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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 June 30, 2017

 

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)

 

 

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 o

 

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 o

 

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

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

 

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

Yes o                     No x

 

As of August 1, 2017, there were 69,388,212 of the registrant’s common units outstanding.

 

 

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TC PIPELINES, LP

 

TABLE O F CONTENTS

 

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	40
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 6.	Exhibits	43
	Signatures	45

 

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

 

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DEFINITIONS

 

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

 

2013 Term Loan Facility	TC PipeLines, LP’s term loan credit facility under a t erm loan agreement dated July 1, 2013
2015 GTN Acquisition	Partnership’s acquisition of the remaining 30 percent interest in GTN on April 1, 2015
2015 Term Loan Facility	TC PipeLines, LP’s term loan credit facility under a t erm loan agreement dated September 30, 2015
2016 PNGTS Acquisition	Partnership’s acquisition of a 49.9 percent interest in PNGTS, effective January 1, 2016
2017 Acquisition	Partnership’s acquisition of the additional 11.81 percent interest in PNGTS and 49.34 percent in Iroquois on June 1, 2017
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
ATM program	At-the-market equity issuance program
Bison	Bison Pipeline LLC
Consolidated Subsidiaries	GTN, Bison, North Baja, Tuscarora and PNGTS
DOT	U.S. Department of Transportation
EBITDA	Earnings Before Interest, Tax, Depreciation and Amortization
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
ILPs	Intermediate Limited Partnerships
Iroquois	Iroquois Gas Transmission System, L.P.
LIBOR	London Interbank Offered Rate
NGA	Natural Gas Act of 1938
North Baja	North Baja Pipeline, LLC
Northern Border	Northern Border Pipeline Company
Our pipeline systems	Our ownership interests in GTN, Northern Border, Bison, Great Lakes, North Baja, Tuscarora, and PNGTS
Partnership	TC PipeLines, LP including its subsidiaries, as applicable
Partnership Agreement	Third Amended and Restated Agreement of Limited Partnership of the Partnership
PHMSA	U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration
PNGTS	Portland Natural Gas Transmission System
SEC	Securities and Exchange Commission
Senior Credit Facility	TC PipeLines, LP’s senior facility under revolving credit agreement as amended and restated, dated November 10, 2016
TransCanada	TransCanada Corporation and its subsidiaries
Tuscarora	Tuscarora Gas Transmission Company
U.S.	United States of America
VIEs	Variable Interest E ntities

 

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), Tuscarora Gas Transmission Company (Tuscarora), Portland Natural Gas Transmission System (PNGTS) and effective June 1, 2017,  Iroquois Gas Transmission System, LP (Iroquois).

 

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PART I

 

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

 

This report includes certain forward-looking statements .Forward-looking statements are identified by words and phrases such as: “anticipate,” “assume, “ “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:

·                   demand for natural gas;

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

·                   natural gas prices and regional differences;

·                   weather conditions;

·                   availability and location of natural gas supplies in Canada and the United States (U.S.) in relation to our pipeline systems;

·                   competition from other pipeline systems;

·                   natural gas storage levels; and

·                   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 partnerships by state or federal governments such as final adoption of proposed regulations narrowing the sources of income qualifying for partnership tax treatment or 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);

·                                     the impact of downward changes in oil and natural gas prices, including the effects on the creditworthiness of our shippers;

·                                     our ongoing ability to grow distributions through acquisitions, accretive expansions or other growth opportunities, including the timing, terms and closure of future potential acquisitions;

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

·                                     the impact of any impairment charges;

·                                     cybersecurity threats, acts of terrorism and related disruptions;

the impact of new accounting pronouncements;

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

·                                     the level 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”of our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on February 28, 2017. 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

 

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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.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.            Financial Statements

 

TC PIPELINES, LP

CONSOLIDATED STATEMENTS OF INCOME

 

		Three months ended						Six months ended
(unaudited)		June 30,						June 30,
(millions of dollars, except per common unit amounts)		2017			2016  (a)			2017			2016  (a)
Transmission revenues		101			101			213			212
Equity earnings (Note 4)		24			20			60			53
Operation and maintenance expenses		(17		)	(14		)	(31		)	(25		)
Property taxes		(7		)	(7		)	(14		)	(14		)
General and administrative		(2		)	(2		)	(4		)	(4		)
Depreciation		(25		)	(24		)	(49		)	(48		)
Financial charges and other (Note 14)		(19		)	(17		)	(36		)	(35		)
Net income before taxes		55			57			139			139
Income taxes (Note 18)		—			—			(1		)	(1		)
Net income		55			57			138			138
Net income attributable to non-controlling interests		—			2			6			8
Net income attributable to controlling interests		55			55			132			130
Net income attributable to controlling interest allocation (Note 8)
Common units		50			50			122			121
General Partner		5			3			8			5
TransCanada and its subsidiaries		—			2			2			4
		55			55			132			130
Net income per common unit (Note 8) — basic and diluted		$	0.73		$	0.76	(b)	$	1.78		$	1.86	(b)
Weighted average common units outstanding — basic and diluted (millions)		68.9			65.5			68.6			64.9
Common units outstanding, end of period (millions)		69.0			65.9			69.0			65.9

 

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(a)               Recast to consolidate PNGTS for all periods presented (Refer to Notes 2 and 6).

(b)              Net income per common unit prior to recast (Refer to Note 2).

 

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

 

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TC PIPELINES, LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three months ended				Six months ended
(unaudited)		June 30,				June 30,
(millions of dollars)		2017		2016 (a)		2017		2016 (a)
Net income		55		57		138		138
Other comprehensive income
Change in fair value of cash flow hedges (Note 12)		—		(1	)	1		(3	)
Amortization of realized loss on derivative financial instruments (Note 12)		1		1		1		1
Reclassification to net income of gains and losses on cash flow hedges (Note 12)		(1	)	—		(1	)	—
Comprehensive income		55		57		139		136
Comprehensive income attributable to non-controlling interests (a)		—		2		6		8
Comprehensive income attributable to controlling interests		55		55		133		128

 

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(a)               Recast to consolidate PNGTS for all periods presented (Refer to Notes 2 and 6).

 

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

 

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TC PIPELINES, LP

CONSOLIDATED BALANCE SHEETS

 

(unaudited)
(millions of dollars)		June 30, 2017		December 31, 2016  (a)
ASSETS
Current Assets
Cash and cash equivalents		51		64
Accounts receivable and other (Note 13)		37		47
Inventories		7		7
Other		5		7
		100		125
Equity investments (Note 4)		1,138		918
Plant, property and equipment (Net of $1,135 accumulated depreciation; 2016 - $1,088)		2,148		2,180
Goodwill		130		130
Other assets		—		1
		3,516		3,354
LIABILITIES AND PARTNERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities		27		29
Accounts payable to affiliates (Note 6 and 11)		35		8
Distribution payable		—		3
Accrued interest		11		10
Current portion of long-term debt (Note 5)		57		52
		130		102
Long-term debt, net (Note 5)		2,333		1,859
Deferred state income taxes (Note 18)		10		10
Other liabilities		28		28
		2,501		1,999
Common units subject to rescission (Note 7)		—		83
Partners’ Equity
Common units		795		1,002
Class B units (Note 7)		95		117
General partner		25		27
Accumulated other comprehensive loss		(1	)	(2	)
Controlling interests		914		1,144
Non-controlling interests		101		97
Equity of former parent of PNGTS		—		31
		1,015		1,272
		3,516		3,354
Contingencies (Note 15)
Variable Interest Entities (Note 17)
Subsequent Events (Note 19)

 

(a)               Recast to consolidate PNGTS for all periods presented (Refer to Notes 2 and 6).

 

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

 

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TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CASH FLOWS

 

		Six months ended
(unaudited)		June 30,
(millions of dollars)		2017		2016  (a)
Cash Generated From Operations
Net income		138		138
Depreciation		49		48
Amortization of debt issue costs reported as interest expense		1		1
Amortization of realized loss on derivative instrument		1		1
Accrual for costs related to the 2017 Acquisition		1		—
Deferred state income tax recovery (Note 18)		—		(7	)
Equity earnings from equity investments (Notes 3 and 4)		(60	)	(53	)
Distributions received from operating activities of equity investments (Note 3)		68		95
Change in operating working capital (Note 10)		7		12
		205		235
Investing Activities
Investment in Great Lakes		(4	)	(4	)
Acquisition of a 49.9 percent interest in PNGTS		—		(193	)
Acquisition of a 49.34 percent in Iroquois and an additional 11.81 percent in PNGTS (Note 6)		(605	)	—
Capital expenditures		(16	)	(18	)
Other		—		2
		(625	)	(213	)
Financing Activities
Distributions paid (Note 9)		(135	)	(119	)
Distributions paid to Class B units (Note 7)		(22	)	(12	)
Distributions paid to non-controlling interests		(5	)	(9	)
Distributions paid to former parent of PNGTS		(1	)	(8	)
Common unit issuance, net (Note 7)		92		—
Common unit issuance subject to rescission, net (Note 7)		—		83
Long-term debt issued, net of discount (Note 5)		607		205
Long-term debt repaid (Note 5)		(128	)	(165	)
Debt issuance costs		(1	)	—
		407		(25	)
Decrease in cash and cash equivalents		(13	)	(3	)
Cash and cash equivalents, beginning of period		64		55
Cash and cash equivalents, end of period		51		52

 

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(a)               Recast to consolidate PNGTS for all periods presented (Refer to Notes 2 and 6).

 

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

 

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TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ EQUITY

 

		Limited Partners								General		Accumulated Other Comprehensive		Non- Controlling		Equity of former parent of		Total
(unaudited)		Common Units				Class B Units				Partner		Loss  (a) (b)		Interest (b)		PNGTS (b)		Equity (b)
		millions of units		millions of dollars		millions of units		millions of dollars		millions of dollars		millions of dollars		millions of dollars		millions of dollars		millions of dollars
Partners’ Equity at December 31, 2016		67.4		1,002		1.9		117		27		(2	)	97		31		1,272
Net income (b)		—		122		—		—		8		—		6		2		138
Other comprehensive income				—		—		—		—		1		—		—		1
ATM equity issuances, net (Note 7)		1.6		90		—		—		2		—		—		—		92
Reclassification of common units no longer subject to rescission (Note 7)		—		81		—		—		2		—		—		—		83
Acquisition of interest in PNGTS and Iroquois ( Note 6)		—		(371	)	—		—		(8	)	—		—		(32	)	(411	)
Distributions (b)		—		(129	)	—		(22	)	(6	)	—		(2	)	(1	)	(160	)
Partners’ Equity at June 30, 2017		69.0		795		1.9		95		25		(1	)	101		—		1,015

 

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(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 $2 million. These estimates assume constant interest rates over time; however, the amounts reclassified will vary based on actual value of interest rates at the date of settlement.

 

(b)              Recast to consolidate PNGTS for all periods presented. See Notes 2 and 6.

 

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

 

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TC PIPELINES, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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.

 

The Partnership owns its pipeline assets through three intermediate limited partnerships (ILPs), TC GL Intermediate Limited Partnership, TC PipeLines Intermediate Limited Partnership and TC Tuscarora Intermediate Limited Partnership.

 

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 six months ended June 30, 2017 and 2016 are not necessarily indicative of the results that may be expected for the full fiscal year.

 

The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016 included as exhibit 99.2 in our Current Report on Form 8-K  dated August 3, 2017. That report contains a more comprehensive summary of the Partnership’s significant 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, and considered necessary to present fairly the financial position of the Partnership, the results of operations and cash flows for the respective periods. Our significant accounting policies are consistent with those disclosed in our audited financial statements and notes thereto for the year ended December 31, 2016 included as exhibit 99.2 in our Current Report on Form 8-K  dated August 3, 2017, except as described in Note 3, Accounting Pronouncements.

 

Basis of Presentation

 

The Partnership consolidates its interests in entities 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 entities over which it is able to exercise significant influence.

 

Acquisitions by the Partnership from TransCanada are considered common control transactions. When businesses are acquired from TransCanada that will be consolidated by the Partnership, the historical financial statements are required to be recast, except net income per common unit, to include the acquired entities for all periods presented.

 

When the Partnership acquires an asset or an investment from TransCanada, which will be accounted for by the equity method, the financial information is not required to be recast and the transaction is accounted for prospectively from the date of the acquisition.

 

On June 1, 2017, the Partnership acquired from a subsidiary of TransCanada an additional 11.81 percent interest in PNGTS, resulting in the Partnership owning 61.71 percent in PNGTS (Refer to Note 6-Acquisitions).  As a result of the Partnership owning 61.71 percent of PNGTS, the Partnership’s historical financial information has been recast, except net income (loss) per common unit, to consolidate PNGTS for all the periods presented in the Partnership’s consolidated financial statements. Additionally, this acquisition was accounted for as transaction between entities under common control, similar to pooling of interests, whereby the assets and liabilities of PNGTS were recorded at TransCanada’s carrying value.

 

Also, on June 1, 2017, the Partnership acquired from subsidiaries of TransCanada a 49.34 percent interest in Iroquois Gas Transmission, L.P. (“Iroquois”) (Refer to Note 6-Acquisitions). Accordingly, this transaction was accounted for as a transaction between entities under common control, similar to pooling of interest, whereby the equity investment in Iroquois was recorded at TransCanada’s carrying value and was accounted for prospectively.

 

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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

 

Retrospective application of ASU No 2016-15 “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”

 

In August 2016, the FASB issued an amendment of previously issued guidance, which intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance is effective January 1, 2018, however, as early adoption is permitted, the Partnership elected to retrospectively apply this guidance effective December 31, 2016. The Partnership has elected to classify distributions received from equity method investees using the nature of distributions approach as it is more representative of the nature of the underlying activities of the investees that generated the distributions. As a result, certain comparative period distributions received from equity method investees, amounting to $42 million for the six months ended June 30, 2016, have been reclassified from investing activities to cash generated from operations in the consolidated statement of cash flows.

 

Effective January 1, 2017

 

Inventory

 

In July 2015, the FASB issued new guidance on simplifying the measurement of inventory. The new guidance specifies that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was effective January 1, 2017, and was applied prospectively and did not have a material impact on the Partnership’s consolidated balance sheet.

 

Equity method and joint ventures

 

In March 2016, the FASB issued new guidance that simplifies the transition to equity method accounting. The new guidance eliminates the requirement to retroactively apply the equity method of accounting when an increase in ownership interest in an investment qualifies for equity method accounting. The new guidance is effective January 1, 2017 and was applied prospectively. The application of this guidance did not have a material impact on the Partnership’s consolidated financial statements.

 

Consolidation

 

In October 2016, the FASB issued new guidance on consolidation relating to interests held through related parties that are under common control.  The new guidance amends the consolidation requirements such that if a decision maker is required to evaluate whether it is the primary beneficiary of a variable interest entry (VIE), it will need to consider only its proportionate indirect interest in the VIE held through a common control party.  The guidance was effective January 1, 2017, was applied retrospectively and did not result in any change to our consolidation conclusions.

 

Future accounting changes

 

Revenue from contracts with customers

 

In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue in accordance with a five-step model. This model is used to depict the transfer of promised goods or services to customers in an amount that reflects the total consideration to which it expects to be entitled to during the term of the contract in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and the related cash flows. The Partnership will adopt the new standard on the effective date of January 1, 2018. There are two methods in which the new standard can be adopted: (1) a full retrospective approach with restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment as of the date of adoption. The Partnership currently

 

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anticipates adopting the standard using the modified retrospective approach with the cumulative-effect of initially applying the guidance recognized at the date of adoption, subject to allowable and elected practical expedients.

 

The Partnership has identified all existing customer contracts that are within the scope of the new guidance and is in the process of analyzing individual contracts or groups of contracts on a segmented basis to identify any significant changes in how revenues are recognized as a result of implementing the new standard. While the Partnership has not identified any material differences in the amount and timing of revenue recognition for the contracts that have been analyzed to date, the evaluation is not complete and the Partnership has not concluded on the overall impact of adopting the new guidance. The Partnership continues its segmented contract analysis to obtain the information necessary to quantify, the cumulative-effect adjustment, if any, on prior period revenues. The Partnership also continues to address any system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

 

Leases

 

In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease requiring the customer to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset in order for the arrangement to qualify as a lease. The new guidance also establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new guidance does not make extensive changes to lessor accounting.

 

The new guidance is effective on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Partnership is continuing to identify and analyze existing lease agreements to determine the effect of adoption of the new guidance on its consolidated financial statements. The Partnership is also addressing system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

 

Goodwill Impairment

 

In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively. Early adoption is permitted. The Partnership is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

 

NOTE 4                 EQUITY INVESTMENTS

 

The Partnership has equity interests in Northern Border, Great Lakes and effective June 1, 2017, Iroquois. The pipeline systems owned by these entities are regulated by FERC. The pipeline systems of Northern Border and Great Lakes are operated by subsidiaries of TransCanada. The Iroquois pipeline system is operated by Iroquois Pipeline Operating Company, a wholly owned subsidiary of Iroquois. The Partnership uses the equity method of accounting for its interests in its equity investees. The Partnership’s equity investments are held through our ILPs that are considered to be variable interest entities (VIEs) (refer to Note 17).

 

		Ownership		Equity Earnings								Equity Investments
		Interest at		Three months				Six Months
(unaudited)		June 30,		ended June 30,				ended June 30,				June 30,		December 31,
(millions of dollars)		2017		2017		2016 (b)		2017		2016 (b)		2017		2016 (b)
Northern Border (a)		50	%	15		16		34		34		437		444
Great Lakes		46.45	%	6		4		23		19		475		474
Iroquois		49.34	%	3		—		3		—		226		—
				24		20		60		53		1,138		918

 

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(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 acquisition of an additional 20 percent interest in April 2006.

 

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(b) Recast to eliminate equity earnings from PNGTS and consolidate PNGTS for all periods presented (Refer to Note 2).

 

Northern Border

The Partnership did not have undistributed earnings from Northern Border for the three and six months ended June 30, 2017 and 2016.

 

The summarized financial information for Northern Border is as follows:

 

(unaudited)
(millions of dollars)		June 30, 2017		December 31, 2016
ASSETS
Cash and cash equivalents		16		14
Other current assets		34		36
Plant, property and equipment, net		1,077		1,089
Other assets		14		14
		1,141		1,153
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities		37		38
Deferred credits and other		30		28
Long-term debt, including current maturities, net		430		430
Partners’ equity
Partners’ capital		645		659
Accumulated other comprehensive loss		(1	)	(2	)
		1,141		1,153

 

		Three months ended				Six months ended
(unaudited)		June 30,				June 30,
(millions of dollars)		2017		2016		2017		2016
Transmission revenues		69		70		144		144
Operating expenses		(18	)	(18	)	(36	)	(35	)
Depreciation		(15	)	(15	)	(30	)	(29	)
Financial charges and other		(5	)	(6	)	(9	)	(11	)
Net income		31		31		69		69

 

Great Lakes

The Partnership made an equity contribution to Great Lakes of $ 4 million in the first quarter of 2017. 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 did not have undistributed earnings from Great Lakes for the three and six months ended June 30, 2017 and 2016.

 

The summarized financial information for Great Lakes is as follows:

 

(unaudited)
(millions of dollars)		June 30, 2017		December 31, 2016
ASSETS
Current assets		61		66
Plant, property and equipment, net		705		714
		766		780
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities		34		40
Long-term debt, including current maturities, net		269		278
Partners’ equity		463		462
		766		780

 

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		Three months ended				Six months ended
(unaudited)		June 30,				June 30,
(millions of dollars)		2017		2016		2017		2016
Transmission revenues		41		36		103		97
Operating expenses		(17	)	(15	)	(30	)	(30	)
Depreciation		(7	)	(7	)	(14	)	(14	)
Financial charges and other		(5	)	(5	)	(10	)	(11	)
Net income		12		9		49		42

 

Iroquois

On June 1, 2017, the Partnership acquired a 49.34 percent interest in Iroquois (Refer to Note 6). The Partnership recorded no undistributed earnings from Iroquois in June 2017.

 

The summarized financial information for Iroquois is as follows:

 

(unaudited)
(millions of dollars)		June 30, 2017		December 31, 2016
ASSETS
Cash and cash equivalents		100		88
Other current assets		26		27
Plant, property and equipment, net		595		611
Other assets		8		7
		729		733
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities		15		16
Long-term debt, including current maturities, net		332		338
Other non-current liabilities		9		5
Partners’ equity		373		374
		729		733

 

		Three months ended				Six months ended
(unaudited)		June 30,				June 30,
(millions of dollars)		2017		2016		2017		2016
Transmission revenues		45		47		98		100
Operating expenses		(13	)	(15	)	(29	)	(30	)
Depreciation		(7	)	(10	)	(14	)	(19	)
Financial charges and other		(5	)	(4	)	(9	)	(8	)
Net income		20		18		46		43

 

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NOTE 5                 DEBT AND CREDIT FACILITIES

 

(unaudited) (millions of dollars)		June 30, 2017		Weighted Average Interest Rate for the Six Months Ended June 30, 2017		December 31, 2016  (a)		Weighted Average Interest Rate for the Year Ended December 31, 2016  (b)
TC PipeLines, LP
Senior Credit Facility due 2021		170		2.22	%	160		1.72	%
2013 Term Loan Facility due July 2018		500		2.15	%	500		1.73	%
2015 Term Loan Facility due September 2018		170		2.04	%	170		1.63	%
4.65% Unsecured Senior Notes due 2021		350		4.65	% (b)	350		4.65	% (b)
4.375% Unsecured Senior Notes due 2025		350		4.375	% (b)	350		4.375	% (b)
3.90 % Unsecured Senior Notes due 2027		500		3.90	% (b)	—		—
GTN
5.29% Unsecured Senior Notes due 2020		100		5.29	% (b)	100		5.29	% (b)
5.69% Unsecured Senior Notes due 2035		150		5.69	% (b)	150		5.69	% (b)
Unsecured Term Loan Facility due 2019		55		1.84	%	65		1.43	%
PNGTS
5.90% Senior Secured Notes due December 2018		36		5.90	% (b)	53		5.90	% (b)
Tuscarora
Unsecured Term Loan due 2019		9		2.03	%	10		1.64	%
3.82% Series D Senior Notes due 2017		12		3.82	% (b)	12		3.82	% (b)
		2,402				1,920
Less: unamortized debt issuance costs and debt discount		12				9
Less: current portion		57				52
		2,333				1,859

 

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(a)               Recast as discussed in Notes 2 and 6.

(b)              Fixed interest rate

 

TC Pipelines, LP

 

The Partnership’s Senior Credit Facility consists of a $500 million senior revolving credit facility with a banking syndicate, maturing November 10, 2021, under which $170 million was outstanding at June 30, 2017 (December 31, 2016 - $160 million), leaving $330 million available for future borrowing. The LIBOR-based interest rate on the Senior Credit Facility was 2.34 percent at June 30, 2017 (December 31, 2016 — 1.92 percent).

 

As of June 30, 2017, the variable interest rate exposure related to the 2013 Term Loan Facility was hedged by fixed interest rate swap arrangements and our effective interest rate was 2.31 percent (December 31, 2016 — 2.31 percent). Prior to hedging activities, the LIBOR-based interest rate on the 2013 Term Loan Facility was 2.31 percent at June 30, 2017 (December 31, 2016 — 1.87 percent).

 

The LIBOR-based interest rate on the 2015 Term Loan Facility was 2.20 percent at June 30, 2017 (December 31, 2016 — 1.77 percent).

 

The 2013 Term Loan Facility and the 2015 Term Loan Facility (Term Loan Facilities) and the Senior Credit Facility  require the Partnership to maintain a certain leverage ratio (debt to adjusted cash flow [net income plus cash distributions received, extraordinary losses, interest expense, expense for taxes paid or accrued, and depreciation and amortization expense less equity earnings and extraordinary gains]) no greater than 5.00 to 1.00 for each fiscal quarter, except for the fiscal quarter and the two following fiscal quarters in which one or more acquisitions has been executed, in which case the leverage ratio is to be no greater than 5.50 to 1.00. The leverage ratio was 4.60 to 1.00 as of June 30, 2017.

 

On May 25, 2017, the Partnership closed a $500 million public offering of senior unsecured notes bearing an interest rate of 3.90 percent maturing May 25, 2027. The net proceeds of $497 million were used to fund a portion of the 2017 Acquisition (Refer to Note 6).The indenture for the notes contains customary investment grade covenants.

 

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