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Form 10-Q CONMED CORP For: Sep 30 Oct 24, 2014 02:12PM

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Form 4 MGIC INVESTMENT CORP For: Oct 23 Filed by: LEHMAN MICHAEL E Oct 24, 2014 02:11PM

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Form 8-K Truven Holding Corp. For: Oct 24 Oct 24, 2014 02:10PM

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Form 10-Q TC PIPELINES LP For: Sep 30 Oct 24, 2014 02:07PM

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File Number:  001-35358

 

TC PipeLines, LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-2135448

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

717 Texas Street, Suite 2400

Houston, Texas

 

77002-2761

(Address of principle executive offices)

 

(Zip code)

 

877-290-2772

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting

company)

 

Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                    No x

 

As of October 24, 2014, there were 63,561,546 of the registrant’s common units outstanding.

 



Table of Contents

 

TC PIPELINES, LP

 

 

Page No.

TABLE OF CONTENTS

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

28

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

28

Item 6.

Exhibits

30

 

Signatures

31

 

All amounts are stated in United States dollars unless otherwise indicated.

 

 

2



Table of Contents

 

DEFINITIONS

 

The abbreviations, acronyms, and industry terminology used in this quarterly report are defined as follows:

 

2013 Acquisition

 

Acquisition of an additional 45 percent membership interest in each of GTN and Bison by the Partnership

2014 Acquisition

 

Partnership’s acquisition of the remaining 30 percent interest in Bison by the Partnership

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

ATM program

 

At-the-market equity issuance program

Bison

 

Bison Pipeline LLC

Carty Lateral

 

The proposed GTN lateral pipeline

DOT

 

U.S. Department of Transportation

EPA

 

U.S. Environmental Protection Agency

FASB

 

Financial Accounting Standards Board

FERC

 

Federal Energy Regulatory Commission

GAAP

 

U.S. generally accepted accounting principles

General Partner

 

TC PipeLines GP, Inc.

Great Lakes

 

Great Lakes Gas Transmission Limited Partnership

GTN

 

Gas Transmission Northwest LLC

IDRs

 

Incentive Distribution Rights

LIBOR

 

London Interbank Offered Rate

North Baja

 

North Baja Pipeline, LLC

Northern Border

 

Northern Border Pipeline Company

Other Pipes

 

GTN, Bison, North Baja and Tuscarora

Our pipeline systems

 

Our ownership interests in GTN, Northern Border, Bison, Great Lakes, North Baja and Tuscarora

Partnership

 

TC PipeLines, LP including its subsidiaries, as applicable

Partnership Agreement

 

Second Amended and Restated Agreement of Limited Partnership

SEC

 

Securities and Exchange Commission

Senior Credit Facility

 

TC PipeLines, LP’s senior credit facility under revolving credit agreement as amended and restated, dated November 20, 2012

Short-Term Loan Facility

 

TC PipeLines, LP short-term loan facility under loan agreement dated October 1, 2014

Term Loan Facility

 

TC PipeLines, LP’s term loan credit facility under a term loan agreement dated July 1, 2013

TransCanada

 

TransCanada Corporation and its subsidiaries

Tuscarora

 

Tuscarora Gas Transmission Company

U.S.

 

United States of America

 

Unless the context clearly indicates otherwise, TC PipeLines, LP and its subsidiaries are collectively referred to in this quarterly report as “we,” “us,” “our” and “the Partnership.” We use “our pipeline systems” and “our pipelines” when referring to the Partnership’s ownership interests in Gas Transmission Northwest LLC (GTN), Northern Border Pipeline Company (Northern Border), Bison Pipeline LLC (Bison), Great Lakes Gas Transmission Limited Partnership (Great Lakes), North Baja Pipeline, LLC (North Baja) and Tuscarora Gas Transmission Company (Tuscarora).

 

 

3



Table of Contents

 

PART I

 

FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report includes certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words and phrases such as: “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “forecast,” “should,” “predict,” “could,” “will,” “may,” and other terms and expressions of similar meaning. The absence of these words, however, does not mean that the statements are not forward-looking. These statements are based on management’s beliefs and assumptions and on currently available information and include, but are not limited to, statements regarding anticipated financial performance, future capital expenditures, liquidity, market or competitive conditions, regulations, organic or strategic growth opportunities, contract renewals and ability to market open capacity, business prospects, outcome of regulatory proceedings and cash distributions to unitholders.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results predicted. Factors that could cause actual results and our financial condition to differ materially from those contemplated in forward-looking statements include, but are not limited to:

 

·                                the ability of our pipeline systems to sell available capacity on favorable terms and renew expiring contracts which are affected by, among other factors:

o                 demand for natural gas;

o                 changes in relative cost structures and production levels of natural gas producing basins;

o                 natural gas prices and regional differences;

o                 weather conditions;

o                 availability and location of natural gas supplies in Canada and the U.S. in relation to our pipeline systems;

o                 competition from other pipeline systems;

o                 natural gas storage levels; and

o                 rates and terms of service;

·                                the performance by the shippers of their contractual obligations on our pipeline systems;

·                                the outcome and frequency of rate proceedings or settlement negotiations on our pipeline systems;

·                                changes in the taxation of master limited partnership investments by state or federal governments such as the elimination of pass-through taxation or tax deferred distributions;

·                                increases in operational or compliance costs resulting from changes in laws and governmental regulations affecting our pipeline systems, particularly regulations issued by the Federal Energy Regulatory Commission (FERC), the U.S. Environmental Protection Agency (EPA) and U.S. Department of Transportation (DOT);

·                                our ongoing ability to grow distributions through acquisitions, accretive expansions or other growth opportunities, including the timing of further potential acquisitions from TransCanada;

·                                potential conflicts of interest between TC PipeLines GP, Inc., our general partner (General Partner), TransCanada and us;

·                                the ability to maintain secure operation of our information technology;

·                                the impact of any impairment charges;

·                                operating hazards, casualty losses and other matters beyond our control; and

·                                the level of our indebtedness, including the indebtedness of our pipeline systems, and the availability of capital.

 

These are not the only factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Other factors described elsewhere in this document, or factors that are unknown or unpredictable, could also have material adverse effects on future results. These and other risks are described in greater detail in Part I, Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2013. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. All forward-looking statements are made only as of the date made and except as required by applicable law, we undertake no obligation to update any forward-looking statements to reflect new information, subsequent events or other changes.

 

 

4



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.           Financial Statements

 

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Three months ended

 

Nine months ended

(unaudited)

 

September 30,

 

September 30,

(millions of dollars, except per common unit
amounts)

 

2014

 

2013

 

2014

 

2013(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

80

 

 

85

 

 

249

 

 

253

 

Equity earnings from unconsolidated affiliates (Note 4)

 

15

 

 

15

 

 

66

 

 

48

 

Operation and maintenance expenses

 

(14

)

 

(13

)

 

(38

)

 

(39

)

Property taxes

 

(5

)

 

(6

)

 

(17

)

 

(18

)

General and administrative

 

(5

)

 

(2

)

 

(8

)

 

(8

)

Depreciation

 

(21

)

 

(21

)

 

(64

)

 

(64

)

Financial charges and other

 

(11

)

 

(12

)

 

(37

)

 

(31

)

Net income

 

39

 

 

46

 

 

151

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

8

 

 

9

 

 

26

 

 

27

 

Net income attributable to controlling interests

 

31

 

 

37

 

 

125

 

 

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests allocation (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

Common units

 

30

 

 

36

 

 

122

 

 

86

 (b)

General Partner

 

1

 

 

1

 

 

3

 

 

2

 

 

 

31

 

 

37

 

 

125

 

 

88

 (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common unit (Note 7) basic and diluted

 

$0.48

 

 

$0.58

 

 

$1.96

 

 

$1.50

 (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding (millions) – basic and diluted

 

62.6

 

 

62.3

 

 

62.4

 

 

57.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units outstanding, end of period (millions)

 

63.6

 

 

62.3

 

 

63.6

 

 

62.3

 

 

 

(a)       Recast as discussed in Note 2.

 

(b)       Recast as discussed in Note 7.

 

 

 

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

 

 

5



Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Three months ended

 

Nine months ended

(unaudited)

 

September 30,

 

September 30,

(millions of dollars)

 

2014

 

2013

 

2014

 

2013(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

39

 

 

46

 

 

151

 

 

141

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges (Note 11)

 

-

 

 

(1

)

 

(1

)

 

(1

)

Reclassification to net income of gains and losses on cash flow hedges (Note 11)

 

-

 

 

-

 

 

-

 

 

-

 

Comprehensive income

 

39

 

 

45

 

 

150

 

 

140

 

Comprehensive income attributable to non-controlling interests

 

8

 

 

9

 

 

26

 

 

27

 

Comprehensive income attributable to controlling interests

 

31

 

 

36

 

 

124

 

 

113

 

 

 

(a)       Recast as discussed in Note 2.

 

 

 

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

 

 

6



Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED BALANCE SHEET

 

(unaudited)

 

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

98

 

 

25

 

Accounts receivable and other (Note 12)

 

31

 

 

37

 

Inventories

 

8

 

 

7

 

 

 

137

 

 

69

 

Investments in unconsolidated affiliates (Note 4)

 

1,174

 

 

1,195

 

Plant, property and equipment

 

 

 

 

 

 

(Net of $715 accumulated depreciation; 2013 - $674)

 

1,985

 

 

2,042

 

Goodwill

 

130

 

 

130

 

Other assets

 

6

 

 

7

 

 

 

3,432

 

 

3,443

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

31

 

 

19

 

Accounts payable to affiliates (Note 10)

 

17

 

 

29

 

Accrued interest

 

12

 

 

4

 

Current portion of long-term debt (Note 5)

 

79

 

 

3

 

 

 

139

 

 

55

 

Long-term debt (Note 5)

 

1,454

 

 

1,575

 

Other liabilities

 

26

 

 

24

 

 

 

1,619

 

 

1,654

 

Partners’ Equity

 

 

 

 

 

 

Common units

 

1,362

 

 

1,322

 

General partner

 

29

 

 

28

 

Accumulated other comprehensive loss

 

(2

)

 

(1

)

Controlling interests

 

1,389

 

 

1,349

 

Non-controlling interests

 

424

 

 

440

 

 

 

1,813

 

 

1,789

 

 

 

3,432

 

 

3,443

 

 

 

 

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

 

 

7



Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine months ended

(unaudited)

 

September 30,

(millions of dollars)

 

2014

 

 

2013

(a)

 

 

 

 

 

 

 

Cash Generated From Operations

 

 

 

 

 

 

Net income

 

151

 

 

141

 

Depreciation

 

64

 

 

64

 

Amortization of debt issue costs

 

1

 

 

1

 

Accruals for costs related to the 2014 acquisition (Note 13)

 

2

 

 

-

 

Change in other assets

 

-

 

 

(4

)

Change in other liabilities

 

1

 

 

2

 

Change in operating working capital (Note 9)

 

36

 

 

11

 

 

 

255

 

 

215

 

Investing Activities

 

 

 

 

 

 

Cumulative distributions in excess of equity earnings:

 

 

 

 

 

 

Northern Border

 

15

 

 

18

 

Great Lakes

 

10

 

 

15

 

Investment in Great Lakes

 

(4

)

 

(4

)

Adjustment to 2013 acquisition (Note 10)

 

(25

)

 

-

 

Acquisition of 45 percent interest in each of GTN and Bison, net of cash acquired (Note 2)

 

-

 

 

(921

)

Adjustment to May 2011 acquisition

 

-

 

 

1

 

Capital expenditures

 

(8

)

 

(9

)

Change in affiliate demand loan receivable

 

-

 

 

(24

)

Other

 

1

 

 

-

 

 

 

(11

)

 

(924

)

Financing Activities

 

 

 

 

 

 

Distributions paid (Note 8)

 

(157

)

 

(137

)

Distributions paid to non-controlling interests

 

(42

)

 

(38

)

Change in affiliate demand loan payable

 

-

 

 

(15

)

ATM equity issuance, net (Note 6)

 

73

 

 

-

 

Equity issuance, net

 

-

 

 

381

 

Long-term debt issued

 

15

 

 

872

 

Long-term debt repaid

 

(60

)

 

(334

)

Equity contribution from Bison’s former parent

 

-

 

 

18

 

Distributions paid to former parent of GTN and Bison

 

-

 

 

(37

)

 

 

(171

)

 

710

 

Increase/(decrease) in cash and cash equivalents

 

73

 

 

1

 

Cash and cash equivalents, beginning of period

 

25

 

 

3

 

Cash and cash equivalents, end of period

 

98

 

 

4

 

 

 

 

(a)       Recast as discussed in Note 2.

 

 

 

 

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

 

 

8



Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ EQUITY

 

 

(unaudited)

 

Common Units

 

General
Partner

 

Accumulated
Other
Comprehensive
Loss

 

Partners’ Equity

 

Non-
Controlling
Interest

 

Total
Equity

 

 

(millions
of units)

 

(millions
of
dollars)

 

(millions
of
dollars)

 

(millions of
dollars)

 

(millions
of units)

 

(millions of
dollars)

 

(millions of
dollars)

 

(millions
of
dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Equity at December 31, 2013

 

62.3

 

1,322

 

28

 

(1)

 

62.3

 

1,349

 

440

 

1,789

Net income

 

 

 

122

 

3

 

-

 

-

 

125

 

26

 

151

Other Comprehensive Loss

 

 

 

-

 

-

 

(1)

 

-

 

(1)

 

-

 

(1)

ATM Equity Issuance, net (Note 6)

 

1.3

 

72

 

1

 

-

 

1.3

 

73

 

-

 

73

Distributions paid

 

 

 

(154)

 

(3)

 

-

 

-

 

(157)

 

(42)

 

(199)

Partners’ Equity at September 30, 2014

 

63.6

 

1,362

 

29

 

(2)

 

63.6

 

1,389

 

424

 

1,813

 

 

(a)       Losses related to cash flow hedges reported in Accumulated Other Comprehensive Loss and expected to be reclassified to Net Income in the next 12 months are estimated to be $1 million. These estimates assume constant interest rates over time; however, the amounts reclassified will vary based on actual interest rates at the date of settlement.

 

 

 

 

 

 

 

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

 

 

9



Table of Contents

 

TC PIPELINES, LP

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1        ORGANIZATION

 

TC PipeLines, LP and its subsidiaries are collectively referred to herein as the Partnership. The Partnership was formed by TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada Corporation (TransCanada Corporation together with its subsidiaries collectively referred to herein as TransCanada), to acquire, own and participate in the management of energy infrastructure assets in North America.

 

NOTE 2        SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying financial statements and related notes have been prepared in accordance with United States generally accepted accounting principles (GAAP) and amounts are stated in U.S. dollars. The results of operations for the three and nine months ended September 30, 2014 and 2013 are not necessarily indicative of the results that may be expected for a full fiscal year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013. That report contains a more comprehensive summary of the Partnership’s major accounting policies. In the opinion of management, the accompanying financial statements contain all of the appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly the financial position of the Partnership, the results of operation and cash flows for the respective periods. Our significant accounting policies are consistent with those disclosed in Note 2 of the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013. Certain items from that Note are repeated or updated below as necessary to assist in understanding the accompanying financial statements.

 

(a) Basis of Presentation

Entities acquired from TransCanada and its affiliates are accounted for as transactions between entities under common control, similar to pooling of interests, whereby the assets and liabilities of entities acquired are recorded at TransCanada’s carrying value and any excess purchase price paid are recorded as a reduction in Partners’ Equity. To the extent that such transactions require the Partnership’s historical financial information to be recast, we will present the transaction as if it had occurred at the beginning of the earliest period presented and any historical net equity amounts prior to the transaction date are reflected in the account of TransCanada as the former parent. However, in calculating the Net income per common unit, net income or loss of the entities acquired prior to the transaction will be reflected in the account of TransCanada. Therefore, any historical net income per common unit amounts will not be recast.

 

The Partnership consolidates its investments in GTN, Bison, North Baja and Tuscarora, over which it is able to exercise control. To the extent there are interests owned by other parties, these interests are included in non-controlling interests. The Partnership uses the equity method of accounting for its investments in Northern Border and Great Lakes, over which it is able to exercise significant influence.

 

On July 1, 2013, the Partnership acquired an additional 45 percent membership interest in each of GTN and Bison (the 2013 Acquisition) from subsidiaries of TransCanada which resulted in a 70 percent ownership in each of GTN and Bison. Partnership’s historical financial information, except net income attributable to controlling interest allocation and net income per common unit amounts, was recast to consolidate GTN and Bison for all periods presented.  See also Note 7.

 

(b) Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ from these estimates.

 

NOTE 3        ACCOUNTING PRONOUNCEMENTS

 

Future Accounting Changes

 

 

10



Table of Contents

 

Revenue from contracts with customers

 

In May 2014, the FASB issued new guidance on Revenue from Contracts with Customers (Topic 606). This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. This new guidance requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new guidance is effective from January 1, 2017 with two methods in which the amendment can be applied; (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application.   Early application is not permitted. The Partnership is currently evaluating the impact of the adoption of this Accounting Standards Update (ASU) and has not yet determined the effect on its consolidated financial statements.

 

NOTE 4        INVESTMENTS IN UNCONSOLIDATED AFFILIATES

 

Northern Border and Great Lakes are regulated by FERC and are operated by TransCanada. The Partnership uses the equity method of accounting for its interests in its equity investees.

 

 

 

 

 

 

Equity Earnings (Loss) from

 

Investments in

 

 

 

Ownership

 

Unconsolidated Affiliates

 

Unconsolidated Affiliates

 

 

 

Interest at

 

Three months

 

Nine Months

 

 

 

 

 

(unaudited)

 

September

 

ended September 30,

 

ended September 30,

 

September

 

December

 

 

 

30,

 

 

 

 

 

 

 

 

 

  30,

 

  31,

 

(millions of dollars)

 

2014

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Border (a)

 

50%

 

14

 

17

 

53

 

48

 

508

 

523

 

Great Lakes

 

46.45%

 

1

 

(2)

 

13

 

-

 

666

 

672

 

 

 

 

 

15

 

15

 

66

 

48

 

1,174

 

1,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)       Equity earnings from Northern Border is net of the 12-year amortization of a $10 million transaction fee paid to the operator of Northern Border at the time of the Partnership’s additional 20 percent interest acquisition in April 2006.

 

Northern Border

 

The Partnership recorded no undistributed earnings from Northern Border for the nine months ended September 30, 2014 and 2013.

 

The summarized financial information for Northern Border is as follows:

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

42

 

27

 

Other current assets

 

32

 

34

 

Plant, property and equipment, net

 

1,173

 

1,197

 

Other assets

 

34

 

33

 

 

 

1,281

 

1,291

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities

 

67

 

51

 

Deferred credits and other

 

22

 

19

 

Long-term debt, including current maturities

 

411

 

411

 

Partners’ equity

 

 

 

 

 

Partners’ capital

 

783

 

812

 

Accumulated other comprehensive loss

 

(2)

 

(2

)

 

 

1,281

 

1,291

 

 

 

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Three months ended

 

Nine months ended

 

 

 

 

 

(unaudited)

 

September 30,

 

September 30,

 

 

 

 

 

(millions of dollars)

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

66

 

 

72

 

 

221

 

 

213

 

Operating expenses

 

(16

)

 

(18

)

 

(50

)

 

(56

)

Depreciation

 

(15

)

 

(15

)

 

(44

)

 

(44

)

Financial charges and other

 

(8

)

 

(6

)

 

(20

)

 

(17

)

Net income

 

27

 

 

33

 

 

107

 

 

96

 

 

Great Lakes

The Partnership made an equity contribution to Great Lakes of $4 million in the first quarter of 2014. This amount represents the Partnership’s 46.45 percent share of a $9 million cash call from Great Lakes to make a scheduled debt repayment.

 

The Partnership recorded no undistributed earnings from Great Lakes for the nine months ended September 30, 2014 and 2013.

 

The summarized financial information for Great Lakes is as follows:

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

46

 

52

 

Plant, property and equipment, net

 

752

 

771

 

 

 

798

 

823

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities

 

26

 

28

 

Long-term debt, including current maturities

 

326

 

335

 

Partners’ equity

 

446

 

460

 

 

 

798

 

823

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

(unaudited)

 

September 30,

 

September 30,

 

 

 

 

 

(millions of dollars)

 

2014

 

 

2013

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

29

 

 

26

 

 

106

 

 

90

 

Operating expenses

 

(14

)

 

(15

)

 

(38

)

 

(45

)

Depreciation

 

(7

)

 

(8

)

 

(21

)

 

(24

)

Financial charges and other

 

(6

)

 

(6

)

 

(19

)

 

(20

)

Net income(loss)

 

2

 

 

(3

)

 

28

 

 

1

 

 

NOTE 5        CREDIT FACILITIES AND LONG-TERM DEBT

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

Senior Credit Facility due 2017

 

335

 

380

 

Term Loan Facility due 2018

 

500

 

500

 

4.65% Unsecured Senior Notes due 2021

 

349

 

349

 

5.09% Unsecured Senior Notes due 2015

 

75

 

75

 

5.29% Unsecured Senior Notes due 2020

 

100

 

100

 

5.69% Unsecured Senior Notes due 2035

 

150

 

150

 

3.82% Series D Senior Notes due 2017

 

24

 

24

 

 

 

1,533

 

1,578

 

 

 

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Less: current portion of long-term debt

 

79

 

3

 

 

 

1,454

 

1,575

 

 

The Partnership’s Senior Credit Facility consists of a $500 million senior revolving credit facility with a banking syndicate, maturing November 20, 2017, under which $335 million was outstanding at September 30, 2014 (December 31, 2013 - $380 million), leaving $165 million available for future borrowing.

 

The London Interbank Offered Rate (LIBOR) based interest rate on the Senior Credit Facility averaged 1.41 percent for the three and nine months ended September 30, 2014 (2013 – 1.44 and 1.45 percent). The LIBOR-based interest rate was 1.41 percent at September 30, 2014 (December 31, 2013 – 1.42 percent).

 

On July 1, 2013, the Partnership entered into a term loan agreement with a syndicate of lenders for a $500 million term loan credit facility (Term Loan Facility). On July 2, 2013, the Partnership borrowed $500 million under the Term Loan Facility.

 

The LIBOR-based interest rate on the Term Loan Facility averaged 1.41 percent for the three months ended September 30, 2014 (2013 – 1.44 percent).  For the nine months ended September 30, 2014, the interest averaged 1.41 percent. After hedging activity, the interest rate incurred on the Term Loan Facility averaged 1.83 percent for three months ended September 30, 2014 (2013 – 1.56 percent).  For the nine months ended September 30, 2014, the interest rate averaged 1.83 percent. Prior to hedging activities, the LIBOR-based interest rate was 1.41 percent at September 30, 2014 (December 31, 2013 – 1.42 percent).

 

The Partnership’s Senior Credit Facility and Term Loan Facility contain a covenant requiring us to maintain a maximum agreed upon leverage ratio.

 

GTN’s Senior Notes provisions contain a covenant that limits total debt to no greater than 70 percent of total capitalization.

 

The Series D Senior Notes, which require yearly principal payments until its maturity, are secured by Tuscarora’s transportation contracts, supporting agreements and substantially all of Tuscarora’s property. The note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners.

 

As of September 30, 2014, the Partnership was in compliance with its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Second Amended and Restated Agreement of Limited Partnership (Partnership Agreement), incurring additional debt and distributions to unitholders.

 

The principal repayments required on the long-term debt are as follows:

 

(unaudited)

 

 

 

(millions of dollars)

 

 

 

 

 

 

 

2014

 

3

 

2015

 

79

 

2016

 

4

 

2017

 

348

 

2018

 

500

 

Thereafter

 

599

 

 

 

1,533

 

 

NOTE 6        PARTNERS’ EQUITY

 

ATM equity issuance program (ATM program)

 

In August 2014, the Partnership entered into an Equity Distribution Agreement (the EDA) with five different financial institutions (Managers). Pursuant to the terms of the EDA, we may from time to time, through the Managers as our sales agents, offer and sell common units having an aggregate offering price of up to $200 million.  Sales of such common units will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed upon by one or more of the Managers and us. We intend to use the net proceeds from sales under the program for general partnership purposes, which may include debt repayment and future acquisitions.

 

Beginning in August until September 30, 2014, the Partnership issued 1.3 million common units under the ATM program generating net proceeds of approximately $73 million, including our General Partner’s proportionate equity contribution of approximately $1 million to maintain its two percent effective interest, net of approximately $1 million of commission to our sales agents.

 

 

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NOTE 7                         NET INCOME PER COMMON UNIT

 

Net income per common unit is computed by dividing net income attributable to controlling interests, after deduction of the General Partner’s allocation and net income attributed to GTN’s and Bison’s former parent, by the weighted average number of common units outstanding. The General Partner’s allocation is equal to an amount based upon the General Partner’s effective two percent general partner interest, plus an amount equal to incentive distributions. Incentive distributions are paid to the General Partner if quarterly cash distributions on the common units exceed levels specified in the Partnership Agreement.

 

Net income per common unit was determined as follows:

 

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

September 30,

 

September 30,

 

(millions of dollars, except per common unit amounts)

 

2014

 

2013

 

2014

 

2013(a)

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests

 

31

 

37

 

125

 

114

 

Net income attributed to GTN’s and Bison’s former parent

 

-

 

-

 

-

 

(26) (b)

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to partners

 

31

 

37

 

125

 

88

 

Net income allocated to General Partner, including incentive distribution rights

 

(1)

 

(1)

 

(3)

 

(2)

 

Net income allocable to common units

 

30

 

36

 

122

 

86(b)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding (millions) – basic and diluted

 

62.6

 

62.3

 

62.4

 

57.8

 

Net income per common unit – basic and diluted

 

$0.48

 

$0.58

 

$1.96

 

$1.50(b)

 

 

 

(a)       Recast as discussed in Note 2.

(b)       Net income allocated to common units and the net income per common unit for nine months ended September 30, 2013 have been revised and are presented consistent with our presentation prior to the recast.  These changes conform to our presentation for a previous common control transaction in 2009 to ensure consistency.  As a result of these changes, we excluded net income allocable to GTN and Bison’s former parent as such amounts were not allocable to either the general partner or common units. These revisions had no impact on these financial statements except as presented below.

 

 

Nine months ended September 30, 2013

 

As previously
presented

 

Adjustment

 

Revised

 

Net income allocable to common units

 

112

 

(26

)

86

 

Net income per common unit – basic and diluted

 

$1.94

 

($0.44

)

$1.50

 

 

 

NOTE 8                         CASH DISTRIBUTIONS

 

For the three and nine months ended September 30, 2014, the Partnership distributed $0.84 and $2.46 per common unit (2013 – $0.81 and $2.37 per common unit) for a total of $54 million and $157 million, respectively (2013 - $52 million and $137 million). The distributions paid for the three and nine months ended September 30, 2014 included incentive distributions of nil million to the General Partner.  There were no incentive distributions paid to the General Partner for the three and nine months ended September 30, 2013.

 

 

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NOTE 9                         CHANGE IN OPERATING WORKING CAPITAL

 

(unaudited)

 

Nine months ended September 30,

 

(millions of dollars)

 

2014

 

2013(a)

 

 

 

 

 

 

 

Change in accounts receivable and other

 

5

 

5

 

Change in accounts payable and accrued liabilities

 

10

 

(2)

 

Change in accounts payable to affiliates (b)

 

13

 

(2)

 

Change in accrued interest

 

8

 

10

 

Change in operating working capital

 

36

 

11

 

 

 

(a)       Recast as discussed in Note 2.

(b)       Excludes Carty Lateral accrual of $25 million at December 31, 2013.

 

 

NOTE 10                  RELATED PARTY TRANSACTIONS

 

The Partnership does not have any employees. The management and operating functions are provided by the General Partner. The General Partner does not receive a management fee in connection with its management of the Partnership. The Partnership reimburses the General Partner for all costs of services provided, including the costs of employee, officer and director compensation and benefits, and all other expenses necessary or appropriate to the conduct of the business of, and allocable to, the Partnership. Such costs include (i) overhead costs (such as office space and equipment) and (ii) out-of-pocket expenses related to the provision of such services. The Partnership Agreement provides that the General Partner will determine the costs that are allocable to the Partnership in any reasonable manner determined by the General Partner in its sole discretion. Total costs charged to the Partnership by the General Partner were $1 million and $2 million for the three and nine months ended September 30, 2014 (2013 – $1 million and $3 million).

 

As operator, TransCanada’s subsidiaries provide capital and operating services to our pipeline systems. TransCanada’s subsidiaries incur costs on behalf of our pipeline systems, including, but not limited to, employee salary and benefit costs, and property and liability insurance costs.

 

Capital and operating costs charged to our pipeline systems for the three and nine months ended September 30, 2014 and 2013 by TransCanada’s subsidiaries and amounts payable to TransCanada’s subsidiaries at September 30, 2014 and December 31, 2013 are summarized in the following tables:

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

September 30,

 

September 30,

 

(millions of dollars)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Capital and operating costs charged by TransCanada’s subsidiaries to:

 

 

 

 

 

 

 

 

 

Great Lakes (a)

 

7

 

7

 

22

 

23

 

Northern Border (a)

 

9

 

7

 

26

 

21

 

GTN (a)

 

8

 

7

 

21

 

21

 

Bison (a)

 

2

 

1

 

4

 

4

 

North Baja

 

1

 

1

 

3

 

3

 

Tuscarora

 

1

 

1

 

3

 

3

 

Impact on the Partnership’s net income:

 

 

 

 

 

 

 

 

 

Great Lakes

 

3

 

3

 

10

 

10

 

Northern Border

 

4

 

3

 

11

 

10

 

GTN (b)

 

5

 

5

 

14

 

14

 

Bison(b)

 

1

 

1

 

3

 

3

 

North Baja

 

1

 

1

 

3

 

3

 

Tuscarora

 

1

 

1

 

3

 

3

 

 

 

15



Table of Contents

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Amount payable to TransCanada’s subsidiaries for costs charged in the period by:

 

 

 

 

 

GTN (a) 

 

11

 

3

 

Northern Border (a)

 

12

 

3

 

Bison (a) 

 

1

 

-

 

Great Lakes (a)

 

13

 

3

 

North Baja

 

1

 

1

 

Tuscarora

 

1

 

-

 

 

(a)       Represents 100 percent of the costs.

(b)       Recast as discussed in Note 2.

 

Great Lakes’ earns transportation revenues from TransCanada and its affiliates under contracts, some of which are provided at discounted rates and some at maximum recourse rates. Great Lakes earned $13 million and $48 million of transportation revenues under these contracts for the three and nine months ended September 30, 2014 (2013 - $14 million and $49 million). These amounts represent 46 percent of total revenues earned by Great Lakes for the three and nine months ended September 30, 2014 (2013 – 54 percent). Great Lakes also earned nil and $1 million of affiliated rental revenue for the three and nine months ended September 30, 2014 (2013 – $1 million and $1 million).

 

Revenue from TransCanada and its affiliates of $6 million and $23 million are included in the Partnership’s equity earnings from Great Lakes for the three and nine months ended September 30, 2014 (2013 - $7 million and $23 million). At September 30, 2014, $7 million was included in Great Lakes’ receivables in regards to the transportation contracts with TransCanada and its affiliates (December 31, 2013 - $11 million).

 

In 2013, the Partnership accrued $25 million of additional consideration payable in accordance with the 2013 Acquisition related to the attainment of certain events with respect to the Carty Lateral. This amount was payable to a subsidiary of TransCanada and was recorded in accounts payable to affiliates as of December 31, 2013. On April 11, 2014, the Partnership made the $25 million payment with respect to the Carty Lateral consideration.

 

NOTE 11                  FAIR VALUE MEASUREMENTS

 

(a) Fair Value Hierarchy

Under Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, fair value measurements are characterized in one of three levels based upon the input used to arrive at the measurement. The three levels of the fair value hierarchy are as follows:

·      Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

·      Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·      Level 3 inputs are unobservable inputs for the asset or liability.

 

When appropriate, valuations are adjusted for various factors including credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

 

(b) Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable and other, accounts payable and accrued liabilities, accounts payable to affiliates and accrued interest approximate their fair values because of the short maturity or duration of these instruments, or because the instruments bear a variable rate of interest or a rate that approximates current rates. The fair value of the Partnership’s long-term debt is estimated by discounting the future cash flows of each instrument at estimated current borrowing rates. The fair value of interest rate derivatives is calculated using the income approach which uses period-end market rates and applies a discounted cash flow valuation model.

 

 

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The estimated fair value of the Partnership’s long-term debt as at September 30, 2014 and December 31, 2013 are as follows:

 

(unaudited)

 

September 30, 2014

 

December 31, 2013

 

(millions of dollars)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Senior Credit Facility due 2017

 

335

 

335

 

380

 

380

 

Term Loan Facility due 2018

 

500

 

500

 

500

 

500

 

4.65% Senior Notes due 2021

 

349

 

368

 

349

 

353

 

5.09% Unsecured Senior Notes due 2015

 

75

 

77

 

75

 

79

 

5.29% Unsecured Senior Notes due 2020

 

100

 

111

 

100

 

106

 

5.69% Unsecured Senior Notes due 2035

 

150

 

167

 

150

 

154

 

3.82% Series D Senior Notes due 2017

 

24

 

25

 

24

 

25

 

 

 

1,533

 

1,583

 

1,578

 

1,597

 

 

Long-term debt is recorded at amortized cost and classified in Level II of the fair value hierarchy for fair value disclosure purposes. Interest rate derivative assets and liabilities are classified in Level II for all periods presented where the fair value is determined by using valuation techniques that refer to observable market data or estimated market prices.

 

Market risk is the risk that changes in market interest rates may result in fluctuations in the fair values or cash flows of financial instruments. The Partnership’s floating rate debt is subject to LIBOR benchmark interest rate risk. The Partnership uses interest rate derivatives to manage its exposure to interest rate risk. We regularly assess the impact of interest rate fluctuations on future cash flows and evaluate hedging opportunities to mitigate our interest rate risk.

 

The interest rate swaps are structured such that the cash flows of the derivative instruments match those of the variable rate of interest on the Term Loan Facility. The Partnership hedged interest payments on $150 million of variable-rate Term Loan Facility with interest rate swaps effective September 3, 2013 and maturing July 1, 2018, at a weighted average fixed interest rate of 2.79 percent. At September 30, 2014, the fair value of the interest rate swaps accounted for as cash flow hedges was a liability of approximately $1 million (both on a gross and net basis) (December 31, 2013 – nil). The Partnership did not record any amounts in net income related to ineffectiveness for interest rate hedges for the three and nine months ended September 30, 2014 (2013 – nil). The change in fair value of interest rate derivative instruments recognized in other comprehensive income was nil and a loss of approximately $1 million for the three and nine months ended September 30, 2014, respectively (2013 – $1 million). For the three and nine months ended September 30, 2014, the net realized loss related to the interest rate swaps was $1 million and $2 million and was included in financial charges and other (2013 – nil).

 

The Partnership has no master netting agreements; however, contracts contain provisions with rights of offset. The Partnership has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. Had the Partnership elected to present these instruments on a net basis, there would be no effect on the consolidated balance sheet as of September 30, 2014 and December 31, 2013.

 

NOTE 12      ACCOUNTS RECEIVABLE AND OTHER

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Trade accounts receivable, net of allowance of nil

 

27

 

33

 

Other

 

4

 

4

 

 

 

31

 

37

 

 

NOTE 13      SUBSEQUENT EVENTS

 

On October 1, 2014, we acquired the remaining 30 percent interest of Bison from a subsidiary of TransCanada.  The total purchase price of the 2014 Acquisition was $215 million plus purchase price adjustments. The acquisition of Bison was financed through combinations of (i) net proceeds from the ATM program, and (ii) short-term financing.

 

 

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Table of Contents

 

The 2014 Acquisition, which resulted in Bison being wholly-owned by the Partnership, will continue to be accounted for as a transaction between entities under common control, similar to pooling of interests, whereby the assets and liabilities of Bison will be recorded at TransCanada’s carrying value and the total excess purchase price paid will be recorded as a reduction in Partners’ Equity.  (See also Note 2).

 

On October 1, 2014, the Partnership borrowed $170 million (Short - Term Loan Facility) payable in 364-days. The outstanding principal bears interest based on the LIBOR plus an applicable margin.  The Short - Term Loan Facility contains a covenant requiring us to maintain a maximum agreed upon leverage ratio.  The Partnership used the proceeds to fund the 2014 Acquisition and reduce the amount outstanding under its Senior Credit Facility.

 

On October 23, 2014, the board of directors of our General Partner declared the Partnership’s third quarter 2014 cash distribution in the amount of $0.84 per common unit payable on November 14, 2014 to unitholders of record as of November 4, 2014.

 

GTN declared a third quarter 2014 distribution of $26 million on October 14, 2014, of which the Partnership will receive its 70 percent share or $18 million on November 3, 2014.

 

Northern Border declared a third quarter 2014 distribution of $38 million on October 21, 2014, of which the Partnership will receive its 50 percent share or $19 million on November 3, 2014.

 

Bison declared a third quarter 2014 distribution of $16 million on October 14, 2014.  The Partnership will receive 100 percent share of this distribution on November 3, 2014.

 

Great Lakes declared a third quarter 2014 distribution of $8 million on October 14, 2014, of which the Partnership will receive its 46.45 percent share or $4 million on November 3, 2014.

 

 

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Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes included in Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2013.

 

RECENT BUSINESS DEVELOPMENTS

 

Cash Distributions –

 

On April 25, 2014, the board of directors of our General Partner declared the Partnership’s first quarter 2014 cash distribution in the amount of $0.81 per common unit, payable on May 15, 2014 to unitholders of record as of May 5, 2014.

 

On July 23, 2014, the board of directors of our General Partner declared the Partnership’s second quarter 2014 cash distribution in the amount of $0.84 per common unit payable on August 14, 2014 to unitholders of record as of August 5, 2014.  The declared distribution reflects a $0.03 per common unit increase to the quarterly distribution.  The second quarter 2014 distribution exceeded the first target of the General Partner’s incentive distribution rights (IDRs) by $0.03 per common unit, resulting in an increase in the distribution on the General Partner interest from 2% to 15% on the incremental distribution in excess of the first target.

 

On October 23, 2014, the board of directors of our General Partner declared the Partnership’s third quarter 2014 cash distribution in the amount of $0.84 per common unit payable on November 14, 2014 to unitholders of record as of November 4, 2014.  The third quarter 2014 distribution exceeded the first target of the General Partner’s IDRs by $0.03 per common unit, resulting in an increase in the distribution on the General Partner interest from 2% to 15% on the incremental distribution in excess of the first target.

 

ATM program - In August 2014, we entered into an Equity Distribution Agreement (the EDA) with five different financial institutions (Managers). Pursuant to the terms of the EDA, we may from time to time, through the Managers as our sales agents, offer and sell common units having an aggregate offering price of up to $200 million.  Sales of such common units will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed upon by one or more of the Managers and us.

 

Beginning in August until September 30, 2014, the Partnership issued 1.3 million common units under the ATM program generating net proceeds of approximately $73 million, including our General Partner’s proportionate equity contribution of approximately $1 million to maintain its two percent effective interest, net of approximately $1 million of commissions to our sales agents.

 

Bison Acquisition – On October 1, 2014, we acquired the remaining 30 percent interest of Bison from a subsidiary of TransCanada.  The total purchase price of the 2014 Acquisition was $215 million plus purchase price adjustments. The acquisition of Bison was financed through combinations of (i) net proceeds from the ATM program, and (ii) short-term financing. This acquisition is expected to improve the Partnership’s long-term cash flow stability and predictability.

 

Short Term Loan Facility- On October 1, 2014, the Partnership borrowed $170 million payable in 364-days. The outstanding principal bears interest based on the LIBOR plus an applicable margin.  We used the proceeds to fund the 2014 Acquisition and reduce the amount outstanding under our Senior Credit Facility.

 

HOW WE EVALUATE OUR OPERATIONS

 

We evaluate our business primarily on the basis of the underlying operating results for each of our pipeline systems along with a measure of Partnership cash flows. This measure does not have a standardized meaning prescribed by GAAP. It is, therefore, considered to be a non-GAAP measure and is unlikely to be comparable to similar measures presented by other entities. Refer to Partnership Cash Flows for additional information.

 

 

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RESULTS OF OPERATIONS

 

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions, which cannot be known with certainty, that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ. There were no significant changes to the Partnership’s critical accounting policies and estimates during the three and nine months ended September 30, 2014.

 

Information about our critical accounting policies and estimates is included under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Accounting Pronouncements

 

Future Accounting Changes

 

Revenue from contracts with customers

 

In May 2014, the FASB issued new guidance on Revenue from Contracts with Customers (Topic 606). This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. This new guidance requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new guidance is effective from January 1, 2017 with two methods in which the amendment can be applied; (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application.   Early application is not permitted. The Partnership is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.

 

Net Income Attributable to Controlling Interests

To supplement our financial statements, we have presented a comparison of the earnings contribution components from each of our investments. We have presented net income attributable to controlling interests in this format to enhance investors’ understanding of the way management analyzes our financial performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

 

 

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Three months ended

 

Nine months ended

 

(unaudited)

 

September 30,

 

September 30,

 

(millions of dollars)

 

2014

 

2013

 

2014

 

2013(a)

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

GTN

 

16

 

19

 

53

 

56

 

Bison

 

12

 

11

 

35

 

33

 

North Baja

 

6

 

6

 

18

 

18

 

Tuscarora

 

3

 

4

 

12

 

12

 

Equity earnings:

 

 

 

 

 

 

 

 

 

Northern Border

 

14

 

17

 

53

 

48

 

Great Lakes

 

1

 

(2)

 

13

 

-

 

Partnership expenses

 

(13)

 

(9)

 

(33)

 

(26)

 

Net income

 

39

 

46

 

151

 

141

 

Net income attributable to non-controlling interests

 

8

 

9

 

26

 

27

 

Net income attributable to controlling interests

 

31

 

37

 

125

 

114

 

 

 

(a) Financial information was recast to consolidate GTN and Bison for the period presented.

 

Third Quarter 2014 Compared with Third Quarter 2013

For the three months ended September 30, 2014, net income attributable to controlling interests decreased by $6 million to $31 million compared to $37 million in the third quarter of 2013. This decrease was primarily due to lower net income from GTN primarily due to lower transportation revenue and higher Partnership expenses primarily due to the costs relating to the 2014 Acquisition.

 

Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013

For the nine months ended September 30, 2014, net income increased by $10 million to $151 million compared to $141 million for the same period in 2013. This increase was primarily due to higher equity earnings from Northern Border and Great Lakes partially offset by higher Partnership expenses.

 

Equity earnings increased from Northern Border and Great Lakes primarily due to higher transportation revenues for the first quarter mainly due to the sale of daily capacity during the winter months.

 

Partnership expenses were $33 million for the nine months ended September 30, 2014, an increase of $7 million compared to the same period in 2013. The increase was primarily due to interest expense incurred in relation to the $500 million term loan obtained to finance a portion of the 2013 Acquisition and costs associated with the 2014 Acquisition.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

Our principal sources of liquidity include distributions received from our investments in partially owned affiliates, operating cash flows from our subsidiaries, public offerings of debt and equity, term loans and our bank credit facility. The Partnership funds its operating expenses, debt service and cash distributions primarily with operating cash flow. Long-term capital needs may be met through the issuance of long-term debt and/or equity.

 

Our pipeline systems’ principal sources of liquidity are cash generated from operating activities, long-term debt offerings, bank credit facilities and equity contributions from their owners. Our pipeline systems have historically funded operating expenses, debt service and cash distributions to their owners primarily with operating cash flow. However, since the fourth quarter of 2010, Great Lakes has funded its debt repayments with cash calls to its owners. Northern Border also funded $62 million of debt repayment in 2013 with a cash call to its owners.

 

Capital expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, issuance of senior unsecured notes or equity contributions from our pipeline systems’ owners. The ability of our pipeline systems to access the debt capital markets under reasonable terms depends on their financial position and general market conditions.

 

 

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The Partnership’s pipeline systems monitor the creditworthiness of their customers and have credit provisions included in their tariffs which, although limited by FERC, allow them to request credit support as circumstances dictate.

 

Our cash flow is based on the distributions from our portfolio of six pipelines. Overall, we believe that our pipeline systems’ ability to obtain financing at reasonable rates, together with a history of consistent cash flow from operating activities, provide a solid foundation to meet future liquidity and capital requirements.  We expect to be able to fund our liquidity requirements, including our distributions, at the Partnership level over the next 12 months utilizing our cash flow and our existing Senior Credit Facility as well as access to the debt and equity capital markets if required.

 

Partnership Cash Flows

 

The Partnership uses the non-GAAP financial measures “Partnership cash flows” and “Partnership cash flows before General Partner distributions” as they provide a measure of cash generated during the period to evaluate our cash distribution capability. As well, management uses these measures as a basis for recommendations to our General Partner’s board of directors regarding the distribution amount to be declared each quarter. Partnership cash flow information is presented to enhance investors’ understanding of the way that management analyzes the Partnership’s financial performance.

 

Partnership cash flows include net income attributable to controlling interests, less net income attributed to GTN’s and Bison’s former parent, plus operating cash flows from North Baja and Tuscarora, and cash distributions received from GTN, Northern Border, Bison and Great Lakes, less equity earnings from unconsolidated affiliates and Other Pipes’ net income as previously reported, plus net income attributable to non-controlling interests from consolidated subsidiaries after the 2013 Acquisition, and net of distributions declared to the General Partner. Partnership cash flows before General Partner distributions represent Partnership cash flows prior to distributions paid to the General Partner.

 

Partnership cash flows and Partnership cash flows before General Partner distributions are provided as a supplement to GAAP financial results and are not meant to be considered in isolation or as substitutes for financial results prepared in accordance with GAAP.

 

 

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Non-GAAP Measures

 

Reconciliations of Net Income Attributable to Controlling Interests to Partnership Cash Flows

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

September 30,

 

September 30,

 

(millions of dollars except per common unit amounts)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests(a)

 

31

 

 

37

 

 

125

 

 

114

 

Less net income attributed to GTN’s and Bison’s former parent (a)

 

-

 

 

-

 

 

-

 

 

(26)

 

Net income as previously reported

 

31

 

 

37

 

 

125

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions from GTN (b)

 

20

 

 

19

 

 

65

 

 

33

 

Cash distributions from Northern Border (b)

 

21

 

 

22

 

 

68

 

 

66

 

Cash distributions from Bison (b)

 

12

 

 

11

 

 

35

 

 

18

 

Cash distributions from Great Lakes (b)

 

5

 

 

3

 

 

24

 

 

15

 

Cash flows provided by North Baja’s and Tuscarora’s operating activities

 

13

 

 

13

 

 

39

 

 

39

 

 

 

71

 

 

68

 

 

231

 

 

171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings as previously reported:

 

 

 

 

 

 

 

 

 

 

 

 

GTN

 

-

 

 

-

 

 

-

 

 

(9)

 

Northern Border

 

(14)

 

 

(17)

 

 

(53)

 

 

(48)

 

Bison

 

-

 

 

-

 

 

-

 

 

(6)

 

Great Lakes

 

(1)

 

 

2

 

 

(13)

 

 

-

 

 

 

(15)

 

 

(15)

 

 

(66)

 

 

(63)

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Other Pipes’ net income as previously reported (c)

 

 

 

 

 

 

 

 

 

 

 

 

GTN

 

(16)

 

 

(19)

 

 

(53)

 

 

(19)

 

Bison

 

(12)

 

 

(11)

 

 

(35)

 

 

(11)

 

North Baja

 

(6)

 

 

(6)

 

 

(18)

 

 

(18)

 

Tuscarora

 

(3)

 

 

(4)

 

 

(12)

 

 

(12)

 

 

 

(37)

 

 

(40)

 

 

(118)

 

 

(60)

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests after the 2013 Acquisition

 

8

 

 

9

 

 

26

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership cash flows before General Partner distributions

 

58

 

 

59

 

 

198

 

 

145

 

General Partner distributions (d)

 

(1)

 

 

(1)

 

 

(3)

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership cash flows

 

57

 

 

58

 

 

195

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared

 

(55)

 

 

(52)

 

 

(161)

 

 

(146)

 

Cash distributions declared per common unit (e)

 

$0.84

 

 

$0.81

 

 

$2.49

 

$2.40

 

Cash distributions paid

 

(54)

 

 

(52)

 

 

(157)

 

 

(137)

 

Cash distributions paid per common unit (e)

 

$0.84

 

 

$0.81

 

 

$2.46

 

$2.37

 

 

(a)                   The additional 45 percent membership interests in each of GTN and Bison were acquired from subsidiaries of TransCanada in July 2013. As a result, the acquisition was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the assets and liabilities of GTN and Bison were recorded at TransCanada’s carrying value and the Partnership’s historical financial information was recast to consolidate GTN and Bison for all periods presented.

(b)                   In accordance with the cash distribution policies of the respective entities, cash distributions from GTN, Northern Border, Bison and Great Lakes, are based on their respective prior quarter financial results. Distributions from GTN and Bison are based on 70 percent ownership starting from July 1, 2013.

(c)                   “Other Pipes” includes the results of North Baja and Tuscarora and, after July 1, 2013, GTN and Bison as well.

(d)                   General Partner distributions represent the cash distributions paid to the General Partner with respect to its effective two percent general partner interest plus an amount equal to incentive distributions. Incentive distributions for the three

 

 

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and nine months ended September 30, 2014 were nil. No incentive distributions were paid to the General Partner for the three and nine months ended September 30, 2013.

(e)                   Cash distributions declared per common unit and cash distributions paid per common unit are computed by dividing cash distributions, after the deduction of the General Partner’s allocation, by the number of common units outstanding. The General Partner’s allocation is computed based upon the General Partner’s effective two percent general partner interest plus an amount equal to incentive distributions.

 

Third Quarter 2014 Compared with Third Quarter 2013

Partnership cash flows decreased $1 million to $57 million for the three months ended September 30, 2014 compared to $58 million in the third quarter of 2013. This decrease was due to a decrease in Other Pipes’ net income partially offset by higher cash distributions from our pipeline investments.

 

The Partnership paid distributions of $54 million in the third quarter of 2014, an increase of $2 million compared to the same period in 2013. This increase was due to a $0.03 increase in the distribution per common unit in July 2014.

 

Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013

For the nine months ended September 30, 2014, Partnership cash flows were $195 million, a $53 million increase compared to the $142 million in the same period of 2013. This increase was primarily due to increased cash distributions from GTN and Bison of $49 million as a result of the 2013 Acquisition.

 

Other Cash Flows

In the first quarter of 2014, the Partnership made an equity contribution of $4 million to Great Lakes which was used to fund debt repayments.

 

In the third quarter of 2014, the Partnership made a payment of $25 million in accordance with the 2013 Acquisition related to the attainment of certain events with respect to the Carty Lateral project.

 

Contractual Obligations

 

The Partnership’s contractual obligations related to debt as of September 30, 2014 included the following:

 

 

 

Payments Due by Period

 

(millions of dollars)

 

Total

 

Less than 1 Year

 

Long-term Portion

 

 

 

 

 

 

 

 

 

Senior Credit Facility due 2017

 

335

 

-

 

335

 

Term Loan Facility due 2018

 

500

 

-

 

500

 

4.65% Senior Notes due 2021

 

349

 

-

 

349

 

5.09% Senior Notes due 2015

 

75

 

75

 

-

 

5.29% Senior Notes due 2020

 

100

 

-

 

100

 

5.69% Senior Notes due 2035

 

150

 

-

 

150

 

3.82% Series D Notes due 2017

 

24

 

4

 

20

 

 

 

1,533

 

79

 

1,454

 

 

 

The Partnership’s Senior Credit Facility consists of a $500 million senior revolving credit facility with a banking syndicate, maturing November 20, 2017, under which $335 million was outstanding at September 30, 2014 (December 31, 2013 - $380 million).

 

The London Interbank Offered Rate (LIBOR) based interest rate on the Senior Credit Facility averaged 1.41 percent for the three and nine months ended September 30, 2014 (2013 — 1.44 and 1.45 percent). The LIBOR-based interest rate was 1.41 percent at September 30, 2014 (December 31, 2013 — 1.42 percent).

 

On July 1, 2013, the Partnership entered into a term loan agreement with a syndicate of lenders for a $500 million term loan credit facility (Term Loan Facility). On July 2, 2013, the Partnership borrowed $500 million under the Term Loan Facility.

 

The LIBOR-based interest rate on the Term Loan Facility averaged 1.41 percent for the three months ended September 30, 2014 (2013 — 1.44 percent).  For the nine months ended September 30, 2014, the interest averaged 1.41 percent. After hedging activity, the interest rate incurred on the Term Loan Facility averaged 1.83 percent for three months ended September 30, 2014 (2013 — 1.56 percent).  For the nine months ended September 30, 2014, the interest rate averaged 1.83 percent. Prior to hedging activities, the LIBOR-based interest rate was 1.41 percent at September 30, 2014 (December 31, 2013 — 1.42 percent).

 

The Partnership’s Senior Credit Facility and Term Loan Facility contain a covenant requiring us to maintain a maximum agreed upon leverage ratio.

 

GTN’s Senior Notes provisions contain a covenant that limits total debt to no greater than 70 percent of total capitalization.

 

 

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Series D Senior Notes are secured by Tuscarora’s transportation contracts, supporting agreements and substantially all of Tuscarora’s property. The note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners.

 

At September 30, 2014, the Partnership was in compliance with its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Partnership Agreement, incurring additional debt and distributions to unitholders.

 

The Partnership’s long-term debt results in exposures to changing interest rates. The Partnership uses derivatives to assist in managing its exposure to interest rate risk. Refer to Market Risk for additional information regarding the derivatives.

 

The fair value of the Partnership’s long-term debt is estimated by discounting the future cash flows of each instrument at estimated current borrowing rates. The estimated fair value of the Partnership’s long-term debt at September 30, 2014 was $1,583 million.

 

Northern Border’s contractual obligations related to debt as of September 30, 2014 included the following:

 

 

 

Payments Due by Period

 

(millions of dollars)

 

Total

 

Less than 1 Year

 

Long-term Portion

 

 

 

 

 

 

 

 

 

6.24% Senior Notes due 2016

 

100

 

-

 

100

 

7.50% Senior Notes due 2021

 

250

 

-

 

250

 

$200 million Credit Agreement due 2016

 

61

 

-

 

61

 

 

 

411

 

-

 

411

 

 

As of September 30, 2014, $61 million was outstanding under its $200 million revolving credit agreement, leaving $139 million available for future borrowings. The weighted average interest rate related to the borrowings on the credit agreement was 1.37 percent as of September 30, 2014 (December 31, 2013 – 1.37 percent). At September 30, 2014, Northern Border was in compliance with all of its financial covenants.

 

Northern Border has commitments of $6 million as of September 30, 2014 in connection with various capital overhaul projects.

 

Great Lakes’ contractual obligations related to debt as of September 30, 2014 included the following:

 

 

 

Payments Due by Period

 

(millions of dollars)

 

Total

 

Less than 1 Year

 

Long-term Portion

 

 

 

 

 

 

 

 

 

6.73% series Senior Notes due 2015 to 2018

 

36

 

9

 

27

 

9.09% series Senior Notes due 2014 and 2021

 

80

 

10

 

70

 

6.95% series Senior Notes due 2019 and 2028

 

110

 

-

 

110

 

8.08% series Senior Notes due 2021 and 2030

 

100

 

-

 

100

 

 

 

326

 

19

 

307

 

 

Great Lakes is required to comply with certain financial, operational and legal covenants. Under the most restrictive covenants in the senior note agreements, approximately $176 million of Great Lakes’ partners’ capital was restricted as to distributions as of September 30, 2014 (December 31, 2013 – $180 million). Great Lakes was in compliance with all of its financial covenants at September 30, 2014.

 

Capital Requirements

The Partnership made an equity contribution to Great Lakes of $4 million in the first quarter of 2014. This amount represents the Partnership’s 46.45 percent share of a $9 million cash call from Great Lakes to make a scheduled debt repayment. The Partnership expects to make an additional $5 million equity contribution to Great Lakes in the fourth quarter of 2014 to further fund debt repayments.

 

GTN will spend approximately $54 million to build the Carty Lateral which is expected to be in-service in the fourth quarter of 2015