gross
transmission plant was reduced to 2.7% effective June 1996 from the 3.6% rate in
its FERC tariff.
Interest expense decreased $2.1 million (6%) for the year ended December 31,
1996, as compared to the results for the same period in 1995 due to a decrease
in the average debt outstanding. Average debt outstanding has decreased between
the two periods reflecting principal payments of $32.5 million made under the
Northern Border Pipeline bank loan agreement.
Other income/(expense) increased $3.6 million for the year ended December
31, 1996, from results for the year ended December 31, 1995, primarily due to
the reversal of previously established reserves for regulatory issues.
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities decreased $38.2 million to $83.4
million for the nine-month period ended September 30, 1998, as compared to the
same period in 1997. Operating activities for the 1997 period included $40.4
million collected by Northern Border Pipeline that was subsequently refunded to
its shippers in October 1997 in accordance with its November 1995 rate case
settlement.
Cash flows provided by operating activities decreased $21.5 million to
$115.3 million for the year ended December 31, 1997 as compared to the same
period in 1996 primarily related to a $52.6 million refund in October 1997 in
accordance with the Stipulation approved by the FERC to settle Northern Border
Pipeline's rate case. During 1997, $40.4 million had been collected subject to
refund by Northern Border Pipeline as a result of its November 1995 rate case.
Cash flows provided by operating activities increased $9.4 million to $136.8
million for the year ended December 31, 1996 as compared to the same period in
1995, due primarily to amounts collected subject to refund by Northern Border
Pipeline as a result of its rate case.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $484.2 million for the nine months ended September
30, 1998 are comprised of $474.4 million for the Chicago Project and $10.0
million for linepack gas acquired from Northern Border Pipeline's shippers. For
the comparable period in 1997, capital expenditures were $69.8 million, which
included $57.2 million for the Chicago Project.
Capital expenditures of $152.1 million for the year ended December 31, 1997,
include $135.7 million for the Chicago Project. The remaining $16.4 million of
capital expenditures for 1997 are primarily related to renewals and replacements
of Northern Border Pipeline's existing facilities. For the comparable period in
1996, capital expenditures were $18.6 million, which included $11.8 million for
the Chicago Project, and $6.8 million primarily related to renewals and
replacements of Northern Border Pipeline's existing facilities.
Total capital expenditures for 1998 are estimated to be $683.0 million for
the Chicago Project, $12.0 million for linepack gas and $10.0 million for
renewals and replacements of
60
existing facilities. The General Partner anticipates that Northern Border
Pipeline will fund approximately 65% of its 1998 capital expenditures by
borrowing on its revolving credit facility. Funds required to meet the remainder
of Northern Border Pipeline's capital expenditures will be provided primarily
from capital contributions from the general partners of Northern Border
Pipeline.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities were $400.8 million for the nine
months ended September 30, 1998, as compared to cash flows used in financing
activities of $37.5 million for the comparable period in 1997. Net cash
contributions from partners were $135.8 million for the nine months ended
September 30, 1998, which included amounts needed to finance a portion of the
capital expenditures for the Chicago Project, as compared to net cash
distributions of $59.3 million for the comparable period in 1997. Additionally,
in the nine months ended September 30, 1998, borrowings under the Pipeline
Credit Agreement totaled $265.0 million and were used to finance a portion of
the capital expenditures for the Chicago Project. For the comparable period in
1997, borrowings under the Pipeline Credit Agreement of $160.0 million were used
primarily to retire amounts related to Northern Border Pipeline's existing bank
loan and credit agreements of $137.5 million.
Cash flows provided by financing activities were $52.4 million for the year
ended December 31, 1997, as compared to cash flows used in financing activities
of $125.3 million for the year ended December 31, 1996. In 1997, sources of
funds from financing activities included a contribution from partners of $81.0
million. Borrowings under the Pipeline Credit Agreement totaled $209 million and
were used primarily to retire amounts related to Northern Border Pipeline's
existing bank loan agreements of $137.5 million and for construction
expenditures related to the Chicago Project. In 1996, net principal reductions
on Northern Border Pipeline's bank loan agreements totaled $22.5 million.
DESCRIPTION OF INDEBTEDNESS OF NORTHERN BORDER PIPELINE
DESCRIPTION OF NOTES
The following is a summary of the terms of $250 million aggregate principal
amount of notes (the "Notes") issued by Northern Border Pipeline in a private
placement pursuant to a Note Purchase Agreement dated as of July 15, 1992, as
amended by a Supplemental Agreement dated as of June 1, 1995 (collectively, the
"Note Agreement"), copies of which are filed as an exhibit to the Registration
Statement of which this prospectus is a part. This summary is qualified in its
entirety by reference to the Note Agreement.
Northern Border Pipeline's obligations under the Note Agreement are
unsecured and non-recourse to the general partners of Northern Border Pipeline.
The Note Agreement provides for four series of Notes with varying interest rates
and maturity dates. The Series A Notes in an aggregate principal amount of $66
million bear interest at an annual rate of 8.26%, payable semiannually, and
mature in August 2000. The Series B Notes in an aggregate principal amount of
$41 million bear interest at an annual rate of 8.38%, payable semiannually, and
mature in August 2001. The Series C Notes in an aggregate principal amount of
$78 million bear interest at an annual rate of 8.49%, payable semiannually, and
mature in August 2002. The Series D Notes in an aggregate principal amount of
$65 million bear interest at an annual rate of 8.57%, payable semiannually, and
mature in August 2003.
Northern Border Pipeline may at any time, at its option and upon written
notice, prepay the Notes of one or more series in whole or in part (in a minimum
amount of, and otherwise in multiples of, $1.0 million). Optional prepayments
will be payable with accrued interest plus any Make-Whole Amount (as defined in
the Note Agreement) premium.
61
The Note Agreement contains various restrictive and affirmative covenants
applicable to Northern Border Pipeline, including:
- requirement that the ratio of Northern Border Pipeline's aggregate
indebtedness to Partners' Capital (as defined in the Note Agreement) not
exceed 2.3 to 1 on a consolidated basis. As of September 30, 1998, the
ratio was 1.47 to 1 on a consolidated basis;
- restrictions on any indebtedness senior to the Notes;
- requirement that Northern Plains or another person approved by a majority
of the holders of the Notes outstanding at the time of selection by the
Northern Border Pipeline Management Committee be the Operator of Northern
Border Pipeline;
- restrictions on certain liens, investments, lines of business, mergers,
consolidations, or sales of assets of Northern Border Pipeline;
- restrictions on amendments, modification, or cancellation of any
Controlled Service Agreement or related Support Agreement (as defined in
the Note Agreement), subject to certain exceptions; and
- restrictions on transactions with affiliates of Northern Border Pipeline
except on an arm's-length basis.
Under the Note Agreement, so long as no Default or Event of Default (as
defined in the Note Agreement) exists or would result, Northern Border Pipeline
is permitted to make cash distributions to its partners if the aggregate amount
of cash distributions made from January 1, 1992 to the date of the proposed cash
distribution (the Computation Period, as defined in the Note Agreement) would
not exceed $20 million plus (or minus in case of a negative amount) the sum of
(1) Consolidated Net Income (as defined in the Note Agreement) for the
Computation Period, (2) an amount equal to the aggregate net cash proceeds
received by Northern Border Pipeline during the Computation Period from the sale
of partnership interests or from capital contributions treated as equity in
accordance with Required Accounting Principles (as defined in the Note
Agreement), (3) an amount equal to Current Taxes (as defined in the Note
Agreement) for the Computation Period and interest payable in respect of any
income tax deficiencies (to the extent recovered pursuant to the FERC tariff
during the Computation Period), (4) an amount equal to 35% of Deferred Income
Taxes (as defined in the Note Agreement) during the Computation Period, and (5)
an amount equal to 35% of Depreciation (as defined in the Note Agreement) during
the Computation Period. Under the most restrictive debt covenant, the partners'
capital that could have been distributed as of September 30, 1998 was $176
million.
If an Event of Default (as defined in the Note Agreement) exists, the
holders of Notes may accelerate the maturity of the Notes and exercise other
rights and remedies.
DESCRIPTION OF BANK CREDIT FACILITY
Northern Border Pipeline entered into a credit agreement, dated as of June
16, 1997 (the "Pipeline Credit Agreement") with certain financial institutions
for which the First National Bank of Chicago acts as Administrative Agent, to
borrow up to an aggregate principal amount of $750 million. The following is a
summary of the terms of the Pipeline Credit Agreement, a copy of which is filed
as an exhibit to the Registration Statement of which this prospectus is a part.
This summary is qualified in its entirety by reference to the Pipeline Credit
Agreement.
Northern Border Pipeline's obligations under the Pipeline Credit Agreement
are unsecured obligations, rank equally with the Notes and are non-recourse to
the general partners of Northern Border Pipeline. The Pipeline Credit Agreement
is comprised of a $200 million five-year revolving credit facility to be used
for the retirement of Northern Border Pipeline's prior credit facility and for
general business purposes and a $550 million
62
three-year revolving credit facility to be used for the construction of the
Chicago Project. The three-year revolving credit facility may be converted to a
term loan maturing in June 2002 once the Chicago Project has been placed in
service and certain other conditions are met. The Pipeline Credit Agreement
permits Northern Border Pipeline to choose among various interest rate options,
to specify the portion of the borrowings to be covered by specific interest rate
options and to specify the interest rate period, subject to certain parameters.
Northern Border Pipeline may borrow under either facility at fixed interest
rates or a margin added or subtracted from a London Interbank Offered Rate
("LIBOR") index (and further adjusted based on Northern Border Pipeline's
leverage ratio) or pursuant to an auction procedure set forth in the Pipeline
Credit Agreement. Northern Border Pipeline is required to pay a facility fee on
the aggregate principal amount of $750 million. As of September 30, 1998, $127.5
million and $346.5 million had been borrowed on the five-year and three-year
revolving credit facilities, respectively.
The Pipeline Credit Agreement contains various restrictive covenants
applicable to Northern Border Pipeline, including restrictions on liens,
additional indebtedness, investments, mergers, consolidations, sales of assets,
guarantees, entering into transactions with affiliates, allowing final judgments
in excess of $25 million to remain undischarged or unbonded, maintaining or
contributing to any ERISA Plan without obtaining the prior written consent of
the Majority Banks (as defined in the Pipeline Credit Agreement), and not
permitting the ratio of Northern Border Pipeline's Indebtedness to the sum of
its General Partners' Capital plus Indebtedness to exceed .65 to 1 on a
consolidated basis. As of September 30, 1998, the ratio was .48 to 1 on a
consolidated basis.
The Pipeline Credit Agreement also contains various affirmative covenants,
customary for this type of facility, including that Northern Border Pipeline
will use its best efforts to cause its Tariff to remain effective at all times,
use it best efforts to maintain existing Service Agreements and Support
Agreements (as defined in the Pipeline Credit Agreement), and that Northern
Border Pipeline will require that all shippers meet certain credit worthiness
standards.
If an Event of Default (as defined in the Pipeline Credit Agreement) occurs
under the Pipeline Credit Agreement, the lending banks may accelerate the
maturity of the amounts due thereunder and exercise other rights and remedies.
INTEREST RATE RISK MANAGEMENT OF NORTHERN BORDER PIPELINE
During September 1998, Northern Border Pipeline executed anticipatory hedge
transactions with an aggregate notional amount of $150 million to fix the
interest rate for a planned issuance of fixed rate debt during 1999. The average
effective interest rate on the transactions, based on ten-year U.S. Treasury
Notes, is 4.90%. As of September 30, 1998, the estimated fair value which would
be payable to terminate the anticipatory hedge transactions, taking into account
current interest rates, was approximately $5 million.
PROJECT COST CONTAINMENT MECHANISM
In connection with the rate case filed with the FERC in November 1995,
Northern Border Pipeline reached a settlement accord with shippers holding
approximately 90% of the aggregate contracted firm capacity as of October 15,
1996 and filed for FERC approval of a Stipulation and Agreement (the
"Stipulation") to settle that rate case. The Stipulation was approved by the
FERC in August 1997. As agreed to in the Stipulation, after completion of
construction of the Chicago Project in December 1998, Northern Border Pipeline
implemented a new depreciation schedule with an extended depreciable life, a $31
million settlement adjustment mechanism that effectively reduces the allowed
return on rate base and the PCCM. The purpose of the PCCM was to limit Northern
Border Pipeline's ability to include cost overruns in rate base and to provide
incentives to Northern Border Pipeline for cost underruns. The Stipulation
63
required the budgeted cost for the Chicago Project, which had been initially
filed with the FERC for approximately $839 million, to be adjusted for the
effects of inflation and for costs attributable to changes in project scope, as
defined by the Stipulation.
In the determination of the PCCM, the actual cost of the project is compared
to the budgeted cost. If there is a cost overrun of $6 million or less, the
shippers will bear the actual cost of the project through its inclusion in
Northern Border Pipeline's rate base. If there is a cost savings of $6 million
or less, the full budgeted cost will be included in the rate base. If there is a
cost overrun or cost savings of more than $6 million but less than 5% of the
budgeted cost, that amount will be allocated 50% to Northern Border Pipeline and
50% to its shippers (50% of the difference between 5% of the budgeted cost and
$6 million will be included in Northern Border Pipeline's rate base and 50% will
be excluded). All cost overruns exceeding 5% of the budgeted cost are excluded
from the rate base.
The budgeted cost of the Chicago Project, as adjusted for the effects of
inflation and project scope changes, has been estimated as of the project's
in-service date to be $889 million. Northern Border Pipeline's initial
notification to the FERC and its shippers reflects the conclusion that there
would be no adjustment to rate base related to the PCCM. Northern Border
Pipeline is obligated by the Stipulation to update its calculation of the PCCM
six months after the project's in-service date. The Stipulation requires the
calculation of the PCCM to be reviewed by an independent national accounting
firm. Although the Partnership believes the initial computation has been
completed pursuant to the terms of the Stipulation, it is unable to make a
definitive determination at this time whether any adjustments will be required.
Should subsequent developments cause costs not to be recovered pursuant to the
PCCM, a non-cash charge to write down transmission plant may result and such
charge could be material to the operating results of the Partnership.
RECENT DEVELOPMENTS
On December 9, 1998, Northern Border Pipeline issued a capital call to its
general partners in the aggregate amount of $26 million. During December 1998,
each of the general partners of Northern Border Pipeline made its full pro rata
contribution of capital pursuant to this call. In addition, on December 22,
1998, the Chicago Project went into service.
YEAR 2000
Northern Border Pipeline, similar to most businesses, relies heavily on
information systems technology to operate in an efficient and effective manner.
Much of this technology takes the form of computers and associated hardware for
data processing and analysis, but, in addition, a great deal of information
processing technology is embedded in microelectronic devices. The Year 2000
("Y2K") problem results from the use in computer hardware and software of two
digits rather than four digits to define the applicable year. As a result,
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If not corrected, many computer
applications could fail or create erroneous results. The effects of the Y2K
problem are compounded because of the interdependence of computer and
telecommunication systems in the United States and throughout the world. This
interdependence is true for Northern Border Pipeline and its suppliers and
customers.
NORTHERN BORDER PIPELINE
To address this potential problem, a comprehensive Year 2000 Plan has been
developed by Northern Border Pipeline to identify, inventory, assess, test, and
remediate all of its computer and operational systems that could be affected by
the Y2K problem. The plan provides for the assessment of the Y2K readiness of
key third-party service providers that Northern Border Pipeline relies on, such
as power and telecommunications suppliers, as well as the development of
64
contingency plans to address potential internal and external failures related to
Y2K issues. A Y2K team has been established to oversee the implementation and
execution of the Year 2000 Plan.
Northern Border Pipeline has completed an initial inventory of its computer
hardware, software and embedded systems and has assessed the compliance for most
items. The testing and remediation process for computer hardware and software is
well underway. Comprehensive plans have been drafted for integrated testing of
critical operational equipment that contain embedded microprocessors. Requests
for Y2K compliance status have been sent to key third-party service providers
and to upstream and downstream entities that interconnect to the Pipeline
System.
Preliminary contingency plans have been developed that address options for
dealing with unforeseen Y2K-related failures in the infrastructure supporting
Northern Border Pipeline. Because of Northern Border Pipeline's internal backup
electrical and communications systems, we believe that it is well prepared to
deal with unresolved compliance problems in these areas, should the need arise.
We anticipate that Northern Border Pipeline's contingency planning process will
be a dynamic process that will reassess the changing Y2K compliance situation
periodically.
Northern Border Pipeline has not incurred material historical costs
associated with the Y2K issue. Further, we anticipate that Northern Border
Pipeline's future costs of implementing the plan will not be material. Although
we believe our estimates are reasonable, there can be no assurance that the
actual costs of implementing the plan will not differ materially from the
estimated costs or that Northern Border Pipeline will not be adversely affected
by Y2K issues.
OUR GENERAL PARTNER
The Partnership and the General Partner are not materially dependent upon
computer systems to conduct their businesses. Accordingly, we do not believe
that the Y2K problem will have a material adverse effect on our business,
financial condition or results of operations.
65
MARKET OVERVIEW
The supply of Canadian natural gas imported into the United States has
increased from 2.22 Tcf in 1993 to 2.91 Tcf in 1997, an increase of 31%. Total
United States natural gas demand in the same period has increased by over 8%.
Canadian natural gas has been steadily increasing its market share in the United
States relative to United States production from 11% in 1993 to over 13% in
1997.
IMPORTS OF CANADIAN NATURAL GAS
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
United States Natural Gas Demand (Tcf)(1)............................ 20.28 20.71 21.58 21.97 21.97
Canadian Imports (Tcf)(2)............................................ 2.22 2.53 2.77 2.85 2.91
Canadian Imports Share of United States Market....................... 11.0% 12.2% 12.8% 13.0% 13.2%
- - ------------------------
(1) EIA "Natural Gas Monthly", October 1998.
(2) NEB Report: "Natural Gas Exports--By Export Point".
The Pipeline System has access to extensive natural gas reserves in the
WCSB, located in the provinces of Alberta, British Columbia, and Saskatchewan.
As of December 31, 1997, the WCSB had remaining established reserves of natural
gas of 61 Tcf with a remaining reserves to production ratio of approximately 11
years at current levels of production. WCSB production has increased 6% since
1995 and it is expected to continue to grow until at least 2004. As described in
the table below, marketable natural gas production is expected to increase by
22% for the period 1999 to 2004.
WCSB MARKETABLE NATURAL GAS PRODUCTION: HISTORICAL & FORECAST
1995(1) 1996(1) 1997(1) 1998(2) 1999(2) 2000(2) 2001(2) 2002(2)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Production (Bcfd)........... 14.6 15.3 15.5 16.1 17.3 17.8 19.3 19.4
Annual Production Growth
(%)....................... 5% 1% 4% 7% 3% 8% 1%
2003(2) 2004(2)
----------- -----------
Production (Bcfd)........... 19.6 19.7
Annual Production Growth
(%)....................... 1% 1%
- - ------------------------
(1) Canadian Association of Petroleum Producers Statistical Handbook.
(2) Sproule's Productive Capability Test of the conventional gas supply of the
WCSB.
66
The Pipeline System currently serves the East North Central Region ("ENC")
of the United States as well as Montana, North Dakota, South Dakota, Minnesota
and Iowa. The ENC is defined by the United States Energy Information
Administration ("EIA") as Ohio, Wisconsin, Indiana, Michigan and Illinois. As a
percentage of the total United States natural gas demand the ENC has accounted
for between 17% and 18% since 1993, and is expected to grow at 1.6% per year
until at least 2003.
One of our strategic objectives is to expand eastward into the United States
northeast markets ("NE"). The EIA defines the NE as Maine, Massachusetts,
Vermont, Rhode Island, New Hampshire, Connecticut, New York, New Jersey and
Pennsylvania. Between 1993 and 1997, NE demand increased by 19% and currently
represents 14.4% of United States demand for natural gas. The NE market is
forecasted to grow at approximately 3.5% per year until at least 2003.
Set forth below is the historical gas demand for the ENC and the NE markets
of the United States.
HISTORICAL NATURAL GAS DEMAND (1)(2)
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
ENC Demand (Tcf)................................................. 3.58 3.59 3.78 3.96 3.85
ENC % of Total United States Demand.............................. 17.6% 17.3% 17.5% 18.0% 17.5%
NE Demand (Tcf).................................................. 2.66 2.80 2.99 3.00 3.16
NE % of Total United States Demand............................... 13.1% 13.5% 13.9% 13.7% 14.4%
- - ------------------------
(1) EIA "Natural Gas Monthly", various issues.
(2) Regional demand does not include pipeline, lease and plant fuel.
The growth in natural gas demand in the NE and ENC has been propelled by the
electrical generation business (including cogeneration and independent power
plants) and the commercial and industrial sectors. The growth reflects not only
an increase in United States demand for energy in general, but also the
influence of the Clean Air Act and other environmental legislation and the
favorable environmental impact of using cleaner burning natural gas rather than
fuel oil and coal. These factors are expected to continue to increase the demand
for natural gas in the United States.
67
BUSINESS OF THE PARTNERSHIP
We were recently formed to acquire, own and participate in the management
and growth of United States based pipeline assets. We will initially own a 30%
interest in Northern Border Pipeline. Our General Partner will manage and
operate our activities.
BUSINESS STRATEGY AND COMPETITIVE STRENGTHS OF THE PARTNERSHIP
We believe that the continuing growth in demand for natural gas is driving
the need for new pipeline capacity in North America. The Pipeline System's
Chicago Project is an example of a project built to transport Canadian natural
gas to growing markets. With increasing volumes of natural gas expected to reach
the northern midwest market during 1999 to 2001 and with the growth of markets
in the northeastern United States, we believe that there will be a need to
transport increasing volumes of natural gas between these two regions.
We intend to capitalize on these opportunities by facilitating the flow of
natural gas to the growing natural gas consuming markets in the United States.
By participating in selected expansions and targeted acquisitions we will seek
to leverage the strategic location and capability of the Pipeline System. Our
strategy is designed to generate increasing amounts of cash from operations to
distribute to our unitholders.
Key elements of our business strategy are to:
- SERVE GROWING MARKETS FOR NATURAL GAS IN THE UNITED STATES. Natural gas
consumption in the United States northeast markets increased by 18.8% from
1994 to 1997 and we expect these markets to grow at approximately 3.5% per
year at least until 2003. We anticipate acquiring ownership interests in
and enhancing transmission pathways which serve these regional demands for
natural gas.
- PURSUE STRATEGIC ACQUISITIONS. We will seek to acquire significant
ownership positions in fully operating pipeline transmission assets in the
United States, with minimal development risk, relatively stable cash flows
and growth potential. We will concentrate on acquiring ownership positions
in pipeline transmission assets that complement our existing asset to
serve growing markets for natural gas in the United States.
- CREATE VALUE BY ESTABLISHING CROSSCOUNTRY ROUTES. Through our
participation in extensions of the Pipeline System and through aquisitions
by the Partnership we envision establishing cross-country routes for
natural gas transmission. By facilitating cross-country routes we would
create a wider range of end-market options for shippers in order to
enhance the value of our existing asset and our future acquisitions.
- APPLY TRANSCANADA'S EXPERTISE TO EFFICIENTLY MANAGE ASSETS. We will use
the combined experience of our management and our affiliate TransCanada to
efficiently manage existing and newly acquired assets. TransCanada has
significant experience and expertise in the development, design,
construction and management of natural gas transmission pipelines,
including the negotiation of shipper contracts and connections with other
pipeline systems, dealing with the FERC and other regulators and the
oversight of operational management. We expect that, in most cases, the
day to day operation of the Partnership's pipeline transmission assets
will be provided by unaffiliated entities.
- CAPITALIZE ON NON-GAS OPPORTUNITIES. We believe that opportunities may
exist to acquire ownership interests in
68
non-natural gas transmission assets that will complement our other assets
throughout the United States. We currently do not have specific plans or
commitments to make any such acquisitions.
We believe we are well positioned to execute our strategy due to the
following competitive strengths:
- RELATIONSHIP WITH TRANSCANADA. One component of TransCanada's corporate
strategy is to develop markets in the United States for the consumption of
western Canadian natural gas. To achieve this objective, TransCanada has
developed and expects to continue to develop pipeline assets which either
link western Canadian natural gas supplies directly to United States
markets or complement pipelines which do so by broadening their coverage
of the United States market. We believe that one of TransCanada's
strengths is the identification, development and construction of new
natural gas transmission pipelines. Due to our relationship with
TransCanada, these transmission assets may provide acquisition
opportunities for us, although TransCanada has no obligation to offer any
assets to us and no assurances can be given that it will offer us any such
assets in the future or, if offered, that they will be offered on terms
attractive to us.
- ACCESS TO PUBLIC CAPITAL. We believe the Partnership can compete
successfully with large corporate buyers to acquire developed natural gas
pipeline transmission assets in the United States. Our competitive
advantage relative to large corporate energy services companies (including
TransCanada) arises from our ability to access public capital with a
structure that allows us to distribute a greater portion of cash from
operations.
- EXPERIENCED MANAGEMENT RESOURCES. In addition to the experienced
management of the General Partner, TransCanada will make available the
services of its management who have substantial experience in and
understanding of the natural gas transmission business, knowledge of
Canadian and United States regulatory matters, and a demonstrated ability
to operate pipeline transmission assets in an efficient and profitable
manner.
- STRATEGICALLY LOCATED AND COST COMPETITIVE EXISTING PIPELINE ASSETS. The
Pipeline System links historically increasing natural gas production in
western Canada with the United States interstate pipeline system. We
believe that the interconnections with other interstate natural gas
transmission systems as well as the cost competitiveness of its tariffs
have made Northern Border Pipeline an attractive transportation option for
shippers. We believe that the strategic and cost competitive position of
the Pipeline System provides the Partnership with a base to effectively
serve developing natural gas markets in the United States.
- STABLE CASH FLOW FROM OPERATIONS. Pipeline transportation of natural gas
in a regulated environment is a relatively stable business well suited to
our strategy. As of December 31, 1998, 91% of the Pipeline System's summer
design capacity is under contract through October 31, 2003. The weighted
average contract life as of December 31, 1998 is approximately 7.6 years.
Our strategy of growth through acquisition of ownership interests in
developed assets is designed to minimize some of the risks inherent in the
identification, development and construction of pipelines.
69
BUSINESS OF NORTHERN BORDER PIPELINE
STRUCTURE
Our Partnership owns a 30% general partner interest in Northern Border
Pipeline. The remaining 70% general partner interest is currently owned by NBP,
a publicly traded limited partnership that is not affiliated with the
Partnership.
Management of Northern Border Pipeline is overseen by the four-member
Northern Border Pipeline Management Committee. Our Partnership controls 30% of
the voting power of the Northern Border Pipeline Management Committee and has
the right to designate one member. NBP controls 70% of the voting power of the
Northern Border Pipeline Management Committee and has the right to designate
three members. Under its partnership agreement, voting power on the Northern
Border Pipeline Management Committee is allocated among NBP's three general
partners in proportion to their relative general partner interests in NBP. As a
result, the 70% voting power of NBP's representatives on the Northern Border
Pipeline Management Committee is allocated as follows: 35% to Northern Plains (a
subsidiary of Enron), 22.75% to Pan Border (a subsidiary of Enron) and 12.25% to
Northwest Border (a subsidiary of Williams). Each of Northern Plains, Pan Border
and Northwest Border has the right to designate one member of the Northern
Border Pipeline Management Committee.
Enron (through Northern Plains and Pan Border) controls 57.75% of the voting
power of the Northern Border Pipeline Management Committee and has the right to
designate two of the members of this Management Committee. The Pipeline System
is also operated by Northern Plains pursuant to an operating agreement.
GENERAL
Northern Border Pipeline's revenue is derived from agreements with various
shippers for the transportation of natural gas. It transports natural gas under
a FERC-regulated tariff that provides an opportunity to recover all of the
operations and maintenance costs of the pipeline, taxes other than income taxes,
interest, depreciation and amortization, an allowance for income taxes and a
regulated return on equity. Northern Border Pipeline is generally allowed to
collect from its shippers a return on regulated rate base as well as recover
that rate base through depreciation and amortization. In the absence of
additions to the rate base, the amount received by Northern Border Pipeline from
its regulated return on equity decreases as the rate base is recovered.
Billings for firm transportation agreements are based on contracted volumes
to determine the allocable share of the cost of service and are not dependent
upon the percentage of available capacity actually used.
Northern Border Pipeline does not own the natural gas that it transports and
therefore it does not assume any natural gas commodity price risk.
THE PIPELINE SYSTEM
With the recent completion of the Chicago Project in December 1998, Northern
Border Pipeline owns a 1,213-mile United States interstate Pipeline System that
transports natural gas from the Montana-Saskatchewan border near Port of Morgan,
Montana, to interconnecting pipelines in the upper midwest of the United States.
The Pipeline System was initially constructed in 1982 with capacity additions to
the Pipeline System in 1991, 1992, and 1998.
The Pipeline System has pipeline access to natural gas reserves in the WCSB
in the provinces of Alberta, British Columbia and Saskatchewan in Canada, as
well as the Williston Basin in the United States. The Pipeline System also has
access to production of Syngas from the Dakota Gasification Plant in North
Dakota. Interconnecting pipeline facilities provide Northern Border Pipeline
shippers access to markets in the Midwest, including Chicago. Access beyond
Chicago throughout the United States is provided by transportation,
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displacement and exchange arrangements by third parties.
The first segment of the Pipeline System, which extends from the Canadian
border to Ventura, Iowa, was completed and placed in service in 1982. In 1991,
an additional compressor station was added to the Pipeline System. In 1992 a
30-inch diameter pipeline, approximately 147 miles in length, was acquired and
placed in service. This pipeline interconnects with the original system near
Ventura, Iowa and terminates near Harper, Iowa where it interconnects with the
facilities of NGPL. As a result of these 1991 and 1992 projects, the throughput
capacity of the Pipeline System increased by 463 MMcfd to 1,675 MMcfd.
There were seven compressor stations on the Pipeline System as of December
31, 1997. Other facilities include three pipeline field offices and warehouses,
six major measurement stations and 39 microwave tower sites.
The Chicago Project, completed in December 1998, extended the Pipeline
System from Harper, Iowa to Manhattan, Illinois, near Chicago, and expanded the
Pipeline System's transportation capacity by up to 700 MMcfd. As a result of the
Chicago Project, total receipt capacity on the Pipeline System is 2,375 MMcfd.
In connection with the Chicago Project, Northern Border Pipeline installed
228,500 compressor horsepower at eight new compressor stations and upgraded five
existing compressor stations by removing from service units producing 100,000
compressor horsepower and installing units producing 175,000 compressor
horsepower. The project's facilities also include 243 miles of new pipeline and
147 miles of pipeline loop.
At its northern end, the Pipeline System is connected to TransCanada's
majority-owned Foothills (Sask.) System in Canada, which in turn is connected to
the Alberta System of TransCanada's wholly owned subsidiary NGT and the pipeline
system of the unaffiliated Transgas Limited in Saskatchewan. The Alberta System
gathers and transports a substantial portion of Canadian natural gas production.
The Pipeline System also connects with facilities of Williston Basin Interstate
Pipeline at Glen Ullin and Buford, North Dakota and facilities of Dakota
Gasification Company at Hebron, North Dakota in the northern portion of the
system.
Interconnecting pipeline facilities provide Northern Border Pipeline's
shippers with flexible access to end markets. The Ventura, Iowa interconnect
with Northern Natural Gas Company functions as a large market center, where
natural gas volumes transported on the Pipeline System are sold, traded and
received for transport to significant consuming markets in the Midwest and to
interconnecting pipeline facilities destined for other markets. The Harper, Iowa
interconnect with NGPL and the Chicago Project extension to Manhattan, Illinois
also provide access for natural gas transported through the Pipeline System to
Chicago and other midwest markets and to interconnecting pipeline facilities
destined for other markets. The Pipeline System has various other delivery and
interconnection points along its length.
The Pipeline System is operated by Northern Plains pursuant to an operating
agreement. Northern Plains employs approximately 190 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 Plains'
employees are not represented by any labor union and are not covered by any
collective bargaining agreements.
THE CHICAGO PROJECT
The Chicago Project was completed and placed in service in December 1998,
expanding and extending the Pipeline System to Manhattan, Illinois, near
Chicago. New transportation contracts entered into in connection with the
Chicago Project provide for additional receipts into the Pipeline System of 700
MMcfd, with 648 MMcfd to be transported through the pipeline's extension into
Illinois and the remainder being delivered at various points along the Pipeline
System.
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PROJECT 2000
In October 1998, Northern Border Pipeline filed a certificate application
with the FERC to seek approval of its Project 2000 to expand and extend its
Pipeline System into Indiana by November 2000. In addition to providing
incremental Canadian natural gas to United States markets, Project 2000 would
afford shippers on the extended pipeline system access to industrial gas
consumers in northern Indiana. Project 2000 capital expenditures are estimated
at $190 million and, with timely approval from the FERC, the General Partner
anticipates construction activities to begin in late 1999. The Partnership's
share of such capital expenditures is expected to be approximately $20.0 million
payable during 1999 and 2000. Proposed facilities will include approximately
34.4 miles of 36-inch pipeline and a total net increase of 53,000 compressor
horsepower.
As a result of the proposed expansion, the pipeline will have receipt
capacity of 2,433 MMcfd from the Port of Morgan, Montana to Ventura, Iowa, 1,491
MMcfd from Ventura to Harper, Iowa, 844 MMcfd from Harper to Manhattan,
Illinois, and 544 MMcfd on the new extension from Manhattan to North Hayden,
Indiana. Six project shippers have agreed to take transportation service of all
the capacity, subject to Northern Border Pipeline satisfying certain conditions
including receipt of FERC and other regulatory approvals by certain specified
dates.
The proposed pipeline extension will interconnect with Northern Indiana
Public Service Company ("NIPSCO"), a local distribution company at the terminus.
NIPSCO has confirmed to Northern Border Pipeline that the interconnect will be
able to take away the required capacity. The Foothills (Sask.) System has
advised Northern Border Pipeline that it intends to file for the required
authorizations to construct and operate any necessary facilities needed to
accommodate increased deliveries by the Foothills (Sask.) System to Northern
Border Pipeline at Port of Morgan.
COMPETITION
If constructed, the Alliance Pipeline, which recently received Canadian and
United States regulatory approvals, would compete directly with Northern Border
Pipeline. The Alliance Pipeline would transport gas from the WCSB to the
midwestern United States.
It is expected that the Alliance Pipeline would provide its shippers with an
option to ship liquids-rich gas. Further deliveries of natural gas by Alliance
(without the liquids-rich element) would require facilities to extract the
natural gas liquids. Alliance has stated that it may build a natural gas liquids
extraction plant near the pipeline's terminus in Chicago.
While there will be a large increase in natural gas moving from the WCSB to
Chicago if the Alliance project is completed, there are several projects
proposed for the 1999 to 2001 timeframe to transport natural gas from the
Chicago area to growing eastern markets. The proposed projects currently being
pursued by unrelated third parties are targeting markets in eastern Canada and
the northeast United States. None of these proposed projects have received final
regulatory approval.
TransCanada owns and operates a pipeline system which transports natural gas
from the same natural gas reserves in western Canada that supply Northern Border
Pipeline's customers. Shippers of TransCanada compete for the same supplies of
natural gas as shippers of Northern Border Pipeline.
Natural gas is also produced in the United States and transported by other
competing unaffiliated pipeline systems to the same destinations as the Pipeline
System.
SHIPPERS
The Pipeline System serves a number of shippers with diverse financial and
market profiles. Based upon existing contracts and the expanded Pipeline
System's capacity, 92% of the firm capacity (based on annual cost of service
obligations) is contracted by producers and marketers. The remaining firm
capacity is contracted to local distribution companies (5%) and interstate
pipelines (3%). At present, the termination dates of these contracts range
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from October 31, 2001 to October 31, 2013. The weighted average contract life as
of November 30, 1998 (based upon annual cost of service obligations) is
approximately 7.6 years.
There are four contracts totaling 143 MMcfd (3.8% of projected firm
capacity) with termination dates of December 31, 2008 or July 31, 2009 that may
be terminated by the shippers if the production of synthetic gas at the Dakota
Gasification Plant by Dakota Gasification Company ceases.
Firm shippers on the Pipeline System which are affiliated with TransCanada
or the general partners of NBP are: Enron Capital & Trade Resources Corp., a
subsidiary of Enron; TransCanada; and Transcontinental Gas Pipe Line
Corporation, a subsidiary of Williams. Together those shippers are responsible
for a certain portion of the cost of service recovery when the Chicago Project
became operational.
Northern Border Pipeline's largest shipper, PAGUS, currently holds, under
three transportation contracts, 741 MMcfd of capacity. One of the transportation
contracts with PAGUS is supported by various credit support arrangements.
In June 1998, PAGUS amended its transportation contracts covering 741 MMcfd
of capacity. The amendments extend the contracts for two years through October
2003. With such extensions, 90% of the Pipeline System's firm capacity is
extended to September 2003.
Order 636 (see "FERC Regulation") has created a secondary market in existing
Northern Border Pipeline capacity. There have been temporary releases of
capacity where the releasing party (which is not relieved of its obligations
under its contract) receives credit against its firm transportation contract for
revenues received as a result of the temporary release. In addition to the
temporary releases, several shippers have permanently released a portion of
their capacity to other shippers who have agreed to comply with the underlying
contractual and regulatory obligations associated with such capacity.
FERC REGULATION
GENERAL
Northern Border Pipeline is subject to extensive regulation by the FERC as a
"natural gas company" under the Natural Gas Act (the "NGA"). Under the NGA and
the Natural Gas Policy Act ("NGPA"), the FERC has jurisdiction over Northern
Border Pipeline with respect to virtually all aspects of its business, including
transportation of natural gas, rates and charges, construction of new
facilities, extension or abandonment of service and facilities, accounts and
records, depreciation and amortization policies, the acquisition and disposition
of facilities, the initiation and discontinuation of services, and certain other
matters. Northern Border Pipeline, where required, holds certificates of public
convenience and necessity issued by the FERC covering its facilities, activities
and services. Under Section 8 of the NGA, the FERC has the power to prescribe
the accounting treatment for items for regulatory purposes. The Northern Border
Pipeline books and records are periodically audited pursuant to Section 8.
Northern Border Pipeline's rates and charges for transportation in
interstate commerce are subject to regulation by the FERC. Rates charged by
natural gas companies may not exceed rates deemed just and reasonable by the
FERC. In addition, natural gas companies are prohibited from unduly preferring
or unreasonably discriminating against any person with respect to pipeline rates
or terms and conditions of service. Certain types of rates may be discounted
without further FERC authorization.
COST OF SERVICE TARIFF
Northern Border Pipeline's firm transportation shippers contract to pay for
an allocable share of the cost of service associated with 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. Similarly during any given month, the shippers' obligations to pay their
allocable share of the cost of service are not dependent
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upon the percentage of available capacity actually used. The cost of service
tariff is regulated by the FERC and provides an opportunity to recover all
operations and maintenance costs of the Pipeline System, taxes other than income
taxes, interest, depreciation and amortization, an allowance for income taxes
and a regulated equity return. Northern Border Pipeline may not charge or
collect more than its cost of service pursuant to its tariff on file with the
FERC.
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency resulting from the comparison of
the cost of service determined for that period in accordance with the FERC
tariff to the estimated billing is accumulated, including carrying charges
thereon, and is either billed to or credited back to the shippers' accounts.
Northern Border Pipeline also provides interruptible transportation service.
The maximum rate charged to interruptible shippers is calculated from cost of
service estimates on the basis of contracted capacity. Except for any period
when the risk conditions described in the next paragraph are applicable, all
revenue from the interruptible transportation service is credited back to the
firm shippers' accounts.
Northern Border Pipeline is at risk for the recovery of the annual cost of
service associated with the capacity from the addition of a compressor station
in 1991 and the addition of four compressor stations and the acquisition of the
147-mile, 30-inch diameter pipeline in 1992. See "Business of Northern Border
Pipeline--The Pipeline System". In the event that a portion of that capacity
were to become uncontracted, or the government authorizations to export or
import natural gas from Canada were to lapse, the FERC has stated that Northern
Border Pipeline would not be allowed to recover from the remaining firm shippers
on the system that portion of its cost of service related to those facilities
and the uncontracted capacity associated with these facilities.
The cost of service has been levelized due primarily to annual depreciation
changes. This means that the annual cost of service, since the effective date of
Northern Border Pipeline's 1992 rate case, was designed to be generally level
until January 1, 1997, after which time a higher levelized cost of service was
to be effective through 2001. As a result of Northern Border Pipeline's rate
case filed in November 1995 and the proposed change in the depreciation schedule
in conjunction with the Chicago Project, the depreciation rate applied to
Northern Border Pipeline's gross transmission plant was reduced effective June
1, 1996, from 3.6% to 2.7%. Beginning January 1, 1997, the depreciation rate was
reduced to 2.5%. Commencing with the in-service date of the Chicago Project, the
depreciation rate will be 2% and is scheduled to increase on January 1, 2000 and
each year thereafter until it reaches 3.2% in 2002.
The November 1995 rate case was filed in compliance with Northern Border
Pipeline's FERC tariff for the determination of its allowed equity rate of
return. In this proceeding, Northern Border Pipeline reached a settlement accord
with shippers holding approximately 90% of the aggregate contracted firm
capacity as of October 15, 1996 (the "Shippers") and filed for FERC approval of
a Stipulation and Agreement ("Stipulation") to settle its rate case. The
Stipulation was approved by the FERC in August 1997. The Stipulation allowed
Northern Border Pipeline to retain its 12.75% equity rate of return through
September 30, 1996, and a 12% rate beginning October 1, 1996. In addition, the
depreciation rate applied to Northern Border Pipeline's gross transmission plant
was reduced as described in the previous paragraph. Under the Stipulation, the
Shippers agreed that for at least seven years following the completion of the
Chicago Project, Northern Border Pipeline may continue to calculate its
allowance for income taxes as a part of its cost of service in the manner it has
historically used. In addition, in connection with the completion of the Chicago
Project, Northern Border Pipeline has implemented a new depreciation schedule
with an extended depreciable life, a capital project cost containment mechanism
and a $31 million settlement adjustment mechanism. The settlement adjustment
mechanism will
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effectively reduce the allowed return on rate base. In October 1997, Northern
Border Pipeline made refunds to its shippers in the amount of $52.6 million,
previously reserved, drawing on an existing $750 million revolving credit
facility and utilizing cash on hand.
OPEN ACCESS REGULATION
Beginning on April 8, 1992, the FERC issued a series of orders (together,
"Order 636") designed to restructure the way that pipelines deliver
transportation services. Among other things, Order 636 required companies to
unbundle their services and offer sales, transportation, storage, gathering and
other services separately; to permanently assign their firm capacity on upstream
pipelines to firm shippers wanting such capacity; and to provide all
transportation services on a basis that is equal in quality for all shippers.
Order 636 was substantially affirmed by the United States Court of Appeals for
the District of Columbia.
Order 636 adopted "right of first refusal" ("ROFR") procedures (imposed by
the FERC as a condition to the pipeline's right to abandon long-term
transportation service) to govern a shipper's continuing rights to
transportation services when its contract with the pipeline expires. The FERC's
rules require existing shippers to match any bid of up to five years in order to
retain their capacity. In a Notice of Proposed Rulemaking issued by the FERC on
July 20, 1998, the FERC has proposed to eliminate the requirement that shippers
match any bid up to 5 years from the ROFR and indicated that it is considering
whether the ROFR should be eliminated entirely. The effect of the Order 636 ROFR
procedures and the FERC's proposals to revise those procedures on Northern
Border Pipeline's ability to renew or recontract firm capacity under long-term
service agreements once existing agreements expire cannot be quantified at this
time.
Beginning in 1996, the FERC issued a series of orders (together "Order 587")
amending its open access regulations to standardize certain business practices
and procedures governing transactions between interstate natural gas pipelines,
their customers, and others doing business with the pipelines. These business
standards, developed by the Gas Industry Standards Board ("GISB"), govern
important business practices such as shipper supplied service nominations,
allocation of available capacity, accounting and invoicing of transportation
service, standardized Internet business transactions, and capacity release.
Northern Border Pipeline has implemented changes to its tariff and internal
systems so it can fully comply with the business standards as required by these
orders.
In 1998, the FERC initiated a number of proceedings to further amend its
open access regulations. In a Notice of Proposed Rulemaking ("NOPR") issued on
July 20, 1998, the FERC proposed changes to its regulations governing short-term
transportation services. Among the proposals considered in the NOPR are auctions
for short-term capacity, removal of price caps for secondary market
transactions, revisions to its reporting requirements, revisions to tariff
provisions governing imbalances, and negotiated services. In a companion Notice
of Inquiry issued the same day, the FERC has requested industry comment on its
pricing policies in the existing long-term market for transportation services
and its pricing policies for new capacity. The FERC also issued a NOPR to revise
its procedures under which shippers or others may have complaints considered by
the FERC. The impact on Northern Border Pipeline of any final rules adopted by
the Commission as a result of these proceedings cannot be assessed at this time.
The FERC has also commenced proceedings to revise its pipeline construction
regulations. On September 30, 1998, the FERC issued a NOPR to amend its
regulations to reflect current FERC policies governing the issuance of pipeline
construction certificates and to codify the filing of certain related
information. Also on September 30, 1998, the FERC issued a NOPR that would give
applicants seeking to construct, operate or abandon natural gas services or
facilities the option of using a pre-filing collaborative
75
process to resolve significant issues among parties and the pipeline. The NOPR
also proposes that a significant portion of the environmental review process
could be completed as part of the collaborative process. As part of the NOPR,
the FERC intends to examine existing landowner notification policies related to
pipeline construction and certain environmental and pipeline construction
issues. The impact on Northern Border Pipeline of any final rules adopted by the
Commission as a result of these proceedings cannot be assessed at this time.
ENVIRONMENTAL AND SAFETY MATTERS
The operations of Northern Border Pipeline are subject to federal, state and
local laws and regulations relating to safety and the protection of the
environment which include the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, the Compensation and Liability Act of
1980, as amended, the Clean Air Act, as amended, the Clean Water Act, as
amended, the Natural Gas Pipeline Safety Act of 1969, as amended, and the
Pipeline Safety Act of 1992. The General Partner believes that Northern Border
Pipeline's operations and facilities are in general compliance in all material
respects with applicable environmental and safety regulations.
Northern Border Pipeline has ongoing environmental and safety audit
programs. As part of the construction of the Chicago Project, Northern Border
Pipeline was required to comply with numerous environmental conditions. Northern
Border Pipeline provides environmental training to all construction personnel.
Northern Border Pipeline has obtained the necessary air quality permits for
construction and operation of the new and upgraded compressor stations and is
working with regulatory agencies through the start-up phases of new equipment
and its operations.
PROPERTIES
Northern Border Pipeline holds the right, title and interest in the Pipeline
System. Northern Border Pipeline owns all of its material equipment and personal
property and leases office space in Omaha, Nebraska. With respect to real
property, the Pipeline System falls into two basic categories: (a) parcels which
Northern Border Pipeline owns in fee, such as certain of the compressor
stations, measurement stations and pipeline field office sites; and (b) parcels
where the interest of Northern Border Pipeline derives from leases, easements,
rights-of-way, permits or licenses from landowners or governmental authorities
permitting the use of such land for the construction and operation of the
Pipeline System. The right to construct and operate the pipeline across certain
property was obtained by Northern Border Pipeline through exercise of the power
of eminent domain. Northern Border Pipeline continues to have the power of
eminent domain in each of the states in which it operates the Pipeline System,
although it may not have the power of eminent domain with respect to Native
American tribal lands.
Approximately 90 miles of the pipeline is located on fee, allotted and
tribal lands within the exterior boundaries of the Fort Peck Indian Reservation
in Montana. Tribal lands are lands owned in trust by the United States for the
Fort Peck Tribes and allotted lands are lands owned in trust by the United
States for an individual Indian or Indians. In 1980, Northern Border Pipeline
entered into a pipeline right-of-way lease with the Fort Peck Tribal Executive
Board, for and on behalf of the Assiniboine and Sioux Tribes of the Fort Peck
Indian Reservation. This pipeline right-of-way lease, which was approved by the
Department of the Interior in 1981, granted to Northern Border Pipeline the
right and privilege to construct and operate its pipeline on certain tribal
lands, for a term of 15 years, renewable for an additional 15 year term at the
option of Northern Border Pipeline without additional rental. Northern Border
Pipeline notified the Bureau of Indian Affairs ("BIA") in March 1996 that it was
exercising its option to renew the pipeline right-of-way lease for an additional
15 year term. Northern Border Pipeline continues to operate on this portion of
the pipeline located on tribal lands in accordance with its renewal rights.
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In conjunction with obtaining a pipeline right-of-way lease across tribal
lands located within the exterior boundaries of the Fort Peck Indian
Reservation, Northern Border Pipeline also obtained a right-of-way across
allotted lands located within the reservation boundaries. This right-of-way,
granted by the BIA on March 25, 1981, for and on behalf of individual Indian
owners, expired on March 31, 1996. Before the termination date, Northern Border
Pipeline undertook efforts to obtain voluntary consents from individual Indian
owners for a new right-of-way, and Northern Border Pipeline filed applications
with the BIA for new right-of-way grants across those tracts of allotted lands
where a sufficient number of consents from the Indian owners had been obtained.
Also, a condemnation action was filed in Federal Court in the District of
Montana concerning those remaining tracts of allotted land for which a majority
of consents were not timely received. An order in this proceeding was issued by
the Federal Court granting Northern Border Pipeline continued access and
possession during the pendency of the condemnation action on the tracts in
question. A stipulation has been entered into involving all but one tract
involved in the condemnation action in which the parties have agreed that the
Court may enter an order assessing compensation in the amount established in an
agreed upon appraisal. The condemnation of the one tract where a stipulation was
not reached has been set for trial in order to determine the value of the
interest being condemned. Amounts ordered by the Court as compensation should be
included in Northern Border Pipeline's cost of service. To date, the BIA has not
issued a formal right-of-way grant for those tracts for which sufficient
landowners consents were obtained. It is anticipated that the issuance of such a
grant will take place in conjunction with the resolution of the condemnation
action.
LITIGATION
In addition to the condemnation actions and matters related to the FERC
regulation, various legal actions that have arisen in the ordinary course of
business are pending with respect to Northern Border Pipeline. In the General
Partner's opinion, none of these proceedings would reasonably be expected to
have a material adverse impact on Northern Border Pipeline's results of
operations or financial position. See "Business of Northern Border
Pipeline--Properties".
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The Partnership (exclusive of its interest in Northern Border Pipeline) is
not currently a party to any legal proceedings that, individually or in the
aggregate, would reasonably be expected to have a material adverse impact on the
Partnership's results of operations or financial position.
HOW TO OBTAIN OTHER INFORMATION ABOUT THE PARTNERSHIP
The Partnership has not previously been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Partnership has filed with the Commission a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), regarding the common units. This prospectus does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Partnership and the common units offered
hereby, you may desire to review the Registration Statement, including its
exhibits and schedules. Statements made in this prospectus concerning the
contents of any contract, agreement or other document are not necessarily
complete; you may desire to review such contracts, agreements or other documents
filed as exhibits to the Registration Statement for a more complete description
of the matter involved, and each such statement in this prospectus is qualified
in its entirety by such reference. The Registration Statement (including the
exhibits and schedules) filed with the SEC by the Partnership may be inspected
and copied at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New
York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained upon written request from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates or from the SEC's Web site on the Internet at
http://www.sec.gov. The SEC's telephone number is 1-800-SEC-0330.
As a result of the offering, the Partnership will become subject to the
informational requirements of the Exchange Act and will file periodic reports
and other information with the SEC. Such reports and other information filed by
the Partnership may be inspected and copied at the public reference facilities
at the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates or from the SEC's Web site on the Internet at http:// www.sec.gov.
78
MANAGEMENT
PARTNERSHIP MANAGEMENT
The General Partner will manage and operate the activities of the
Partnership pursuant to the Partnership Agreement. The unitholders will not
directly or indirectly participate in the management or operation of the
Partnership or have actual or apparent authority to enter into contracts on
behalf of, or to otherwise bind, the Partnership. Notwithstanding any limitation
on its obligations or duties, the General Partner will be liable, as general
partner of the Partnership, for all debts of the Partnership (to the extent not
paid by the Partnership), except to the extent that indebtedness or other
obligations incurred by the Partnership are made specifically non-recourse to
the General Partner. Whenever possible, the General Partner intends to make any
such indebtedness or other obligations non-recourse to the General Partner.
At least two of the members of the Board of Directors of the General Partner
who are neither officers or employees of the General Partner nor directors,
officers or employees of any affiliate of the General Partner (and have not been
for the past five years) will serve on the Conflicts Committee. The Conflicts
Committee will have the authority to review specific matters as to which the
Board of Directors believes there may be a conflict of interest in order to
determine if the resolution of such conflict proposed by the General Partner is
fair and reasonable to the Partnership. Any matters approved by the Conflicts
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner or its Board of Directors of any duties they may owe the
Partnership or the unitholders. See "Conflicts of Interest and Fiduciary
Responsibilities--Fiduciary and Other Duties". In addition, the members of the
Conflicts Committee will also constitute an Audit Committee which will review
the external financial reporting of the Partnership, recommend engagement of the
Partnership's independent public accountants and review the Partnership's
procedures for internal auditing and the adequacy of its internal accounting
controls. The members of the Conflicts Committee will also serve on the
Compensation Committee, which will oversee compensation decisions for the
officers of the General Partner as well as the compensation plans described
below.
As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership. In general, the current TransCanada personnel
involved in managing TransCanada's interest in Northern Border Pipeline and
other United States pipeline investments are expected to manage and operate the
Partnership's business as officers and employees of the General Partner and its
affiliates.
Certain officers of the General Partner may spend a substantial amount of
time managing the business and affairs of TransCanada and its other affiliates
and may face a conflict regarding the allocation of their time between the
Partnership and TransCanada's other business interests. The General Partner
intends to cause its officers to devote as much time to the management of the
Partnership as is necessary for the proper conduct of its business and affairs.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and member of the Board of Directors of the
General Partner. Executive officers and directors are elected for one-year
terms.
NAME AGE POSITION WITH GENERAL PARTNER
- - ---------------------------------------------------- ----- ----------------------------------------------------
George W. Watson.................................... 51 Chairman
John W. Carruthers.................................. 45 President, Chief Executive Officer
Paul F. MacGregor................................... 41 Vice President, Business Development
Bruce A. Westell.................................... 52 Vice President and Treasurer
Gary G. Penrose..................................... 56 Vice President, Taxation
Rhondda E.S. Grant.................................. 41 Corporate Secretary
Stephen J.J. Letwin................................. 43 Director, Chief Financial Officer
GEORGE W. WATSON has been Chief
Executive Officer of TransCanada since 1994 and President since 1993. From 1990
to 1993, Mr. Watson was TransCanada's Chief Financial Officer, and, in 1993,
became a member of TransCanada's board of directors. Mr. Watson is a member of
the boards of several of TransCanada's subsidiaries and affiliates as well as
the Toronto-Dominion Bank, a publicly traded Canadian company which is not
affiliated with TransCanada. Mr. Watson holds an MBA, in finance and marketing,
and a BSc in electrical engineering, both from Queen's University. He also
completed the Advanced Management Program at Harvard University in 1988. Mr.
Watson was recently elected Vice-Chair of the Interstate Natural Gas Association
of America.
JOHN W. CARRUTHERS has been Vice-President of Business Development for
TransCanada's energy transmission business unit since July 1998 and, from 1997
to July 1998, he was Vice-President of Strategic Development of that business
unit. Mr. Carruthers was Vice-President, Business Development of TransCanada's
energy management group in 1996 and General Manager, international business
development in 1995. From 1992 to 1995, Mr. Carruthers was Amoco Canada's
Manager of Finance & Administration. Mr. Carruthers is Chairman of the Board of
Express Pipeline and has been TransCanada's, and is expected to be the
Partnership's, representative on the Northern Border Pipeline Management
Committee. Mr. Carruthers is also a member of the Management Committees of
several of TransCanada's North American pipeline investments including the
Iroquois System, the Trans Quebec and Maritimes System and the Portland System.
Mr. Carruthers holds a BComm from the University of Calgary.
PAUL F. MACGREGOR has been Vice-President, North American pipeline
investments for TransCanada's energy transmission business unit since July 1998.
Prior to that time and since 1997, Mr. MacGregor has been a Vice-President of
Alberta Natural Gas Company Ltd, a subsidiary of TransCanada. In 1996, Mr.
MacGregor was Director of Field Operations for TransCanada. From 1993 to 1995,
Mr. MacGregor was Regional Manager, Field Operations for TransCanada in North
Bay, Ontario. Mr. MacGregor has been with TransCanada since 1981 holding various
positions in the Facilities Planning and Evaluations, Finance and Operations
groups. Mr. MacGregor holds an MBA, with a major in accounting, from McMaster
University, and a BSc in civil engineering from the University of Waterloo.
BRUCE A. WESTELL has been Vice-President and Treasurer of TransCanada since
February 1997 and Treasurer since August 1990. Mr. Westell holds an MBA from the
University of Western Ontario and a BMath from the University of Waterloo.
GARY G. PENROSE has been Vice-President, Taxation of TransCanada since
February 1997. Prior thereto he was General Manager, Taxation. Mr. Penrose has
been with TransCanada since 1972 and for the past 20 years has been a member of
the Taxation Group. Mr. Penrose is a Chartered Accountant and holds a BA from
York University.
80
RHONDDA E.S. GRANT has acted as Corporate Secretary and Associate General
Counsel, Corporate of TransCanada since July 1998. From 1994 to 1998, Ms. Grant
was Corporate Secretary and Associate General Counsel of NOVA Corporation. From
1989 to 1995, Ms. Grant was Senior Corporate Counsel at NOVA Corporation. Ms.
Grant holds a Bachelor of Laws and a BA (Honours) from the University of British
Columbia.
STEPHEN J.J. LETWIN has been a Senior Vice-President and the Chief Financial
Officer of TransCanada since March 1998. From 1996, when he joined TransCanada,
to 1998, Mr. Letwin was President of TransCanada Energy USA Inc., an energy
processing and marketing company. From 1992 to 1995, Mr. Letwin was Senior
Vice-President and Chief Financial Officer of Numac Energy Inc. (an oil and gas
company). Mr. Letwin holds a BSc (Honours) from McMaster University and obtained
an MBA (Finance) from Windsor University and he attended the Executive Program
at Queen's University. In addition, Mr. Letwin is a Certified General
Accountant.
Shortly after the consummation of the Transactions, the General Partner will
add two directors who will be neither owners, officers, nor employees of the
General Partner nor officers, directors or employees, of any affiliate of the
General Partner (and have not been for the past five years). These two
additional directors will be appointed to the Conflicts Committee, Audit
Committee and Compensation Committee.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner will not receive any management fee or other
compensation in connection with its management of the Partnership. The General
Partner and its affiliates, including TransCanada, performing services for the
Partnership will be reimbursed for all expenses incurred on behalf of the
Partnership, including the costs of employee, officer and director compensation
and benefits properly allocable to the Partnership, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Partnership. The Partnership Agreement provides that the General Partner
will determine the expenses that are allocable to the Partnership in any
reasonable manner determined by the General Partner in its sole discretion.
EXECUTIVE COMPENSATION
The Partnership and the General Partner were formed in December 1998.
Accordingly, the General Partner paid no compensation to its directors and
officers with respect to fiscal 1998, nor did any obligations accrue in respect
of management incentive or retirement benefits for the directors and officers
with respect to such year. Officers and employees of the General Partner may
participate in employee benefit plans and arrangements sponsored by the General
Partner or its affiliates, including plans which may be established by the
General Partner or its affiliates in the future.
Shortly after the consummation of the Transactions, the General Partner
expects that the Compensation Committee will consider and implement incentive
compensation arrangements for key officers of the General Partner. The General
Partner expects that these arrangements would provide additional compensation to
these key officers under circumstances where the General Partner is receiving
distributions pursuant to the Incentive Distribution Rights. See "Cash
Distribution Policy-- Incentive Distribution Rights--Hypothetical Annualized
Yield". This incentive compensation will be an expense of the Partnership.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to officers or employees of the
General Partner who also serve as directors. The General Partner anticipates
that each independent director will receive a combination of cash and units for
attending meetings of the Board of Directors as well as committee meetings. In
addition, each independent director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the Board of Directors or
committees thereof. Each director will be fully indemnified by the Partnership
for his actions associated with being a director to the extent permitted under
Delaware law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units that will
be issued upon the consummation of the Transactions and held by beneficial
owners of 5% or more of the units, by directors of the General Partner and by
all directors and executive officers of the General Partner as a group.
PERCENTAGE PERCENTAGE
OF OF
COMMON COMMON SUBORDINATED SUBORDINATED
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED
- - ------------------------------------------------------- --------------- --------------- ------------- ---------------
TransCanada PipeLines Limited(1)....................... 3,960,000 100%
TC PipeLines GP, Inc.(2)............................... 3,960,000 100
George W. Watson....................................... --
John W. Carruthers..................................... --
Paul F. MacGregor...................................... --
Bruce A. Westell....................................... --
Gary G. Penrose........................................ --
Rhondda E.S. Grant..................................... --
Stephen J. J. Letwin................................... --
All directors and executive officers as a group (7
persons)............................................. --
- - ------------------------------
(1) TransCanada PipeLines Limited is the sole ultimate stockholder of TC
PipeLines GP, Inc. The address of TransCanada PipeLines Limited is 111 Fifth
Avenue S.W. Calgary, Alberta T2P 3Y6.
(2) The address of TC PipeLines GP, Inc. is Four Greenspoint Plaza, 16945
Northchase Drive Houston, Texas 77060. If the over-allotment option is
exercised, the General Partner will own 1,614,000 subordinated units.
The following table sets forth the beneficial ownership of TransCanada
common shares held by directors and executive officers of the General Partner as
of December 17, 1998.
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS
- - ------------------------------------------------------------------------------------------ ------------ ---------------
George W. Watson.......................................................................... 411,574 *
John W. Carruthers........................................................................ 30,322 *
Paul F. MacGregor......................................................................... 14,629 *
Bruce A. Westell.......................................................................... 71,823 *
Gary G. Penrose........................................................................... 36,076 *
Rhondda E.S. Grant........................................................................ 651 *
Stephen J.J. Letwin....................................................................... 72,582 *
All directors and executive officers as a group (7 persons)............................... 637,657 *
- - ------------------------
* Less than 1%.
(1) Includes both outstanding TransCanada common shares and TransCanada common
shares such person has the right to acquire within 60 days after the date
of this prospectus by exercise of outstanding stock options. Shares subject
to exercisable stock options include 372,132 for Mr. Watson; 30,222 for Mr.
Carruthers; 14,372 for Mr. MacGregor; 70,650 for Mr. Westell; 35,388 for
Mr. Penrose; 651 for Ms. Grant; and 71,582 for Mr. Letwin.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partner and TransCanada, its indirect
ultimate sole stockholder, and its other affiliates, on the one hand, and the
Partnership and its limited partners, on the other hand. The directors and
officers of the General Partner have fiduciary duties to manage the General
Partner, including its investments in its affiliates (such as the Partnership),
in a manner beneficial to TransCanada. At the same time, the General Partner has
a fiduciary duty to manage the Partnership in a manner beneficial to the
Partnership and the unitholders. The Partnership Agreement contains certain
provisions that allow the General Partner to take into account the interests of
parties in addition to the Partnership in resolving conflicts of interest,
thereby limiting its fiduciary duty to the unitholders, as well as provisions
that may restrict the remedies available to unitholders for actions taken that
might, without such limitations, constitute breaches of fiduciary duty. The duty
of the directors and officers of the General Partner to TransCanada may,
therefore, come into conflict with the duties of the General Partner to the
Partnership and the unitholders. The Conflicts Committee of the Board of
Directors of the General Partner will, at the request of the General Partner,
review conflicts of interest that may arise between the General Partner,
TransCanada or its other affiliates, on the one hand, and the Partnership, on
the other. See "--Fiduciary and Other Duties" and "Management--Partnership
Management".
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a general
partner to be waived or restricted by a partnership agreement have not been
resolved in a court of law, and the General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict fiduciary duties of the General Partner.
Unitholders should consult their own legal counsel concerning the fiduciary
responsibilities of the General Partner and its officers and directors and the
remedies available to the unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
CERTAIN ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH
AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE CONVERSION OF
SUBORDINATED UNITS
Decisions of the General Partner with respect to the amount and timing of
asset purchases and sales, cash expenditures, borrowings, issuances of
additional units and the creation, reduction or increase of reserves in any
quarter will affect whether, or the extent to which, there is sufficient
Available Cash from the Partnership's Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distributions Levels on all units in a given
quarter or in subsequent quarters. The Partnership Agreement provides that any
borrowings by the Partnership or the approval thereof by the General Partner
shall not constitute a breach of any duty owed by the General Partner to the
Partnership or the unitholders, including borrowings that have the purpose or
effect, directly or indirectly, of enabling the General Partner and its
affiliates to receive distributions on any units held by them or the Incentive
Distribution Rights or hasten the expiration of the Subordination Period or the
conversion of the subordinated units into common units. The Partnership
Agreement provides that the Partnership and the Intermediate Partnership may
borrow funds from the General Partner and its affiliates. The General Partner
and its affiliates may not borrow funds from the Partnership or the Intermediate
Partnership. Furthermore, any actions taken by the General Partner consistent
with the standards of reasonable discretion set forth in the definitions of
Available Cash, Operating Surplus and Capital Surplus will be deemed not to
constitute a breach of any duty
83
of the General Partner to the Partnership or the unitholders.
THE PARTNERSHIP WILL NOT HAVE ANY EMPLOYEES AND WILL RELY ON THE EMPLOYEES OF
THE GENERAL PARTNER AND ITS AFFILIATES
The Partnership will not have any officers or employees and will rely solely
on officers and employees of the General Partner and its affiliates. Affiliates
of the General Partner will conduct business and activities of their own in
which the Partnership will have no economic interest. If such separate
activities of the affiliates of the General Partner are significantly greater
than the activities of the Partnership, there could be material competition
between the Partnership, the General Partner and affiliates of the General
Partner for the time and effort of the officers and employees who provide
services to the General Partner. Certain of the officers of the General Partner
who will provide services to the Partnership will not be required to work full
time on the affairs of the Partnership. Such officers may devote significant
time to the affairs of the General Partner's affiliates and will be compensated
by these affiliates for the services rendered to them. There may be significant
conflicts between the Partnership and affiliates of the General Partner
regarding the availability of such officers of the General Partner to manage the
Partnership.
THE PARTNERSHIP WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR
CERTAIN EXPENSES.
Under the terms of the Partnership Agreement, the Partnership will reimburse
the General Partner and its affiliates for costs incurred in managing and
operating the Partnership, including costs incurred in rendering corporate staff
and support services to the Partnership. The Partnership Agreement provides that
the General Partner will determine the expenses that are allocable to the
Partnership in any reasonable manner determined by the General Partner in its
sole discretion. See "Management--Reimbursement of Expenses of the General
Partner and its Affiliates".
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT TO THE
PARTNERSHIP'S OBLIGATIONS
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractual arrangements to all or particular assets of the
Partnership, with the other party thereto having no recourse against the General
Partner or its assets. The Partnership Agreement provides that any action by the
General Partner in so limiting the liability of the General Partner or that of
the Partnership will not be deemed to be a breach of the General Partner's
fiduciary duties, even if the Partnership could have obtained more favorable
terms without such limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
Any agreements between the Partnership, on the one hand, and the General
Partner and its affiliates, on the other, will not grant to the unitholders,
separate and apart from the Partnership, the right to enforce the obligations of
the General Partner and such affiliates in favor of the Partnership. Therefore,
the General Partner, in its capacity as the general partner of the Partnership,
will be primarily responsible for enforcing such obligations, including the
Revolving Credit Facility.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE GENERAL PARTNER AND
ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS
Under the terms of the Partnership Agreement, the General Partner is not
restricted from causing the Partnership to pay the General Partner or its
affiliates for any services rendered or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership, provided
such services or contractual agreements are on terms fair and reasonable to the
Partnership. See "--Fiduciary and Other Duties". Neither the
84
Partnership Agreement nor any of the other agreements, contracts and
arrangements (including the Revolving Credit Facility) between the Partnership,
on the one hand, and the General Partner and its affiliates, on the other, are
or will be the result of arm's-length negotiations. In addition, the General
Partner will negotiate the terms of any acquisitions from TransCanada, subject
to the approval of the Conflicts Committee consisting of the directors of the
General Partner unaffiliated with TransCanada.
All of such transactions entered into after the sale of the common units
offered in the offering are to be on terms which are fair and reasonable to the
Partnership, provided that any transaction shall be deemed fair and reasonable
if (1) such transaction is approved by the Conflicts Committee, (2) its terms
are no less favorable to the Partnership than those generally being provided to
or available from unrelated third parties or (3) taking into account the
totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership), the transaction is fair to the Partnership. The General Partner
and its affiliates will have no obligation to permit the Partnership to use any
facilities or assets of the General Partner and such affiliates, except as may
be provided in contracts entered into from time to time specifically dealing
with such use, nor shall there be any obligation of the General Partner and its
affiliates to enter into any such contracts.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT
The General Partner may exercise its right to call and purchase common units
as provided in the Partnership Agreement or assign such right to one of its
affiliates or to the Partnership. The General Partner may use its own
discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a common unitholder may have his common
units purchased from him even though he may not desire to sell them, and the
price paid may be less than the amount the holder would desire to receive upon
sale of his common units. For a description of such right, see "The Partnership
Agreement--Limited Call Right".
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS OF
COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP FOR THE OFFERING HAVE NOT
BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The common unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of the offering. The attorneys,
independent public accountants and others who have performed services for the
Partnership in connection with the offering have been retained by the General
Partner, its affiliates and the Partnership and may continue to be retained by
the General Partner, its affiliates and the Partnership after the offering.
Attorneys, independent public accountants and others who will perform services
for the Partnership in the future will be selected by the General Partner or the
Conflicts Committee and may also perform services for the General Partner and
its affiliates. The Partnership may retain separate counsel for itself or the
holders of common units in the event of a conflict of interest arising between
the General Partner and its affiliates, on the one hand, and the Partnership or
the holders of common units, on the other, after the sale of the common units
offered hereby, depending on the nature of such conflict, but it does not intend
to do so in most cases.
THE GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH THE PARTNERSHIP UNDER CERTAIN
CIRCUMSTANCES
The Partnership Agreement provides that the General Partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in the Partnership. TransCanada and other
affiliates of the General Partner will not be prohibited from engaging in other
businesses or activities, including those that might be in direct competition
with the Partnership. Accordingly, TransCanada and its affiliates (other than
85
the General Partner) are free to engage in any type of business activity
whatsoever, including those that may be in direct competition with the
Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Partnership and the
unitholders as a fiduciary. Consequently, the General Partner must exercise good
faith and integrity in handling the assets and affairs of the Partnership. In
contrast to the relatively well-developed law concerning fiduciary duties owed
by officers and directors to the shareholders of a corporation, the law
concerning the duties owed by a general partner to other partners and to
partnerships is relatively undeveloped. Neither the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") nor case law defines with
particularity the fiduciary duties owed by a general partner to limited partners
of a limited partnership, but the Delaware Act provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by a general partner to limited partners and the
partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in the
absence of a provision in a partnership agreement providing otherwise, would
generally prohibit a general partner of a Delaware limited partnership from
taking any action or engaging in any transaction as to which it has a conflict
of interest. In order to induce the General Partner to manage the business of
the Partnership, the Partnership Agreement, as permitted by the Delaware Act,
contains various provisions intended to have the effect of restricting the
fiduciary duties that might otherwise be owed by the General Partner to the
Partnership and its partners and waiving or consenting to conduct by the General
Partner and its affiliates that might otherwise raise issues as to compliance
with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Partnership, a holder of common units is required to agree to be bound by
the provisions thereof, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of freedom
of contract and the enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does not render the
partnership agreement unenforceable against such person.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Partnership or
any other partner, on the other, the General Partner shall resolve such
conflict. The General Partner in general shall not be in breach of its
obligations under the Partnership Agreement or its duties to the Partnership or
the unitholders if the resolution of such conflict is fair and reasonable to the
Partnership, and any resolution shall conclusively be deemed to be fair and
reasonable to the Partnership if such resolution is (1) approved by the
Conflicts Committee (although no party is obligated to seek such approval and
the General Partner may adopt a resolution or course of action that has not
received such approval), (2) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(3) fair to the Partnership, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership). In resolving
such conflict, the General Partner may (unless the resolution is specifically
provided for in the Partnership Agreement) consider the relative interests of
the parties involved in such conflict or affected by such action, any customary
or accepted industry practices or historical dealings with a particular person
or entity and, if applicable, generally accepted accounting practices or
principles and such other factors as its deems relevant. Thus,
86
unlike the strict duty of a fiduciary who must act solely in the best interests
of his beneficiary, the Partnership Agreement permits the General Partner to
consider the interests of all parties to a conflict of interest, including the
interests of the General Partner. In connection with the resolution of any
conflict that arises, unless the General Partner has acted in bad faith, the
action taken by the General Partner shall not constitute a breach of the
Partnership Agreement, any other agreement or any standard of care or duty
imposed by the Delaware Act or other applicable law. The Partnership Agreement
also provides that in certain circumstances the General Partner may act in its
sole discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the General Partner and its officers and directors to act
under the Partnership Agreement or any other agreement contemplated therein and
to make any decisions pursuant to the authority prescribed in the Partnership
Agreement, so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, the best interests of the Partnership.
Further, the Partnership Agreement provides that the General Partner and its
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partner and such other persons acted in good
faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by the
General Partner or such other persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement--Indemnification". Thus, the General
Partner could be indemnified for its negligent acts if it met such requirements
concerning good faith and the best interests of the Partnership.
87
DESCRIPTION OF THE COMMON UNITS
Upon consummation of the offering, the common units will be registered under
the Exchange Act and the rules and regulations promulgated thereunder, and the
Partnership will be subject to the reporting and certain other requirements of
the Exchange Act. The Partnership will be required to file periodic reports
containing financial and other information with the SEC.
Purchasers of common units in the offering and subsequent transferees of
common units (or their brokers, agents or nominees on their behalf) who wish to
become unitholders of record will be required to execute Transfer Applications,
the form of which is included as Appendix B to this prospectus, before the
purchase or transfer of such common units will be registered on the records of
the Transfer Agent and before cash distributions or federal income tax
allocations can be made to the purchaser or transferee. The Partnership will be
entitled to treat the nominee holder of a common unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those that
it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The common units and the subordinated units represent limited partner
interests in the Partnership, which entitle the holders thereof to participate
in Partnership distributions and exercise the rights or privileges available to
limited partners under the Partnership Agreement. For a description of the
relative rights and preferences of holders of common units and subordinated
units in and to Partnership distributions, together with a description of the
circumstances under which subordinated units may convert into common units, see
"Cash Distribution Policy" and "Description of Subordinated Units". For a
description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement".
88
TRANSFER AGENT AND REGISTRAR
DUTIES
will serve as registrar and transfer agent (the "Transfer Agent") for
the common units and will receive a fee from the Partnership for serving in such
capacities. All fees charged by the Transfer Agent for transfers of common units
will be borne by the Partnership and not by the holders of common units, except
that fees similar to those customarily paid by stockholders for surety bond
premiums to replace lost or stolen certificates, taxes and other governmental
charges, special charges for services requested by a holder of a common unit and
other similar fees or charges will be borne by the affected holder. There will
be no charge to holders for disbursements of the Partnership's cash
distributions. The Partnership will indemnify the Transfer Agent, its agents and
each of their respective shareholders, directors, officers and employees against
all claims and losses that may arise out of acts performed or omitted in respect
of its activities as such, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
RESIGNATION OR REMOVAL
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the Partnership of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the transfer
agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Until a common unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a Transfer Application by such investor in connection with such common units.
Any subsequent transfers of a common unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application (the form of which is set forth as Appendix B to this prospectus and
which is also set forth on the reverse side of the certificates representing the
common units), the transferee of common units (1) becomes the record holder of
such common units and shall constitute an assignee until admitted into the
Partnership as a substitute limited partner, (2) automatically requests
admission as a substituted limited partner in the Partnership, (3) agrees to be
bound by the terms and conditions of, and executes, the Partnership Agreement,
(4) represents that such transferee has the capacity, power and authority to
enter into the Partnership Agreement, (5) grants powers of attorney to officers
of the General Partner and any liquidator of the Partnership as specified in the
Partnership Agreement and (6) makes the consents and waivers contained in the
Partnership Agreement. An assignee will become a substituted limited partner of
the Partnership in respect of the transferred common units upon the consent of
the General Partner and the recordation of the name of the assignee on the books
and records of the Partnership. Such consent may be withheld in the sole
discretion of the General Partner.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Partnership in respect of the transferred
common units. A purchaser or transferee of common units who
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does not execute and deliver a Transfer Application obtains only (a) the right
to assign the common units to a purchaser or other transferee and (b) the right
to transfer the right to seek admission as a substituted limited partner in the
Partnership with respect to the transferred common units. Thus, a purchaser or
transferee of common units who does not execute and deliver a Transfer
Application will not receive cash distributions or federal income tax
allocations unless the common units are held in a nominee or "street name"
account and the nominee or broker has executed and delivered a Transfer
Application with respect to such common units, and may not receive certain
federal income tax information or reports furnished to record holders of common
units. The transferor of common units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the common units, but a transferee agrees, by acceptance of the
certificate representing common units, that the transferor will not have a duty
to insure the execution of the Transfer Application by the transferee and will
have no liability or responsibility if such transferee neglects to or chooses
not to execute and forward the Transfer Application to the Transfer Agent. See
"The Partnership Agreement--Status as Limited Partner or Assignee".
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of interests in the Partnership,
and the rights of holders of such interests to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units. For any given quarter, any Available Cash will first be
distributed to the General Partner and to the holders of common units, and then
will be distributed to the holders of subordinated units depending upon the
amount of Available Cash for the quarter, the amount of Common Unit Arrearages,
if any, and other factors discussed below.
CONVERSION OF SUBORDINATED UNITS
The Subordination Period will generally extend from the closing of the
offering until the first day of any quarter beginning after March 31, 2004 in
respect of which (1) distributions of Available Cash from Operating Surplus on
the common units, the subordinated units and the related distributions on the
general partner interests with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the outstanding common units,
the subordinated units and the related distributions on the general partner
interests during such periods, (2) the Adjusted Operating Surplus generated
during each of the three consecutive four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the common units and the subordinated units that were outstanding on a
fully diluted basis and the related distributions on the general partner
interests during such periods, and (3) there are no outstanding Common Unit
Arrearages.
Prior to the end of the Subordination Period and to the extent the tests for
conversion described below are satisfied, a portion of the subordinated units
may be eligible to convert into common units prior to March 31, 2004.
Subordinated units will convert into common units on a one-for-one basis on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) March 31, 2002 with respect to one-third of
the subordinated units (1,320,000 subordinated units) and (b) March 31, 2003
with respect to one-third of the subordinated units (1,320,000 subordinated
units), in respect of which each of the financial tests described in clauses
(1), (2) and (3) above have been satisfied; provided, however, that the early
conversion of the second one-third of subordinated units may not occur until at
least one year following the early conversion of the first one-third of
subordinated units.
Upon expiration of the Subordination Period, all remaining subordinated
units will convert into common units on a one-for-one basis and will thereafter
participate, pro rata, with the other common units in distributions of Available
Cash. In addition, if the General Partner is removed as general partner of the
Partnership under circumstances where Cause does not exist and units held by the
General Partner and its affiliates are not voted in favor of such removal, (1)
the Subordination Period will end and all outstanding subordinated units will
immediately convert into common units on a one-for-one basis, (2) any existing
Common Unit Arrearages will be extinguished and (3) the General Partner will
have the right to convert its general partner interests (and Incentive
Distribution Rights) into common units or to receive cash in exchange for such
interests.
LIMITED VOTING RIGHTS
Holders of subordinated units will generally vote as a class separate from
the holders of common units and, as in the case of holders of common units, will
have very limited voting rights. During the Subordination Period, common units
and subordinated units each vote separately as a class on the following matters:
(1) a sale or exchange of all or substantially all of the Partnership's assets,
(2) the election of a successor General Partner, (3) a dissolution or
reconstitution of the Partnership, (4) a merger of the Partnership,
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(5) issuance of limited partner interests in certain circumstances and (6)
certain amendments to the Partnership Agreement, including any amendment that
would cause the Partnership to be treated as an association taxable as a
corporation. The subordinated units are not entitled to vote on approval of
certain actions of the General Partner (including the withdrawal of the General
Partner or the transfer by the General Partner of its general partner interest
or Incentive Distribution Rights under certain circumstances). Removal of the
General Partner requires a two-thirds vote of all outstanding units. Under the
Partnership Agreement, the General Partner generally will be permitted to effect
amendments to the Partnership Agreement that do not materially adversely affect
unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If the Partnership liquidates during the Subordination Period, under certain
circumstances holders of outstanding common units will be entitled to receive
more per unit in liquidating distributions than holders of outstanding
subordinated units. The per unit difference will be dependent upon the amount of
gain or loss recognized by the Partnership in liquidating its assets. Following
conversion of the subordinated units into common units, all units will be
treated the same upon liquidation of the Partnership.
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THE PARTNERSHIP AGREEMENT
THE FOLLOWING PARAGRAPHS ARE A SUMMARY OF THE MATERIAL PROVISIONS OF THE
PARTNERSHIP AGREEMENT. THE FORM OF THE PARTNERSHIP AGREEMENT FOR THE PARTNERSHIP
IS INCLUDED IN THIS PROSPECTUS AS APPENDIX A. THE FORM OF PARTNERSHIP AGREEMENT
FOR THE INTERMEDIATE PARTNERSHIP (THE "INTERMEDIATE PARTNERSHIP AGREEMENT") IS
INCLUDED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS
CONSTITUTES A PART. THE PARTNERSHIP WILL PROVIDE PROSPECTIVE INVESTORS WITH A
COPY OF THE FORM OF THE INTERMEDIATE PARTNERSHIP AGREEMENTS UPON REQUEST AT NO
CHARGE. THE DISCUSSIONS PRESENTED HEREIN AND BELOW OF THE MATERIAL PROVISIONS OF
THE PARTNERSHIP AGREEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
PARTNERSHIP AGREEMENT AND THE INTERMEDIATE PARTNERSHIP AGREEMENT. THE
PARTNERSHIP WILL BE THE SOLE LIMITED PARTNER OF THE INTERMEDIATE PARTNERSHIP,
WHICH WILL OWN, MANAGE AND OPERATE THE PARTNERSHIP'S BUSINESS. THE GENERAL
PARTNER WILL SERVE AS THE GENERAL PARTNER OF THE PARTNERSHIP AND OF THE
INTERMEDIATE PARTNERSHIP, OWNING AN AGGREGATE 2% GENERAL PARTNER INTEREST IN THE
PARTNERSHIP AND THE INTERMEDIATE PARTNERSHIP ON A COMBINED BASIS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "PARTNERSHIP AGREEMENT"
CONSTITUTE REFERENCES TO THE PARTNERSHIP AGREEMENT AND THE INTERMEDIATE
PARTNERSHIP AGREEMENT, COLLECTIVELY.
CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT ARE SUMMARIZED ELSEWHERE IN
THIS PROSPECTUS UNDER VARIOUS HEADINGS. WITH REGARD TO THE TRANSFER OF COMMON
UNITS, SEE "DESCRIPTION OF THE COMMON UNITS--TRANSFER OF COMMON UNITS". WITH
REGARD TO DISTRIBUTIONS OF AVAILABLE CASH, SEE "CASH DISTRIBUTION POLICY". WITH
REGARD TO ALLOCATIONS OF TAXABLE INCOME AND TAXABLE LOSS, SEE "TAX
CONSIDERATIONS". PROSPECTIVE INVESTORS ARE URGED TO REVIEW THESE SECTIONS OF
THIS PROSPECTUS AND THE PARTNERSHIP AGREEMENT CAREFULLY.
ORGANIZATION AND DURATION
The Partnership was organized in December 1998. The Partnership will
dissolve on December 31, 2097, unless sooner dissolved pursuant to the terms of
the Partnership Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited to
serving as the limited partner of the Intermediate Partnership and engaging in
any business activity that may be engaged in by the Intermediate Partnership or
that is approved by the General Partner. The Intermediate Partnership Agreement
provides that the Intermediate Partnership may, directly or indirectly, engage
in (1) the operations as conducted immediately prior to the offering, including
the ownership of a general partner interest in Northern Border Pipeline, (2) any
other activity approved by the General Partner but only to the extent that the
General Partner reasonably determines that, as of the date of the acquisition or
commencement of such activity, such activity generates "qualifying income" (as
such term is defined in Section 7704 of the Code) or (3) any activity that
enhances the operations of an activity that is described in (1) or (2) above.
Although the General Partner has the ability under the Partnership Agreement to
cause the Partnership and the Intermediate Partnership to engage in activities
other than the transportation of natural gas, the General Partner has no current
plans to do so. See "Business Strategy and Competitive Strengths". The General
Partner is authorized in general to perform all acts deemed necessary to carry
out such purposes and to conduct the business of the Partnership.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a unit from a unitholder
and executes and delivers a Transfer Application with respect thereto, grants to
the General Partner and, if a liquidator of the Partnership has been appointed,
such liquidator, a power of attorney to, among other things, execute and file
certain documents required in connection with the qualification, continuance or
dissolution of the Partnership or the
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amendment of the Partnership Agreement in accordance with the terms thereof and
to make consents and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The Transactions." The unitholders are not obligated to make
additional capital contributions to the Partnership, except as described below
under "--Limited Liability".
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his common units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the Limited Partners as a
group to remove or replace the General Partner, to approve certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the Delaware Act, then the Limited Partners could
be held personally liable for the Partnership's obligations under the laws of
Delaware to the same extent as the General Partner with respect to persons who
transact business with the Partnership reasonably believing, based on the
Limited Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds that nonrecourse liability. The Delaware Act
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution was in violation of the Delaware
Act shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution. Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and which could not be
ascertained from the partnership agreement.
The Intermediate Partnership will initially conduct business in at least
seven states. Maintenance of limited liability may require compliance with legal
requirements in such jurisdictions in which the Intermediate Partnership
conducts business, including qualifying the Intermediate Partnership to do
business there. Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly established in many
jurisdictions. If it were determined that the Partnership was, by virtue of its
limited partner interest in the Intermediate Partnership or otherwise,
conducting business in any state without compliance with the applicable limited
partnership statute, or that the right or exercise of the right by the Limited
Partners as a group to remove or replace the General Partner, to approve certain
amendments to the Partnership Agreement, or to take other action pursuant to the
Partnership Agreement constituted "participation in the control" of the
Partnership's business for the purposes of the
94
statutes of any relevant jurisdiction, then the Limited Partners could be held
personally liable for the Partnership's obligations under the law of such
jurisdiction to the same extent as the General Partner under certain
circumstances. The Partnership will operate in such manner as the General
Partner deems reasonable and necessary or appropriate to preserve the limited
liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any limited partners; provided that, during the Subordination Period, except
as provided in the following sentence, the Partnership may not issue, without
the approval of the holders of a Unit Majority, (a) equity securities of the
Partnership ranking prior or senior to the common units or (b) an aggregate of
more than 9,400,000 additional common units or other securities ranking on a
parity with the common units. During the Subordination Period, the Partnership
may also issue an unlimited number of additional common units or parity
securities without the approval of the unitholders (1) upon exercise of the
underwriters' overallotment option, (2) upon conversion of subordinated units,
(3) pursuant to employee benefit plans, (4) upon conversion of the general
partner interests and Incentive Distribution Rights as a result of a withdrawal
of the General Partner, (5) in the event of a combination or subdivision of
common units, or (6) in connection with an Acquisition or Capital Improvement
that would have resulted, on a pro forma basis, in an increase in Adjusted
Operating Surplus on a per unit basis pro forma for the preceding four-quarter
period (or within 365 days of, and the net proceeds from such issuance are used
to repay debt incurred in connection with, such an Acquisition or Capital
Improvement). In accordance with Delaware law and the provisions of the
Partnership Agreement, the Partnership may also issue additional Partnership
Securities that, in the sole discretion of the General Partner, may have special
voting rights to which the common units are not entitled.
Upon issuance of additional Partnership Securities (other than upon exercise
of the over-allotment option), the General Partner will be required to make
additional capital contributions to the extent necessary to maintain its 2%
general partner interest in the Partnership and Intermediate Partnership.
Moreover, the General Partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to purchase common
units, subordinated units or other equity securities of the Partnership from the
Partnership whenever, and on the same terms that, the Partnership issues such
securities or rights to persons other than the General Partner and its
affiliates, to the extent necessary to maintain the percentage interest of the
General Partner and its affiliates in the Partnership (including their interest
represented by common units and subordinated units) that existed immediately
prior to each such issuance. The holders of common units will not have
preemptive rights to acquire additional common units or other partnership
interests that may be issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment (other than certain
amendments discussed below), the General Partner is required to seek written
approval of the holders of the number of units required to approve such
amendment or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment. In general, proposed amendments must be approved by
holders of a Unit Majority, except that no amendment may be made which would (1)
enlarge the obligations of any Limited Partner without its consent, unless
approved by at least a majority
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of the type or class of limited partner interests so affected, (2) enlarge the
obligations of, restrict in any way any action by or rights of, or reduce in any
way the amounts distributable, reimbursable or otherwise payable by the
Partnership to the General Partner or any of its affiliates without its consent,
which may be given or withheld in its sole discretion, (3) change the term of
the Partnership, (4) provide that the Partnership is not dissolved upon the
expiration of its term or upon an election to dissolve the Partnership by the
General Partner that is approved by holders of a Unit Majority or (5) give any
person the right to dissolve the Partnership other than the General Partner's
right to dissolve the Partnership with the approval of holders of a Unit
Majority. The provision of the Partnership Agreement preventing the amendments
having the effects described in clauses (1)-(5) above can be amended upon the
approval of the holders of at least 90% of the outstanding units voting together
as a single class.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect (1)
a change in the name of the Partnership, the location of the principal place of
business of the Partnership, the registered agent or the registered office of
the Partnership, (2) the admission, substitution, withdrawal or removal of
partners in accordance with the Partnership Agreement, (3) a change that, in the
sole discretion of the General Partner, is necessary or advisable to qualify or
continue the qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability under the laws
of any state or to ensure that neither the Partnership nor the Intermediate
Partnership will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes, (4) an amendment
that is necessary, in the opinion of counsel to the Partnership, to prevent the
Partnership, or the General Partner or its directors, officers, agents or
trustees, from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, whether or not substantially similar to
plan asset regulations currently applied or proposed, (5) subject to the
limitations on the issuance of additional common units or other limited or
general partner interests described above, an amendment that in the discretion
of the General Partner is necessary or advisable in connection with the
authorization of additional limited or general partner interests, (6) any
amendment expressly permitted in the Partnership Agreement to be made by the
General Partner acting alone, (7) an amendment effected, necessitated or
contemplated by a merger agreement that has been approved pursuant to the terms
of the Partnership Agreement, (8) any amendment that, in the discretion of the
General Partner, is necessary or advisable in connection with the formation by
the Partnership of, or its investment in, any corporation, partnership or other
entity (other than the Intermediate Partnership) as otherwise permitted by the
Partnership Agreement, (9) a change in the fiscal year or taxable year of the
Partnership and changes related thereto, and (10) any other amendments
substantially similar to any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee if
such amendments, in the discretion of the General Partner, (1) do not adversely
affect the Limited Partners in any material respect, (2) are necessary or
advisable to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute, (3) are
necessary or advisable to facilitate the trading of limited partner interests
(including the division of any class or classes of outstanding limited partner
interests into different classes to facilitate uniformity of tax
96
consequences within such classes of limited partner interests) or to comply with
any rule, regulation, guideline or requirement of any securities exchange on
which the limited partner interests are or will be listed for trading,
compliance with any of which the General Partner deems to be in the best
interests of the Partnership and the Limited Partners, (4) are necessary or
advisable in connection with any action taken by the General Partner relating to
splits or combinations of units pursuant to the provisions of the Partnership
Agreement or (5) are required to effect the intent expressed in this prospectus
or the intent of the provisions of the Partnership Agreement or is otherwise
contemplated by the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel (as
defined below) in the event of the amendments described in the two immediately
preceding paragraphs. No other amendments to the Partnership Agreement will
become effective without the approval of holders of at least 90% of the units
unless the Partnership obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability under applicable law of any
limited partner in the Partnership or the limited partner of the Intermediate
Partnership.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Partnership to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets in
a single transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of the
Partnership the sale, exchange or other disposition of all or substantially all
of the assets of the Intermediate Partnership; provided that the General Partner
may mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets without such approval. The General
Partner may also sell all or substantially all of the Partnership's assets
pursuant to a foreclosure or other realization upon the foregoing encumbrances
without such approval. Furthermore, provided that certain conditions are
satisfied, the General Partner may merge the Partnership or any member of the
Partnership Group into, or convey some or all of the Partnership Group's assets
to, a newly formed entity if the sole purpose of such merger or conveyance is to
effect a mere change in the legal form of the Partnership into another limited
liability entity. The unitholders are not entitled to dissenters' rights of
appraisal under the Partnership Agreement or applicable Delaware law in the
event of a merger or consolidation of the Partnership, a sale of substantially
all of the Partnership's assets or any other transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2097, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (1) the election of the General Partner to dissolve the
Partnership, if approved by the holders of a Unit Majority, (2) the sale,
exchange or other disposition of all or substantially all of the assets and
properties of the Partnership and the Intermediate Partnership, (3) the entry of
a decree of judicial dissolution of the Partnership or (4) the withdrawal or
removal of the General Partner or any other event that results in its ceasing to
be the General Partner (other than by reason of a transfer of its general
partner interest in accordance with the Partnership Agreement or withdrawal or
removal following approval and admission of a successor). Upon
97
a dissolution pursuant to clause (4), the holders of a Unit Majority may also
elect, within certain time limitations, to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new limited partnership on terms identical to
those set forth in the Partnership Agreement and having as general partner an
entity approved by the holders of a Unit Majority subject to receipt by the
Partnership of an opinion of counsel to the effect that (x) such action would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Intermediate Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax purposes
upon the exercise of such right to continue (herein, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the General Partner that such Liquidator deems necessary or desirable
in its good faith judgment in connection therewith, liquidate the Partnership's
assets and apply the proceeds of the liquidation as provided in "Cash
Distribution Policy-- Distributions of Cash Upon Liquidation". Under certain
circumstances and subject to certain limitations, the Liquidator may defer
liquidation or distribution of the Partnership's assets for a reasonable period
of time or distribute assets to partners in kind if it determines that a sale
would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Partnership and the Intermediate Partnership prior to March 31,
2009 (with limited exceptions described below), without obtaining the approval
of the holders of at least a majority of the outstanding common units (excluding
common units held by the General Partner and its affiliates) and furnishing an
Opinion of Counsel. On or after March 31, 2009, the General Partner may withdraw
as the General Partner (without first obtaining approval from any unitholder) by
giving 90 days' written notice, and such withdrawal will not constitute a
violation of the Partnership Agreement. Notwithstanding the foregoing, the
General Partner may withdraw without unitholder approval upon 90 days' notice to
the Limited Partners if at least 50% of the outstanding common units are held or
controlled by one person and its affiliates (other than the General Partner and
its affiliates). In addition, the Partnership Agreement permits the General
Partner (in certain limited instances) to sell or otherwise transfer all of its
general partner interests in the Partnership without the approval of the
unitholders. See "--Transfer of General Partner Interest and Incentive
Distribution Rights".
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interests in the Partnership), the holders of a Unit Majority
may select a successor to such withdrawing General Partner. If such a successor
is not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Partnership will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Partnership and to appoint a successor General
Partner. See "--Termination and Dissolution".
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units
(including units held by the General Partner and its affiliates) and the
Partnership receives an Opinion of Counsel. The ownership of an aggregate of
20.2% of the outstanding units by the General Partner has the practical effect
of making the General Partner's removal quite difficult. Any such removal is
also subject to the approval of a
98
successor general partner by the vote of the holders of a Unit Majority. The
Partnership Agreement also provides that if the General Partner is removed as
general partner of the Partnership under circumstances where Cause does not
exist and units held by the General Partner and its affiliates are not voted in
favor of such removal (1) the Subordination Period will end and all outstanding
subordinated units will immediately convert into common units on a one-for-one
basis, (2) any existing Common Unit Arrearages will be extinguished and (3) the
General Partner will have the right to convert its general partner interests and
all the Incentive Distribution Rights into common units or to receive cash in
exchange for such interests.
Withdrawal or removal of the General Partner as a general partner of the
Partnership also constitutes withdrawal or removal, as the case may be, of the
General Partner as a general partner of the Intermediate Partnership.
In the event of removal of the General Partner under circumstances where
Cause exists or withdrawal of the General Partner where such withdrawal violates
the Partnership Agreement, a successor general partner will have the option to
purchase the general partner interests and Incentive Distribution Rights of the
departing General Partner (the "Departing Partner") in the Partnership and the
Intermediate Partnership for a cash payment equal to the fair market value of
such interests. Under all other circumstances where the General Partner
withdraws or is removed by the Limited Partners, the Departing Partner will have
the option to require the successor general partner to purchase such general
partner interests of the Departing Partner and its Incentive Distribution Rights
for such amount. In each case, such fair market value will be determined by
agreement between the Departing Partner and the successor general partner, or if
no agreement is reached, by an independent investment banking firm or other
independent expert selected by the Departing Partner and the successor general
partner (or if no expert can be agreed upon, by an expert chosen by agreement of
the experts selected by each of them). In addition, the Partnership will be
required to reimburse the Departing Partner for all amounts due the Departing
Partner, including, without limitation, all employee-related liabilities,
including severance liabilities, incurred in connection with the termination of
any employees employed by the Departing Partner for the benefit of the
Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing Partner's
general partner interests in the Partnership and the Intermediate Partnership
and its Incentive Distribution Rights will automatically convert into common
units equal to the fair market value of such interests as determined by an
investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
TRANSFER OF GENERAL PARTNER INTEREST AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a General Partner of all, but not less than all, of
its general partner interest in the Partnership and the Intermediate Partnership
to (a) an affiliate of the General Partner or (b) another person in connection
with the merger or consolidation of the General Partner with or into another
person or the transfer by the General Partner of all or substantially all of its
assets to another person, the General Partner may not transfer all or any part
of its general partner interest in the Partnership and the Intermediate
Partnership to another person prior to March 31, 2009, without the approval of
the holders of at least a majority of the outstanding common units (excluding
common units held by the General Partner and its affiliates); provided that, in
each case, such transferee assumes the rights and duties of the General Partner
to whose interest such transferee has succeeded, agrees to be bound by the
provisions of the Partnership Agreement, furnishes an Opinion of Counsel and
agrees to acquire all (or the appropriate portion thereof, as applicable) of the
General Partner's interest in the Intermediate Partnership and agrees to be
bound by the provisions of the Intermediate Partnership
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Agreement. The General Partner shall have the right at any time, however, to
transfer its common units and subordinated units to one or more persons (other
than the Partnership) without unitholder approval. At any time, the
stockholder(s) of the General Partner may sell or transfer all or part of their
interest in the General Partner to an affiliate without the approval of the
unitholders. The General Partner or its affiliates or a subsequent holder may
transfer its Incentive Distribution Rights to an affiliate or another person in
connection with its merger or consolidation with or into, or sale of all or
substantially all of its assets to, such person without the prior approval of
the unitholders; provided that, in each case, such transferee agrees to be bound
by the provisions of the Partnership Agreement. Prior to March 31, 2009, other
transfers of the Incentive Distribution Rights will require the affirmative vote
of holders of a Unit Majority. On or after March 31, 2009, the Incentive
Distribution Rights will be freely transferable.
TRANSCANADA OWNERSHIP OF GENERAL PARTNER
TransCanada has agreed with the underwriters of the offering that it will
retain beneficial ownership of the General Partner until both (1) TransCanada
(or an affiliate) is no longer providing the Revolving Credit Facility and (2)
six months after such time as none of the officers of the General Partner are
directors, officers or employees of TransCanada or its other affiliates.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Partnership or otherwise change the management of the
Partnership. If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of any class of units,
such person or group loses voting rights with respect to all of its units. The
Partnership Agreement also provides that if the General Partner is removed as a
general partner of the Partnership under circumstances where Cause does not
exist and units held by the General Partner and its affiliates are not voted in
favor of such removal, (1) the Subordination Period will end and all outstanding
subordinated units will immediately convert into common units on a one-for-one
basis, (2) any existing Common Unit Arrearages will be extinguished and (3) the
General Partner will have the right to convert its general partner interests
(and all of its Incentive Distribution Rights) into common units or to receive
cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including common units) are held by persons
other than the General Partner and its affiliates, the General Partner will have
the right, which it may assign in whole or in part to any of its affiliates or
to the Partnership, to acquire all, but not less than all, of the remaining
limited partner interests of such class held by such unaffiliated persons as of
a record date to be selected by the General Partner, on at least 10 but not more
than 60 days' notice. The purchase price in the event of such a purchase shall
be the greater of (1) the highest price paid by the General Partner or any of
its affiliates for any limited partner interests of such class purchased within
the 90 days preceding the date on which the General Partner first mails notice
of its election to purchase such limited partner interests, and (2) the Current
Market Price (as defined in the Glossary) as of the date three days prior to the
date such notice is mailed. As a consequence of the General Partner's right to
purchase outstanding limited partner interests, a holder of limited partner
interests may have his limited partner interests purchased even though he may
not desire to sell them, or the price paid may be less than the amount the
holder would desire to receive upon the sale of his limited partner interests.
The tax consequences to a unitholder of the exercise of this call right are the
same as a sale by such unitholder of his common units in the market. See "Tax
Considerations-- Disposition of Common Units".
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MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all units, unitholders or assignees who are record holders of units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to common units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the General Partner shall be deemed to be the limited partner with
respect thereto and shall, in exercising the voting rights in respect of such
common units on any matter, vote such common units at the written direction of
such record holder. Absent such direction, such common units will not be voted
(except that, in the case of common units held by the General Partner on behalf
of Non-citizen Assignees (as defined below), the General Partner shall
distribute the votes in respect of such common units in the same ratios as the
votes of limited partners in respect of other units are cast).
The General Partner does not anticipate that any meeting of unitholders will
be called in the foreseeable future. Any action that is required or permitted to
be taken by the unitholders may be taken either at a meeting of the unitholders
or without a meeting if consents in writing setting forth the action so taken
are signed by holders of such number of units as would be necessary to authorize
or take such action at a meeting of all of the unitholders. Meetings of the
unitholders of the Partnership may be called by the General Partner or by
unitholders owning at least 20% of the outstanding units of the class for which
a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of the class or
classes for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of unitholders of such class or classes,
unless any such action by the unitholders requires approval by holders of a
greater percentage of such units, in which case the quorum shall be such greater
percentage.
Each record holder of a unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the Partnership. See "--Issuance of Additional
Securities". However, if at any time any person or group (other than the General
Partner and its affiliates or a direct transferee of the General Partner or its
affiliates) acquires, in the aggregate, beneficial ownership of 20% or more of
any class of units then outstanding, such person or group will lose voting
rights with respect to all of its units and such units may not be voted on any
matter and will not be considered to be outstanding when sending notices of a
meeting of unitholders, calculating required votes, determining the presence of
a quorum or for other similar Partnership purposes. The Partnership Agreement
provides that common units held in nominee or street name account will be voted
by the broker (or other nominee) pursuant to the instruction of the beneficial
owner unless the arrangement between the beneficial owner and his nominee
provides otherwise. Except as otherwise provided in the Partnership Agreement,
subordinated units will vote together with common units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability", the common units will
be fully paid, and unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a common unit, subsequent to executing and delivering a
Transfer Application, but pending its admission
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as a substituted Limited Partner in the Partnership, is entitled to an interest
in the Partnership equivalent to that of a Limited Partner with respect to the
right to share in allocations and distributions from the Partnership, including
liquidating distributions. The General Partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substitute Limited Partner at the written direction of such assignee. See
"--Meetings; Voting". Transferees who do not execute and deliver a Transfer
Application will be treated neither as assignees nor as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to record holders of common units. See "Description of the
Common Units-- Transfer of Common Units".
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner, create
a substantial risk of cancellation or forfeiture of any property in which the
Partnership has an interest because of the nationality, citizenship or other
related status of any Limited Partner or assignee, the Partnership may redeem
the units held by such Limited Partner or assignee at their Current Market
Price. In order to avoid any such cancellation or forfeiture, the General
Partner may require each Limited Partner or assignee to furnish information
about his nationality, citizenship or related status. If a Limited Partner or
assignee fails to furnish information about such nationality, citizenship or
other related status within 30 days after a request for such information or the
General Partner determines after receipt of such information that the Limited
Partner or assignee is not an eligible citizen, such Limited Partner or assignee
may be treated as a non-citizen assignee ("Non-citizen Assignee"). In addition
to other limitations on the rights of an assignee who is not a substituted
Limited Partner, a Non-citizen Assignee does not have the right to direct the
voting of his units and may not receive distributions in kind upon liquidation
of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify (1)
the General Partner, (2) any Departing Partner, (3) any Person who is or was an
affiliate of a General Partner or any Departing Partner, (4) any Person who is
or was a member, partner, officer, director, employee, agent or trustee of a
General Partner or any Departing Partner or any affiliate of a General Partner
or any Departing Partner, or (5) any Person who is or was serving at the request
of a General Partner or any Departing Partner or any affiliate of a General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person ("Indemnitees"), to the
fullest extent permitted by law, 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 an Indemnitee; provided that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or 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. Any indemnification under these
provisions will be only out of the assets of the Partnership, and the General
Partner shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to the Partnership to enable it to effectuate, such
indemnification. The Partnership is authorized to purchase (or to reimburse the
General Partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with the
Partnership's activities, regardless of whether
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the Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax and financial reporting purposes, the fiscal year of the Partnership is
the calendar year.
The Partnership will furnish or make available (including by electronic
means) to record holders of common units (1) within 120 days after the close of
each fiscal year of the Partnership an annual report containing audited
financial statements and a report thereon by its independent public accountants
and (2) within 90 days after the close of each quarter (other than the fourth
quarter), certain summary financial information.
The Partnership will furnish each record holder of a unit information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year. Such information is expected to be furnished in summary form
so that certain complex calculations normally required of partners can be
avoided. The Partnership's ability to furnish such summary information to
unitholders will depend on the cooperation of such unitholders in supplying
certain information to the Partnership. Every unitholder (without regard to
whether he supplies such information to the Partnership) will receive
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (1) a current
list of the name and last known address of each partner, (2) a copy of the
Partnership's tax returns, (3) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (4) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (5) information
regarding the status of the Partnership's business and financial condition, and
(6) such other information regarding the affairs of the Partnership as is just
and reasonable. The General Partner may, and intends to, keep confidential from
the Limited Partners trade secrets or other information the disclosure of which
the General Partner believes in good faith is not in the best interests of the
Partnership or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act and applicable state securities laws any common units
or other securities of the Partnership (including subordinated units) proposed
to be sold by the General Partner or any of its affiliates if an exemption from
such registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale".
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, the General Partner will
hold 3,960,000 (or 1,614,000 if the underwriters' over-allotment option is
exercised in full) subordinated units (all of which will convert into common
units at the end of the Subordination Period and some of which may convert
earlier). The sale of these units could have an adverse impact on the price of
the common units or on any trading market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units owned by an "affiliate" of the Partnership (as that term
is defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an affiliate
of the issuer to be sold into the market in an amount that does not exceed,
during any three-month period, the greater of (1) 1% of the total number of such
securities outstanding or (2) the average weekly reported trading volume of the
common units for the four calendar weeks prior to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Partnership. A
person who is not deemed to have been an affiliate of the Partnership at any
time during the three months preceding a sale, and who has beneficially owned
his common units for at least two years, would be entitled to sell such common
units under Rule 144 without regard to the public information requirements,
volume limitations, manner of sale provisions or notice requirements of Rule
144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the common units
or an aggregate of more than 9,400,000 additional common units (which number
shall be subject to adjustment in the event of a combination or subdivision of
common units and shall exclude common units issued upon exercise of the
underwriters' over-allotment option, upon conversion of subordinated units, upon
conversion of the General Partner interest as a result of a withdrawal of the
General Partner, pursuant to an employee benefit plan or in connection with
certain acquisitions or capital improvements), or an equivalent amount of
securities ranking on a parity with the common units, without the approval of
the holders of a Unit Majority. The Partnership Agreement provides that, after
the Subordination Period, the Partnership may issue an unlimited number of
limited partner interests of any type without a vote of the unitholders. The
Partnership Agreement does not impose any restriction on the Partnership's
ability to issue equity securities ranking junior to the common units at any
time. Any issuance of additional common units or certain other equity securities
would result in a corresponding decrease in the proportionate ownership interest
in the Partnership represented by, and could adversely affect the cash
distributions to and market price of, common units then outstanding. See "The
Partnership Agreement--Issuance of Additional Securities".
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act and state
laws the offer and sale of any units that they hold. Subject to the terms and
conditions of the Partnership Agreement, such registration rights allow the
General Partner and its affiliates or their assignees holding any units to
require registration of any such units and to include any such units in a
registration by the Partnership of other units, including units offered by the
Partnership or by any unitholder. Such registration rights will continue in
effect for two years following any withdrawal or removal of the General Partner
as a general partner of the Partnership. In connection with
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any such registration, the Partnership will indemnify each unitholder
participating in such registration and its officers, directors and controlling
persons from and against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or prospectus. The
Partnership will bear all costs and expenses of any such registration. In
addition, the General Partner and its affiliates may sell their units in private
transactions at any time, subject to compliance with applicable laws.
The Partnership, the Intermediate Partnership, the General Partner,
TransCanada and certain of its affiliates and the officers and directors of the
General Partner have agreed with the underwriters not to dispose of or hedge any
of their common units or subordinated units or securities convertible into or
exchangeable for, or that represent the right to receive, common units or
subordinated units or any securities that are senior to or pari passu with
common units during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives of the underwriters (other than the
redemption of the subordinated units in the event the over-allotment option is
exercised).
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NORTHERN BORDER PIPELINE PARTNERSHIP AGREEMENT
Upon the consummation of the offering, the principal asset of the
Partnership will be a 30% general partner interest in Northern Border Pipeline.
The rights, benefits, privileges and obligations of the Partnership as a partner
in Northern Border Pipeline are governed by the terms and provisions set forth
in the Partnership Agreement for Northern Border Pipeline (the "Northern Border
Pipeline Partnership Agreement"). The following paragraphs are a summary of
certain provisions of the Northern Border Pipeline Partnership Agreement, a copy
of which is included as an exhibit to the Registration Statement of which this
prospectus is a part. The following discussion is qualified in its entirety by
reference to the Northern Border Pipeline Partnership Agreement. Prospective
investors are urged to review these sections of this prospectus and the Northern
Border Pipeline Partnership Agreement carefully.
ORGANIZATION AND PARTNERS
Northern Border Pipeline is a general partnership that was formed effective
as of March 9, 1978 pursuant to the Uniform Partnership Act as then in effect in
the State of Texas. Upon completion of the offering, the general partners of
Northern Border Pipeline will be the Partnership (through the Intermediate
Partnership), which will own a 30% general partner interest, and NBP (through a
subsidiary limited partnership), which will own the remaining 70% general
partner interest. The address of Northern Border Pipeline is 1111 South 103rd
Street, Omaha, Nebraska 68124-1000, and its telephone number is (402) 398-7700.
PURPOSE
The purpose of Northern Border Pipeline under the Northern Border Pipeline
Partnership Agreement is limited to the planning, design, financing,
construction, ownership and operation of the Pipeline System (together with all
related properties and facilities) and any extensions, expansions, additions or
other improvements thereto. Unless all of the partners in Northern Border
Pipeline agree otherwise, such purpose clause has the effect of restricting
Northern Border Pipeline from constructing or acquiring additional natural gas
transmission assets (other than those that constitute an expansion, extension,
addition or improvement of the Pipeline System) and from expanding the scope of
its activities beyond the natural gas transmission business.
MANAGEMENT AND VOTING
Except for the day to day management of the affairs of Northern Border
Pipeline and the operation of the Pipeline System, which are the responsibility
of the operator (see "--Operator"), management of Northern Border Pipeline will
be overseen by the Northern Border Pipeline Management Committee, composed of
one representative of the Partnership and three representatives of NBP, one
designated by each general partner of NBP. The representative of the Partnership
on the Northern Border Pipeline Management Committee will receive no fee from
the Partnership for serving in such capacity other than reimbursement for
expenses incurred in connection therewith. Voting power on the Northern Border
Pipeline Management Committee is based on the percentage interest of the general
partners, so that the representative of the Partnership will control 30% of the
total voting power and the representatives of NBP will control 70% of the total
voting power. Under the Northern Border Pipeline Partnership Agreement, voting
power on the Northern Border Pipeline Management Committee is allocated in
accordance with the relative interests of the general partners of NBP.
Accordingly, the 70% voting power of the NBP's representatives on the Northern
Border Pipeline Management Committee is allocated as follows: 35% to the
representative designated by Northern Plains, an affiliate of Enron, 22.75% to
the representative designated by Pan Border, also an affiliate of Enron, and
12.25% to the representative designated by Northwest Border, an affiliate of
Williams. Enron (through Northern Plains and Pan Border) controls 57.75% of the
voting power of the Northern Border Pipeline Management
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Committee and has the right to designate two of its members.
Each member of the Northern Border Pipeline Management Committee is entitled
to vote its percentage of voting power without regard to the decision of the
other members. Thus, except as to any matters before the Northern Border
Pipeline Management Committee requiring unanimity, it is possible that the
Northern Border Pipeline Management Committee could approve a particular project
by majority vote, and obligate the Partnership with respect to such project to
the full extent of its 30% interest, despite the fact that the Partnership's
representative on the Northern Border Pipeline Management Committee voted
against such project. The Partnership representative will generally be obligated
to vote the interest of the Partnership in Northern Border Pipeline in a manner
that is in the best interests of the Partnership. The Partnership Agreement
currently modifies such duty, however, by providing that the general partner of
the Partnership or a person designated by it to serve on the Northern Border
Pipeline Management Committee will not be in breach of the terms of the
Partnership Agreement or in breach of a fiduciary duty to the Partnership or the
unitholders with respect to the voting of the Partnership's interest on the
Northern Border Pipeline Management Committee if the person designated by such
general partner of the Partnership to serve on the Northern Border Pipeline
Management Committee acted in good faith and in a manner reasonably believed by
such person to be in, or not inconsistent with, the best interests of the
Partnership. See "Conflicts of Interest and Fiduciary Responsibility--Fiduciary
Duties of the General Partners and the Partnership Policy Committee".
Generally, the Northern Border Pipeline Management Committee will act by
majority vote. However, unanimity will be required with respect to certain
matters: (1) expansions or extensions of the Pipeline System requiring capital
expenditures in an amount (currently $19.6 million or more) requiring
certification of such facilities by the FERC, (2) settlement of cases brought
under Section 4 or 5 of the Natural Gas Act, (3) certain transfers of general
partner interests in Northern Border Pipeline and (4) any change in, or
suspension of, the cash distribution policy of Northern Border Pipeline. If,
however, all but one of the members of the Northern Border Pipeline Management
Committee vote in favor of a matter requiring unanimous approval (other than
transfers of general partner interests), any one of the partners voting in favor
of such matter has the right to submit such matter to an arbitration panel
composed of three independent natural gas industry experts (one appointed by the
members voting in favor of such matter, one appointed by the dissenting member
and a third appointed by such two experts). The arbitration panel will determine
if Northern Border Pipeline should proceed with the disputed matter, using the
best interests of Northern Border Pipeline as its sole criteria. If the panel
concludes that approval of the matter before it is in the best interests of
Northern Border Pipeline, such matter will be deemed to have received unanimous
approval despite the disapproving vote of the dissenting member. If the matter
approved by the arbitration panel involves a project the cost of which is such
that FERC certification of the facilities is required, however, the partner
represented by the dissenting member will not be required (but shall have the
option) to advance funds with respect to such project. Thus, for example, if the
representative of the Partnership votes against such an extension of the
Pipeline System requiring FERC certification, the three representatives of NBP
vote in favor of such extension and the arbitration panel concludes that such
extension is in the best interests of Northern Border Pipeline, then Northern
Border Pipeline would be allowed to proceed with the proposed extension and the
Partnership would have the right, but would not be obligated, to contribute its
pro rata share of the equity contributions to fund such extension. If the
Partnership elected not to make such additional contributions, its interest in
Northern Border Pipeline would be diluted, and NBP would be required to fund
100% of such additional contributions (if it elected to go forward on such
basis).
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OPERATOR
The Northern Border Pipeline Partnership Agreement designates Northern
Plains as the operator of the Pipeline System. Northern Plains' rights and
obligations as operator are set forth in the Northern Border Pipeline
Partnership Agreement and in a separate Operating Agreement between Northern
Plains and Northern Border Pipeline. The initial term of the Operating Agreement
expires in 2007, and the Operating Agreement will continue in effect thereafter
on a year-to-year basis unless terminated by Northern Border Pipeline or
Northern Plains. Substantially all of the services provided by the operator are
provided by employees of Northern Plains who devote their time to the day-to-day
operations of Northern Border Pipeline. Northern Plains may be removed as
operator upon the unanimous vote of the members of the of Northern Border
Pipeline Management Committee (other than the member appointed by Northern
Plains), or if the total number of members on the Northern Border Pipeline
Management Committee has increased to five or more members by the vote of
members representing 65% or more of the total interest in Northern Border
Pipeline, in support of a finding that the operator has, through misfeasance,
nonfeasance or gross negligence, acted in a manner contrary to the best
interests of Northern Border Pipeline. The operator is entitled to reimbursement
for all reasonable costs, including overhead and administrative expenses,
incurred by it and its affiliates in connection with the performance of its
responsibilities as operator. In addition, Northern Border Pipeline has agreed
to indemnify the operator against any claims and liabilities arising out of the
good faith performance by the operator of its responsibilities pursuant to the
Northern Border Pipeline Partnership Agreement (to the extent the operator is
acting within the scope of its authority and in the course of Northern Border
Pipeline's business).
CASH DISTRIBUTION POLICY
Because the principal asset of the Partnership will be its 30% general
partner interest in Northern Border Pipeline, the ability of the Partnership to
generate income and make distributions to the unitholders is dependent upon the
receipt of cash distributions by the Partnership from Northern Border Pipeline.
In general, the Northern Border Pipeline Partnership Agreement provides that
distributions to the partners in Northern Border Pipeline are to be made on a
pro rata basis according to each partner's capital account balance. The amount
and timing of such distributions are determined by the Northern Border Pipeline
Management Committee. Any changes to, or suspension of, the cash distribution
policy of Northern Border Pipeline requires the unanimous approval of the
Northern Border Pipeline Management Committee, subject to arbitration in the
event three of the four members of the Northern Border Pipeline Management
Committee vote in favor of such change or suspension. See "Northern Border
Pipeline Partnership Agreement--Management and Voting".
The cash distribution policy of Northern Border Pipeline as currently
approved by the Northern Border Pipeline Management Committee, by unanimous
vote, provides that distributions are to be made by Northern Border Pipeline
quarterly in an amount equal to the previous quarter's sum (if positive) of (1)
100% of net income generated by Northern Border Pipeline during such quarter
(excluding certain noncash items), plus (2) 100% of the current portion of any
allowance for income taxes as reflected in Northern Border Pipeline's tariff for
such quarter, plus (3) an amount equal to 35% of the sum of deferred tax
expense, depreciation expense, amortization of regulatory assets (or minus, in
the case of amortization of regulatory liabilities) for such quarter, minus (4)
an amount equal to 35% of maintenance capital expenditures for such quarter as
computed in accordance with Northern Border Pipeline's tariff. See also "Cash
Distribution Policy--General". Decisions by Northern Border Pipeline regarding
amounts to be placed in or released from reserves consistent with the Northern
Border Pipeline Partnership Agreement will affect the amount of its net book
income, and therefore the amount of cash distributed to the
108
Partnership. Cash distributions are currently made by Northern Border Pipeline
on a quarterly basis approximately one month after the end of the quarter.
Under certain circumstances, the application of Northern Border Pipeline's
cash distribution policy could result in a reduced distribution to its partners,
including us, in any particular quarter. For example, in the fourth quarter of
1997 Northern Border Pipeline made no cash distributions to its partners as a
result of a rate refund to shippers. This rate refund resulted from a FERC
mandated retroactive adjustment to Northern Border Pipeline's depreciation
schedule. See "Business of Northern Border Pipeline--FERC Regulation-- Cost of
Service Tariff" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Pro Forma Financial Condition and Results of
Operations of the Partnership".
AUDIT AND COMPENSATION COMMITTEE
The Northern Border Pipeline Partnership Agreement authorizes each
representative on the Northern Border Pipeline Management Committee other than
Northern Plains, if Northern Plains or its affiliate is the operator, to appoint
one member to serve on a three member Audit and Compensation Committee. No
member of such committee may also be an officer, director or employee of the
operator, which is currently Northern Plains, or of any affiliate thereof. The
Audit and Compensation Committee is responsible for all matters relating to any
audits of Northern Border Pipeline and review of the compensation of the
operator's senior management and reimbursement of the operator for its costs and
expenses relating to personnel. The Audit and Compensation Committee is
obligated to report to the Northern Border Pipeline Management Committee on an
annual basis with respect to such matters.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION
The Northern Border Pipeline Partnership Agreement provides that, if
Northern Border Pipeline has a net profit or a net loss, items of income, gain,
loss and deduction will be allocated to the respective capital accounts of the
partners in accordance with their respective interests in Northern Border
Pipeline (i.e., based on relative capital account balances). Such allocations
are subject to retroactive adjustment resulting from any changes in a partner's
capital account pursuant to FERC or other governmental orders or regulations.
TRANSFER OF INTEREST
In general, the general partners in Northern Border Pipeline are not
permitted to transfer their respective general partner interests (or any
indebtedness owed to them by Northern Border Pipeline) without the unanimous
consent of the Northern Border Pipeline Management Committee. Each such general
partner may, however, encumber its interests in the profits and surplus of
Northern Border Pipeline (and any such indebtedness) and transfer its interest
in Northern Border Pipeline (or any such indebtedness) to a corporation that is
an affiliate of such transferor in connection with a statutory merger with such
corporation or sale of all or substantially all of its assets to such
corporation.
ADDITIONAL CAPITAL REQUIREMENTS
The Northern Border Pipeline Partnership Agreement provides that the
Northern Border Pipeline Management Committee may request additional capital
contributions from the general partners of Northern Border Pipeline. Each such
general partner has the right, but not the obligation, to contribute its pro
rata portion of the total amount of additional contributions requested. If the
Partnership elected not to make such additional contribution, its interest in
Northern Border Pipeline would be diluted, and NBP would be required to fund
100% of such additional contribution (if it elected to go forward on such
basis).
CHANGE TO CORPORATE FORM
The Northern Border Pipeline Partnership Agreement provides that, under
certain circumstances, the business and assets of Northern Border Pipeline will
be transferred to
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a corporation in which each partner would receive shares of stock sufficient to
give it an ownership interest in such corporation that is equal to its then
existing ownership interest in Northern Border Pipeline. Such transfer will
occur automatically in the event it becomes unlawful for Northern Border
Pipeline to carry on its business and Northern Border Pipeline holds an
effective certificate of public convenience and necessity from the FERC at such
time. The General Partner believes it is unlikely that circumstances requiring
such an automatic transfer will occur. The general partners in Northern Border
Pipeline may also cause such a transfer to a corporation to take place upon the
approval of partners owning at least a two-thirds interest of Northern Border
Pipeline. Pursuant to the terms of the Partnership Agreement, however, the
Partnership's representative on the Northern Border Pipeline Management
Committee may not approve such a transaction without first obtaining the
approval of the holders of at least 66 2/3% of the outstanding units during the
Subordination Period and a majority thereafter.
WITHDRAWAL OF GENERAL PARTNERS
The general partners in Northern Border Pipeline have the right to withdraw
from Northern Border Pipeline. In such event, the withdrawing partner's capital
account is treated as a contingent liability of Northern Border Pipeline to be
repaid upon liquidation of Northern Border Pipeline or at such other time as the
Northern Border Pipeline Management Committee determines that such amount may be
repaid without undue hardship to Northern Border Pipeline.
INDEMNIFICATION
Pursuant to the terms of the Northern Border Pipeline Partnership Agreement,
Northern Border Pipeline has agreed to indemnify the operator and the members of
the Northern Border Pipeline Management Committee and any other committees
established by such committee (including the Audit and Compensation Committee)
against any claims and liabilities arising out of the good faith performance by
such persons of their responsibilities and obligations (to the
extent within the scope of their authority) in the course of Northern Border
Pipeline's business.
TERMINATION AND DISSOLUTION
The Northern Border Pipeline Partnership Agreement provides that Northern
Border Pipeline will automatically dissolve upon (1) the transfer by Northern
Border Pipeline of all of its business and assets to a corporation (see
"--Change to Corporate Form"), (2) the sale or abandonment of all or
substantially all of Northern Border Pipeline's business and assets (provided
that any such sale or abandonment may be made only pursuant to unanimous written
consent of all general partners) or (3) the occurrence of any event that makes
it unlawful for the business of Northern Border Pipeline to be carried on. In
addition to such automatic dissolution events, Northern Border Pipeline may be
dissolved by unanimous consent of all of its partners, upon the occurrence of a
bankruptcy or similar event with respect to a partner or the dissolution of a
partner.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
The Northern Border Pipeline Partnership Agreement provides that, following
the dissolution of Northern Border Pipeline, unless Northern Border Pipeline is
reconstituted and continued pursuant to the terms of the Northern Border
Pipeline Partnership Agreement, the business and affairs of Northern Border
Pipeline will be wound up and the assets thereof liquidated in an orderly
manner. Any amounts remaining upon satisfaction of Northern Border Pipeline's
obligations to its creditors will be distributed to the partners in accordance
with the positive balances in their respective capital accounts.
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TAX CONSIDERATIONS
THIS SECTION IS A SUMMARY OF MATERIAL TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO PROSPECTIVE UNITHOLDERS WHO ARE INDIVIDUAL CITIZENS OR RESIDENTS OF
THE UNITED STATES AND, TO THE EXTENT SET FORTH BELOW UNDER "--LEGAL OPINIONS AND
ADVICE", EXPRESSES THE OPINION OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSON (A
PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS), SPECIAL COUNSEL TO THE GENERAL
PARTNER AND THE PARTNERSHIP ("COUNSEL"), INSOFAR AS IT RELATES TO MATTERS OF
UNITED STATES FEDERAL INCOME TAX LAW AND LEGAL CONCLUSIONS WITH RESPECT THERETO.
THIS SECTION IS BASED UPON CURRENT PROVISIONS OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE"), EXISTING AND PROPOSED REGULATIONS THEREUNDER AND
CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS, ALL OF WHICH ARE SUBJECT TO
CHANGE. SUBSEQUENT CHANGES IN SUCH AUTHORITIES MAY CAUSE THE TAX CONSEQUENCES TO
VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED BELOW. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES IN THIS SECTION TO THE PARTNERSHIP ARE REFERENCES
TO BOTH THE PARTNERSHIP AND 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, NON-RESIDENT ALIENS OR OTHER UNITHOLDERS SUBJECT TO SPECIALIZED
TAX TREATMENT (SUCH AS TAX-EXEMPT INSTITUTIONS, FOREIGN PERSONS, INDIVIDUAL
RETIREMENT ACCOUNTS, REITS OR MUTUAL FUNDS). ACCORDINGLY, EACH PROSPECTIVE
UNITHOLDER SHOULD CONSULT, AND SHOULD DEPEND ON, HIS OWN TAX ADVISOR IN
ANALYZING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO HIM OF THE
OWNERSHIP OR DISPOSITION OF COMMON UNITS.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and covenants and subject to the qualifications set forth in the detailed
discussion that follows, for federal income tax purposes (1) the Partnership and
the Intermediate Partnership will each be treated as a partnership, and (2)
owners of common units (with certain exceptions, as described in "--Limited
Partner Status" below) will be treated as partners of the Partnership (but not
the Intermediate Partnership). In addition, all statements as to matters of
United States federal income tax law and legal conclusions with respect thereto
contained in this section, unless otherwise noted, reflect the opinion of
Counsel.
No ruling has been or will be requested from the IRS and the IRS has made no
determination with respect to the foregoing issues or any other matter affecting
the Partnership or prospective unitholders. An opinion of counsel represents
only that counsel's best legal judgment and does not bind the IRS or the courts.
Thus, no assurance can be provided that the opinions and statements set forth
herein would be sustained by a court if contested by the IRS. Any such contest
with the IRS may materially and adversely impact the market for the common units
and the prices at which common units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the unitholders and
the General Partner. Furthermore, no assurance can be given that
the treatment of 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.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (see "--Tax Treatment of
Operations--Treatment of Short Sales"),
(2) whether a unitholder acquiring common units in separate transactions
must maintain a single aggregate adjusted tax basis in his
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common units (see "--Disposition of Common Units--Recognition of Gain or
Loss"),
(3) whether the Partnership's monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units-- Allocations Between Transferors and
Transferees"), and
(4) whether the Partnership's method for depreciating Section 743
adjustments is sustainable (see "--Tax Treatment of Operations--Section
754 Election").
TAX RATES
In general, the highest marginal United States federal income tax rate for
individuals for 1998 is 39.6% and the maximum United States federal income tax
rate for net capital gains of an individual is 20% if the asset was held for
more than 12 months at the time of disposition.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his allocable share of items of income, gain, loss and deduction 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 cash distributed is in excess of the
partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to the status of the Partnership or the Intermediate
Partnership as a partnership for federal income tax purposes. Instead the
Partnership has relied on the opinion of Counsel that, based upon the Code, the
regulations thereunder, published revenue rulings and court decisions, the
Partnership and the Intermediate Partnership will each 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 Partner,
and has assumed that Northern Border Pipeline Company is organized and will be
operated in accordance with the Texas Uniform Partnership Act and the Northern
Border Pipeline Partnership Agreement as currently in effect. The
representations and covenants upon which Counsel has relied are:
(a) Neither the Partnership nor the Intermediate Partnership will elect
to be treated as an association or corporation;
(b) The Partnership will be operated in accordance with (1) all
applicable partnership statutes, (2) the Partnership Agreement, and (3) the
description thereof in this prospectus;
(c) The Intermediate Partnership will be operated in accordance with (1)
all applicable partnership statutes, (2) the Intermediate Partnership
Agreement, and (3) the description thereof in this prospectus;
(d) For each taxable year, more than 90% of the gross income of the
Partnership will be derived from (i) the exploration, development,
production, processing, refining, transportation or marketing of any mineral
or natural resource, including oil, gas, or product thereof and naturally
occurring carbon dioxide or (ii) other items of income that counsel has
opined or may opine is "qualifying income" within the meaning of Section
7704(d) of the Code; and
(e) Neither the General Partner, the Partnership nor the Intermediate
Partnership will approve any modification to the Northern Border Pipeline
partnership agreement, which modification would permit Northern Border
Pipeline to engage in any activity other than the transportation (within the
meaning of Section 7704(d) of the Code) of natural gas without first
receiving an opinion of counsel to the effect that such modification will
not cause Northern Border Pipeline to
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have income that is not qualifying income (as described below).
Section 7704 of the Code provides that publicly traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the "Qualifying
Income Exception") exists with respect to publicly-traded partnerships of which
90% or more of the gross income for every taxable year consists of "qualifying
income." Qualifying income includes income and gains derived from the
transportation and marketing of natural gas. Other types of qualifying income
include interest (from other than a financial business), dividends, gains from
the sale of real property and gains from the sale or other disposition of
capital assets held for the production of income that otherwise constitutes
qualifying income. Based upon the representations of the Partnership and the
General Partner and a review of the applicable legal authorities, Counsel is of
the opinion that at least 90% of the Partnership's gross income will constitute
qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), 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
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that 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 that time, does not have
liabilities in excess of the tax basis of its assets. Thereafter, the
Partnership would be treated as a corporation for federal income tax purposes.
If the Partnership or the Intermediate Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the unitholders, and its net income would be
taxed to the Partnership or the Intermediate Partnership at corporate rates. In
addition, any distribution made to a unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the unitholder's tax basis in his
common units) or taxable capital gain (after the unitholder's tax basis in his
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 and thus would likely result in a substantial reduction of the
value of the units.
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 of the Partnership will be
treated as partners of the Partnership for federal income tax purposes. Counsel
is also of the opinion that (a) assignees who have executed and delivered
Transfer Applications, and are awaiting admission as limited partners and (b)
unitholders whose common units are held in street name or by a nominee and who
have the right to direct the nominee in the exercise of all substantive rights
attendant to the ownership of their common units will be treated as partners of
the Partnership for federal income tax purposes. As there is no direct authority
addressing assignees of common units who are entitled to execute and deliver
Transfer Applications and thereby become entitled to direct the exercise of
attendant rights, but who fail to execute and deliver Transfer Applications,
Counsel's opinion does not extend to these persons. Furthermore, a purchaser or
other transferee of common units who does not execute and
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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 Treatment of Operations--Treatment of Short Sales".
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by 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.
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 even if he has not received a cash distribution. Each unitholder
will be required to include in income his allocable share of Partnership income,
gain, loss and deduction for the taxable year of the Partnership ending with or
within the taxable year of the unitholder.
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
tax basis in his common units immediately before the distribution. Cash
distributions in excess of a unitholder's tax basis generally will be considered
to be gain from the sale or exchange of the common units, taxable in accordance
with the rules described under "--Disposition of Common Units" below. Any
reduction in a unitholder's share of the Partnership's liabilities for which no
partner, including the General Partner, bears the economic risk of loss
("nonrecourse liabilities") will be treated as a distribution of cash to that
unitholder. To the extent that Partnership distributions cause a unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "--Limitations on
Deductibility of Partnership Losses".
A decrease in a unitholder's percentage interest in the Partnership because
of the issuance by the Partnership of additional common units will decrease such
unitholder's share of nonrecourse liabilities of the Partnership, and thus will
result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a unitholder,
regardless of his tax basis in his common units, if such distribution reduces
the unitholder's share of the Partnership's "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated "inventory items" (both
as defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the unitholder will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged such assets
with the Partnership in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the unitholder's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) the unitholder's tax basis for the share of such Section
751 Assets deemed relinquished in the exchange.
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RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of common units in the offering
who holds such common units from the date of the closing of the offering through
December 31, 2002 will be allocated, on a cumulative basis, an amount of federal
taxable income for such period that will be approximately % of the cash
distributed with respect to that period. The Partnership anticipates that after
the taxable year ending December 31, 2002 the ratio of taxable income to cash
distributions to the unitholders will increase. The foregoing estimates are
based upon the assumption that gross income from operations will approximate the
amount required to make the Minimum Quarterly Distribution with respect to all
units and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
common units.
BASIS OF COMMON UNITS
A unitholder's initial tax basis for his common units will be the amount he
paid for the common units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income and
by any increases in his share of Partnership nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Partnership, by
the unitholder's share of Partnership losses, by any decrease in his share of
Partnership nonrecourse liabilities and by his share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Partnership
debt which is recourse to the General Partner, but will have a share, generally
based on his share of profits, of Partnership nonrecourse liabilities. See
"--Disposition of Common Units--Recognition of Gain or Loss".
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a unitholder of his share of Partnership losses will be
limited to the tax basis in his units and, in the case of an individual
unitholder or a corporate unitholder (if more than 50% of the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the unitholder is considered
to be "at risk" with respect to the Partnership's activities, if that is less
than the unitholder's tax 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 tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a unit, any gain recognized by a
unitholder can be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis limitation.
Any excess loss (above such gain) previously suspended by the at risk or basis
limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
unitholder borrows to acquire or hold his units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to units for repayment. A unitholder's at risk amount will increase or
decrease as the tax basis of the unitholder's units increases or decreases
(other
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than tax basis increases or decreases attributable to increases or decreases in
his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership 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 a unitholder's income generated by the
Partnership may be deducted in full when he 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 (1) interest on indebtedness
properly allocable to property held for investment, (2) the Partnership's
interest expense attributed to portfolio income, and (3) the portion of interest
expense incurred to purchase or carry an interest in a passive activity to the
extent attributable to portfolio income. The computation of a unitholder's
investment interest expense will take into account interest on any margin
account borrowing or other loan incurred to purchase or carry a unit. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the production
of investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income, gain, loss
and deduction will be allocated among the General Partner and the unitholders in
accordance with their respective percentage interests in the Partnership. At any
time that distributions are made to the common units and not to the subordinated
units, or that distributions made pursuant to the Incentive Distribution Rights
are made to the General Partner, gross income will be allocated to the
recipients to the extent of such distribution. If the Partnership has a net
loss, items of income, gain, loss and deduction will generally be allocated
first, to the General Partner and the unitholders in accordance with their
respective percentage interests to the extent of their positive capital accounts
(as maintained under the Partnership Agreement) and, second, to the General
Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair
116
market value of property contributed to the Partnership by the General Partner
("Contributed Property"). The effect of these allocations to a unitholder will
be essentially the same as if the tax basis of the Contributed Property were
equal to their fair market value at the time of contribution. 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. 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 or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partners' relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that, except as described in "--Tax Treatment of
Operations-- Section 754 Election" and "--Disposition of Common
Units--Allocations Between Transferors and Transferees", allocations under the
Partnership Agreement will be given effect for federal income tax purposes in
determining a unitholder's distributive share of an item of income, gain, loss
or deduction.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership will use the year ending December 31 as its taxable year and
will adopt the accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending within or with the taxable year of the unitholder. In
addition, a unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his units following the close of the
Partnership's taxable year but before the close of his taxable year must include
his allocable share of Partnership income, gain, loss and deduction in income
for his taxable year with the result that he will be required to report in
income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "--Disposition of Common
Units--Allocations Between Transferors and Transferees".
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of 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. A portion of the Partnership
assets will initially have an aggregate tax basis equal to the tax basis of
those assets in the possession of TransCan Northern Ltd. immediately prior to
the closing of the offering; the balance of the Partnership's assets will have
an initial tax basis equal to their fair market value on the date of the closing
of the offering. The federal income tax burden associated with the difference
between the fair market value of property contributed by TransCan Northern Ltd.
and the tax basis established for such property will be borne by
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the General Partner. See "--Allocation of Partnership Income, Gain, Loss and
Deduction".
To the extent allowable, the Partnership may elect to use the depletion,
depreciation and cost recovery methods that will result in the largest
deductions in the early years of the Partnership. The Partnership generally will
not be entitled to any amortization deductions with respect to any goodwill
conveyed to the Partnership on formation. 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 as ordinary income upon a sale of his interest in the
Partnership. See "--Allocation of Partnership Income, Gain, Loss and Deduction"
and "--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 (i.e. syndication expenses) 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. Under recently adopted regulations, the underwriting
discounts and commissions would be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The election
will generally permit the Partnership to adjust a common unit purchaser's (other
than a common unit purchaser that purchases common units from the Partnership)
tax basis in the Partnership's assets ("inside basis") pursuant to Section
743(b) of the Code to reflect his purchase price. The Section 743(b) adjustment
belongs to the purchaser and not to other partners. (For purposes of this
discussion, a partner's inside basis in the Partnership's assets will be
considered to have two components: (1) his share of the Partnership's tax basis
in such assets ("common basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury regulations under Section 743 of the Code require, if the
remedial allocation method is adopted (which the Partnership intends to do), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Nevertheless, the proposed regulations under Section 197 indicate
that the Section 743(b) adjustment attributable to an amortizable Section 197
intangible should be treated as a newly-acquired asset placed in service in the
month when the purchaser acquires the unit. Under Treasury Regulation Section
1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. Although
the proposed regulations under Section 743 will likely eliminate many of the
problems if finalized in their current form, the depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment may
differ from the methods and useful lives generally used to depreciate the common
basis in such properties. Pursuant to the Partnership Agreement, the Partnership
is authorized to adopt a convention to preserve the uniformity of units even if
such convention
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is not consistent with Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3). See "--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, or treat that portion as
non-amortizable to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the proposed regulations
under Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) and Proposed Treasury Regulation Section 1.197-2(g)(3) (neither
of which is expected to directly apply to a material portion of the
Partnership's assets). To the extent such Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, the Partnership will apply the rules described in the Regulations and
legislative history. 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) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's assets. Such an aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to certain unitholders. See "--Uniformity of
Units".
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS could seek to reallocate some or all of any Section
743(b) adjustment to goodwill not so allocated by the Partnership to the extent
that, as an intangible asset, it would be amortizable over a longer period of
time or under a less accelerated method than the tangible assets of the
Partnership.
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than such units' share of the aggregate tax basis of the
Partnership's assets immediately prior to the transfer. In such a case, as a
result of the election, the transferee would have a higher tax basis in his
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 tax basis in such units is lower than such
unit's share of the aggregate tax basis of the Partnership's assets immediately
prior to the transfer. Thus, the fair market value of the units may be affected
either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and 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 resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be
made, and should, in the Partnership's opinion, the expense of compliance exceed
the benefit of the election, the Partnership may seek permission from the IRS to
revoke the Section 754 election for the Partnership. If such permission is
granted, a subsequent purchaser of units may be allocated more income than he
would have been allocated had the election not been revoked.
ALTERNATIVE MINIMUM TAX
Although it is not expected that the Partnership will generate significant
tax preference items or adjustments, each unitholder will be required to take
into account his distributive share of any items of
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Partnership income, gain, deduction or loss for purposes of the alternative
minimum tax. The minimum tax rate for noncorporate taxpayers is 26% on the first
$175,000 of alternative minimum taxable income in excess of the exemption amount
and 28% on any additional alternative minimum taxable income. Prospective
unitholders should consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the 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 bases, 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 by the Partnership. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are subsequently found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by unitholders might
change, and unitholders might be required to adjust their tax liability for
prior years.
TREATMENT OF SHORT SALES
A unitholder whose units are loaned to a "short seller" to cover a short
sale of units may be considered as having disposed of ownership of those units.
If so, he would no longer be a partner with respect to those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
- any Partnership income, gain, deduction or loss with respect to those
units would not 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.
Unitholders desiring to assure their status as partners and avoid the risk
of gain recognition should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their units. The IRS has announced that it
is actively studying issues relating to the tax treatment of short sales of
partnership interests. See also "--Disposition of Common Units--Recognition of
Gain or Loss".
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. Because the amount realized includes a unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale of
units could result in a tax liability in excess of any cash received from such
sale.
Prior Partnership distributions in excess of cumulative net taxable income
in respect of a common unit which decreased a unitholder's tax basis in such
common unit will, in effect, become taxable income if the common unit is sold at
a price greater than the unitholder's tax basis in such common unit, even if the
price is less than his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"--Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partner of units,
a unitholder could realize additional gain from the sale of units than had such
convention
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been respected. In that case, the unitholder may have been entitled to
additional deductions against income in prior years but may be unable to claim
them, with the result to him of greater overall taxable income than appropriate.
Counsel is unable to opine as to the validity of the convention but believes
such a contest by the IRS to be unlikely because a successful contest could
result in substantial additional deductions to other unitholders.
Except as set forth below, gain or loss recognized by a unitholder (other
than a "dealer" in units) on the sale or exchange of a unit held for more than
one year will generally be taxable as capital gain or loss. Capital gain
recognized on the sale of units held for more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss (which will
likely be substantial), however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Code to the extent attributable
to assets giving rise to depreciation recapture or other "unrealized
receivables" or to "inventory items" owned by the Partnership. The term
"unrealized receivables" includes potential recapture items, including
depreciation recapture. Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of the unit and may be recognized even if there is a net taxable
loss realized on the sale of the unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a disposition of units. Net capital loss
may offset no more than $3,000 of ordinary income in the case of individuals and
may only be used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of common units, a common unitholder will be
unable to select high or low basis common units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. 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 in separate transactions should consult his tax advisor as to the
possible consequences of such ruling.
Certain provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a taxpayer
as having sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or terminated at its fair market value) if
the taxpayer or related persons enters into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect to the
partnership interest or substantially identical property. Moreover, if a
taxpayer has previously entered into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect to the
partnership interest, the taxpayer will be treated as having sold such position
if the taxpayer or related person then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also authorized
to issue regulations that treat a taxpayer that enters into transactions or
positions that have substantially the same effect as the preceding transactions
as having constructively sold the financial position.
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ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the unitholders in proportion to the number of units owned by
each of them as of the opening of the NYSE on the first business day of the
month (the "Allocation Date"). However, gain or loss realized on a sale or other
disposition of Partnership assets other than in the ordinary course of business
will be allocated among the unitholders on the Allocation Date in the month in
which that gain or loss is recognized. As a result, a unitholder transferring
common units in the open market may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the unitholder's
interest), 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 under 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 cash distribution with respect to
such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale or
exchange and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that set forth the amount
of the consideration received for the unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these 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. If the
Partnership elects to be treated as a large partnership, it will not terminate
by reason of the sale or exchange of interests in the Partnership. A termination
of the Partnership will cause a termination of the Intermediate Partnership. A
termination of the Partnership will result in the closing of the Partnership's
taxable year for all unitholders. In the case of a unitholder reporting on a
taxable year other than a fiscal year ending December 31, the closing of the
Partnership's taxable year may result in more than 12 months' taxable income or
loss of the Partnership being includable in his taxable income for the year of
termination. 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 a
termination, and a termination could result in a deferral of Partnership
deductions for depreciation. A termination could also result in penalties if the
Partnership
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were unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject the
Partnership to, any tax legislation enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any unitholder or any General
Partner or any former unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be determined, the
Partnership is authorized to treat the payment as a distribution to current
unitholders. The Partnership is 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 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
Because the Partnership cannot match transferors and transferees of units,
uniformity of the economic and tax characteristics of the units to a purchaser
of such units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could have a
negative impact on the value of the Units. See "--Tax Treatment of Operations--
Section 754 Election".
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 a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, or treat that portion as nonamortizable, to the extent
attributable to property the Common Basis of which is not amortizable,
consistent with the proposed regulations under Section 743 but despite its
inconsistency with Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3) (neither of which is expected to
directly apply to a material portion of the Partnership's assets). See "--Tax
Treatment of Operations--Section 754 Election". To the extent such Section
743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, the Partnership will apply the rules described
in the Regulations and legislative history. If the Partnership determines that
such a position cannot reasonably be taken, the Partnership may adopt a
depreciation and amortization convention under which all purchasers acquiring
units in the same month would receive depreciation and amortization deductions,
whether attributable to Common Basis or Section 743(b) 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
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and amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any units that would not have a material adverse effect on
the unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of units might be affected, and the gain from the sale
of units might be increased without the benefit of additional deductions. See
"--Disposition of Common Units--Recognition of Gain or Loss".
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 ("IRAs") 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.
A regulated investment partnership or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income 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 (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent of the Partnership on a Form W-8 in order to
obtain credit for the taxes withheld. A change in applicable law 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 corporation 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 income and gain (as
adjusted for changes in the foreign corporation's "United States net equity")
which are effectively connected with the conduct of a United States trade or
business. That tax may be reduced or eliminated by an income tax treaty between
the United States and the country with respect to which the foreign corporate
unitholder is a "qualified resident." In addition, such a unitholder is subject
to special information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
disposition of such unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign unitholder. Apart from the
ruling, a foreign unitholder will not be taxed or subject to withholding upon
the disposition of a unit if that foreign unitholder has held less than 5% in
value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded
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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 calendar year, certain tax information, including a Schedule
K-1, which sets forth each unitholder's share of the Partnership's income, gain,
loss and deduction for the preceding Partnership taxable year. 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 unitholder's share of
income, gain, loss and deduction. There is no assurance that any of those
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. Any such
challenge by the IRS could negatively affect the value of the units.
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 adjust a prior year's tax liability, and possibly may result in an
audit of the unitholder's own return. Any audit of a unitholder's return could
result in adjustments 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 and deduction are determined in a 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 the General Partner as the Tax Matters Partner of the
Partnership.
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 that unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% interest in 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. However, if the
Partnership elects to be treated as a large partnership, a partner will not have
the right to participate in settlement conferences with the IRS or to seek a
refund.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a unitholder to substantial
penalties. However, if the Partnership elects to be treated as a large
partnership, its partners would be required to treat all Partnership items in a
manner consistent with the Partnership return.
If the Partnership elects to be treated as a large partnership, each partner
would take into account separately his share of the following items, determined
at the partnership level: (1) taxable income or loss from passive loss
limitation activities; (2) taxable income or loss from other activities (such as
portfolio income or loss); (3) net capital gains to the extent allocable to
passive loss limitation activities
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and other activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and other
activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing fuel
from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate. Moreover, miscellaneous itemized deductions would
not be passed through to the partners and 30% of such deductions would be used
at the partnership level.
A number of other changes to the tax compliance and administrative rules
relating to electing large partnerships have been made. One provision requires
that each partner in an electing large partnership, such as the Partnership,
take into account his share of any adjustments to partnership items in the year
such adjustments are made. Under prior law, adjustments relating to partnership
items for a previous taxable year were taken into account by those persons who
were partners in the previous taxable year. Alternatively, a partnership could
elect to or, in some circumstances, could be required to directly pay the tax
resulting from any such adjustments. In either case, therefore, unitholders
could bear significant economic burdens associated with tax adjustments relating
to periods predating their acquisition of units. It is not expected that the
Partnership will elect to have the large partnership provisions apply because of
the cost of their application.
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 owner and the nominee; (b)
whether the beneficial owner is (1) a person that is not a United States person,
(2) a foreign government, an international organization or any wholly owned
agency or instrumentality of either of the foregoing, or (3) a tax-exempt
entity; (c) the amount and description of units held, acquired or transferred
for the beneficial owner; and (d) 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 it
will not constitute a tax shelter. However, the General Partner, as a principal
organizer of the Partnership, will register the Partnership as a tax shelter
with the Secretary of the Treasury in 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 must furnish the registration
number to the unitholders, and 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 unit to furnish the
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 or
other benefit
126
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 that failure, will be subject to a
$250 penalty for each 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 negligence or disregard of rules or regulations, 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
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (1)
with respect to which there is, or was, "substantial authority" or (2) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters," a
term that in this context does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included in the distributive
shares of unitholders might result in such an "understatement" of income for
which no "substantial authority" exists, 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%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. Although
an analysis of those various taxes is not presented here, each prospective
unitholder should consider their potential impact on his investment in the
Partnership. The Partnership will own property or do business in Illinois, Iowa,
Minnesota, Montana, Nebraska, North Dakota, South Dakota and Texas. Of those,
only Texas and South Dakota do not currently impose a personal income tax. A
unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of the states in which the Partnership does business
or owns property and may be subject to penalties for failure to comply with
those requirements. In certain states, tax losses may not produce a tax benefit
in the year incurred (if, for example, the Partnership has no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some of the states may require the Partnership, or the
Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a unitholder who is not a resident of the state. Withholding, the
amount of which may be greater or less than a particular unitholder's income tax
liability to the state, generally does not relieve the non-resident unitholder
from the obligation to file an income tax return. Amounts withheld
127
may be treated as if distributed to unitholders for purposes of determining the
amounts distributed by the Partnership. See "--Disposition of Common
Units--Entity-Level Collections". Based on current law and its estimate of
future Partnership operations, the General Partner anticipates that any amounts
required to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, of his
investment in the Partnership. Accordingly, each prospective unitholder should
consult, and must depend upon, his own tax counsel or other advisor with regard
to those matters. Further, it is the responsibility of each unitholder to file
all state and local, as well as United States federal, tax returns that may be
required of such unitholder. Counsel has not rendered an opinion on the state or
local tax consequences of an investment in the Partnership.
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable income
by such plan and, if so, the potential after-tax investment return. See "Tax
Considerations-- Uniformity of Units--Tax-Exempt Organizations and Certain Other
Investors". The person with investment discretion with respect to the assets of
an employee benefit plan (a "fiduciary") should determine whether an investment
in the Partnership is authorized by the appropriate governing instrument and is
a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partner also would be a fiduciary of such plan and the operations of the
Partnership would be subject to the regulatory restrictions of ERISA, including
its prohibited transaction rules, as well as the prohibited transaction rules of
the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under certain circumstances. Pursuant to these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things, (a) the equity interest acquired by employee benefit plans
are publicly offered securities--i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered pursuant to certain provisions of the federal
securities laws, (b) the entity is an "operating company"--i.e., it is primarily
engaged in the
128
production or sale of a product or service other than the investment of capital
either directly or through a majority owned subsidiary or subsidiaries, or (c)
there is no significant investment by benefit plan investors, which is defined
to mean that less than 25% of the value of each class of equity interest
(disregarding certain interests held by the General Partner, its affiliates, and
certain other persons) is held by the employee benefit plans referred to above,
IRAs and other employee benefit plans not subject to ERISA (such as governmental
plans). The Partnership's assets should not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for the Partnership by
the law firm of Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York. Certain legal matters
in connection with the common units offered hereby are being passed upon for the
underwriters by Andrews & Kurth L.L.P., New York, New York, who also acts as
regulatory counsel for Northern Border Pipeline with respect to certain FERC
matters.
EXPERTS
The balance sheet of TC PipeLines, LP as of December 23, 1998 has been
included in this prospectus and in the Registration Statement in reliance upon
the report of KPMG LLP, independent chartered accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The balance sheet of TC PipeLines GP, Inc. as of December 23, 1998 has been
included in this prospectus and in the Registration Statement in reliance upon
the report of KPMG LLP, independent chartered accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The balance sheets of Northern Border Pipeline Company as of December 31,
1997, 1996 and 1995, and the related statements of income, changes in partners'
capital and cash flows for the years then ended, included in this prospectus and
in the Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
With respect to the unaudited balance sheet of Northern Border Pipeline
Company as of September 30, 1998, the related statements of income and cash
flows for the three-month and nine-month periods ended September 30, 1998 and
1997, and the related statements of changes in partners' capital for the three-
month and nine-month periods ended September 30, 1998, included in this
prospectus and in the Registration Statement, Arthur Andersen LLP has reported
that they have applied limited procedures in accordance with professional
standards for a review of that information. However, their separate report
thereon states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
report on that information should be restricted in light of the limited nature
of the review procedures applied. In addition, the accountants are not subject
to the liability provisions of Section 11 of the Securities Act of 1933 for
their report on the unaudited interim financial information because the report
is not a "report" or a "part" of the Registration Statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
129
UNDERWRITING
The Partnership and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the common units being
offered. Subject to certain conditions, each Underwriter has severally agreed to
purchase the number of common units indicated in the following table. Goldman,
Sachs & Co., Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and PaineWebber Incorporated are
the representatives of the Underwriters.
Underwriters Number of Common Units
- - ----------------------------------------------------------------- --------------------------
Goldman, Sachs & Co..............................................
Salomon Smith Barney Inc.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Morgan Stanley & Co. Incorporated................................
PaineWebber Incorporated.........................................
-----------
Total........................................................ 15,640,000
-----------
-----------
------------------
If the Underwriters sell more common units than the total number set forth
in the table above, the Underwriters have an option to buy up to an additional
2,346,000 common units from the Partnership to cover such sales. They may
exercise that option for 30 days. If any common units are purchased pursuant to
that option, the Underwriters will severally purchase common units in
approximately the same proportion as set forth in the table above.
The following tables show the per common unit and total underwriting
discounts and commissions to be paid to the Underwriters by the Partnership.
Such amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional common units.
Paid by the Partnership
No Exercise Full Exercise
------------ -------------
Per common unit............. $ $
Total....................... $ $
Common units sold by the Underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any common units sold by the Underwriters to securities dealers may
be sold at a discount of up to $ per common unit from the initial public
offering price. Any such securities dealers may resell any common units
purchased from the Underwriters to certain other brokers or dealers at a
discount of up to $ per common unit from the initial public offering price.
If all the common units are not sold at the initial offering price, the
representatives may change the offering price and the other selling terms.
The Partnership, the Intermediate Partnership, the General Partner,
TransCanada and certain of its affiliates and the officers and directors of the
General Partner have agreed with the Underwriters not to dispose of or hedge any
of their common units or subordinated units or securities convertible into or
exchangeable for, or that represent the right to receive, common units or
subordinated units or
U-1
any securities that are senior to or pari passu with common units during the
period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of the
representatives (other than the redemption of subordinated units in the event
the overallotment option is exercised). See "Units Available for Future Sale"
for a discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the common units.
The initial public offering price will be negotiated among the General Partner
and the representatives. Among the factors to be considered in determining the
initial public offering price of the common units, in addition to prevailing
market conditions, will be Northern Border Pipeline's historical performance,
the Partnership's pro forma historical performance, estimates of the business
potential and earnings prospects of the Partnership, an assessment of the
Partnership's management and the consideration of the above factors in relation
to market valuation of companies in related businesses, including NBP.
The common units will be listed on the New York Stock Exchange under the
symbol " ". In order to meet one of the requirements for listing the common
units on the NYSE, the Underwriters have undertaken to sell lots of 100 or more
common units to a minimum of 2,000 beneficial holders.
In connection with the offering, the Underwriters may purchase and sell
common units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the Underwriters of a greater number of
common units than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common units while
the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased common
units sold by or for the account of such Underwriter in stabilizing or short
covering transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common units. As a result, the price of the
common units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
The Partnership estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $3 million.
Because the National Association for Securities Dealers, Inc. ("NASD") views
the common units offered hereby as interests in a direct participation program,
the offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Accordingly, the representatives have informed the Partnership that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority without the prior written approval of the transaction by
the customer. Investor suitability with respect to the common units should be
judged similarly to the suitability with respect to other securities that are
listed for trading on a national securities exchange. The Underwriters do not
expect sales to discretionary accounts to exceed five percent of the total
number of common units offered.
The Partnership, the Intermediate Partnership, the General Partner,
TransCanada and certain of its affiliates have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, TransCanada and its subsidiaries in the
ordinary course of business and have received customary fees for performing such
services.
U-2
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
TC PipeLines, LP:
Pro Forma Balance Sheet--September 30, 1998.............................................................. F-2
Pro Forma Statements of Income--Nine Months Ended September 30, 1998 and Year Ended December 31, 1997.... F-3
Notes to Pro Forma Financial Statements.................................................................. F-4
Report of Independent Chartered Accountants.............................................................. F-6
Balance Sheet--December 23, 1998......................................................................... F-7
Note to Balance Sheet.................................................................................... F-7
Northern Border Pipeline Company:
Report of Independent Public Accountants dated January 22, 1997.......................................... F-8
Balance Sheets--December 31, 1996 and 1995............................................................... F-9
Statements of Income--Years Ended December 31, 1996 and 1995............................................. F-10
Statements of Cash Flows--Years Ended December 31, 1996 and 1995......................................... F-11
Statements of Changes in Partners' Capital--Years Ended December 31, 1996 and 1995....................... F-12
Notes to Financial Statements............................................................................ F-13
Report of Independent Public Accountants dated January 26, 1998.......................................... F-20
Balance Sheets--December 31, 1997 and 1996............................................................... F-21
Statements of Income--Years Ended December 31, 1997 and 1996............................................. F-22
Statements of Cash Flows--Years Ended December 31, 1997 and 1996......................................... F-23
Statements of Changes in Partners' Capital--Years Ended December 31, 1997 and 1996....................... F-24
Notes to Financial Statements............................................................................ F-25
Report of Independent Public Accountants dated October 13, 1998.......................................... F-32
Balance Sheet--September 30, 1998........................................................................ F-33
Statements of Income--Three Months Ended September 30, 1998 and 1997; Nine Months Ended September 30,
1998 and 1997.......................................................................................... F-34
Statements of Cash Flows--Three Months Ended September 30, 1998 and 1997; Nine Months Ended September 30,
1998 and 1997.......................................................................................... F-35
Statements of Changes in Partners' Capital--Three Months Ended September 30, 1998; Nine Months Ended
September 30, 1998..................................................................................... F-36
Selected Notes to Financial Statements................................................................... F-37
TC PipeLines GP, Inc. (General Partner):
Report of Independent Chartered Accountants.............................................................. F-39
Balance Sheet--December 23, 1998......................................................................... F-40
Note to Balance Sheet.................................................................................... F-40
F-1
TC PIPELINES, LP
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(THOUSANDS OF DOLLARS)
PRO FORMA PRO FORMA
TC PIPELINES, LP ADJUSTMENTS TC PIPELINES, LP
---------------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
ASSETS
Cash.................................................................. -- 1(a) 1
282,156(e)
(282,156)(f)
Investment in Northern Border Pipeline................................ -- 236,777(c) 236,777
--- ----------- --------
-- 236,778 236,778
--- ----------- --------
--- ----------- --------
LIABILITIES AND PARTNERS' CAPITAL
Long-Term Debt........................................................ -- 134,770(c) --
(134,770)(f)
Partners' Capital
General Partner................................................... -- 1(a) 4,737
4,736(c)
Common Units...................................................... -- 50,389(c) 185,159
282,156(e)
(147,386)(f)
Subordinated Units................................................ -- 46,882(c) 46,882
--- ----------- --------
-- 236,778 236,778
--- ----------- --------
-- 236,778 236,778
--- ----------- --------
--- ----------- --------
The accompanying notes to the pro forma financial statements are an
integral part of these statements.
F-2
TC PIPELINES, LP
PRO FORMA STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31, 1997
NINE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------------------------
----------------------------------------------- PRO FORMA
PRO FORMA PRO FORMA TC PRO FORMA TC PIPELINES,
TC PIPELINES, LP ADJUSTMENTS PIPELINES, LP TC PIPELINES, LP ADJUSTMENTS LP
---------------- ----------- -------------- ------------------ ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Equity Income from
Investment in Northern
Border Pipeline......... -- 21,615(g) 21,615 -- 21,832(g) 21,832
General and Administrative
Expenses................ -- (900)(h) (900) (1,200)(h) (1,200)
---------------- ----------- ------- --- ----------- -------
Net Income to Partners.... -- 20,715 20,715 -- 20,632 20,632
---------------- ----------- ------- --- ----------- -------
---------------- ----------- ------- --- ----------- -------
Net Income Per Unit....... $ 1.04(i) $ 1.03(i)
------- -------
------- -------
The accompanying notes to the pro forma financial statements are an
integral part of these statements.
F-3
TC PIPELINES, LP
NOTES TO PRO FORMA FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
TC PipeLines, LP was formed on December 16, 1998 as a Delaware limited
partnership. The accompanying unaudited pro forma financial information has been
prepared by management in accordance with accounting principles generally
accepted in the United States. The pro forma financial statements of TC
PipeLines, LP have been prepared from information derived from the audited
financial statements of TC PipeLines, LP and the audited and unaudited financial
statements of Northern Border Pipeline Company ("Northern Border Pipeline")
appearing elsewhere in this registration statement, and the assumptions outlined
in Note 2 below. Northern Border Pipeline is currently owned by Northern Border
Partners, L.P. (70%), TransCan Northern Ltd. (24%) and TransCanada Border
PipeLine Ltd. (6%).
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma financial statements of TC PipeLines, LP have been prepared as
if the transactions to be effected at the consummation of an offering (the
"offering") as described in a prospectus (the "prospectus") included in this
registration statement had been completed on September 30, 1998, in the case of
the pro forma balance sheet and as of January 1,1997, in the case of the pro
forma statements of income for the year ended December 31, 1997 and the nine
months ended September 30, 1998. The financial statements are based on currently
available information and certain estimates and assumptions, and therefore the
actual financial statements will differ from the pro forma financial statements.
However, management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as contemplated in the
prospectus and that the pro forma financial statements give appropriate effect
to those assumptions.
The unaudited pro forma financial statements have been presented in response
to requirements of the United States Securities and Exchange Commission and do
not purport to be indicative of the financial position and results of operations
of TC PipeLines, LP as of such dates or for such periods, nor are they
indicative of future results. The unaudited pro forma financial information
should be read in conjunction with the historical audited financial statements
and notes thereto of TC PipeLines, LP and Northern Border Pipeline.
The significant assumptions are as follows.
(a) Upon formation, cash amounting to $1,000 is deposited into the
Partnership in exchange for an initial general partnership interest.
(b) TransCan Northern Ltd. and TransCanada Border PipeLine Ltd., both of
which are wholly-owned subsidiaries of TransCanada PipeLines Limited,
will convey their combined 30% equity interest in Northern Border
Pipeline to TC PipeLines, LP indirectly through a separate intermediate
partnership (collectively, the "Partnership"). TC PipeLines GP, Inc.
("General Partner") will serve as the general partner of the Partnership.
(c) The Partnership is in a position to exercise significant influence over
Northern Border Pipeline and the investment is accounted for using the
equity method of accounting. The pro forma investment balance as of
September 30,1998 represents the combined carrying values of the
investment in Northern Border Pipeline as reflected in the financial
records of
F-4
TC PIPELINES, LP
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NOTE 2 PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (CONTINUED)
TransCan Northern Ltd. and TransCanada Border PipeLine Ltd. as of that
date. The balance also equates to 30% of the net assets of Northern
Border Pipeline as of September 30, 1998.
As contemplated in the offering, the investment in Northern Border
Pipeline is conveyed to the Partnership in exchange for a number of
common units (which will not be outstanding after the Transactions),
3,960,000 subordinated units, a 2% combined general partnership interest
in the Partnership and the Intermediate Partnership, the right to receive
incentive distributions, and the Partnership's assumption of
approximately $135 million of indebtedness associated with the
investment.
(d) The underwriters' over-allotment option is not exercised.
(e) Net proceeds to the Partnership from the sale of common units are
expected to be approximately $282 million, after deducting underwriting
discounts and commissions and expenses of the offering totaling $23
million.
(f) The Partnership will use a portion of the proceeds to repay the
approximately $135 million of assumed indebtedness. The remainder of the
net proceeds will be used to redeem all of the common units issued to
TransCan Northern Ltd. and TransCanada Border PipeLine Ltd.
(g) Pro forma equity income represents 30% of the net income of Northern
Border Pipeline.
(h) Annual incremental general and administrative expenses of the
Partnership are estimated to be $1.2 million.
(i) The General Partner's allocation of net income is based on a 2%
interest in the Partnership, which has been deducted before calculating
net income per unit. The computation of net income per unit assumes that
15,640,000 common units and 3,960,000 subordinated units are outstanding
at all times during the periods presented.
F-5
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of TC PipeLines GP, Inc., general partner of TC
PipeLines, LP
We have audited the accompanying balance sheet of TC PipeLines, LP (the
"Partnership") as of December 23, 1998. This financial statement is the
responsibility of the management of the Partnership's general partner, TC
PipeLines GP, Inc. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of TC PipeLines, LP as of December 23,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Calgary, Canada
December 23, 1998
F-6
TC PIPELINES, LP
BALANCE SHEET
DECEMBER 23, 1998
ASSETS
Cash............................................................................. $ 10
Investment in TC PipeLines Intermediate Limited Partnership...................... 990
---------
$ 1,000
---------
---------
PARTNERS' CAPITAL.................................................................. $ 1,000
---------
---------
NOTE TO BALANCE SHEET
TC PipeLines, LP (the "Partnership") was formed on December 16, 1998 as a
Delaware limited partnership. The Partnership was formed to acquire a 30%
interest in the assets of Northern Border Pipeline Company. In order to simplify
the Partnership's obligations under the laws of selected jurisdictions in which
the Partnership will conduct business, the Partnership's activities will be
conducted through a separate intermediate partnership, TC PipeLines Intermediate
Limited Partnership (the "Intermediate Partnership"). The assets and liabilities
of the Partnership will be conveyed to and assumed by the Intermediate
Partnership.
The Partnership intends to offer 15,640,000 common units, representing
limited partner interests in the Partnership, pursuant to a public offering and
to concurrently issue 3,960,000 subordinated units, representing additional
limited partner interests in the Partnership, to TransCan Northern Ltd., as well
as an aggregate 2% general partner interest in the Partnership and the
Intermediate Partnership, on a combined basis.
TC PipeLines GP, Inc. as general partner contributed $10 and TransCan
Northern Ltd. as the organizational limited partner, contributed $990 to the
Partnership on December 23, 1998. The Partnership invested $990 in the
Intermediate Partnership. There have been no other transactions involving the
Partnership as of December 23, 1998.
F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of Northern Border Pipeline Company:
We have audited the accompanying balance sheets of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 1996 and 1995, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northern Border Pipeline
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 22, 1997
F-8
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- --------------
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................... 1,493,525 1,494,837
Construction work in progress................................................... 19,591 5,056
-------------- --------------
Total property, plant and equipment........................................... 1,513,116 1,499,893
Less: Accumulated provision for depreciation and amortization................... 575,257 542,306
-------------- --------------
Net property, plant and equipment............................................... 937,859 957,587
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents....................................................... 4,294 11,428
Receivables..................................................................... 19,264 20,195
Materials and supplies, at cost................................................. 3,847 4,065
-------------- --------------
Total current assets.......................................................... 27,405 35,688
-------------- --------------
DEFERRED CHARGES.................................................................. 8,873 18,086
-------------- --------------
974,137 1,011,361
-------------- --------------
-------------- --------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................. 526,962 555,964
-------------- --------------
LONG-TERM DEBT, net of current maturities......................................... 360,000 395,000
-------------- --------------
CURRENT LIABILITIES
Current maturities of long-term debt............................................ 17,500 15,000
Note payable.................................................................... 10,000 --
Accounts payable................................................................ 2,846 1,173
Accrued taxes other than income................................................. 20,968 19,903
Accrued interest................................................................ 10,353 10,516
Over recovered cost of service.................................................. 4,236 2,508
Accumulated provision for billings subject to refund............................ 12,227 --
-------------- --------------
Total current liabilities..................................................... 78,130 49,100
-------------- --------------
RESERVES AND DEFERRED CREDITS..................................................... 9,045 11,297
-------------- --------------
974,137 1,011,361
-------------- --------------
-------------- --------------
The accompanying notes to financial statements are an integral part of these
statements.
F-9
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
FOR THE YEAR
ENDED DECEMBER 31,
--------------------
1996 1995
--------- ---------
OPERATING REVENUES......................................................................... 201,943 206,497
--------- ---------
OPERATING EXPENSES
Operations and maintenance............................................................... 26,974 25,573
Depreciation and amortization............................................................ 46,979 47,081
Taxes other than income.................................................................. 24,390 23,886
--------- ---------
Operating expenses..................................................................... 98,343 96,540
--------- ---------
OPERATING INCOME........................................................................... 103,600 109,957
--------- ---------
INTEREST EXPENSE........................................................................... 33,117 35,205
--------- ---------
OTHER INCOME (EXPENSE)
Other income (expense), net.............................................................. 2,964 (307)
Allowance for equity funds used during construction...................................... 396 90
--------- ---------
Other income (expense)................................................................. 3,360 (217)
--------- ---------
NET INCOME................................................................................. 73,843 74,535
--------- ---------
--------- ---------
The accompanying notes to financial statements are an integral part of these
statements.
F-10
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FOR THE YEAR
ENDED DECEMBER 31,
----------------------
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................................. 73,843 74,535
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 47,010 47,083
Amortization of debt expense......................................................... 924 1,066
Allowance for equity funds used during construction.................................. (396) (90)
Provision for billings subject to refund............................................. 12,227 --
Other reserves and deferred credits.................................................. (2,252) 5,714
Changes in current assets and liabilities:
Receivables........................................................................ 931 (2,045)
Materials and supplies............................................................. 218 (253)
Accounts payable................................................................... 1,673 (252)
Accrued taxes other than income.................................................... 1,065 (295)
Accrued interest................................................................... (163) (243)
Over recovered cost of service..................................................... 1,728 2,209
---------- ----------
Total adjustments................................................................ 62,965 52,894
---------- ----------
Net cash provided by operating activities........................................ 136,808 127,429
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net........................................ (18,597) (8,310)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners.............................................................. (102,845) (98,517)
Retirement of long-term debt........................................................... (32,500) (35,000)
Borrowings on note payable............................................................. 10,000 --
---------- ----------
Net cash used in financing activities.................................................. (125,345) (133,517)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................................. (7,134) (14,398)
Cash and cash equivalents--beginning of year............................................. 11,428 25,826
---------- ----------
Cash and cash equivalents--end of year................................................... 4,294 11,428
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-11
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
NORTHERN
BORDER
TRANSCANADA INTERMEDIATE
BORDER TRANSCAN LIMITED
PIPELINE LTD. NORTHERN LTD. PARTNERSHIP TOTAL
------------- ------------- ------------ ----------
Balance, December 31, 1994.............................. 92,792 81,193 405,961 579,946
Net income.............................................. 11,925 10,435 52,175 74,535
Distributions........................................... (15,763) (13,793) (68,961) (98,517)
------------- ------------- ------------ ----------
Balance, December 31, 1995.............................. 88,954 77,835 389,175 555,964
Net income.............................................. 11,237 10,916 51,690 73,843
Distributions........................................... (13,936) (16,917) (71,992) (102,845)
Ownership transfer...................................... (54,637) 54,637 -- --
------------- ------------- ------------ ----------
Balance, December 31, 1996.............................. 31,618 126,471 368,873 526,962
------------- ------------- ------------ ----------
------------- ------------- ------------ ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-12
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership, formed March 9, 1978, pursuant to the Texas Uniform Partnership
Act. The ownership percentages of the partners in Northern Border Pipeline
(Partners) at December 31, 1996 and 1995, are as follows:
PARTNER 1996 1995
- - --------------------------------------------------------------------------------------------------- ----- -----
Northern Border Intermediate Limited Partnership................................................... 70 70
TransCanada Border PipeLine Ltd.................................................................... 6 16
TransCan Northern Ltd.............................................................................. 24 14
The pipeline system owned by Northern Border Pipeline is a 969-mile natural
gas transmission line extending from the United States-Canadian border near Port
of Morgan, Montana, to a terminus near Harper, Iowa, where it interconnects with
the system of Natural Gas Pipeline Company of America.
Northern Border Pipeline is managed by a Management Committee that includes
three representatives from Northern Border Intermediate Limited Partnership
(Partnership) and one representative from TransCanada Border PipeLine Ltd. and
TransCan Northern Ltd. (collectively TransCanada), both of which are
wholly-owned subsidiaries of TransCanada PipeLines Limited. The Partnership's
representatives selected by its general partners, Northern Plains Natural Gas
Company (Northern Plains), a wholly-owned subsidiary of Enron Corp. (Enron), Pan
Border Gas Company, a wholly-owned subsidiary of PanEnergy Corp. (PanEnergy),
and Northwest Border Pipeline Company, a wholly-owned subsidiary of The Williams
Companies, Inc., have 35%, 22.75% and 12.25%, respectively, of the voting
interest on the Management Committee. The representative designated by
TransCanada votes the remaining 30% interest. The day-to-day management of
Northern Border Pipeline's affairs is the responsibility of Northern Plains (the
Operator), as defined by the operating agreement between Northern Border
Pipeline and Northern Plains. Northern Border Pipeline is charged for the
salaries, benefits and expenses of the Operator. Substantially all of the
operations and maintenance expenses are paid to the Operator and other Enron
affiliates.
Net income and distributions are allocated based on ownership percentage.
Effective December 1, 1996, TransCan Northern Ltd. purchased a portion of the
TransCanada Border Pipeline Ltd. equity ownership in Northern Border Pipeline.
The net income and distributions are reflected in the capital account balances
at their new ownership interests from that date forward.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northern Border Pipeline is subject to regulation by the Federal Energy
Regulatory Commission (FERC). Northern Border Pipeline's accounting policies
conform to generally accepted accounting principles, as applied in the case of
regulated entities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-13
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property, plant and equipment is stated at original cost. Construction work
in progress shown on the accompanying balance sheet includes approximately $16.8
million and $4.6 million at December 31, 1996 and 1995, respectively, of
project-to-date expenditures on Northern Border Pipeline's proposed expansion
and extension of its pipeline from its current terminus near Harper, Iowa to a
point near Manhattan, Illinois (The Chicago Project) (see Note 5).
Expenditures for maintenance and repairs are charged to operations in the
period incurred. The provision for depreciation and amortization of the
transmission line is an integral part of Northern Border Pipeline's FERC tariff
and its levelized cost of service. The effective depreciation rate applied to
Northern Border Pipeline's gross transmission plant in both 1996 and 1995 was
3.1% (see Note 5).
Composite rates are applied to all other functional groups of property
having similar economic characteristics. The original cost of property retired
is charged to accumulated depreciation and amortization, net of salvage and cost
of removal. No retirement gain or loss is included in income except in the case
of extraordinary retirements or sales.
(B) INCOME TAXES
Income taxes are the responsibility of the Partners and are not reflected in
these financial statements. However, the Northern Border Pipeline FERC tariff
establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, Partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $306.7 million and $322.7 million as of December 31, 1996 and
1995, respectively, and are primarily related to accelerated depreciation and
other plant-related differences.
(C) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
(D) REVENUE RECOGNITION
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency resulting from the comparison of
the cost of service determined for that period in accordance with the FERC
tariff (incurred cost of service) to the estimated billing is accumulated,
including carrying charges thereon and is either billed to or credited back to
the shippers. Revenues reflect incurred cost of service. An amount equal to
differences between billing estimates and the incurred cost of service,
including carrying charges, is reflected in current assets or current
liabilities.
F-14
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) represents the
estimated costs, during the period of construction, of funds used for
construction purposes. Recognition of this allowance is appropriate because it
constitutes an actual cost of construction. For regulated activities, Northern
Border Pipeline is permitted to earn a return on and recover AFUDC through its
inclusion in rate base and the provision for depreciation. The rate employed for
the equity component of AFUDC is the equity rate of return stated in Northern
Border Pipeline's FERC tariff.
(F) RISK MANAGEMENT
Financial instruments are used by Northern Border Pipeline in the management
of its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions which hedge interest rate risk by effectively converting
certain of its floating rate debt to fixed rate debt. Northern Border Pipeline
does not use these agreements for trading purposes. The cost or benefit of the
interest rate swap agreements is recognized currently as a component of interest
expense.
3. SHIPPER SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff which directs
that Northern Border Pipeline collect its cost of service through the firm
transportation service agreements (firm service agreements). Northern Border
Pipeline's FERC tariff provides an opportunity to recover all operations and
maintenance costs of the pipeline, taxes other than income taxes, interest,
depreciation and amortization, an allowance for income taxes and a regulated
equity return. Billings for the firm service agreements are based on contracted
volumes to determine the allocable share of cost of service and are not
dependent on the volumes actually transported.
Northern Border Pipeline has firm service agreements for various terms
extending as long as October 2012. Based on existing contracts and capacity,
Northern Border Pipeline has contracts for its entire firm capacity through
October 2001. Northern Border Pipeline also has interruptible service contracts
with numerous other shippers as a result of its self-implementing blanket
transportation authority. Revenues received from the interruptible service
contracts are credited to the cost of service reducing the billings for the firm
service agreements.
Northern Border Pipeline's largest shipper, Pan-Alberta Gas (U.S.) Inc.
(PAG-US), is obligated for approximately 49.0% of the cost of service through
its firm service agreements which expire in October 2001. Operating revenues
from the PAG-US firm service agreements and interruptible service contracts for
the years ended December 31, 1996 and 1995 were $101.7 million and $99.9
million, respectively. Northern Natural Gas Company, a wholly-owned subsidiary
of Enron, and Panhandle Eastern Pipe Line Company, a wholly-owned subsidiary of
PanEnergy, have executed financial guarantees representing 17.2% and 10.7%,
respectively, of the total cost of service related to the contracted capacity of
PAG-US. The remaining 21.1% of the cost of service obligation of PAG-US is
supported by various credit support arrangements, including among others, a
letter of credit, an escrow account and an upstream capacity transfer agreement.
F-15
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS (CONTINUED)
Shippers affiliated with the Partners of Northern Border Pipeline have firm
service agreements representing approximately 10.4% of the cost of service
through October 2001. These firm service agreements extend for various terms
which range from October 2005 to December 2008. Operating revenues from the
affiliated firm service agreements and interruptible service contracts for the
years ended December 31, 1996 and 1995 were $22.7 million and $18.8 million,
respectively.
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
In October 1996, Northern Border Pipeline entered into a one-year $50
million revolving credit agreement with a financial institution. The credit
agreement permits Northern Border Pipeline to choose among various interest rate
options, to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period, subject to
certain parameters. The interest rate options available under the credit
agreement are based upon the London Interbank Offered Rate (LIBOR), certificate
of deposit rates or other short-term interest rates. Compensating balances are
not required, but Northern Border Pipeline is required to pay a commitment fee
on unborrowed funds. In late December 1996, $10 million was borrowed under the
credit agreement at an interest rate of 5.94% and is shown as a note payable in
the accompanying balance sheet.
Northern Border Pipeline has senior notes in the aggregate principal amount
of $250 million at both December 31, 1996 and 1995, pursuant to note purchase
agreements, which combined have an average fixed interest rate of 8.43%. Annual
principal payments on the senior notes begin August 2000, with the final
principal payment due August 2003.
As of December 31, 1996 and 1995, Northern Border Pipeline had outstanding
$127.5 million and $160 million, respectively, under an amended bank loan
agreement. The amended bank loan agreement provides for fixed, semi-annual
repayments and has a final maturity of December 31, 1999. The amended bank loan
agreement permits Northern Border Pipeline to choose among various interest rate
options, to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period, subject to
certain parameters. The interest rate options available to Northern Border
Pipeline under the amended bank loan agreement are based upon LIBOR, CD Advances
rate or U.S. prime rate.
At both December 31, 1996 and 1995, Northern Border Pipeline had outstanding
interest rate swap agreements with notional amounts of $90 million and $115
million, respectively. Under the agreements, which have a remaining average
maturity of approximately three years as of December 31, 1996, Northern Border
Pipeline makes payments to counterparties at fixed rates and in return receives
payments at variable rates based on LIBOR. At both December 31, 1996 and 1995,
Northern Border Pipeline was in a payable position relative to its
counterparties. The average effective interest rate of Northern Border
Pipeline's amended bank loan agreement, taking into consideration the interest
rate swap agreements, was 7.32% and 7.39% at December 31, 1996 and 1995,
respectively.
F-16
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
The average interest rates and interest paid, net of amounts capitalized, on
the total outstanding debt, including the interest rate swap agreements, were as
follows:
1996 1995
--------- ---------
Average interest rate during the year........................................................ 8.37% 8.34%
Average interest rate at December 31......................................................... 8.21% 8.38%
Interest paid, net of amounts capitalized, during the year (in millions of dollars).......... $ 31.9 $ 34.3
Aggregate repayments of long-term debt required for the next five years are
as follows: $17.5 million, $50 million, $60 million, $66 million and $41 million
for 1997, 1998, 1999, 2000 and 2001, respectively.
The credit agreement, senior notes and amended bank loan agreement restrict
the incurrence of other indebtedness by Northern Border Pipeline and also place
certain restrictions on distributions to the partners of Northern Border
Pipeline. Under the most restrictive of the covenants, as of December 31, 1996
and 1995, respectively, $27 million and $29 million of Partners' capital of
Northern Border Pipeline could be distributed.
The following estimated fair values of financial instruments represent the
amount at which each instrument could be exchanged in a current transaction
between willing parties. Based on quoted market prices for similar issues with
similar terms and remaining maturities, the estimated fair value of the senior
notes was approximately $271 million and $282 million at December 31, 1996 and
1995, respectively. At December 31, 1996 and 1995, the estimated fair value
which would be payable to terminate the interest rate swap agreements, taking
into account current interest rates, was approximately $4 million and $7
million, respectively. Northern Border Pipeline presently intends to maintain
the current schedule of maturities for the senior notes and the interest rate
swap agreements which will result in no gains or losses on their respective
repayment. The carrying value of the credit agreement and the amended bank loan
agreement approximates the fair value since the interest rates are periodically
adjusted to current market conditions.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY PROCEEDINGS
In November 1995, Northern Border Pipeline filed a rate case in compliance
with its FERC tariff for the determination of its allowed equity rate of return.
In December 1995, the FERC issued an order that permitted Northern Border
Pipeline to begin collecting the requested increase in the equity rate of return
effective June 1, 1996, subject to refund. Northern Border Pipeline filed for
FERC approval of a Stipulation and Agreement (Stipulation) on October 15, 1996,
to settle its rate case. On November 19, 1996, the Stipulation was certified by
an Administrative Law Judge (ALJ) to the FERC for review and approval. In
accordance with the terms of the Stipulation, Northern Border Pipeline's allowed
equity rate of return would be reduced from a requested 14.25% to 12.75% for the
period June 1, 1996 to October 1, 1996 and to 12% thereafter. Additionally, the
Stipulation would reduce the depreciation rate applied to Northern Border
Pipeline's gross transmission plant from 3.6% to 2.7% for the period June 1,
1996 to December 31, 1996, resulting in an average effective depreciation rate
of 3.1% for the year ended December 31, 1996. Beginning January 1, 1997, the
depreciation rate would be reduced to 2.5%. Northern Border Pipeline has reduced
its
F-17
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating revenues by approximately $12.2 million for the year ended December
31, 1996, which includes $7.4 million attributable to the reduction in
depreciation and amortization expense for 1996, to reflect the terms of the
Stipulation. Northern Border Pipeline must receive FERC approval of the
Stipulation before it can implement all of the filed for terms and any
associated refunds. Northern Border Pipeline is unable to predict if or when the
Stipulation will be approved as filed and thus actual results could differ from
amounts recorded.
In August 1996, the FERC issued an order which contained a preliminary
determination favorable to Northern Border Pipeline's October 1995 amended
application with the FERC for The Chicago Project. The preliminary determination
found that The Chicago Project is required by the public convenience and
necessity and authorizes the project facility costs to be included with existing
facility costs in the determination of rates. The preliminary determination
contemplates issuance of a final order by the FERC, subject to completion of the
environmental review. In September 1996, Northern Border Pipeline filed an
amendment to its October 1995 application to reflect limited facility
modifications which among other things, reduced environmental impacts and
project costs. In December 1996, the FERC issued a draft Environmental Impact
Statement (EIS) which concluded The Chicago Project would have a limited adverse
environmental impact and would be environmentally acceptable after adoption of
certain recommended mitigation measures. Northern Border Pipeline's September
1996 application with the FERC for The Chicago Project facilities proposes
construction and operation of 243 miles of pipeline, 147 miles of pipeline loop
and a total of 228,500 compressor horsepower at eight compressor stations. The
application also requests approval to remove from service 100,000 compressor
horsepower at five existing compressor stations to be replaced with 175,000
compressor horsepower. The project is expected to cost, using certain
construction cost escalation assumptions, approximately $837 million and,
subject to timely regulatory approvals, be ready for service in November 1998. A
final EIS and FERC order approving construction and operation of The Chicago
Project is anticipated in 1997.
In May 1996, the FERC granted rehearing of its May 1994 order on Northern
Border Pipeline's methodology for recording in its books and reflecting in its
rates amounts related to alternative minimum tax (AMT). The FERC Audit Staff
(Staff), in December 1991 after an examination of Northern Border Pipeline's
records for the period January 1, 1987 through December 31, 1989, took exception
to Northern Border Pipeline's established method of accounting for AMT for
ratemaking purposes. Northern Border Pipeline did not agree with the exception
noted by the Staff and proceeded with a hearing before an ALJ who concluded
Northern Border Pipeline had properly accounted for AMT. Ultimately, in the May
1996 order, the FERC accepted the ALJ's conclusions and vacated its May 1994
order which had held that the AMT component of Northern Border Pipeline's rate
base should reflect the particular tax circumstances of each Northern Border
Pipeline partner. There were no accounting adjustments or rate refunds required
in resolution of this issue.
In May 1996, the Staff issued its audit report on its examination of
Northern Border Pipeline's records for the three year period subsequent to
January 1, 1990. The audit report required Northern Border Pipeline to record
certain adjustments to its accounts including the reclassification of $3.9
million of costs from utility plant in service to a regulatory asset. In
accordance with Northern Border Pipeline's FERC tariff, the regulatory asset is
includable in rate base, however Northern Border Pipeline must file with the
FERC for the future recovery of this asset through amortization in cost of
service. The adjustments made to Northern Border Pipeline's accounts as a result
of the
F-18
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
audit report did not materially affect Northern Border Pipeline's financial
position or results of operations.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent liabilities
with respect to compliance with applicable environmental laws and regulations.
OTHER
Various legal actions which have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues, including the FERC proceedings discussed above, will not have a material
adverse impact on Northern Border Pipeline's results of operations or financial
position.
6. CAPITAL EXPENDITURE PROGRAM
Total capital expenditures for 1997 are estimated to be $210 million for The
Chicago Project and $14 million for renewals and replacements for the existing
facilities. Funds required to meet the 1997 capital expenditures are anticipated
to be provided primarily from debt borrowings and equity contributions.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of Northern Border Pipeline Company:
We have audited the accompanying balance sheets of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 1997 and 1996, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northern Border Pipeline
Company as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 26, 1998
F-20
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................... 1,497,743 1,493,525
Construction work in progress................................................... 211,378 19,591
-------------- --------------
Total property, plant and equipment........................................... 1,709,121 1,513,116
Less: Accumulated provision for depreciation and amortization................... 608,231 575,257
-------------- --------------
Net property, plant and equipment............................................. 1,100,890 937,859
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents....................................................... 19,986 4,294
Receivables..................................................................... 17,337 19,264
Materials and supplies, at cost................................................. 3,677 3,847
-------------- --------------
Total current assets.......................................................... 41,000 27,405
-------------- --------------
DEFERRED CHARGES.................................................................. 5,230 8,873
-------------- --------------
1,147,120 974,137
-------------- --------------
-------------- --------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................. 581,412 526,962
-------------- --------------
LONG-TERM DEBT, net of current maturities......................................... 459,000 360,000
-------------- --------------
CURRENT LIABILITIES
Current maturities of long-term debt............................................ -- 17,500
Note payable.................................................................... -- 10,000
Accounts payable................................................................ 61,618 2,846
Accrued taxes other than income................................................. 20,294 20,968
Accrued interest................................................................ 10,367 10,353
Over recovered cost of service.................................................. 4,601 4,236
Accumulated provision for rate refunds.......................................... -- 12,227
-------------- --------------
Total current liabilities..................................................... 96,880 78,130
-------------- --------------
RESERVES AND DEFERRED CREDITS..................................................... 9,828 9,045
-------------- --------------
1,147,120 974,137
-------------- --------------
-------------- --------------
The accompanying notes to financial statements are an integral part of these
statements.
F-21
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
OPERATING REVENUES
Operating revenues....................................................................... 226,019 214,103
Provision for rate refunds............................................................... (39,969) (12,160)
--------- ---------
Operating revenues, net................................................................ 186,050 201,943
--------- ---------
OPERATING EXPENSES
Operations and maintenance............................................................... 28,522 26,974
Depreciation and amortization............................................................ 38,708 46,979
Taxes other than income.................................................................. 22,393 24,390
--------- ---------
Operating expenses..................................................................... 89,623 98,343
--------- ---------
OPERATING INCOME........................................................................... 96,427 103,600
--------- ---------
INTEREST EXPENSE........................................................................... 33,020 33,117
--------- ---------
OTHER INCOME
Other income, net........................................................................ 4,305 2,517
Allowance for borrowed funds used during construction.................................... 3,660 447
Allowance for equity funds used during construction...................................... 1,400 396
--------- ---------
Other income........................................................................... 9,365 3,360
--------- ---------
NET INCOME................................................................................. 72,772 73,843
--------- ---------
--------- ---------
The accompanying notes to financial statements are an integral part of these
statements.
F-22
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. 72,772 73,843
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 38,715 47,010
Amortization of debt expense....................................................... 296 924
Allowance for equity funds used during construction................................ (1,400) (396)
Provision for rate refunds......................................................... 40,403 12,227
Rate refunds paid.................................................................. (52,630) --
Other reserves and deferred credits................................................ 783 (2,252)
Changes in current assets and liabilities:
Receivables...................................................................... 1,927 931
Materials and supplies........................................................... 170 218
Accounts payable................................................................. 14,587 1,673
Accrued taxes other than income.................................................. (674) 1,065
Accrued interest................................................................. 14 (163)
Over recovered cost of service................................................... 365 1,728
---------- ----------
Total adjustments.............................................................. 42,556 62,965
---------- ----------
Net cash provided by operating activities...................................... 115,328 136,808
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net.................................... (152,070) (18,597)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners.......................................................... 81,000 --
Distributions to Partners............................................................ (99,322) (102,845)
Issuance of long-term debt........................................................... 209,000 --
Retirement of long-term debt......................................................... (127,500) (32,500)
(Repayment of) borrowings on note payable............................................ (10,000) 10,000
Long-term debt issuance costs........................................................ (744) --
---------- ----------
Net cash provided by (used in) financing activities................................ 52,434 (125,345)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................................. 15,692 (7,134)
Cash and cash equivalents--beginning of period........................................... 4,294 11,428
---------- ----------
Cash and cash equivalents--end of period................................................. 19,986 4,294
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-23
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
NORTHERN
BORDER
TRANSCANADA INTERMEDIATE
BORDER TRANSCAN LIMITED
PIPELINE LTD. NORTHERN LTD. PARTNERSHIP TOTAL
-------------------- ------------- -------------------- ----------
Balance, December 31, 1995............... 88,954 77,835 389,175 555,964
Net Income............................... 11,237 10,916 51,690 73,843
Distributions............................ (13,936) (16,917) (71,992) (102,845)
Ownership transfer....................... (54,637) 54,637 -- --
------- ------------- -------- ----------
Balance, December 31, 1996............... 31,618 126,471 368,873 526,962
Net Income............................... 4,366 17,466 50,940 72,772
Contributions............................ 4,860 19,440 56,700 81,000
Distributions............................ (5,959) (23,838) (69,525) (99,322)
------- ------------- -------- ----------
Balance, December 31, 1997............... 34,885 139,539 406,988 581,412
------- ------------- -------- ----------
------- ------------- -------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-24
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership, formed March 9, 1978, pursuant to the Texas Uniform Partnership
Act. The ownership percentages of the partners in Northern Border Pipeline
(Partners) at both December 31, 1997 and 1996, are as follows:
OWNERSHIP
PARTNER PERCENTAGE
- - --------------------------------------------------------------------------------- -----------------
Northern Border Intermediate Limited Partnership................................. 70
TransCan Northern Ltd............................................................ 24
TransCanada Border PipeLine Ltd.................................................. 6
The pipeline system owned by Northern Border Pipeline is a 969-mile natural
gas transmission line extending from the United States-Canadian border near Port
of Morgan, Montana, to a terminus near Harper, Iowa, where it interconnects with
the pipeline system of Natural Gas Pipeline Company of America (NGPL).
Northern Border Pipeline is managed by a Management Committee that includes
three representatives from Northern Border Intermediate Limited Partnership
(Partnership) and one representative from TransCanada Border PipeLine Ltd. and
TransCan Northern Ltd. (collectively TransCanada), both of which are
wholly-owned subsidiaries of TransCanada PipeLines Limited. The Partnership's
representatives selected by its general partners, Northern Plains Natural Gas
Company (Northern Plains), a wholly-owned subsidiary of Enron Corp. (Enron), Pan
Border Gas Company, a wholly-owned subsidiary of Duke Energy Corporation (Duke
Energy), and Northwest Border Pipeline Company, a wholly-owned subsidiary of The
Williams Companies, Inc., have 35%, 22.75% and 12.25%, respectively, of the
voting interest on the Management Committee. The representative designated by
TransCanada votes the remaining 30% interest. The day-to-day management of
Northern Border Pipeline's affairs is the responsibility of Northern Plains (the
Operator), as defined by the operating agreement between Northern Border
Pipeline and Northern Plains. Northern Border Pipeline is charged for the
salaries, benefits and expenses of the Operator. Substantially all of the
operations and maintenance expenses are paid to the Operator and other Enron
affiliates.
Net income and distributions are allocated based on ownership percentage.
Effective December 1, 1996, TransCan Northern Ltd. purchased a portion of the
TransCanada Border PipeLine Ltd. equity ownership in Northern Border Pipeline.
The net income and distributions are reflected in the capital account balances
at their new ownership interests from that date forward.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northern Border Pipeline is subject to regulation by the Federal Energy
Regulatory Commission (FERC). Northern Border Pipeline's accounting policies
conform to generally accepted accounting principles, as applied in the case of
regulated entities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-25
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property, plant and equipment is stated at original cost. Construction work
in progress shown on the accompanying balance sheet includes approximately
$197.9 million and $16.8 million at December 31, 1997 and 1996, respectively, of
project-to-date costs on Northern Border Pipeline's expansion and extension of
its pipeline from its current terminus near Harper, Iowa to a point near
Manhattan, Illinois (The Chicago Project) (see Note 5). At December 31, 1997,
approximately $44.2 million of project costs incurred but not paid for The
Chicago Project were recorded in accounts payable and construction work in
progress on the balance sheet and were excluded from the change in accounts
payable and expenditures for property, plant and equipment, net on the
statements of cash flows.
Maintenance and repairs are charged to operations in the period incurred.
The provision for depreciation and amortization of the transmission line is an
integral part of Northern Border Pipeline's FERC tariff and its levelized cost
of service. The effective depreciation rate applied to Northern Border
Pipeline's gross transmission plant in 1997 and 1996 was 2.5% and 3.1%,
respectively (see Note 5). Composite rates are applied to all other functional
groups of property having similar economic characteristics.
The original cost of property retired is charged to accumulated depreciation
and amortization, net of salvage and cost of removal. No retirement gain or loss
is included in income except in the case of extraordinary retirements or sales.
(B) INCOME TAXES
Income taxes are the responsibility of the Partners and are not reflected in
these financial statements. However, the Northern Border Pipeline FERC tariff
establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, Partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $300.0 million and $306.7 million as of December 31, 1997 and
1996, respectively, and are primarily related to accelerated depreciation and
other plant-related differences.
(C) REVENUE RECOGNITION
Northern Border Pipeline bills the cost of service on an estimated basis for
a six month cycle. Any net excess or deficiency resulting from the comparison of
the cost of service determined for that period in accordance with the FERC
tariff (incurred cost of service) to the estimated billing is accumulated,
including carrying charges thereon and is either billed to or credited back to
the shippers. Revenues reflect incurred cost of service. An amount equal to
differences between billing estimates and the incurred cost of service,
including carrying charges, is reflected in current assets or current
liabilities.
F-26
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) represents the
estimated costs, during the period of construction, of funds used for
construction purposes. Recognition of this allowance is appropriate because it
constitutes an actual cost of construction. For regulated activities, Northern
Border Pipeline is permitted to earn a return on and recover AFUDC through its
inclusion in rate base and the provision for depreciation. The rate employed for
the equity component of AFUDC is the equity rate of return stated in Northern
Border Pipeline's FERC tariff.
(E) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
(F) RISK MANAGEMENT
Financial instruments are used by Northern Border Pipeline in the management
of its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions which hedge interest rate risk by effectively converting
certain of its floating rate debt to fixed rate debt. Northern Border Pipeline
does not use these agreements for trading purposes. The cost or benefit of the
interest rate swap agreements is recognized currently as a component of interest
expense.
3. SHIPPER SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff which directs
that Northern Border Pipeline collect its cost of service through firm
transportation service agreements (firm service agreements). Northern Border
Pipeline's FERC tariff provides an opportunity to recover all operations and
maintenance costs of the pipeline, taxes other than income taxes, interest,
depreciation and amortization, an allowance for income taxes and a regulated
equity return. Billings for the firm service agreements are based on contracted
volumes to determine the allocable share of cost of service and are not
dependent upon the percentage of available capacity actually used.
Northern Border Pipeline's firm service agreements, including firm service
agreements applicable to The Chicago Project, extend for various terms with
termination dates that range from October 2001 to October 2013. Northern Border
Pipeline also has interruptible service contracts with numerous other shippers
as a result of its self-implementing blanket transportation authority. Revenues
received from the interruptible service contracts are credited to the cost of
service reducing the billings for the firm service agreements.
At December 31, 1997, Northern Border Pipeline's largest shipper,
Pan-Alberta Gas (U.S.) Inc. (PAGUS), was obligated for approximately 49.0% of
the cost of service through its firm service agreements which expire in October
2001. Operating revenues from the PAGUS firm service agreements and
interruptible service contracts for the years ended December 31, 1997 and 1996
were $86.8 million and $95.7 million, respectively. Northern Natural Gas Company
(Northern), a wholly-
F-27
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHIPPER SERVICE AGREEMENTS (CONTINUED)
owned subsidiary of Enron, and Panhandle Eastern Pipe Line Company (Panhandle),
a wholly-owned subsidiary of Duke Energy, have executed financial guarantees
representing 17.2% and 10.7%, respectively, of the total cost of service related
to the contracted capacity of PAGUS. The remaining cost of service obligation of
PAGUS is supported by various credit support arrangements, including among
others, a letter of credit, an escrow account and an upstream capacity transfer
agreement. After The Chicago Project is placed in service, PAGUS is obligated
for approximately 29.9% of the cost of service and the financial guarantees
related to the PAGUS contracted capacity by Northern and Panhandle will
represent 10.5% and 6.5%, respectively, of the total cost of service.
Shippers affiliated with the Partners of Northern Border Pipeline have firm
service agreements representing approximately 12.6% of the cost of service at
December 31, 1997. These firm service agreements extend for various terms with
termination dates that range from October 2003 to December 2008. Operating
revenues from the affiliated firm service agreements and interruptible service
contracts for the years ended December 31, 1997 and 1996 were $20.2 million and
$21.4 million, respectively.
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Detailed information on short-term borrowings and long-term debt is as
follows:
DECEMBER 31,
--------------------
(THOUSANDS OF DOLLARS) 1997 1996
- - ----------------------------------------------------------------------- --------- ---------
Senior notes--average 8.43% due from 2000 to 2003...................... 250,000 250,000
1996 one-year revolving credit facility--average 5.95% and 5.94% in
1997 and 1996, respectively.......................................... -- 10,000
Pipeline Credit Agreement
Five-year revolving credit facility.................................. 127,500 --
Three-year revolving credit facility................................. 81,500 --
Amended bank loan agreement due 1999................................... -- 127,500
--------- ---------
Total.................................................................. 459,000 387,500
Less: Current maturities of long-term debt............................. -- 17,500
Amount classified as note payable...................................... -- 10,000
--------- ---------
Long-term debt......................................................... 459,000 360,000
--------- ---------
--------- ---------
In June 1997, Northern Border Pipeline entered into a credit agreement
(Pipeline Credit Agreement) with certain financial institutions to borrow up to
an aggregate principal amount of $750 million. The Pipeline Credit Agreement is
comprised of a $200 million five-year revolving credit facility to be used for
the retirement of Northern Border Pipeline's existing bank loan agreement and
for general business purposes, and a $550 million three-year revolving credit
facility to be used for the construction of The Chicago Project. The three-year
revolving credit facility may be converted to a term loan maturing in June 2002
once The Chicago Project has been placed in service and certain other conditions
are met. The Pipeline Credit Agreement permits Northern Border Pipeline to
choose among various interest rate options, to specify the portion of the
borrowings to be covered
F-28
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
by specific interest rate options and to specify the interest rate period,
subject to certain parameters. Northern Border Pipeline is required to pay a
facility fee on the aggregate principal amount of $750 million.
At both December 31, 1997 and 1996, Northern Border Pipeline had outstanding
interest rate swap agreements with notional amounts of $90 million. Under the
agreements, which have a remaining average maturity of approximately two years
as of December 31, 1997, Northern Border Pipeline makes payments to
counterparties at fixed rates and in return receives payments at variable rates
based on the London Interbank Offered Rate. At both December 31, 1997 and 1996,
Northern Border Pipeline was in a payable position relative to its
counterparties. The average effective interest rate of Northern Border
Pipeline's variable rate debt, taking into consideration the interest rate swap
agreements, was 7.09% and 7.32% at December 31, 1997 and 1996, respectively.
Interest paid, net of amounts capitalized, during the years ended December
31, 1997 and 1996 was $29.0 million and $31.9 million, respectively.
Aggregate required repayments of long-term debt are as follows: $148
million, $41 million and $206 million for 2000, 2001 and 2002, respectively.
There are no required repayment obligations for 1998 and 1999.
Certain of Northern Border Pipeline's long-term debt and credit arrangements
contain requirements as to the maintenance of minimum partners' capital and debt
to capitalization ratios which restrict the incurrence of other indebtedness by
Northern Border Pipeline and also place certain restrictions on distributions to
the partners of Northern Border Pipeline. Under the most restrictive of the
covenants, as of December 31, 1997 and 1996, respectively, $81 million and $27
million of partners' capital of Northern Border Pipeline could be distributed.
The following estimated fair values of financial instruments represent the
amount at which each instrument could be exchanged in a current transaction
between willing parties. Based on quoted market prices for similar issues with
similar terms and remaining maturities, the estimated fair value of the senior
notes was approximately $276 million and $271 million at December 31, 1997 and
1996, respectively. At December 31, 1997 and 1996, the estimated fair value
which would be payable to terminate the interest rate swap agreements, taking
into account current interest rates, was approximately $3 million and $4
million, respectively. Northern Border Pipeline presently intends to maintain
the current schedule of maturities for the senior notes and the interest rate
swap agreements which will result in no gains or losses on their respective
repayment. The carrying value of Northern Border Pipeline's variable rate debt
approximates the fair value since the interest rates are periodically adjusted
to current market conditions.
5. COMMITMENTS AND CONTINGENCIES
REGULATORY PROCEEDINGS
In January 1998, Northern Border Pipeline filed an application with the FERC
to acquire the linepack gas required to operate the pipeline from the shippers
and to provide the linepack gas in the future for its operations. The estimated
value of the linepack gas, including the linepack gas attributable to the
pipeline extension for The Chicago Project, is $12.5 million. Northern Border
Pipeline has proposed that the cost of the linepack gas be included in its rate
base.
F-29
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In August 1997, Northern Border Pipeline received FERC approval of the
Stipulation and Agreement (Stipulation) filed on October 15, 1996 to settle its
November 1995 rate case. Northern Border Pipeline filed the rate case, in
compliance with its FERC tariff, for the determination of its allowed equity
rate of return and was permitted, pursuant to a December 1995 FERC order, to
begin collecting the requested increase in the equity rate of return effective
June 1, 1996, subject to refund. In accordance with the terms of the
Stipulation, Northern Border Pipeline's allowed equity rate of return was
reduced from the requested 14.25% to 12.75% for the period June 1, 1996 to
September 30, 1996 and to 12% thereafter. Additionally, the Stipulation reduced
the effective depreciation rate applied to Northern Border Pipeline's gross
transmission plant from 3.6% to 2.7% for the period June 1, 1996 to December 31,
1996, which resulted in an average effective depreciation rate of 3.1% for the
year ended December 31, 1996. Beginning January 1, 1997, the depreciation rate
was reduced to 2.5%. In October 1997, Northern Border Pipeline used a
combination of cash on hand and borrowings on a revolving credit facility to pay
refunds to its shippers of approximately $52.6 million.
In August 1997, the FERC issued a certificate of public convenience and
necessity authorizing Northern Border Pipeline to construct and operate
facilities, as filed for in a September 1996 application with the FERC for The
Chicago Project. Northern Border Pipeline has accepted the certificate and
construction is proceeding. NGPL had filed in the United States Court of Appeals
for the District of Columbia a petition for review of the August order issued by
the FERC that has been dismissed. The Chicago Project pipeline facilities
consist of 243 miles of pipeline and 147 miles of pipeline loop. Compression
facilities for The Chicago Project involve the installation of 228,500
compressor horsepower at eight new compressor stations and upgrades at five
existing compressor stations by the removal from service of units producing
100,000 compressor horsepower with the installation of replacement units
producing 175,000 compressor horsepower. The project's estimated cost, as filed
with the FERC, is approximately $839 million and it is expected to be ready for
service in the fourth quarter of 1998.
In May 1996, the FERC granted rehearing of its May 1994 order on Northern
Border Pipeline's methodology for recording in its books and reflecting in its
rates amounts related to alternative minimum tax (AMT). The FERC Audit Staff
(Staff), in December 1991 after an examination of Northern Border Pipeline's
records for the period January 1, 1987 through December 31, 1989, took exception
to Northern Border Pipeline's established method of accounting for AMT for
ratemaking purposes.
Northern Border Pipeline did not agree with the exception noted by the Staff
and proceeded with a hearing before an Administrative Law Judge (ALJ) who
concluded Northern Border Pipeline had properly accounted for AMT. Ultimately,
in the May 1996 order, the FERC accepted the ALJ's conclusions and vacated its
May 1994 order which had held that the AMT component of Northern Border
Pipeline's rate base should reflect the particular tax circumstances of each
Northern Border Pipeline partner. There were no accounting adjustments or rate
refunds required in resolution of this issue.
In May 1996, the Staff issued its audit report on its examination of
Northern Border Pipeline's records for the three year period subsequent to
January 1, 1990. The audit report required Northern Border Pipeline to record
certain adjustments to its accounts including the reclassification of $3.9
million of costs from utility plant in service to a regulatory asset. In
accordance with Northern
F-30
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Border Pipeline's FERC tariff, the regulatory asset is includable in rate base,
however, Northern Border Pipeline must file with the FERC for the future
recovery of this asset through amortization in cost of service. The adjustments
made to Northern Border Pipeline's accounts as a result of the audit report did
not materially affect Northern Border Pipeline's financial position or results
of operations.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent liabilities
with respect to compliance with applicable environmental laws and regulations.
OTHER
Various legal actions that have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues will not have a material adverse impact on Northern Border Pipeline's
results of operations or financial position.
6. CAPITAL EXPENDITURE PROGRAM
Total capital expenditures for 1998 are estimated to be $637 million for The
Chicago Project and $8 million for renewals and replacements of the existing
facilities. Capital expenditures for linepack gas, if the filing to acquire the
linepack is approved by the FERC, would be approximately $12.5 million (see Note
5). Funds required to meet the 1998 capital expenditures are anticipated to be
provided primarily from debt borrowings and capital contributions.
F-31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee of
Northern Border Pipeline Company:
We have reviewed the accompanying balance sheet of Northern Border Pipeline
Company (a Texas partnership) as of September 30,1998, the related statements of
income and cash flows for the three-month and nine-month periods ended September
30, 1998 and 1997, and the related statements of changes in partners' capital
for the three-month and nine-month periods ended September 30, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 13, 1998
F-32
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30,
1998
--------------
ASSETS
NATURAL GAS TRANSMISSION PLANT
In service...................................................................................... 1,538,092
Construction work in progress................................................................... 649,167
--------------
Total property, plant and equipment........................................................... 2,187,259
Less: Accumulated provision for depreciation and amortization................................... 584,397
--------------
Net property, plant and equipment............................................................. 1,602,862
--------------
CURRENT ASSETS
Cash and cash equivalents....................................................................... 19,952
Receivables..................................................................................... 16,021
Materials and supplies, at cost................................................................. 3,824
Under recovered cost of service................................................................. 1,381
--------------
Total current assets.......................................................................... 41,178
--------------
DEFERRED CHARGES.................................................................................. 9,764
--------------
1,653,804
--------------
--------------
PARTNERS' CAPITAL AND LIABILITIES
PARTNERS' CAPITAL................................................................................. 789,258
--------------
LONG-TERM DEBT.................................................................................... 724,000
--------------
CURRENT LIABILITIES
Accounts payable................................................................................ 103,009
Accrued taxes other than income................................................................. 21,449
Accrued interest................................................................................ 6,270
Over recovered cost of service.................................................................. --
--------------
Total current liabilities..................................................................... 130,728
--------------
RESERVES AND DEFERRED CREDITS..................................................................... 9,818
--------------
1,653,804
--------------
--------------
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-33
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
OPERATING REVENUES
Operating revenues.................................................. 49,121 46,586 145,476 180,338
Provision for rate refunds.......................................... -- 893 -- (39,969)
--------- --------- --------- ---------
Operating revenues, net........................................... 49,121 47,479 145,476 140,369
--------- --------- --------- ---------
OPERATING EXPENSES
Operations and maintenance.......................................... 7,137 7,086 21,581 21,027
Depreciation and amortization....................................... 10,272 9,737 30,060 28,988
Taxes other than income............................................. 5,362 5,818 17,267 17,793
Regulatory credit................................................... (2,479) -- (4,709) --
--------- --------- --------- ---------
Operating expenses................................................ 20,292 22,641 64,199 67,808
--------- --------- --------- ---------
OPERATING INCOME...................................................... 28,829 24,838 81,277 72,561
--------- --------- --------- ---------
INTEREST EXPENSE...................................................... 11,742 8,324 30,422 24,162
--------- --------- --------- ---------
OTHER INCOME
Allowance for funds used during construction
Debt.............................................................. 5,811 1,023 12,022 1,874
Equity............................................................ 3,408 369 7,921 801
Other income (expenses), net........................................ 639 (527) 1,253 2,280
--------- --------- --------- ---------
Other income...................................................... 9,858 865 21,196 4,955
--------- --------- --------- ---------
NET INCOME............................................................ 26,945 17,379 72,051 53,354
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-34
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ 26,945 17,379 72,051 53,354
--------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 10,274 9,707 30,071 28,991
Amortization of debt expense...................................... 91 88 273 201
Allowance for equity funds used during construction............... (3,408) (369) (7,921) (801)
Provision for rate refunds........................................ -- (709) -- 40,403
Regulatory credit................................................. (2,549) -- (4,807) --
Other reserves and deferred credits............................... (40) 773 (10) 773
Changes in current assets and liabilities:
Receivables..................................................... (385) 6,762 1,316 3,497
Materials and supplies.......................................... (343) (601) (147) (216)
Accounts payable................................................ (397) 1,414 1,488 (376)
Accrued taxes other than income................................. 3,085 4,683 1,155 381
Accrued interest................................................ (4,255) (4,320) (4,097) (5,430)
Over/under recovered cost of service............................ (352) 1,988 (5,982) 827
--------- --------- --------- ---------
Total adjustments............................................. 1,721 19,416 11,339 68,250
--------- --------- --------- ---------
Net cash provided by operating activities..................... 28,666 36,795 83,390 121,604
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net................... (185,284) (36,776) (484,219) (69,773)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Partners........................................... -- 40,000 197,000 40,000
Distributions to Partners............................................. (28,290) (32,870) (61,205) (99,322)
Issuance of long-term debt............................................ 175,000 -- 265,000 160,000
Retirement of long-term debt.......................................... -- -- -- (127,500)
Repayment of note payable............................................. -- -- -- (10,000)
Long-term debt issuance costs......................................... -- (7) -- (682)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities................. 146,710 7,123 400,795 (37,504)
--------- --------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................. (9,908) 7,142 (34) 14,327
Cash and cash equivalents--beginning of period.......................... 29,860 11,479 19,986 4,294
--------- --------- --------- ---------
Cash and cash equivalents--end of period................................ 19,952 18,621 19,952 18,621
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).................................. 10,095 11,533 22,224 27,517
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-35
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NORTHERN
TRANSCANADA BORDER
BORDER TRANSCAN INTERMEDIATE
PIPELINE NORTHERN LIMITED
LTD. LTD. PARTNERSHIP TOTAL
------------- ----------- ------------ ---------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Balance, June 30, 1998...................................... 47,436 189,745 553,422 790,603
Net income.................................................. 1,617 6,467 18,861 26,945
Distributions............................................... (1,698) (6,790) (19,802) (28,290)
------------- ----------- ------------ ---------
Balance, September 30, 1998................................. 47,355 189,422 552,481 789,258
------------- ----------- ------------ ---------
------------- ----------- ------------ ---------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Balance, December 31, 1997.................................. 34,885 139,539 406,988 581,412
Net income.................................................. 4,323 17,292 50,436 72,051
Contributions............................................... 11,820 47,280 137,900 197,000
Distributions............................................... (3,673) (14,689) (42,843) (61,205)
------------- ----------- ------------ ---------
Balance, September 30, 1998................................. 47,355 189,422 552,481 789,258
------------- ----------- ------------ ---------
------------- ----------- ------------ ---------
The accompanying report of independent public accountants and the selected notes
to financial statements should be read in conjunction with these statements.
F-36
NORTHERN BORDER PIPELINE COMPANY
SELECTED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership and is subject to regulation by the Federal Energy Regulatory
Commission (FERC). The financial statements included herein have been prepared
by Northern Border Pipeline without audit in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted, although
Northern Border Pipeline believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements as of December
31, 1997, together with the report of independent public accountants thereon. In
the opinion of management, these statements reflect all adjustments which are
necessary for a fair statement of results for the interim periods.
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Income taxes are the responsibility of the partners and are not
reflected in these financial statements. However, the Northern Border Pipeline
tariff establishes the method of accounting for and calculating income taxes and
requires Northern Border Pipeline to reflect in its cost of service the income
taxes which would have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for purposes of
calculating the return allowed by the FERC, partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred income taxes.
Such amounts were $296.0 million and $300.0 million as of September 30,1998 and
December 31, 1997, respectively, and are primarily related to accelerated
depreciation and other plant-related differences.
3. Construction work in progress shown on the accompanying balance sheets
includes approximately $648.1 million and $197.9 million at September 30, 1998
and December 31, 1997, respectively, of project-to-date costs on Northern Border
Pipeline's expansion and extension of its pipeline system from its current
terminus near Harper, Iowa to a point near Manhattan, Illinois (The Chicago
Project). At September 30, 1998 and December 31, 1997, respectively,
approximately $84.1 million and $44.2 million of project costs incurred but not
paid for The Chicago Project were recorded in accounts payable and construction
work in progress on the balance sheet and were excluded from the change in
accounts payable and expenditures for property, plant and equipment, net on the
statements of cash flows. The project's budgeted cost, as filed with the FERC,
is $839 million and it is expected to be ready for service in December 1998.
4. In September 1998, Pan-Alberta Gas (U.S.) Inc. (PAGUS), Northern Border
Pipeline's largest shipper, signed amendments to its transportation contracts
covering 741 million cubic feet per day of capacity. The amendments extend the
contracts for two years through October 2003.
PAGUS became a related party to Northern Border Pipeline after the merger of
NOVA Corporation and TransCanada PipeLines Limited (TransCanada) effective July
2, 1998. Two of Northern Border Pipeline's partners, TransCanada Border PipeLine
Ltd. and TransCan Northern Ltd., are wholly-owned subsidiaries of TransCanada.
At the time of the merger, the parent company of PAGUS was a subsidiary of NOVA
Corporation. On August 6, 1998, Pan-Alberta Gas Ltd., the parent company of
PAGUS, announced the pending sale of its business, once certain conditions are
met.
F-37
NORTHERN BORDER PIPELINE COMPANY
SELECTED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
5. During September 1998, Northern Border Pipeline executed anticipatory
hedge transactions with an aggregate notional amount of $150 million to lock in
the interest rate for a planned issuance of fixed rate debt during 1999. The
average effective interest rate on the transactions, based on ten-year U.S.
Treasury Notes, is 4.90%. At September 30, 1998, the estimated fair value which
would be payable to terminate the anticipatory hedge transactions, taking into
account current interest rates, was approximately $5 million.
6. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133--"Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which establishes accounting
and reporting standards requiring that every derivative instrument be recorded
on the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999, but may be
implemented as of the beginning of any fiscal quarter after issuance. Adoption
of the statement is not expected to have a material effect on Northern Border
Pipeline's financial position or results of operation.
7. Certain balances in the 1997 financial statements have been reclassified
to be consistent with current presentation.
F-38
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of TC PipeLines GP, Inc.
We have audited the accompanying balance sheet of TC PipeLines GP, Inc. as
of December 23, 1998. This financial statement is the responsibility of the
management of the company. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of TC PipeLines GP, Inc. as of
December 23, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Calgary, Canada
December 23, 1998
F-39
TC PIPELINES GP, INC.
BALANCE SHEET
DECEMBER 23, 1998
ASSETS
Cash............................................................................. $ 980
Investment in TC PipeLines, LP................................................... 10
Investment in TC PipeLines Intermediate Limited Partnership...................... 10
---------
$ 1,000
---------
---------
SHARE CAPITAL...................................................................... $ 1,000
---------
---------
NOTE TO BALANCE SHEET
TC PipeLines GP, Inc. (the "General Partner") is a wholly-owned subsidiary
of TransCan Northern Ltd. ("TransCan Northern"). TransCan Northern is a
wholly-owned subsidiary of TransCanada PipeLines Limited. The General Partner
was formed on December 16, 1998 as a Delaware corporation. The General Partner
owns a 1.0% general partner interest in TC PipeLines, LP (the "Partnership") and
a 1.0101% general partner interest in TC PipeLines Intermediate Limited
Partnership (the "Intermediate Partnership").
On December 23, 1998, the General Partner issued 1 common share to TransCan
Northern, its sole shareholder for $1,000.
The General Partner has invested $10 in the Partnership and $10 in the
Intermediate Partnership. There have been no other transactions involving the
General Partner as of December 23, 1998.
F-40
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
TC PIPELINES, L.P.
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
Section 1.1 Definitions............................................................ 1
Section 1.2 Construction........................................................... 16
ARTICLE II
ORGANIZATION
Section 2.1 Formation.............................................................. 16
Section 2.2 Name................................................................... 16
Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices... 16
Section 2.4 Purpose and Business................................................... 17
Section 2.5 Powers................................................................. 17
Section 2.6 Power of Attorney...................................................... 17
Section 2.7 Term................................................................... 18
Section 2.8 Title to Partnership Assets............................................ 18
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability................................................ 19
Section 3.2 Management of Business................................................. 19
Section 3.3 Outside Activities of the Limited Partners............................. 19
Section 3.4 Rights of Limited Partners............................................. 19
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 Certificates........................................................... 20
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates...................... 21
Section 4.3 Record Holders......................................................... 21
Section 4.4 Transfer Generally..................................................... 22
Section 4.5 Registration and Transfer of Limited Partner Interests................. 22
Section 4.6 Transfer of the General Partner's General Partner Interest............. 23
Section 4.7 Transfer of Incentive Distribution Rights.............................. 23
Section 4.8 Restrictions on Transfers.............................................. 24
Section 4.9 Citizenship Certificates; Non-citizen Assignees........................ 24
Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees........... 25
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions........................................... 26
Section 5.2 Contributions by the General Partner and its Affiliates................ 26
Section 5.3 Contributions by Initial Limited Partners and Reimbursement of the
General Partner........................................................ 27
Section 5.4 Interest and Withdrawal................................................ 27
Section 5.5 Capital Accounts....................................................... 27
Section 5.6 Issuances of Additional Partnership Securities......................... 30
Section 5.7 Limitations on Issuance of Additional Partnership Securities........... 31
Section 5.8 Conversion of Subordinated Units....................................... 32
Section 5.9 Limited Preemptive Right............................................... 33
A-i
Section 5.10 Splits and Combination................................................. 33
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests...... 34
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes............................... 35
Section 6.2 Allocations for Tax Purposes........................................... 40
Section 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders......................................................... 42
Section 6.4 Distributions of Available Cash from Operating Surplus................. 43
Section 6.5 Distributions of Available Cash from Capital Surplus................... 44
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................. 44
Section 6.7 Special Provisions Relating to the Holders of Subordinated Units....... 45
Section 6.8 Special Provisions Relating to the Holders of Incentive Distribution
Rights................................................................. 45
Section 6.9 Entity-Level Taxation.................................................. 46
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management............................................................. 46
Section 7.2 Certificate of Limited Partnership..................................... 48
Section 7.3 Restrictions on General Partner's Authority............................ 48
Section 7.4 Reimbursement of the General Partner................................... 49
Section 7.5 Outside Activities..................................................... 50
Section 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner........................................................ 51
Section 7.7 Indemnification........................................................ 52
Section 7.8 Liability of Indemnitees............................................... 53
Section 7.9 Resolution of Conflicts of Interest.................................... 54
Section 7.10 Other Matters Concerning the General Partner........................... 55
Section 7.11 Purchase or Sale of Partnership Securities............................. 56
Section 7.12 Registration Rights of the General Partner and its Affiliates.......... 56
Section 7.13 Reliance by Third Parties.............................................. 58
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting................................................. 58
Section 8.2 Fiscal Year............................................................ 59
Section 8.3 Reports................................................................ 59
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information............................................ 59
Section 9.2 Tax Elections.......................................................... 59
Section 9.3 Tax Controversies...................................................... 60
Section 9.4 Withholding............................................................ 60
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners.................................. 60
Section 10.2 Admission of Substituted Limited Partner............................... 60
A-ii
Section 10.3 Admission of Successor General Partner................................. 61
Section 10.4 Admission of Additional Limited Partners............................... 61
Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.......... 61
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner...................................... 62
Section 11.2 Removal of the General Partner......................................... 63
Section 11.3 Interest of Departing Partner and Successor General Partner............ 63
Section 11.4 Termination of Subordination Period, Conversion of Subordinated Units
and Extinguishment of Cumulative Common Unit Arrearages................ 65
Section 11.5 Withdrawal of Limited Partners......................................... 65
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution............................................................ 65
Section 12.2 Continuation of the Business of the Partnership After Dissolution...... 65
Section 12.3 Liquidator............................................................. 66
Section 12.4 Liquidation............................................................ 66
Section 12.5 Cancellation of Certificate of Limited Partnership..................... 67
Section 12.6 Return of Contributions................................................ 67
Section 12.7 Waiver of Partition.................................................... 67
Section 12.8 Capital Account Restoration............................................ 67
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner.................. 68
Section 13.2 Amendment Procedures................................................... 69
Section 13.3 Amendment Requirements................................................. 69
Section 13.4 Special Meetings....................................................... 70
Section 13.5 Notice of a Meeting.................................................... 70
Section 13.6 Record Date............................................................ 70
Section 13.7 Adjournment............................................................ 70
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes............. 71
Section 13.9 Quorum................................................................. 71
Section 13.10 Conduct of a Meeting................................................... 71
Section 13.11 Action Without a Meeting............................................... 72
Section 13.12 Voting and Other Rights................................................ 72
ARTICLE XIV
MERGER
Section 14.1 Authority.............................................................. 73
Section 14.2 Procedure for Merger or Consolidation.................................. 73
Section 14.3 Approval by Limited Partners of Merger or Consolidatio................. 74
Section 14.4 Certificate of Merger.................................................. 74
Section 14.5 Effect of Merger....................................................... 74
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right to Acquire Limited Partner Interests............................. 76
A-iii
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices.................................................. 77
Section 16.2 Further Action......................................................... 78
Section 16.3 Binding Effect......................................................... 78
Section 16.4 Integration............................................................ 78
Section 16.5 Creditors.............................................................. 78
Section 16.6 Waiver................................................................. 78
Section 16.7 Counterparts........................................................... 78
Section 16.8 Applicable Law......................................................... 78
Section 16.9 Invalidity of Provisions............................................... 78
Section 16.10 Consent of Partners.................................................... 78
A-iv
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF TC PIPELINES, LP
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TC PIPELINES,
LP dated as of , 1999, is entered into by and among TC PipeLines
GP, Inc., a Delaware corporation, as the General Partner, and TransCan Northern
Ltd., a Delaware corporation, as the Organizational Limited Partner, together
with any other Persons who become Partners in the Partnership or parties hereto
as provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACQUISITION" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"ADDITIONAL BOOK BASIS" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event
shall first be deemed to offset or decrease that portion of the
Carrying Value of such Adjusted Property that is attributable to any
prior positive adjustments made thereto pursuant to a Book-Up Event or
Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced as
a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion
of any such increase in Carrying Value shall be treated as Additional
Book Basis; provided that the amount treated as Additional Book Basis
pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments
after such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"EXCESS ADDITIONAL BOOK BASIS"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
A-1
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"ADJUSTED CAPITAL ACCOUNT" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by a Partner from and
after the date on which such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest was first issued.
"ADJUSTED OPERATING SURPLUS" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net decrease
in Working Capital Borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
"ADJUSTED PROPERTY" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "CONTROL" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"AGGREGATE REMAINING NET POSITIVE ADJUSTMENTS" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"AGREED ALLOCATION" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "AGREED ALLOCATION" is used).
"AGREED VALUE" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use
A-2
such method as it deems reasonable and appropriate to allocate the aggregate
Agreed Value of Contributed Properties contributed to the Partnership in a
single or integrated transaction among each separate property on a basis
proportional to the fair market value of each Contributed Property.
"AGREEMENT" means this Agreement of Limited Partnership of TC PipeLines, LP,
as it may be amended, supplemented or restated from time to time.
"ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"ASSOCIATE" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"AVAILABLE CASH" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership Group on
hand at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such Quarter resulting from Working
Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including
reserves for future capital expenditures and for anticipated future
credit needs of the Partnership Group) subsequent to such Quarter, (ii)
comply with applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which any
Group Member is a party or by which it is bound or its assets are subject
or (iii) provide funds for distributions under Section 6.4 or 6.5 in
respect of any one or more of the next four Quarters; provided, however,
that the General Partner may not establish cash reserves pursuant to
(iii) above if the effect of such reserves would be that the Partnership
is unable to distribute the Minimum Quarterly Distribution on all Common
Units, plus any Cumulative Common Unit Arrearage on all Common Units,
with respect to such Quarter; and, provided further, that disbursements
made by a Group Member or cash reserves established, increased or reduced
after the end of such Quarter but on or before the date of determination
of Available Cash with respect to such Quarter shall be deemed to have
been made, established, increased or reduced, for purposes of determining
Available Cash, within such Quarter if the General Partner so determines.
Notwithstanding the foregoing, "AVAILABLE CASH" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"BOOK BASIS DERIVATIVE ITEMS" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
A-3
"BOOK-DOWN EVENT" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BOOK-TAX DISPARITY" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"BOOK-UP EVENT" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BUSINESS DAY" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America,
the State of New York, Canada or the Province of Alberta shall not be regarded
as a Business Day.
"CAPITAL ACCOUNT" means the capital account maintained for a Partner
pursuant to Section 5.5. The "CAPITAL ACCOUNT" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution and Conveyance Agreement.
"CAPITAL IMPROVEMENT" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, pipeline
systems, terminalling and storage facilities and related assets), in each case
made to increase the operating capacity or revenues of the Partnership Group
from the operating capacity or revenues of the Partnership Group existing
immediately prior to such addition, improvement, acquisition or construction.
"CAPITAL SURPLUS" has the meaning assigned to such term in Section 6.3(a).
"CARRYING VALUE" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"CAUSE" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
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"CERTIFICATE" means a certificate (i) substantially in the form of Exhibit A
to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
"CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"CITIZENSHIP CERTIFICATION" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"CLAIM" has the meaning assigned to such term in Section 7.12(c).
"CLOSING DATE" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"CLOSING PRICE" has the meaning assigned to such term in Section 15.1(a).
"CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
successor law.
"COMBINED INTEREST" has the meaning assigned to such term in Section
11.3(a).
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON UNIT" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partner (exclusive of its interest as a holder of the General Partner
Interest and Incentive Distribution Rights) and having the rights and
obligations specified with respect to Common Units in this Agreement. The term
"COMMON UNIT" does not refer to a Subordinated Unit prior to its conversion into
a Common Unit pursuant to the terms hereof.
"COMMON UNIT ARREARAGE" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"CONFLICTS COMMITTEE" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
security holders, officers nor employees of the General Partner nor officers,
directors or employees of any Affiliate of the General Partner.
"CONTRIBUTED PROPERTY" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to a new partnership on termination of the
Partnership pursuant to Section 708 of the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to Section 5.5(d), such property shall
no longer constitute a Contributed Property, but shall be deemed an Adjusted
Property.
"CONTRIBUTION AND CONVEYANCE AGREEMENT" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partner, the Partnership,
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the Intermediate Partnership, TransCan Northern, TransCanada Border Pipeline
Ltd. and certain other parties, together with the additional conveyance
documents and instruments contemplated or referenced thereunder.
"CUMULATIVE COMMON UNIT ARREARAGE" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"CURATIVE ALLOCATION" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"CURRENT MARKET PRICE" has the meaning assigned to such term in Section
15.1(a).
"DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section 17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"DEPARTING PARTNER" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"DEPOSITARY" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"ELIGIBLE CITIZEN" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"EVENT OF WITHDRAWAL" has the meaning assigned to such term in Section
11.1(a).
"FINAL SUBORDINATED UNITS" has the meaning assigned to such term in Section
6.1(d)(x).
"FIRST LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"FIRST TARGET DISTRIBUTION" means $ per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $ multiplied by a fraction of
which the numerator is the number of days in such period, and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"GENERAL PARTNER" means TC PipeLines GP, Inc., a Delaware corporation, and
its successors and permitted assigns as general partner of the Partnership.
"GENERAL PARTNER INTEREST" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"GROUP" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
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"GROUP MEMBER" means a member of the Partnership Group.
"HOLDER" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"INCENTIVE DISTRIBUTION RIGHT" means a non-voting Limited Partner Interest
initially held by the General Partner, which Partnership Interest will confer
upon the holder thereof only the rights and obligations specifically provided in
this Agreement with respect to Incentive Distribution Rights (and no other
rights otherwise available to or other obligations of a holder of a Partnership
Interest). Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution Right shall not be entitled to vote such
Incentive Distribution Right on any Partnership matter except as may otherwise
be required by law.
"INCENTIVE DISTRIBUTIONS" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"INDEMNIFIED PERSONS" has the meaning assigned to such term in Section
7.12(c).
"INDEMNITEE" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"INITIAL COMMON UNITS" means the Common Units sold in the Initial Offering.
"INITIAL LIMITED PARTNERS" means the General Partner (with respect to the
Common Units, Subordinated Units and the Incentive Distribution Rights received
by it pursuant to Section 5.2) and the Underwriters, in each case upon being
admitted to the Partnership in accordance with Section 10.1.
"INITIAL OFFERING" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"INITIAL UNIT PRICE" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"INTERIM CAPITAL TRANSACTIONS" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (other than the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, and (ii) sales or other dispositions of
assets as part of normal retirements or replacements.
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"INTERMEDIATE PARTNERSHIP" means TC PipeLines Intermediate Limited
Partnership, a Delaware limited partnership, and any successors thereto.
"INTERMEDIATE PARTNERSHIP AGREEMENT" means the Agreement of Limited
Partnership of TC PipeLines Intermediate Limited Partnership, as it may be
amended, supplemented or restated from time to time.
"ISSUE PRICE" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"LIMITED PARTNER" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3 or (b) solely for purposes
of Articles V, VI, VII and IX and Sections 12.3 and 12.4, each Assignee;
provided, however, that when the term "LIMITED PARTNER" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"LIMITED PARTNER INTEREST" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "LIMITED PARTNER INTEREST" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"LIQUIDATION DATE" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"LIQUIDATOR" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"MERGER AGREEMENT" has the meaning assigned to such term in Section 14.1.
"MINIMUM QUARTERLY DISTRIBUTION" means $0. per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on
, 1999, it means the product of $0. multiplied by a fraction of
which the numerator is the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"NATIONAL SECURITIES EXCHANGE" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"NET AGREED VALUE" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such
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property (as adjusted pursuant to Section 5.5(d)(ii)) at the time such property
is distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"NET INCOME" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"NET LOSS" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"NET POSITIVE ADJUSTMENTS" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"NET TERMINATION GAIN" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"NET TERMINATION LOSS" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"NON-CITIZEN ASSIGNEE" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated to
the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and 6.2(b)(iii) if
such properties were disposed of in a taxable transaction in full satisfaction
of such liabilities and for no other consideration.
"NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"NORTHERN BORDER PIPELINE" means Northern Border Pipeline Company, a Texas
general partnership.
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"NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in
Section 15.1(b).
"OPERATING EXPENDITURES" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
debt service payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or
(ii) made in connection with the refinancing or refunding of indebtedness
with the proceeds from new indebtedness or from the sale of equity
interests. For purposes of the foregoing, at the election and in the
reasonable discretion of the General Partner, any payment of principal or
premium shall be deemed to be refunded or refinanced by any indebtedness
incurred or to be incurred by the Partnership Group within 180 days
before or after such payment to the extent of the principal amount of
such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures made
for Acquisitions or for Capital Improvements, (ii) payment of transaction
expenses relating to Interim Capital Transactions or (iii) distributions
to Partners. Where capital expenditures are made in part for Acquisitions
or for Capital Improvements and in part for other purposes, the General
Partner's good faith allocation between the amounts paid for each shall
be conclusive.
"OPERATING SURPLUS" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $ million plus all cash and cash equivalents of the
Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such
period, other than cash receipts from Interim Capital Transactions
(except to the extent specified in Section 6.5) and (iii) all cash
receipts of the Partnership Group after the end of such period but on or
before the date of determination of Operating Surplus with respect to
such period resulting from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end
of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining Operating
Surplus, within such period if the General Partner so determines.
Notwithstanding the foregoing, "OPERATING SURPLUS" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"OPINION OF COUNSEL" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"ORGANIZATIONAL LIMITED PARTNER" means TransCan Northern in its capacity as
the organizational limited partner of the Partnership pursuant to this
Agreement.
"OUTSTANDING" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than
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the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates or (ii) to any Person or
Group who acquired 20% or more of any Outstanding Partnership Securities of any
class then Outstanding directly or indirectly from a Person or Group described
in clause (i) provided that the General Partner shall have notified such Person
or Group in writing that such limitation shall not apply.
"OVER-ALLOTMENT OPTION" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"PARITY UNITS" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"PARTNERS" means the General Partner and the Limited Partners.
"PARTNERSHIP" means TC PipeLines, LP, a Delaware limited partnership, and
any successors thereto.
"PARTNERSHIP GROUP" means the Partnership, the Intermediate Partnership and
any Subsidiary of any such entity, treated as a single consolidated entity.
"PARTNERSHIP INTEREST" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"PARTNERSHIP SECURITY" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"PERCENTAGE INTEREST" means as of any date of determination (a) as to the
General Partner (with respect to its General Partner Interest), an aggregate
1.0%, (b) as to any Unitholder or Assignee holding Units, the product obtained
by multiplying (i) 99% less the percentage applicable to paragraph (c) by (ii)
the quotient obtained by dividing (A) the number of Units held by such
Unitholder or Assignee by (B) the total number of all Outstanding Units, and (c)
as to the holders of additional Partnership Securities issued by the Partnership
in accordance with Section 5.6, the
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percentage established as a part of such issuance. The Percentage Interest with
respect to an Incentive Distribution Right shall at all times be zero.
"PERSON" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"PER UNIT CAPITAL AMOUNT" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"PRO RATA" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"PURCHASE DATE" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units owned
by the General Partner and its Affiliates) pursuant to Article XV.
"QUARTER" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"RECAPTURE INCOME" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"RECORD DATE" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"RECORD HOLDER" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"REDEEMABLE INTERESTS" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-1
(Registration No. 333- ) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"REMAINING NET POSITIVE ADJUSTMENTS" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over (b) the sum of the General
Partner's Share of Additional Book Basis Derivative
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Items with respect to the General Partner Interest for each prior taxable
period, and (iii) with respect to the holders of Incentive Distribution Rights,
the excess of (a) the Net Positive Adjustments of the holders of Incentive
Distribution Rights as of the end of such period over (b) the sum of the Share
of Additional Book Basis Derivative Items of the holders of the Incentive
Distribution Rights for each prior taxable period.
"REQUIRED ALLOCATIONS" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b)
any allocation of an item of income, gain, loss or deduction pursuant to Section
6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"RESIDUAL GAIN" or "RESIDUAL LOSS" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"SECOND LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"SECOND TARGET DISTRIBUTION" means $0. per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1999, it means the product of $0. multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"SECURITIES ACT" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"SHARE OF ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments
of the Partners holding the Incentive Distribution Rights as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time.
"SPECIAL APPROVAL" means approval by a majority of the members of the
Conflicts Committee.
"SUBORDINATED UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "SUBORDINATED UNIT" as used herein does not include a Common Unit.
"SUBORDINATION PERIOD" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after March 31, 2004 in respect
of which (i) (A) distributions of Available Cash from Operating Surplus
on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or
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exceeded the sum of the Minimum Quarterly Distribution on all Outstanding
Common Units and Subordinated Units during such periods and (B) the
Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully diluted basis (i.e., taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter with
respect to which such determination is made, and all Common Units and
Subordinated Units that have as of the date of determination, been earned
by but not yet issued to management of the Partnership in respect of
incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and on the general partner interest
in the Intermediate Partnership, during such periods and (ii) there are
no Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of such
removal.
"SUBSIDIARY" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in Section
14.2(b).
"THIRD TARGET DISTRIBUTION" means $0. per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1999, it means the product of $0. multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"TRADING DAY" has the meaning assigned to such term in Section 15.1(a).
"TRANSCANADA" means TransCanada PipeLines Limited, a Canadian corporation.
"TRANSCANADA BORDER PIPELINE" means TransCanada Border Pipeline Ltd., a
Nevada corporation and a wholly-owned subsidiary of TransCanada.
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"TRANSCAN NORTHERN" means TransCan Northern Ltd., a Delaware corporation and
a wholly-owned subsidiary of TransCanada.
"TRANSFER" has the meaning assigned to such term in Section 4.4(a).
"TRANSFER AGENT" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"TRANSFER APPLICATION" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"UNDERWRITER" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement dated
, 1999 among the Underwriters, the Partnership, the Intermediate
Partnership, the General Partner, TransCanada and others, providing for the
purchase of Common Units by such Underwriters.
"UNIT" means a Partnership Security that is designated as a "UNIT" and shall
include Common Units and Subordinated Units but shall not include (i) a General
Partner Interest or (ii) Incentive Distribution Rights.
"UNITHOLDERS" means the holders of Common Units and Subordinated Units.
"UNIT MAJORITY" means, during the Subordination Period, at least a majority
of the Outstanding Common Units voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"UNPAID MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"UNREALIZED GAIN" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 5.5(d) as of such date).
"UNREALIZED LOSS" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"UNRECOVERED CAPITAL" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"WITHDRAWAL OPINION OF COUNSEL" has the meaning assigned to such term in
Section 11.1(b).
"WORKING CAPITAL BORROWINGS" means borrowings exclusively for working
capital purposes made pursuant to a credit facility or other arrangement
requiring all such borrowings thereunder to be reduced to a relatively small
amount each year for an economically meaningful period of time.
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Section 1.2 CONSTRUCTION.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "INCLUDE" or "INCLUDES" means
includes, without limitation, and "INCLUDING" means including, without
limitation.
ARTICLE II
ORGANIZATION
Section 2.1 FORMATION.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of TC Pipelines, L.P. in its entirety. This amendment and
restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
Section 2.2 NAME.
The name of the Partnership shall be "TC PipeLines, LP" The Partnership's
business may be conducted under any other name or names deemed necessary or
appropriate by the General Partner in its sole discretion, including the name of
the General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary for
the purpose of complying with the laws of any jurisdiction that so requires. The
General Partner in its discretion may change the name of the Partnership at any
time and from time to time and shall notify the Limited Partners of such change
in the next regular communication to the Limited Partners.
Section 2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE; OTHER
OFFICES.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at , and
the registered agent for service of process on the Partnership in the State of
Delaware at such registered office shall be . The principal office
of the Partnership shall be located at or such other place as the
General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate. The address of the General Partner shall be or such
other place as the General Partner may from time to time designate by notice to
the Limited Partners.
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Section 2.4 PURPOSE AND BUSINESS.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a partner of the Intermediate Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a partner of the Intermediate Partnership pursuant to the
Intermediate Partnership Agreement or otherwise, (b) engage directly in, or
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Intermediate Partnership is permitted to engage in by the
Intermediate Partnership Agreement and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, (c) engage directly in, or enter
into or form any corporation, partnership, joint venture, limited liability
company or other arrangement to engage indirectly in, any business activity that
is approved by the General Partner and which lawfully may be conducted by a
limited partnership organized pursuant to the Delaware Act and, in connection
therewith, to exercise all of the rights and powers conferred upon the
Partnership pursuant to the agreements relating to such business activity;
provided, however, that the General Partner reasonably determines, as of the
date of the acquisition or commencement of such activity, that such activity (i)
generates "QUALIFYING INCOME" (as such term is defined pursuant to Section 7704
of the Code) or (ii) enhances the operations of an activity of the Intermediate
Partnership or a Partnership activity that generates qualifying income, and (d)
do anything necessary or appropriate to the foregoing, including the making of
capital contributions or loans to a Group Member. The General Partner has no
obligation or duty to the Partnership, the Limited Partners, or the Assignees to
propose or approve, and in its discretion may decline to propose or approve, the
conduct by the Partnership of any business.
Section 2.5 POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
Section 2.6 POWER OF ATTORNEY.
(a) Each Limited Partner and each Assignee hereby constitutes and
appoints the General Partner and, if a Liquidator shall have been selected
pursuant to Section 12.3, the Liquidator, (and any successor to the
Liquidator by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, as the case may be, with
full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and
stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that
the General Partner or the Liquidator deems necessary or appropriate to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other instruments that
the General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change,
modification or restatement of this Agreement; (C) all certificates,
documents and other instruments (including conveyances and a certificate
of cancellation) that the General Partner or the Liquidator deems
necessary or appropriate to reflect the dissolution and liquidation of
the Partnership pursuant to the terms of this Agreement; (D) all
certificates, documents and other instruments relating to the admission,
withdrawal,
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removal or substitution of any Partner pursuant to, or other events
described in, Article IV, X, XI or XII; (E) all certificates, documents
and other instruments relating to the determination of the rights,
preferences and privileges of any class or series of Partnership
Securities issued pursuant to Section 5.6; and (F) all certificates,
documents and other instruments (including agreements and a certificate
of merger) relating to a merger or consolidation of the Partnership
pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given
by the Partners hereunder or is consistent with the terms of this
Agreement or is necessary or appropriate, in the discretion of the
General Partner or the Liquidator, to effectuate the terms or intent of
this Agreement; provided, that when required by Section 13.3 or any other
provision of this Agreement that establishes a percentage of the Limited
Partners or of the Limited Partners of any class or series required to
take any action, the General Partner and the Liquidator may exercise the
power of attorney made in this Section 2.6(a)(ii) only after the
necessary vote, consent or approval of the Limited Partners or of the
Limited Partners of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the
maximum extent permitted by law, not be affected by the subsequent death,
incompetency, disability, incapacity, dissolution, bankruptcy or termination
of any Limited Partner or Assignee and the transfer of all or any portion of
such Limited Partner's or Assignee's Partnership Interest and shall extend
to such Limited Partner's or Assignee's heirs, successors, assigns and
personal representatives. Each such Limited Partner or Assignee hereby
agrees to be bound by any representation made by the General Partner or the
Liquidator acting in good faith pursuant to such power of attorney; and each
such Limited Partner or Assignee, to the maximum extent permitted by law,
hereby waives any and all defenses that may be available to contest, negate
or disaffirm the action of the General Partner or the Liquidator taken in
good faith under such power of attorney. Each Limited Partner or Assignee
shall execute and deliver to the General Partner or the Liquidator, within
15 days after receipt of the request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 2.7 TERM.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2097 or until
the earlier dissolution of the Partnership in accordance with the provisions of
Article XII. The existence of the Partnership as a separate legal entity shall
continue until the cancellation of the Certificate of Limited Partnership as
provided in the Delaware Act.
Section 2.8 TITLE TO PARTNERSHIP ASSETS.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the
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Partnership, the General Partner, one or more of its Affiliates or one or more
nominees, as the General Partner may determine. The General Partner hereby
declares and warrants that any Partnership assets for which record title is held
in the name of the General Partner or one or more of its Affiliates or one or
more nominees shall be held by the General Partner or such Affiliate or nominee
for the use and benefit of the Partnership in accordance with the provisions of
this Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 LIMITATION OF LIABILITY.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
Section 3.2 MANAGEMENT OF BUSINESS.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, member, general partner, agent or trustee of the General Partner or
any of its Affiliates, or any officer, director, employee, member, general
partner, agent or trustee of a Group Member, in its capacity as such, shall not
be deemed to be participation in the control of the business of the Partnership
by a limited partner of the Partnership (within the meaning of Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate the limitations
on the liability of the Limited Partners or Assignees under this Agreement.
Section 3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS.
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
Section 3.4 RIGHTS OF LIMITED PARTNERS.
(a) In addition to other rights provided by this Agreement or by
applicable law, and except as limited by Section 3.4(b), each Limited
Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership, upon
reasonable written demand and at such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
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(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner;
and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners
and Assignees, for such period of time as the General Partner deems
reasonable, (i) any information that the General Partner reasonably believes
to be in the nature of trade secrets or (ii) other information the
disclosure of which the General Partner in good faith believes (A) is not in
the best interests of the Partnership Group, (B) could damage the
Partnership Group or (C) that any Group Member is required by law or by
agreement with any third party to keep confidential (other than agreements
with Affiliates of the Partnership the primary purpose of which is to
circumvent the obligations set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 CERTIFICATES.
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of such
Person evidencing the number of such Units being so issued. In addition, (a)
upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the name of the General Partner evidencing its interests in
the Partnership and (b) upon the request of any Person owning Incentive
Distribution Rights or any other Partnership Securities other than Common Units
or Subordinated Units, the Partnership shall issue to such Person one or more
certificates evidencing such Incentive Distribution Rights or other Partnership
Securities other than Common Units or Subordinated Units. Certificates shall be
executed on behalf of the Partnership by the Chairman of the Board, President or
any Executive Vice President or Vice President and the Secretary or any
Assistant Secretary of the General Partner. No Common Unit Certificate shall be
valid for any purpose until it has been countersigned by the Transfer Agent;
provided, however, that if the General Partner elects to issue Common Units in
global form, the Common Unit Certificates shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the Common Units have been
duly registered in accordance with the directions of the Partnership and the
Underwriters. Subject to the requirements of Section 6.7(b), the Partners
holding Certificates evidencing Subordinated Units may exchange such
Certificates for Certificates evidencing Common Units on or after the date on
which such Subordinated Units are converted into Common Units pursuant to the
terms of Section 5.8.
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Section 4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES.
(a) If any mutilated Certificate is surrendered to the Transfer Agent,
the appropriate officers of the General Partner on behalf of the Partnership
shall execute, and the Transfer Agent shall countersign and deliver in
exchange therefor, a new Certificate evidencing the same number and type of
Partnership Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall
countersign a new Certificate in place of any Certificate previously issued
if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
Partnership has notice that the Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety
or sureties and with fixed or open penalty as the Partnership may
reasonably direct, in its sole discretion, to indemnify the Partnership,
the Partners, the General Partner and the Transfer Agent against any
claim that may be made on account of the alleged loss, destruction or
theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
Section 4.3 RECORD HOLDERS.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative capacity
for another Person in acquiring and/or holding Partnership Interests, as between
the Partnership on the one hand, and such other Persons on the other, such
representative Person (a) shall be the Partner or Assignee (as the case may be)
of record and beneficially, (b) must execute and deliver a Transfer Application
and (c) shall be bound by this Agreement and shall have the rights and
obligations of a Partner or Assignee (as the case may be) hereunder and as, and
to the extent, provided for herein.
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Section 4.4 TRANSFER GENERALLY.
(a) The term "TRANSFER," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the General Partner, by which the holder of a Limited Partner
Interest assigns such Limited Partner Interest to another Person who is or
becomes a Limited Partner or an Assignee, and includes a sale, assignment,
gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
IV. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any stockholder of the General Partner of any or all of the
issued and outstanding stock of the General Partner.
Section 4.5 REGISTRATION AND TRANSFER OF LIMITED PARTNER INTERESTS.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as
it may prescribe and subject to the provisions of Section 4.5(b), the
Partnership will provide for the registration and transfer of Limited
Partner Interests. The Transfer Agent is hereby appointed registrar and
transfer agent for the purpose of registering Common Units and transfers of
such Common Units as herein provided. The Partnership shall not recognize
transfers of Certificates evidencing Limited Partner Interests unless such
transfers are effected in the manner described in this Section 4.5. Upon
surrender of a Certificate for registration of transfer of any Limited
Partner Interests evidenced by a Certificate, and subject to the provisions
of Section 4.5(b), the appropriate officers of the General Partner on behalf
of the Partnership shall execute and deliver, and in the case of Common
Units, the Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required pursuant to
the holder's instructions, one or more new Certificates evidencing the same
aggregate number and type of Limited Partner Interests as was evidenced by
the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall
not recognize any transfer of Limited Partner Interests until the
Certificates evidencing such Limited Partner Interests are surrendered for
registration of transfer and such Certificates are accompanied by a Transfer
Application duly executed by the transferee (or the transferee's
attorney-in-fact duly authorized in writing). No charge shall be imposed by
the Partnership for such transfer; provided, that as a condition to the
issuance of any new Certificate under this Section 4.5, the Partnership may
require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an
amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee
in respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and
be bound by and to have executed this Agreement, (iii) represented and
warranted that such transferee has the right, power and authority and, if an
individual, the capacity to enter into this Agreement, (iv) granted the
powers of attorney set
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forth in this Agreement and (v) given the consents and approvals and made
the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any
time to transfer their Subordinated Units and Common Units (whether issued
upon conversion of the Subordinated Units or otherwise) to one or more
Persons.
Section 4.6 TRANSFER OF THE GENERAL PARTNER'S GENERAL PARTNER INTEREST.
(a) Subject to Section 4.6(c) below, prior to March 31, 2009, the
General Partner shall not transfer all or any part of its General Partner
Interest to a Person unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner
and its Affiliates) or (ii) is of all, but not less than all, of its General
Partner Interest to (A) an Affiliate of the General Partner or (B) another
Person in connection with the merger or consolidation of the General Partner
with or into another Person or the transfer by the General Partner of all or
substantially all of its assets to another Person.
(b) Subject to Section 4.6(c) below, on or after March 31, 2009, the
General Partner may transfer all or any of its General Partner Interest
without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to
another Person shall be permitted unless (i) the transferee agrees to assume
the rights and duties of the General Partner under this Agreement and the
Intermediate Partnership Agreement and to be bound by the provisions of this
Agreement and the Intermediate Partnership Agreement, (ii) the Partnership
receives an Opinion of Counsel that such transfer would not result in the
loss of limited liability of any Limited Partner or of any limited partner
of the Intermediate Partnership or cause the Partnership or the Intermediate
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed) and (iii) such transferee also
agrees to purchase all (or the appropriate portion thereof, if applicable)
of the partnership interest of the General Partner as the general partner or
managing member of each other Group Member. In the case of a transfer
pursuant to and in compliance with this Section 4.6, the transferee or
successor (as the case may be) shall, subject to compliance with the terms
of Section 10.3, be admitted to the Partnership as a General Partner
immediately prior to the transfer of the Partnership Interest, and the
business of the Partnership shall continue without dissolution.
Section 4.7 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS.
Prior to March 31, 2009, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to March
31, 2009, shall require the prior approval of holders at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner and
its Affiliates). On or after March 31, 2009, the General Partner or any other
holder of Incentive Distribution Rights may transfer any or all of its Incentive
Distribution Rights without Unitholder approval. Notwithstanding anything herein
to the contrary, no transfer of Incentive Distribution Rights to another Person
shall be permitted unless the transferee agrees to be bound by the provisions of
this Agreement. The General Partner shall have the authority (but shall not be
required) to adopt such reasonable restrictions on the transfer of Incentive
Distribution Rights and requirements for registering the transfer of Incentive
Distribution Rights as the General Partner, in its sole discretion, shall
determine are necessary or appropriate.
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Section 4.8 RESTRICTIONS ON TRANSFERS.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership
Interests shall be made if such transfer would (i) violate the then
applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authority with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or the Intermediate Partnership under
the laws of the jurisdiction of its formation, or (iii) cause the
Partnership or the Intermediate Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that
such restrictions are necessary to avoid a significant risk of the
Partnership or the Intermediate Partnership becoming taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes. The restrictions may be imposed by making such amendments to this
Agreement as the General Partner may determine to be necessary or
appropriate to impose such restrictions; provided, however, that any
amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of
trading of any class of Limited Partner Interests on the principal National
Securities Exchange on which such class of Limited Partner Interests is then
traded must be approved, prior to such amendment being effected, by the
holders of at least a majority of the Outstanding Limited Partner Interests
of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this
Agreement, shall preclude the settlement of any transactions involving
Partnership Interests entered into through the facilities of any National
Securities Exchange on which such Partnership Interests are listed for
trading.
Section 4.9 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to
the General Partner, within 30 days after receipt of such request, an
executed Citizenship Certification or such other information concerning his
nationality, citizenship or other related status (or, if the Limited Partner
or Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other related status of such Person) as the
General Partner may request. If a Limited Partner or Assignee fails to
furnish to the General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt
of such Citizenship Certification or other requested information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Partnership Interests owned by such
Limited Partner or Assignee shall be subject to redemption in accordance
with the provisions of Section 4.10. In addition, the General Partner may
require that the status of any such Partner or Assignee be changed to that
of a Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect
of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited
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Partner Interests other than those of Non-citizen Assignees are cast, either
for, against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall
have no right to receive a distribution in kind pursuant to Section 12.4 but
shall be entitled to the cash equivalent thereof, and the Partnership shall
provide cash in exchange for an assignment of the Non-citizen Assignee's
share of the distribution in kind. Such payment and assignment shall be
treated for Partnership purposes as a purchase by the Partnership from the
Non-citizen Assignee of his Limited Partner Interest (representing his right
to receive his share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the
General Partner, request admission as a Substituted Limited Partner with
respect to any Limited Partner Interests of such Non-citizen Assignee not
redeemed pursuant to Section 4.10, and upon his admission pursuant to
Section 10.2, the General Partner shall cease to be deemed to be the Limited
Partner in respect of the Non-citizen Assignee's Limited Partner Interests.
Section 4.10 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his
Partnership Interests to a Person who is an Eligible Citizen and who
furnishes a Citizenship Certification to the General Partner prior to the
date fixed for redemption as provided below, redeem the Partnership Interest
of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited
Partner or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail,
postage prepaid. The notice shall be deemed to have been given when so
mailed. The notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the redemption
price will be made upon surrender of the Certificate evidencing the
Redeemable Interests and that on and after the date fixed for redemption
no further allocations or distributions to which the Limited Partner or
Assignee would otherwise be entitled in respect of the Redeemable
Interests will accrue or be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner
Interests of the class to be so redeemed multiplied by the number of
Limited Partner Interests of each such class included among the
Redeemable Interests. The redemption price shall be paid, in the
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank
or accompanied by an assignment duly executed in blank, the Limited
Partner or Assignee or his duly authorized representative shall be
entitled to receive the payment therefor.
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(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to
Limited Partner Interests held by a Limited Partner or Assignee as nominee
of a Person determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice
of redemption from transferring his Limited Partner Interest before the
redemption date if such transfer is otherwise permitted under this
Agreement. Upon receipt of notice of such a transfer, the General Partner
shall withdraw the notice of redemption, provided the transferee of such
Limited Partner Interest certifies to the satisfaction of the General
Partner in a Citizenship Certification delivered in connection with the
Transfer Application that he is an Eligible Citizen. If the transferee fails
to make such certification, such redemption shall be effected from the
transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 ORGANIZATIONAL CONTRIBUTIONS.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00, for a certain interest in the Partnership and has been
admitted as the General Partner and as a Limited Partner of the Partnership, and
the Organizational Limited Partner made an initial Capital Contribution to the
Partnership in the amount of $990.00 for an interest in the Partnership and has
been admitted as a Limited Partner of the Partnership. As of the Closing Date,
the interest of the Organizational Limited Partner shall be redeemed as provided
in the Contribution and Conveyance Agreement; the initial Capital Contributions
of each Partner shall thereupon be refunded; and the Organizational Limited
Partner shall cease to be a Limited Partner of the Partnership. Ninety-nine
percent of any interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions shall be allocated
and distributed to the Organizational Limited Partner, and the balance thereof
shall be allocated and distributed to the General Partner.
Section 5.2 CONTRIBUTIONS TO THE PARTNERSHIP.
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, (i) TransCanada Border PipeLine contributed to the Partnership,
as a Capital Contribution, all of its interest in the Intermediate
Partnership in exchange for _____________ Common Units, (ii) TransCan
Northern contributed to the Partnership, as a Capital Contribution, all but
its 1.0101% general partner interest in the Intermediate Partnership in
exchange for (A) a general partner interest in the Partnership, (B)
_____________ Common Units, (C) _____________ Subordinated Units, (D) the
Incentive Distribution Rights, (iii) the Partnership redeemed all of the
Common Units issued to TransCanada Border PipeLine and TransCan Northern for
cash, and (E) the assumption of certain liabilities of TransCan Northern,
and (iv) TransCan Northern transferred all of its interests in the
Partnership to the General Partner.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the
Initial Offering or pursuant to the Over-Allotment Option), the General
Partner shall be required to make additional Capital Contributions equal to
1/99th of any amount contributed to the Partnership by the Limited Partners
in exchange for such additional Limited Partner Interests. Except as set
forth in the immediately preceding sentence and Article XII, the General
Partner shall not be obligated to make any additional Capital Contributions
to the Partnership.
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Section 5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS AND REIMBURSEMENT OF THE
GENERAL PARTNER.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to
the Issue Price per Initial Common Unit, multiplied by the number of Common
Units specified in the Underwriting Agreement to be purchased by such
Underwriter at the Closing Date. In exchange for such Capital Contributions
by the Underwriters, the Partnership shall issue Common Units to each
Underwriter on whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) the cash contribution to the
Partnership by or on behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter
shall contribute to the Partnership cash in an amount equal to the Issue
Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter
at the Option Closing Date. In exchange for such Capital Contributions by
the Underwriters, the Partnership shall issue Common Units to each
Underwriter on whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) the cash contributions to the
Partnership by or on behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit. Upon receipt by the Partnership of the Capital
Contributions from the Underwriters as provided in this Section 5.3(b), the
Partnership shall use such cash to redeem from the General Partner or its
Affiliates that number of Subordinated Units held by the General Partner or
its Affiliates equal to the number of Common Units issued to the
Underwriters as provided in this Section 5.3(b).
(c) No Limited Partner Interests will be issued or issuable as of or at
the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to , (ii) the
"OPTIONAL UNITS" as such term is used in the Underwriting Agreement in an
aggregate number up to issuable upon exercise of the
Over-Allotment Option pursuant to subparagraph (b) hereof, (iii) the
Subordinated Units issuable to the General Partner pursuant to
Section 5.2 hereof, and (iv) the Incentive Distribution Rights.
Section 5.4 INTEREST AND WITHDRAWAL.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
Section 17-502(b) of the Delaware Act.
Section 5.5 CAPITAL ACCOUNTS.
(a) The Partnership shall maintain for each Partner (or a beneficial
owner of Partnership Interests held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion) owning a Partnership Interest
a separate Capital Account with respect to such Partnership Interest in
accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions made to the Partnership with respect to such Partnership
Interest pursuant to this Agreement and (ii) all items of Partnership income
and gain (including, without limitation, income and gain exempt from tax)
computed in accordance
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with Section 5.5(b) and allocated with respect to such Partnership Interest
pursuant to Section 6.1, and decreased by (x) the amount of cash or Net
Agreed Value of all actual and deemed distributions of cash or property made
with respect to such Partnership Interest pursuant to this Agreement and (y)
all items of Partnership deduction and loss computed in accordance with
Section 5.5(b) and allocated with respect to such Partnership Interest
pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain,
loss or deduction which is to be allocated pursuant to Article VI and is to
be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Intermediate Partnership
Agreement) of all property owned by the Intermediate Partnership or any
other Subsidiary that is classified as a partnership for federal income
tax purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither
be deducted nor amortized under Section 709 of the Code, if any, shall,
for purposes of Capital Account maintenance, be treated as an item of
deduction at the time such fees and other expenses are incurred and shall
be allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those
items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code,
without regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalized for federal
income tax purposes. To the extent an adjustment to the adjusted tax
basis of any Partnership asset pursuant to Section 734(b) or 743(b) of
the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment in the Capital Accounts shall be
treated as an item of gain or loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount to
the Partnership's Carrying Value with respect to such property as of such
date.
(v) In accordance with the requirements of Section 704(b) of the
Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property. Upon an
adjustment pursuant to Section 5.5(d) to the Carrying Value of any
Partnership property subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
or amortization attributable to such property shall be determined (A) as
if the adjusted basis of such property were equal to the Carrying Value
of such property immediately following such adjustment and (B) using a
rate of depreciation, cost recovery or amortization derived from the same
method and useful life (or, if applicable, the remaining useful life) as
is applied for federal income tax purposes; provided, however,
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that, if the asset has a zero adjusted basis for federal income tax
purposes, depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the General Partner may
adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is
placed in service and shall be allocated among the Partners pursuant to
Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2)
of the Code shall, to the extent possible, be allocated in the same
manner to the Partners to whom such deemed deduction was allocated.
(c) (i)A transferee of a Partnership Interest shall succeed to a pro
rata portion of the Capital Account of the transferor relating to the
Partnership Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to
Section 5.8 by a holder thereof (other than a transfer to an Affiliate
unless the General Partner elects to have this subparagraph 5.5(c)(ii)
apply), the Capital Account maintained for such Person with respect to
its Subordinated Units or converted Subordinated Units will (A) first, be
allocated to the Subordinated Units or converted Subordinated Units to be
transferred in an amount equal to the product of (x) the number of such
Subordinated Units or converted Subordinated Units to be transferred and
(y) the Per Unit Capital Amount for a Common Unit, and (B) second, any
remaining balance in such Capital Account will be retained by the
transferor, regardless of whether it has retained any Subordinated Units
or converted Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the
retained Subordinated Units or converted Subordinated Units, if any, will
have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with
respect to the transferred Subordinated Units or converted Subordinated
Units will have a balance equal to the amount allocated under clause (A)
hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partner's
Combined Interest to Common Units pursuant to Section 11.3(b), the Capital
Account of all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as if such Unrealized Gain or Unrealized Loss had been
recognized on an actual sale of each such property immediately prior to such
issuance and had been allocated to the Partners at such time pursuant to
Section 6.1 in the same manner as any item of gain or loss actually
recognized during such period would have been allocated. In determining such
Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair
market value of all Partnership assets (including, without limitation, cash
or cash equivalents) immediately prior to the issuance of additional
Partnership Interests shall be determined by the General Partner using such
reasonable method of valuation as it may adopt; provided, however, that the
General Partner, in arriving at such valuation, must take fully into account
the fair market value of the Partnership Interests of all Partners at such
time. The General Partner shall allocate such aggregate value among the
assets of the Partnership (in such manner as it determines in its discretion
to be reasonable) to arrive at a fair market value for individual
properties.
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(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable
to such Partnership property, as if such Unrealized Gain or Unrealized
Loss had been recognized in a sale of such property immediately prior to
such distribution for an amount equal to its fair market value, and had
been allocated to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such Unrealized
Gain or Unrealized Loss the aggregate cash amount and fair market value
of all Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of
an actual distribution which is not made pursuant to Section 12.4 or in
the case of a deemed distribution, be determined and allocated in the
same manner as that provided in Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as
it may adopt.
Section 5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any
time and from time to time to such Persons for such consideration and on
such terms and conditions as shall be established by the General Partner in
its sole discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes,
or one or more series of any such classes, with such designations,
preferences, rights, powers and duties (which may be senior to existing
classes and series of Partnership Securities), as shall be fixed by the
General Partner in the exercise of its sole discretion, including (i) the
right to share Partnership profits and losses or items thereof; (ii) the
right to share in Partnership distributions; (iii) the rights upon
dissolution and liquidation of the Partnership; (iv) whether, and the terms
and conditions upon which, the Partnership may redeem the Partnership
Security; (v) whether such Partnership Security is issued with the privilege
of conversion or exchange and, if so, the terms and conditions of such
conversion or exchange; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned
or transferred; and (vii) the right, if any, of each such Partnership
Security to vote on Partnership matters, including matters relating to the
relative rights, preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this
Section 5.6, (ii) the conversion of the General Partner Interest and
Incentive Distribution Rights into Units pursuant to the terms of this
Agreement, (iii) the admission of Additional Limited Partners and (iv) all
additional issuances of Partnership Securities. The General Partner is
further authorized and directed to specify the relative rights, powers and
duties of the holders of the Units or other Partnership Securities being so
issued. The General Partner shall do all things necessary to comply with the
Delaware Act and is authorized and directed to do all things it deems to be
necessary or advisable in connection with any future issuance of Partnership
Securities or in connection with the conversion of the General Partner
Interest and Incentive Distribution Rights into Units pursuant to the terms
of this Agreement, including compliance with any statute, rule, regulation
or guideline of any federal, state or other
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governmental agency or any National Securities Exchange on which the Units
or other Partnership Securities are listed for trading.
Section 5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES.
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity Units
issued (A) in connection with the exercise of the Over-Allotment Option, (B)
in accordance with Sections 5.7(b) and 5.7(c), (C) upon conversion of
Subordinated Units pursuant to Section 5.8, (D) upon conversion of the
General Partner Interest and Incentive Distribution Rights pursuant to
Section 11.3(b), (D) pursuant to the employee benefit plans of the General
Partner, the Partnership or any other Group Member and (E) in the event of a
combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval
of the Unitholders, if such issuance occurs (i) in connection with an
Acquisition or a Capital Improvement or (ii) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection
with, an Acquisition or a Capital Improvement, in each case where such
Acquisition or Capital Improvement involves assets that, if acquired by the
Partnership as of the date that is one year prior to the first day of the
Quarter in which such Acquisition is to be consummated or such Capital
Improvement is to be completed, would have resulted, on a pro forma basis,
in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect
to each of the four most recently completed Quarters (on a pro forma
basis as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Parity Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing Date,
then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter, if
any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such Quarter, and (ii) for each other
Quarter, on a pro forma basis consistent with the procedures, as applicable, set
forth in Appendix D to the Registration Statement. Furthermore, the amount in
clause (A) shall be determined on a pro forma basis assuming that (1) all of the
Parity Units to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness that
is to be repaid with the proceeds of such issuance of Parity Units) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (3) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the acquired
assets, and (4) the non-personnel costs and expenses are computed on
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the same basis as those incurred by the Partnership in the operation of the
Partnership's business at similarly situated Partnership facilities.
(c) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) additional Partnership Securities having rights to
distributions or in liquidation ranking prior or senior to the Common Units,
without the prior approval of the holders of a Unit Majority.
(d) No fractional Units shall be issued by the Partnership.
Section 5.8 CONVERSION OF SUBORDINATED UNITS.
(a) A total of of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after
March 31, 2002, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Outstanding Common Units and Subordinated
Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully-diluted basis (i.e. taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter with
respect to which such determination is made, and all Common Units and
Subordinated Units that have, as of the date of determination, been
earned by but not yet issued to management of the Partnership in respect
of incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and the Intermediate Partnership,
during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional of the Outstanding Subordinated Units
will convert into Common Units on a one-for-one basis on the first day after
the Record Date for distribution in respect of any Quarter ending on or
after March 31, 2003, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Outstanding Common Units and Subordinated
Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
Outstanding during such periods on a fully-diluted basis (i.e. taking
into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have,
as of the date of determination, already vested or are scheduled to vest
prior to the end of the Quarter immediately following the Quarter
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with respect to which such determination is made, and all Common Units
and Subordinated Units that have, as of the date of determination, been
earned by but not yet issued to management of the Partnership in respect
of incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and the Intermediate Partnership,
during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to
this Section 5.8(b) may not occur until at least one year following the
conversion of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated
Units shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b)
at a time when there shall be more than one holder of Subordinated Units,
then, unless all of the holders of Subordinated Units shall agree to a
different allocation, the Subordinated Units that are to be converted into
Common Units shall be allocated among the holders of Subordinated Units pro
rata based on the number of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Sections 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis on the first day following the Record Date for
distributions in respect of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units
on a one-for-one basis as set forth in, and pursuant to the terms of,
Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
Section 5.9 LIMITED PREEMPTIVE RIGHT.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
Section 5.10 SPLITS AND COMBINATION.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments
of distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
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(b) Whenever such a distribution, subdivision or combination of
Partnership Securities is declared, the General Partner shall select a
Record Date as of which the distribution, subdivision or combination shall
be effective and shall send notice thereof at least 20 days prior to such
Record Date to each Record Holder as of a date not less than 10 days prior
to the date of such notice. The General Partner also may cause a firm of
independent public accountants selected by it to calculate the number of
Partnership Securities to be held by each Record Holder after giving effect
to such distribution, subdivision or combination. The General Partner shall
be entitled to rely on any certificate provided by such firm as conclusive
evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or
combination, the Partnership may issue Certificates to the Record Holders of
Partnership Securities as of the applicable Record Date representing the new
number of Partnership Securities held by such Record Holders, or the General
Partner may adopt such other procedures as it may deem appropriate to
reflect such changes. If any such combination results in a smaller total
number of Partnership Securities Outstanding, the Partnership shall require,
as a condition to the delivery to a Record Holder of such new Certificate,
the surrender of any Certificate held by such Record Holder immediately
prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any
distribution, subdivision or combination of Units. If a distribution,
subdivision or combination of Units would result in the issuance of
fractional Units but for the provisions of Section 5.7(e) and this Section
5.10(d), each fractional Unit shall be rounded to the nearest whole Unit
(and a 0.5 Unit shall be rounded to the next higher Unit).
Section 5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER INTERESTS.
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
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ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) NET INCOME. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the
aggregate Net Income allocated to such Partners pursuant to this Section
6.1(a)(ii) for the current taxable year and all previous taxable years is
equal to the aggregate Net Losses allocated to such Partners pursuant to
Section 6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage Interests.
(b) NET LOSSES. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 6.1(b)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
6.1(a)(iii) for all previous taxable years, provided that the Net Losses
shall not be allocated pursuant to this Section 6.1(b)(i) to the extent
that such allocation would cause any Unitholder to have a deficit balance
in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year
(or increase any existing deficit balance in its Adjusted Capital
Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) NET TERMINATION GAINS AND LOSSES. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 6.1(c) shall be made after
Capital
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Account balances have been adjusted by all other allocations provided under
this Section 6.1 and after all distributions of Available Cash provided
under Sections 6.4 and 6.5 have been made; provided, however, that solely
for purposes of this Section 6.1(c), Capital Accounts shall not be adjusted
for distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of
the Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each such
Partner has been allocated Net Termination Gain equal to any such deficit
balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to such
Common Unit for such Quarter (the amount determined pursuant to this
clause (2) is hereinafter defined as the "UNPAID MQD") plus (3) any then
existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding Subordinated Units, Pro Rata, and 1% to
the General Partner until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, plus (2) the Minimum Quarterly Distribution for the Quarter
during which the Liquidation Date occurs, reduced by any distribution
pursuant to Section 6.4(a)(iii) with respect to such Subordinated Unit
for such Quarter;
(D) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to the
sum of (1) its Unrecovered Capital, plus (2) the Unpaid MQD, plus (3) any
then existing Cumulative Common Unit Arrearage, plus (4) the excess of
(aa) the First Target Distribution less the Minimum Quarterly
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating Surplus
that was distributed pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the
sum of (1) plus (2) plus (3) plus (4) is hereinafter defined as the
"FIRST LIQUIDATION TARGET AMOUNT");
(E) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections 6.4(a)(v)
and 6.4(b)(iii) (the sum of (1) plus (2) is hereinafter defined as the
"SECOND LIQUIDATION TARGET AMOUNT");
(F) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over
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(bb) the cumulative per Unit amount of any distributions of Operating
Surplus that was distributed pursuant to Sections 6.4(a)(vi) and
6.4(b)(iv);
(G) Finally, any remaining amount 50.5102% to all Unitholders, Pro
Rata, 48.4898% to the holders of the Incentive Distribution Rights, Pro
Rata, and 1% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until the Capital Account in respect
of each Subordinated Unit then Outstanding has been reduced to zero;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such
taxable period:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant
to this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and
shall be interpreted consistently therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM GAIN.
Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain
for such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant
to this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect
to such taxable period. This Section 6.1(d)(ii) is intended to comply
with the chargeback of items of income and gain requirement in Treasury
Regulation Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
(III) PRIORITY ALLOCATIONS. (A) If the amount of cash or the Net
Agreed Value of any property distributed (except cash or property
distributed pursuant to Section 12.4) to any Unitholder with respect to
its Units for a taxable year is greater (on a per Unit basis) than the
amount of cash or the Net Agreed Value of property distributed to the
other Unitholders with respect to their Units (on a per Unit basis), then
(1) each Unitholder
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receiving such greater cash or property distribution shall be allocated
gross income in an amount equal to the product of (aa) the amount by
which the distribution (on a per Unit basis) to such Unitholder exceeds
the distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/99th of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the
Treasury Regulations promulgated under Section 704(b) of the Code, the
deficit balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section
6.1(d)(i) or (ii).
(v) GROSS INCOME ALLOCATIONS. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable
period in excess of the sum of (A) the amount such Partner is required to
restore pursuant to the provisions of this Agreement and (B) the amount
such Partner is deemed obligated to restore pursuant to Treasury
Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be
specially allocated items of Partnership gross income and gain in the
amount of such excess as quickly as possible; provided, that an
allocation pursuant to this Section 6.1(d)(v) shall be made only if and
to the extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if this Section 6.1(d)(v)
were not in this Agreement.
(vi) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must
be allocated in a different ratio to satisfy the safe harbor requirements
of the Treasury Regulations promulgated under Section 704(b) of the Code,
the General Partner is authorized, upon notice to the other Partners, to
revise the prescribed ratio to the numerically closest ratio that does
satisfy such requirements.
(vii) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner
bears the Economic Risk of Loss with respect to a Partner Nonrecourse
Debt, such Partner Nonrecourse Deductions attributable thereto shall be
allocated between or among such Partners in accordance with the ratios in
which they share such Economic Risk of Loss.
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(viii) NONRECOURSE LIABILITIES. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall
be allocated among the Partners in accordance with their respective
Percentage Interests.
(ix) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required
to be adjusted pursuant to such Section of the Treasury Regulations.
(x) ECONOMIC UNIFORMITY. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of
the Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking
into account allocations pursuant to Section 6.1(d)(iii), shall be
allocated 100% to each Partner holding Subordinated Units that are
Outstanding as of the termination of the Subordination Period ("FINAL
SUBORDINATED UNITS") in the proportion of the number of Final
Subordinated Units held by such Partner to the total number of Final
Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital
Account maintained with respect to such Final Subordinated Units to an
amount equal to the product of (A) the number of Final Subordinated Units
held by such Partner and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity between
the Capital Accounts underlying Final Subordinated Units and the Capital
Accounts underlying Common Units held by Persons other than the General
Partner and its Affiliates immediately prior to the conversion of such
Final Subordinated Units into Common Units. This allocation method for
establishing such economic uniformity will only be available to the
General Partner if the method for allocating the Capital Account
maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 5.5(c)(ii) does not
otherwise provide such economic uniformity to the Final Subordinated
Units.
(XI) CURATIVE ALLOCATION.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and (2)
Partner Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partner Nonrecourse Debt
Minimum Gain. Allocations pursuant to this Section 6.1(d)(xi)(A) shall
only be made with respect to Required Allocations to the extent the
General Partner reasonably determines that such allocations will
otherwise be inconsistent with the economic agreement among the Partners.
Further, allocations
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pursuant to this Section 6.1(d)(xi)(A) shall be deferred with respect to
allocations pursuant to clauses (1) and (2) hereof to the extent the
General Partner reasonably determines that such allocations are likely to
be offset by subsequent Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(vii) CORRECTIVE ALLOCATIONS. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized Loss
under Section 5.5(d) hereof), the General Partner shall allocate
additional items of gross income and gain away from the holders of
Incentive Distribution Rights to the Unitholders and the General Partner,
or additional items of deduction and loss away from the Unitholders and
the General Partner to the holders of Incentive Distribution Rights, to
the extent that the Additional Book Basis Derivative Items allocated to
the Unitholders or the General Partner exceed their Share of Additional
Book Basis Derivative Items. For this purpose, the Unitholders and the
General Partner shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis Derivative
Items have reduced the amount of income that would otherwise have been
allocated to the Unitholders or the General Partner under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken into
account in computing cost of goods sold would reduce the amount of book
income otherwise available for allocation among the Partners). Any
allocation made pursuant to this Section 6.1(d)(xii)(A) shall be made
after all of the other Agreed Allocations have been made as if this
Section 6.1(d)(xii) were not in this Agreement and, to the extent
necessary, shall require the reallocation of items that have been
allocated pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c)
hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
Section 6.2 ALLOCATIONS FOR TAX PURPOSES.
(a) Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as its correlative item of "BOOK"
income, gain, loss or deduction is allocated pursuant to Section 6.1.
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(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated
for federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the manner
provided under Section 704(c) of the Code that takes into account the
variation between the Agreed Value of such property and its adjusted
basis at the time of contribution; and (B) any item of Residual Gain or
Residual Loss attributable to a Contributed Property shall be allocated
among the Partners in the same manner as its correlative item of "BOOK"
gain or loss is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the
Partners in the same manner as its correlative item of "BOOK" gain or
loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i)
adopt such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of
this Agreement as appropriate (x) to reflect the proposal or promulgation of
Treasury Regulations under Section 704(b) or Section 704(c) of the Code or
(y) otherwise to preserve or achieve uniformity of the Limited Partner
Interests (or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 6.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Limited Partner Interests
issued and Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite any
inconsistency of such approach with Treasury Regulation Section
1.167(c)-l(a)(6), Proposed Treasury Regulation Section 1.197-2(g)(3), or any
successor regulations thereto. If the General Partner determines that such
reporting position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers
acquiring Limited Partner Interests in the same month would receive
depreciation and amortization deductions, based upon the same applicable
rate as if they had purchased a direct interest in the Partnership's
property. If the General Partner chooses not to utilize such aggregate
method, the General Partner may use any other reasonable depreciation and
amortization conventions to preserve the uniformity of the intrinsic tax
characteristics of any Limited Partner Interests that would not
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have a material adverse effect on the Limited Partners or the Record Holders
of any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 6.2, be characterized as Recapture Income in the same proportions
and to the same extent as such Partners (or their predecessors in interest)
have been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by
the Partnership for federal income tax purposes and allocated to the
Partners in accordance with the provisions hereof shall be determined
without regard to any election under Section 754 of the Code which may be
made by the Partnership; provided, however, that such allocations, once
made, shall be adjusted as necessary or appropriate to take into account
those adjustments permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction
attributable to a transferred Partnership Interest, shall for federal income
tax purposes, be determined on an annual basis and prorated on a monthly
basis and shall be allocated to the Partners as of the opening of the New
York Stock Exchange on the first Business Day of each month; provided,
however, that (i) such items for the period beginning on the Closing Date
and ending on the last day of the month in which the Option Closing Date or
the expiration of the Over-allotment Option occurs shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first
Business Day of the next succeeding month; and provided, further, that gain
or loss on a sale or other disposition of any assets of the Partnership
other than in the ordinary course of business shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first
Business Day of the month in which such gain or loss is recognized for
federal income tax purposes. The General Partner may revise, alter or
otherwise modify such methods of allocation as it determines necessary, to
the extent permitted or required by Section 706 of the Code and the
regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under
the provisions of this Article VI shall instead be made to the beneficial
owner of Limited Partner Interests held by a nominee in any case in which
the nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion.
Section 6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS; DISTRIBUTIONS TO
RECORD HOLDERS.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on March 31, 1999, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the
Delaware Act, be distributed in accordance with this Article VI by the
Partnership to the Partners as of the Record Date selected by the General
Partner in its reasonable discretion. All amounts of Available Cash
distributed by the Partnership on any date from any source shall be deemed
to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to
Section 6.4 equals the Operating Surplus from the Closing Date through the
close of the immediately preceding Quarter. Any remaining amounts of
Available Cash distributed by the Partnership on such date shall, except as
otherwise provided in Section 6.5, be deemed to be "CAPITAL SURPLUS." All
distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
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(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied
and distributed solely in accordance with, and subject to the terms and
conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or
less than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid
by the Partnership, directly or through the Transfer Agent or through any
other Person or agent, only to the Record Holder of such Partnership
Interest as of the Record Date set for such distribution. Such payment shall
constitute full payment and satisfaction of the Partnership's liability in
respect of such payment, regardless of any claim of any Person who may have
an interest in such payment by reason of an assignment or otherwise.
Section 6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS.
(a) DURING SUBORDINATION PERIOD. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5 shall, subject to
Section 17-607 of the Delaware Act, be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, Pro Rata, 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the
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second sentence of Section 6.6(a), the distribution of Available Cash that is
deemed to be Operating Surplus with respect to any Quarter will be made solely
in accordance with Section 6.4(a)(vii).
(b) AFTER SUBORDINATION PERIOD. Available Cash with respect to any
Quarter after the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5, subject to Section
17-607 of the Delaware Act, shall be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for
such Quarter;
(ii) Second, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, Pro Rata, and 13.1327% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, Pro Rata, and 23.2347% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 48.4898%
to the holders of the Incentive Distribution Rights, Pro Rata, and 1% to
the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
Section 6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 99%
to all Unitholders, Pro Rata, and 1% to the General Partner until a hypothetical
holder of a Common Unit acquired on the Closing Date has received with respect
to such Common Unit, during the period since the Closing Date through such date,
distributions of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash that is deemed
to be Capital Surplus shall then be distributed 99% to all Unitholders holding
Common Units, Pro Rata, and 1% to the General Partner until there has been
distributed in respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
Section 6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS.
(a) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution, Third Target Distribution, Common Unit
Arrearages and Cumulative Common Unit Arrearages shall be proportionately
adjusted in the event of any distribution, combination or subdivision
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(whether effected by a distribution payable in Units or otherwise) of Units
or other Partnership Securities in accordance with Section 5.10. In the
event of a distribution of Available Cash that is deemed to be from Capital
Surplus, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution shall
be adjusted proportionately downward to equal the product obtained by
multiplying the otherwise applicable Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution and Third Target
Distribution, as the case may be, by a fraction of which the numerator is
the Unrecovered Capital of the Common Units immediately after giving effect
to such distribution and of which the denominator is the Unrecovered Capital
of the Common Units immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution shall also be
subject to adjustment pursuant to Section 6.9.
Section 6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED UNITS.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain,
loss and deduction and distributions made with respect to Common Units, the
holder of a Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided, however, that
immediately upon the conversion of Subordinated Units into Common Units
pursuant to Section 5.8, the Unitholder holding a Subordinated Unit shall
possess all of the rights and obligations of a Unitholder holding Common
Units hereunder, including the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units; provided, however, that
such converted Subordinated Units shall remain subject to the provisions of
Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into
a Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer
its converted Subordinated Units to a Person which is not an Affiliate of
the holder until such time as the General Partner determines, based on
advice of counsel, that a converted Subordinated Unit should have, as a
substantive matter, like intrinsic economic and federal income tax
characteristics, in all material respects, to the intrinsic economic and
federal income tax characteristics of an Initial Common Unit. In connection
with the condition imposed by this Section 6.7(b), the General Partner may
take whatever reasonable steps are required to provide economic uniformity
to the converted Subordinated Units in preparation for a transfer of such
converted Subordinated Units, including the application of Sections
5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may be taken
that would have a material adverse effect on the Unitholders holding Common
Units represented by Common Unit Certificates.
Section 6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION
RIGHTS.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
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Section 6.9 ENTITY-LEVEL TAXATION.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Intermediate Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Intermediate
Partnership to entity-level taxation for federal income tax purposes, the then
applicable Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution Date shall be adjusted to
equal the product obtained by multiplying (a) the amount thereof by (b) one
minus the sum of (i) the highest marginal federal corporate (or other entity, as
applicable) income tax rate of the Partnership or the Intermediate Partnership
for the taxable year of the Partnership or the Intermediate Partnership in which
such Quarter occurs (expressed as a percentage) plus (ii) the effective overall
state and local income tax rate (expressed as a percentage) applicable to the
Partnership or the Intermediate Partnership for the calendar year next preceding
the calendar year in which such Quarter occurs (after taking into account the
benefit of any deduction allowable for federal income tax purposes with respect
to the payment of state and local income taxes), but only to the extent of the
increase in such rates resulting from such legislation or interpretation. Such
effective overall state and local income tax rate shall be determined for the
taxable year next preceding the first taxable year during which the Partnership
or the Intermediate Partnership is taxable for federal income tax purposes as an
association taxable as a corporation or is otherwise subject to entity-level
taxation by determining such rate as if the Partnership or the Intermediate
Partnership had been subject to such state and local taxes during such preceding
taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 MANAGEMENT.
(a) The General Partner shall conduct, direct and manage all activities
of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the General Partner, and no
Limited Partner or Assignee shall have any management power over the
business and affairs of the Partnership. In addition to the powers now or
hereafter granted a general partner of a limited partnership under
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to Section 7.3,
shall have full power and authority to do all things and on such terms as
it, in its sole discretion, may deem necessary or appropriate to conduct the
business of the Partnership, to exercise all powers set forth in Section 2.5
and to effectuate the purposes set forth in Section 2.4, including the
following:
(i) the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of, or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into Partnership
Securities, and the incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership
or the merger or other combination of the Partnership with or into
another Person (the matters described in this clause (iii) being subject,
however, to any prior approval that may be required by Section 7.3);
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(iv) the use of the assets of the Partnership (including cash on
hand) for any purpose consistent with the terms of this Agreement,
including the financing of the conduct of the operations of the
Partnership Group; subject to Section 7.6(a), the lending of funds to
other Persons (including the Intermediate Partnership); the repayment of
obligations of the Partnership Group and the making of capital
contributions to any member of the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the
contract to have no recourse against the General Partner or its assets
other than its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership than
would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms
of employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited
or general partnerships, joint ventures, corporations or other
relationships (including the acquisition of interests in, and the
contributions of property to, the Intermediate Partnership from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations
of the Partnership, including the bringing and defending of actions at
law or in equity and otherwise engaging in the conduct of litigation and
the incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited
Partner Interests from, or requesting that trading be suspended on, any
such exchange (subject to any prior approval that may be required under
Section 4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or
the issuance of additional options, rights, warrants and appreciation
rights relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Intermediate Partnership as a partner.
(b) Notwithstanding any other provision of this Agreement, the
Intermediate Partnership Agreement, the Delaware Act or any applicable law,
rule or regulation, each of the Partners and the Assignees and each other
Person who may acquire an interest in Partnership Securities hereby (i)
approves, ratifies and confirms the execution, delivery and performance by
the parties thereto of the Intermediate Partnership Agreement, the
Underwriting Agreement, the Intermediate Partnership, the Contribution and
Conveyance Agreement, and the other agreements and other described in or
filed as exhibits to the Registration Statement that are
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related to the transactions contemplated by the Registration Statement; (ii)
agrees that the General Partner (on its own or through any officer of the
Partnership) is authorized to execute, deliver and perform the agreements
referred to in clause (i) of this sentence and the other agreements, acts,
transactions and matters described in or contemplated by the Registration
Statement on behalf of the Partnership without any further act, approval or
vote of the Partners or the Assignees or the other Persons who may acquire
an interest in Partnership Securities; and (iii) agrees that the execution,
delivery or performance by the General Partner, any Group Member or any
Affiliate of any of them, of this Agreement or any agreement authorized or
permitted under this Agreement (including the exercise by the General
Partner or any Affiliate of the General Partner of the rights accorded
pursuant to Article XV), shall not constitute a breach by the General
Partner of any duty that the General Partner may owe the Partnership or the
Limited Partners or any other Persons under this Agreement (or any other
agreements) or of any duty stated or implied by law or equity.
Section 7.2 CERTIFICATE OF LIMITED PARTNERSHIP.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of the State of
Delaware or of any other state in which the Partnership may elect to do business
or own property. Subject to the terms of Section 3.4(a), the General Partner
shall not be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any amendment
thereto to any Limited Partner.
Section 7.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY.
(a) The General Partner may not, without written approval of the
specific act by holders of all of the Outstanding Limited Partner Interests
or by other written instrument executed and delivered by holders of all of
the Outstanding Limited Partner Interests subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the
Partnership; (ii) possessing Partnership property, or assigning any rights
in specific Partnership property, for other than a Partnership purpose;
(iii) admitting a Person as a Partner; (iv) amending this Agreement in any
manner; or (v) transferring its interest as general partner of the
Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may
not sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions (including by way of merger, consolidation or other
combination) or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the
Intermediate Partnership, taken as a whole, without the approval of holders
of a Unit Majority; provided however that this provision shall not preclude
or limit the General Partner's ability to mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the assets of the
Partnership or Intermediate Partnership and shall not apply to any forced
sale of any or all of the assets of the Partnership or Intermediate
Partnership pursuant to the foreclosure of, or other realization upon, any
such
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encumbrance. Without the approval of holders of a Unit Majority, the General
Partner shall not, on behalf of the Partnership, (i) consent to any
amendment to the Intermediate Partnership Agreement or, except as expressly
permitted by Section 7.9(d), take any action permitted to be taken by a
partner of the Intermediate Partnership, in either case, that would have a
material adverse effect on the Partnership as a partner of the Intermediate
Partnership or (ii) except as permitted under Sections 4.6, 11.1 and 11.2,
elect or cause the Partnership to elect a successor general partner of the
Partnership or the Intermediate Partnership.
(c) The General Partner may not approve or consent to the conversion of
Northern Border Pipeline to corporate form without first obtaining the
approval of the holders of at least 66 2/3% of the Outstanding Units during
the Subordination Period and at least a majority of the Outstanding Units
thereafter.
Section 7.4 REIMBURSEMENT OF THE GENERAL PARTNER.
(a) Except as provided in this Section 7.4 and elsewhere in this
Agreement or in the Intermediate Partnership Agreement, the General Partner
shall not be compensated for its services as general partner or managing
member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of
the General Partner to perform services for the Partnership or for the
General Partner in the discharge of its duties to the Partnership), and (ii)
all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operating the Partnership's business (including expenses allocated to the
General Partner by its Affiliates). The General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion. Reimbursements
pursuant to this Section 7.4 shall be in addition to any reimbursement to
the General Partner as a result of indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion
and without the approval of the Limited Partners (who shall have no right to
vote in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership
Securities or options to purchase Partnership Securities), or cause the
Partnership to issue Partnership Securities in connection with, or pursuant
to, any employee benefit plan, employee program or employee practice
maintained or sponsored by the General Partner or any of its Affiliates, in
each case for the benefit of employees of the General Partner, any Group
Member or any Affiliate, or any of them, in respect of services performed,
directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Partnership Securities that the General Partner or such
Affiliate is obligated to provide to any employees pursuant to any such
employee benefit plans, employee programs or employee practices. Expenses
incurred by the General Partner in connection with any such plans, programs
and practices (including the net cost to the General Partner or such
Affiliate of Partnership Securities purchased by the General Partner or such
Affiliate from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with
Section 7.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by
the General Partner as permitted by this Section 7.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's General Partner
Interest pursuant to Section 4.6.
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Section 7.5 OUTSIDE ACTIVITIES.
(a) After the Closing Date, the General Partner, for so long as it is
the General Partner of the Partnership (i) agrees that its sole business
will be to act as the general partner of the Partnership, the Intermediate
Partnership, and any other partnership or limited liability company of which
the Partnership or the Intermediate Partnership is, directly or indirectly,
a partner and to undertake activities that are ancillary or related thereto
(including being a limited partner in the Partnership) and (ii) shall not
engage in any business or activity or incur any debts or liabilities except
in connection with or incidental to (A) its performance as general partner
of one or more Group Members or as described in or contemplated by the
Registration Statement or (B) the acquiring, owning or disposing of debt or
equity securities in any Group Member.
(b) Except as specifically restricted by Section 7.5(a), each Indemnitee
(other than the General Partner) shall have the right to engage in
businesses of every type and description and other activities for profit and
to engage in and possess an interest in other business ventures of any and
every type or description, whether in businesses engaged in or anticipated
to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law
to any Group Member or any Partner or Assignee. Neither any Group Member,
any Limited Partner nor any other Person shall have any rights by virtue of
this Agreement, the Intermediate Partnership Agreement or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(c) Subject to the terms of Section 7.5(a), Section 7.5(b) and Section
7.5(c), but otherwise notwithstanding anything to the contrary in this
Agreement, (i) the engaging in competitive activities by any Indemnitees
(other than the General Partner) in accordance with the provisions of this
Section 7.5 is hereby approved by the Partnership and all Partners, (ii) it
shall be deemed not to be a breach of the General Partner's fiduciary duty
or any other obligation of any type whatsoever of the General Partner for
the Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the
Partnership and (iii) the General Partner and the Indemnities shall have no
obligation to present business opportunities to the Partnership.
(d) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing
Date and, except as otherwise provided in this Agreement, shall be entitled
to exercise all rights of the General Partner or Limited Partner, as
applicable, relating to such Units or Partnership Securities.
(e) The term "AFFILIATES" when used in Section 7.5(a) and Section 7.5(d)
with respect to the General Partner shall not include any Group Member or
any Subsidiary of the Group Member.
(f) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of
this Agreement purport or are interpreted to have the effect of restricting
the fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited
Partners to any such restriction, such provisions shall be inapplicable and
have no effect in determining whether the General Partner has complied with
its fiduciary duties in connection with determinations made by it under this
Section 7.5.
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Section 7.6 LOANS FROM THE GENERAL PARTNER; LOANS OR CONTRIBUTIONS FROM THE
PARTNERSHIP; CONTRACTS WITH AFFILIATES; CERTAIN RESTRICTIONS ON THE
GENERAL PARTNER.
(a) The General Partner or its Affiliates may lend to any Group Member,
and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of
time and in such amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not charge the
borrowing party interest at a rate greater than the rate that would be
charged the borrowing party or impose terms less favorable to the borrowing
party than would be charged or imposed on the borrowing party by unrelated
lenders on comparable loans made on an arm's-length basis (without reference
to the lending party's financial abilities or guarantees). The borrowing
party shall reimburse the lending party for any costs (other than any
additional interest costs) incurred by the lending party in connection with
the borrowing of such funds. For purposes of this Section 7.6(a) and Section
7.6(b), the term "GROUP MEMBER" shall include any Affiliate of a Group
Member that is controlled by the Group Member. No Group Member may lend
funds to the General Partner or any of its Affiliates (other than another
Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided,
however, that the Partnership may not charge the Group Member interest at a
rate less than the rate that would be charged to the Group Member (without
reference to the General Partner's financial abilities or guarantees) by
unrelated lenders on comparable loans. The foregoing authority shall be
exercised by the General Partner in its sole discretion and shall not create
any right or benefit in favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with
any of its Affiliates to, render services to a Group Member or to the
General Partner in the discharge of its duties as general partner of the
Partnership. Any services rendered to a Group Member by the General Partner
or any of its Affiliates shall be on terms that are fair and reasonable to
the Partnership; provided, however, that the requirements of this Section
7.6(c) shall be deemed satisfied as to (i) any transaction approved by
Special Approval, (ii) any transaction, the terms of which are no less
favorable to the Partnership Group than those generally being provided to or
available from unrelated third parties or (iii) any transaction that, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership Group), is equitable to the Partnership
Group. The provisions of Section 7.4 shall apply to the rendering of
services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that
are fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 7.6(e) shall be deemed to be satisfied as to
(i) the transactions effected pursuant to Sections 5.2 and 5.3, the
Contribution and Conveyance Agreement and any other transactions described
in or contemplated by the Registration Statement, (ii) any transaction
approved by Special Approval, (iii) any transaction, the terms of which are
no less favorable to the Partnership than those generally being provided to
or available from unrelated third parties, or (iv) any transaction that,
taking into account the totality of the relationships
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between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership), is equitable to
the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Conflicts Committee,
in determining whether the appropriate number of Partnership Securities are
being issued, may take into account, among other things, the fair market
value of the assets, the liquidated and contingent liabilities assumed, the
tax basis in the assets, the extent to which tax-only allocations to the
transferor will protect the existing partners of the Partnership against a
low tax basis, and such other factors as the Conflicts Committee deems
relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General
Partner and its Affiliates, except as may be provided in contracts entered
into from time to time specifically dealing with such use, nor shall there
be any obligation on the part of the General Partner or its Affiliates to
enter into such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of
the conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
Section 7.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law but subject to the
limitations expressly provided in this Agreement, all Indemnitees shall be
indemnified and held harmless by the Partnership from and against any and
all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnitee may be involved, or is threatened to
be involved, as a party or otherwise, by reason of its status as an
Indemnitee; provided, that in each case the Indemnitee acted in good faith
and in a manner that such Indemnitee reasonably believed to be in, or (in
the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful;
provided, further, no indemnification pursuant to this Section 7.7 shall be
available to the General Partner with respect to its obligations incurred
pursuant to the Underwriting Agreement or the Contribution and Conveyance
Agreement (other than obligations incurred by the General Partner on behalf
of the Partnership or the Intermediate Partnership). The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere, or its equivalent, shall not create a
presumption that the Indemnitee acted in a manner contrary to that specified
above. Any indemnification pursuant to this Section 7.7 shall be made only
out of the assets of the Partnership, it being agreed that the General
Partner shall not be personally liable for such indemnification and shall
have no obligation to contribute or loan any monies or property to the
Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal
fees and expenses) incurred by an Indemnitee who is indemnified pursuant to
Section 7.7(a) in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by the Partnership prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt
by the Partnership of any undertaking by or on behalf of the Indemnitee to
repay such amount if it shall be determined that the Indemnitee is not
entitled to be indemnified as authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in
addition to any other rights to which an Indemnitee may be entitled under
any agreement, pursuant to any vote of the
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holders of Outstanding Limited Partner Interests, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee
and as to actions in any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee who has
ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the
General Partner, its Affiliates and such other Persons as the General
Partner shall determine, against any liability that may be asserted against
or expense that may be incurred by such Person in connection with the
Partnership's activities or such Person's activities on behalf of the
Partnership, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute "FINES" within the meaning of Section 7.7(a); and
action taken or omitted by it with respect to any employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be
in the interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose which is in, or not opposed to, the best
interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to
personal liability by reason of the indemnification provisions set forth in
this Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right
of any past, present or future Indemnitee to be indemnified by the
Partnership, nor the obligations of the Partnership to indemnify any such
Indemnitee under and in accordance with the provisions of this Section 7.7
as in effect immediately prior to such amendment, modification or repeal
with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
Section 7.8 LIABILITY OF INDEMNITEES.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, no Indemnitee shall be liable for monetary damages to the
Partnership, the Limited Partners, the Assignees or any other Persons who
have acquired interests in the Partnership Securities, for losses sustained
or liabilities incurred as a result of any act or omission if such
Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth
in Section 7.1(a), the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon
it hereunder either directly or by or through its agents, and the
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General Partner shall not be responsible for any misconduct or negligence on
the part of any such agent appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not be
liable to the Partnership or to any Partner for its good faith reliance on
the provisions of this Agreement. The provisions of this Agreement, to the
extent that they restrict or otherwise modify the duties and liabilities of
an Indemnitee otherwise existing at law or in equity, are agreed by the
Partners to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect
the limitations on the liability to the Partnership, the Limited Partners,
the General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise
or be asserted.
Section 7.9 RESOLUTION OF CONFLICTS OF INTEREST.
(a) Unless otherwise expressly provided in this Agreement or the
Intermediate Partnership Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of its
Affiliates, on the one hand, and the Partnership, the Intermediate
Partnership, any Partner or any Assignee, on the other, any resolution or
course of action by the General Partner or its Affiliates in respect of such
conflict of interest shall be permitted and deemed approved by all Partners,
and shall not constitute a breach of this Agreement, of the Intermediate
Partnership Agreement, of any agreement contemplated herein or therein, or
of any duty stated or implied by law or equity, if the resolution or course
of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but
not required in connection with its resolution of such conflict of interest
to seek Special Approval of such resolution. Any conflict of interest and
any resolution of such conflict of interest shall be conclusively deemed
fair and reasonable to the Partnership if such conflict of interest or
resolution is (i) approved by Special Approval (as long as the material
facts known to the General Partner or any of its Affiliates regarding any
proposed transaction were disclosed to the Conflicts Committee at the time
it gave its approval), (ii) on terms no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties or (iii) fair to the Partnership, taking into account the totality
of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). The General Partner may also adopt a resolution or course of
action that has not received Special Approval. The General Partner
(including the Conflicts Committee in connection with Special Approval)
shall be authorized in connection with its determination of what is "fair
and reasonable" to the Partnership and in connection with its resolution of
any conflict of interest to consider (A) the relative interests of any party
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person;
(C) any applicable generally accepted accounting practices or principles;
and (D) such additional factors as the General Partner (including the
Conflicts Committee) determines in its sole discretion to be relevant,
reasonable or appropriate under the circumstances. Nothing contained in this
Agreement, however, is intended to nor shall it be construed to require the
General Partner (including the Conflicts Committee) to consider the
interests of any Person other than the Partnership. In the absence of bad
faith by the General Partner, the resolution, action or terms
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so made, taken or provided by the General Partner with respect to such
matter shall not constitute a breach of this Agreement or any other
agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the
Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or "necessary or advisable" or
under a grant of similar authority or latitude, except as otherwise provided
herein, the General Partner or such Affiliate shall be entitled to consider
only such interests and factors as it desires and shall have no duty or
obligation to give any consideration to any interest of, or factors
affecting, the Partnership, the Intermediate Partnership, any Limited
Partner or any Assignee, (ii) it may make such decision in its sole
discretion (regardless of whether there is a reference to "sole discretion"
or "discretion") unless another express standard is provided for, or (iii)
in "good faith" or under another express standard, the General Partner or
such Affiliate shall act under such express standard and shall not be
subject to any other or different standards imposed by this Agreement, the
Intermediate Partnership Agreement, any other agreement contemplated hereby
or under the Delaware Act or any other law, rule or regulation. In addition,
any actions taken by the General Partner or such Affiliate consistent with
the standards of "reasonable discretion" set forth in the definitions of
Available Cash or Operating Surplus shall not constitute a breach of any
duty of the General Partner to the Partnership or the Limited Partners. The
General Partner shall have no duty, express or implied, to sell or otherwise
dispose of any asset of the Partnership Group other than in the ordinary
course of business. No borrowing by any Group Member or the approval thereof
by the General Partner shall be deemed to constitute a breach of any duty of
the General Partner to the Partnership or the Limited Partners by reason of
the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable distributions to the General Partner or its
Affiliates (including in their capacities as Limited Partners) to exceed 1%
of the total amount distributed to all partners or (B) hasten the expiration
of the Subordination Period or the conversion of any Subordinated Units into
Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such
transaction, arrangement or resolution shall be considered in the context of
all similar or related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of
the Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to
be taken by the General Partner pursuant to this Section 7.9.
Section 7.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons
as to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
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(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly
authorized officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the best
interests of the Partnership.
Section 7.11 PURCHASE OR SALE OF PARTNERSHIP SECURITIES.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
Section 7.12 REGISTRATION RIGHTS OF THE GENERAL PARTNER AND ITS AFFILIATES.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an
Affiliate of the General Partner at the date hereof notwithstanding that it
may later cease to be an Affiliate of the General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act
(or any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership
Securities (the "HOLDER") to dispose of the number of Partnership Securities
it desires to sell at the time it desires to do so without registration
under the Securities Act, then upon the request of the General Partner or
any of its Affiliates, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use all reasonable
efforts to cause to become effective and remain effective for a period of
not less than six months following its effective date or such shorter period
as shall terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement under the
Securities Act registering the offering and sale of the number of
Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in
the best interests of the Partnership and its Partners due to a pending
transaction, investigation or other event, the filing of such registration
statement or the effectiveness thereof may be deferred for up to six months,
but not thereafter. In connection with any registration pursuant to the
immediately preceding sentence, the Partnership shall promptly prepare and
file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no
such qualification shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service of process
or to taxation or qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction solely as a result of such
registration, and (y) such documents as may be necessary to apply for
listing or to list the Partnership Securities subject to such registration
on such National Securities Exchange as the Holder shall reasonably request,
and
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do any and all other acts and things that may reasonably be necessary or
advisable to enable the Holder to consummate a public sale of such
Partnership Securities in such states. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of
the Partnership for cash (other than an offering relating solely to an
employee benefit plan), the Partnership shall use all reasonable efforts to
include such number or amount of securities held by the Holder in such
registration statement as the Holder shall request. If the proposed offering
pursuant to this Section 7.12(b) shall be an underwritten offering, then, in
the event that the managing underwriter or managing underwriters of such
offering advise the Partnership and the Holder in writing that in their
opinion the inclusion of all or some of the Holder's Partnership Securities
would adversely and materially affect the success of the offering, the
Partnership shall include in such offering only that number or amount, if
any, of securities held by the Holder which, in the opinion of the managing
underwriter or managing underwriters, will not so adversely and materially
affect the offering. Except as set forth in Section 7.12(c), all costs and
expenses of any such registration and offering (other than the underwriting
discounts and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 7.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the
meaning of the Securities Act) and any agent thereof (collectively,
"INDEMNIFIED PERSONS") against any losses, claims, demands, actions, causes
of action, assessments, damages, liabilities (joint or several), costs and
expenses (including interest, penalties and reasonable attorneys' fees and
disbursements), resulting to, imposed upon, or incurred by the Indemnified
Persons, directly or indirectly, under the Securities Act or otherwise
(hereinafter referred to in this Section 7.12(c) as a "CLAIM" and in the
plural as "CLAIMS") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were
registered under the Securities Act or any state securities or Blue Sky
laws, in any preliminary prospectus (if used prior to the effective date of
such registration statement), or in any summary or final prospectus or in
any amendment or supplement thereto (if used during the period the
Partnership is required to keep the registration statement current), or
arising out of, based upon or resulting from the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any Indemnified Person
to the extent that any such claim arises out of, is based upon or results
from an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary, summary or
final prospectus or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such
cessation and for so long thereafter as is required for the Holder to sell
all of the
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Partnership Securities with respect to which it has requested during such
two-year period inclusion in a registration statement otherwise filed or
that a registration statement be filed; provided, however, that the
Partnership shall not be required to file successive registration statements
covering the same Partnership Securities for which registration was demanded
during such two-year period. The provisions of Section 7.12(c) shall
continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this
Section 7.12 shall (i) specify the Partnership Securities intended to be
offered and sold by the Person making the request, (ii) express such
Person's present intent to offer such shares for distribution, (iii)
describe the nature or method of the proposed offer and sale of Partnership
Securities, and (iv) contain the undertaking of such Person to provide all
such information and materials and take all action as may be required in
order to permit the Partnership to comply with all applicable requirements
in connection with the registration of such Partnership Securities.
Section 7.13 RELIANCE BY THIRD PARTIES.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General Partner
to act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets of
the Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to contest,
negate or disaffirm any action of the General Partner or any such officer in
connection with any such dealing. In no event shall any Person dealing with the
General Partner or any such officer or its representatives be obligated to
ascertain that the terms of the Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
any such officer or its representatives. Each and every certificate, document or
other instrument executed on behalf of the Partnership by the General Partner or
its representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 RECORDS AND ACCOUNTING.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of
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time. The books of the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance with U.S. GAAP.
Section 8.2 FISCAL YEAR.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
Section 8.3 REPORTS.
(a) As soon as practicable, but in no event later than 120 days after
the close of each fiscal year of the Partnership, the General Partner shall
cause to be mailed or furnished to each Record Holder of a Unit as of a date
selected by the General Partner in its discretion, an annual report
containing financial statements of the Partnership for such fiscal year of
the Partnership, presented in accordance with U.S. GAAP, including a balance
sheet and statements of operations, Partnership equity and cash flows, such
statements to be audited by a firm of independent public accountants
selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the
General Partner shall cause to be mailed or furnished to each Record Holder
of a Unit, as of a date selected by the General Partner in its discretion, a
report containing unaudited financial statements of the Partnership and such
other information as may be required by applicable law, regulation or rule
of any National Securities Exchange on which the Units are listed for
trading, or as the General Partner determines to be necessary or
appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 TAX RETURNS AND INFORMATION..
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
Section 9.2 TAX ELECTIONS.
(a) The Partnership shall make the election under Section 754 of the
Code in accordance with applicable regulations thereunder, subject to the
reservation of the right to seek to revoke any such election upon the
General Partner's determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other provision
herein contained, for the purposes of computing the adjustments under
Section 743(b) of the Code, the General Partner shall be authorized (but not
required) to adopt a convention whereby the price paid by a transferee of a
Limited Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National Securities Exchange
on which such Limited Partner Interests are traded during the calendar month
in which such transfer is deemed to occur pursuant to Section 6.2(g) without
regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted
by the Code.
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Section 9.3 TAX CONTROVERSIES.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
Section 9.4 WITHHOLDING.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Intermediate
Partnership to comply with any withholding requirements established under the
Code or any other federal, state or local law including, without limitation,
pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that
the Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 ADMISSION OF INITIAL LIMITED PARTNERS.
Upon the transfer of Common Units, Subordinated Units and Incentive
Distribution Rights to the General Partner as described in Section 5.2, the
General Partner shall be deemed to have been admitted to the Partnership as a
Limited Partner in respect of the Common Units, Subordinated Units and Incentive
Distribution Rights transferred to it. Upon the issuance by the Partnership of
Common Units to the Underwriters as described in Section 5.3 in connection with
the Initial Offering and the execution by each Underwriter of a Transfer
Application, the General Partner shall admit the Underwriters to the Partnership
as Initial Limited Partners in respect of the Common Units purchased by them.
Section 10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER.
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such
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consent is withheld, such transferee shall be an Assignee. An Assignee shall
have an interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Limited
Partner Interests that are held by Assignees, the General Partner shall be
deemed to be the Limited Partner with respect thereto and shall, in exercising
the voting rights in respect of such Limited Partner Interests on any matter,
vote such Limited Partner Interests at the written direction of the Assignee who
is the Record Holder of such Limited Partner Interests. If no such written
direction is received, such Limited Partner Interests will not be voted. An
Assignee shall have no other rights of a Limited Partner.
Section 10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner Interest pursuant to
Section 4.6 who is proposed to be admitted as a successor General Partner shall
be admitted to the Partnership as the General Partner, effective immediately
prior to the withdrawal or removal of the predecessor or transferring General
Partner pursuant to Section 11.1 or 11.2 or the transfer of the General Partner
Interest pursuant to Section 4.6, provided, however, that no such successor
shall be admitted to the Partnership until compliance with the terms of Section
4.6 has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
members of the Partnership Group without dissolution.
Section 10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) A Person (other than the General Partner, an Initial Limited Partner
or a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner (i) evidence of acceptance in form satisfactory to the
General Partner of all of the terms and conditions of this Agreement,
including the power of attorney granted in Section 2.6, and (ii) such other
documents or instruments as may be required in the discretion of the General
Partner to effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in
the General Partner's discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded as such in the books and records of the
Partnership, following the consent of the General Partner to such admission.
Section 10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
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ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 WITHDRAWAL OF THE GENERAL PARTNER.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each
such event herein referred to as an "EVENT OF WITHDRAWAL");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Intermediate Partnership);
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for
relief under Chapter 7 of the United States Bankruptcy Code; (C) files a
petition or answer seeking for itself a liquidation, dissolution or
similar relief (but not a reorganization) under any law; (D) files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the General Partner in a
proceeding of the type described in clauses (A)-(C) of this Section
11.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment
of a trustee (but not a debtor-in-possession), receiver or liquidator of
the General Partner or of all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or
against the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation; (B) in the event
the General Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General Partner; (C) in
the event the General Partner is acting in such capacity by virtue of
being a trustee of a trust, the termination of the trust; (D) in the
event the General Partner is a natural person, his death or adjudication
of incompetency; and (E) otherwise in the event of the termination of the
General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the
period beginning on the Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on December 31, 2008, the General Partner voluntarily
withdraws by giving at least 90 days' advance notice of its intention to
withdraw to the Limited Partners; provided that prior to the effective date
of such withdrawal, the withdrawal is approved by Unitholders holding at
least a majority of the Outstanding Common Units (excluding Common Units
held by the General Partner and its Affiliates) and the General
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Partner delivers to the Partnership an Opinion of Counsel ("WITHDRAWAL
OPINION OF COUNSEL") that such withdrawal (following the selection of the
successor General Partner) would not result in the loss of the limited
liability of any Limited Partner or of a limited partner of the Intermediate
Partnership or cause the Partnership or the Intermediate Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes (to the extent not previously
treated as such); (ii) at any time after 12:00 midnight, Eastern Standard
Time, on March 31, 2009, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice to the Unitholders, such withdrawal to take
effect on the date specified in such notice; (iii) at any time that the
General Partner ceases to be the General Partner pursuant to Section
11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding
clause (i) of this sentence, at any time that the General Partner
voluntarily withdraws by giving at least 90 days' advance notice of its
intention to withdraw to the Limited Partners, such withdrawal to take
effect on the date specified in the notice, if at the time such notice is
given one Person and its Affiliates (other than the General Partner and its
Affiliates) own beneficially or of record or control at least 50% of the
Outstanding Units. The withdrawal of the General Partner from the
Partnership upon the occurrence of an Event of Withdrawal shall also
constitute the withdrawal of the General Partner as general partner or
managing member, as the case may be, of the other Group Members. If the
General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i),
the holders of a Unit Majority, may, prior to the effective date of such
withdrawal, elect a successor General Partner. The Person so elected as
successor General Partner shall automatically become the successor general
partner or managing member, as the case may be, of the other Group Members
of which the General Partner is a general partner or a managing member. If,
prior to the effective date of the General Partner's withdrawal, a successor
is not selected by the Unitholders as provided herein or the Partnership
does not receive a Withdrawal Opinion of Counsel, the Partnership shall be
dissolved in accordance with Section 12.1. Any successor General Partner
elected in accordance with the terms of this Section 11.1 shall be subject
to the provisions of Section 10.3.
Section 11.2 REMOVAL OF THE GENERAL PARTNER.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a Unit Majority (including
Units held by the General Partner and its Affiliates). Such removal shall be
effective immediately following the admission of a successor General Partner
pursuant to Section 10.3. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as general partner
or managing member, as the case may be, of the other Group Members of which the
General Partner is a general partner or a managing member. If a Person is
elected as a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing member, as the case
may be, of the other Group Members of which the General Partner is a general
partner or a managing member. The right of the holders of Outstanding Units to
remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
Section 11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders
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of Outstanding Units under circumstances where Cause does not exist, if a
successor General Partner is elected in accordance with the terms of Section
11.1 or 11.2, the Departing Partner shall have the option exercisable prior
to the effective date of the departure of such Departing Partner to require
its successor to purchase its General Partner Interest and its general
partner interest (or equivalent interest) in the other Group Members and all
of its Incentive Distribution Rights (collectively, the "COMBINED INTEREST")
in exchange for an amount in cash equal to the fair market value of such
Combined Interest, such amount to be determined and payable as of the
effective date of its departure. If the General Partner is removed by the
Unitholders under circumstances where Cause exists or if the General Partner
withdraws under circumstances where such withdrawal violates this Agreement
or the Intermediate Partnership Agreement, and if a successor General
Partner is elected in accordance with the terms of Section 11.1 or 11.2,
such successor shall have the option, exercisable prior to the effective
date of the departure of such Departing Partner, to purchase the Combined
Interest for such fair market value of such Combined Interest. In either
event, the Departing Partner shall be entitled to receive all reimbursements
due such Departing Partner pursuant to Section 7.4, including any employee-
related liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the General
Partner for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Combined
Interest shall be determined by agreement between the Departing Partner and its
successor or, failing agreement within 30 days after the effective date of such
Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts, and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then the Departing Partner shall
designate an independent investment banking firm or other independent expert,
the Departing Partner's successor shall designate an independent investment
banking firm or other independent expert, and such firms or experts shall
mutually select a third independent investment banking firm or independent
expert, which third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined Interest. In making
its determination, such third independent investment banking firm or other
independent expert may consider the then current trading price of Units on any
National Securities Exchange on which Units are then listed, the value of the
Partnership's assets, the rights and obligations of the Departing Partner and
other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common
Units pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a), without reduction
in such Partnership Interest (but subject to proportionate dilution by
reason of the admission of its successor). Any successor General Partner
shall indemnify the Departing Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date on which the
Departing Partner (or its transferee) becomes a Limited Partner. For
purposes of this Agreement, conversion of the Combined Interest to Common
Units will be characterized as if the General Partner (or its transferee)
contributed its Combined Interest to the Partnership in exchange for the
newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the
terms of Section 11.1 or 11.2 and the option described in Section 11.3(a) is
not exercised by the party entitled to do so, the successor General Partner
shall, at the effective date of its admission to the Partnership, contribute
to the Partnership cash in the amount equal to 1/99th of the Net Agreed
Value of the Partnership's assets on such date. In such event, such
successor General Partner shall, subject
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to the following sentence, be entitled to 1% of all Partnership allocations
and distributions. The successor General Partner shall cause this Agreement
to be amended to reflect that, from and after the date of such successor
General Partner's admission, the successor General Partner's interest in all
Partnership distributions and allocations shall be 1%.
Section 11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF SUBORDINATED
UNITS AND EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
Section 11.5 WITHDRAWAL OF LIMITED PARTNERS.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 DISSOLUTION.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and
such successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
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Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders of a Unit Majority. Unless such an election is made
within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as
necessary, to file a new partnership agreement and certificate of limited
partnership, and the successor general partner may for this purpose
exercise the powers of attorney granted the General Partner pursuant to
Section 2.6; provided, that the right of the holders of a Unit Majority
to approve a successor General Partner and to reconstitute and to
continue the business of the Partnership shall not exist and may not be
exercised unless the Partnership has received an Opinion of Counsel that
(x) the exercise of the right would not result in the loss of limited
liability of any Limited Partner and (y) neither the Partnership, the
reconstituted limited partnership nor the Intermediate Partnership would
be treated as an association taxable as a corporation or otherwise be
taxable as an entity for federal income tax purposes upon the exercise of
such right to continue.
Section 12.3 LIQUIDATOR.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article XII,
the Liquidator approved in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 7.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein.
Section 12.4 LIQUIDATION.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines
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to be in the best interest of the Partners, subject to Section 17-804 of the
Delaware Act and the following:
(a) DISPOSITION OF ASSETS. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall be
deemed for purposes of Section 12.4(c) to have received cash equal to its
fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in its
absolute discretion, defer liquidation or distribution of the Partnership's
assets for a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnership's assets would be impractical
or would cause undue loss to the Partners. The Liquidator may, in its
absolute discretion, distribute the Partnership's assets, in whole or in
part, in kind if it determines that a sale would be impractical or would
cause undue loss to the Partners.
(b) DISCHARGE OF LIABILITIES. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution
rights under Article VI. With respect to any liability that is contingent,
conditional or unmatured or is otherwise not yet due and payable, the
Liquidator shall either settle such claim for such amount as it thinks
appropriate or establish a reserve of cash or other assets to provide for
its payment. When paid, any unused portion of the reserve shall be
distributed as additional liquidation proceeds.
(c) LIQUIDATION DISTRIBUTIONS. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made
by reason of distributions pursuant to this Section 12.4(c)) for the taxable
year of the Partnership during which the liquidation of the Partnership
occurs (with such date of occurrence being determined pursuant to Treasury
Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be
made by the end of such taxable year (or, if later, within 90 days after
said date of such occurrence).
Section 12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 12.6 RETURN OF CONTRIBUTIONS.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
Section 12.7 WAIVER OF PARTITION.
To the maximum extent permitted by law, each Partner hereby waives any right
to partition of the Partnership property.
Section 12.8 CAPITAL ACCOUNT RESTORATION.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year of
the Partnership during which such liquidation occurs, or, if later, within 90
days after the date of such liquidation.
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