ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS

12 Months Ended

Dec. 31, 2011

ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS

ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS

NOTE 5    ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS

GTN and Bison Equity Investment Acquisitions

On May 3, 2011, the Partnership acquired 25 percent membership interests in GTN and Bison from subsidiaries of TransCanada.

The GTN pipeline system extends from an interconnection near Kingsgate, British Columbia, Canada at the Canadian border to a point near Malin, Oregon at the California border. The Bison pipeline system extends from the Powder River Basin near Gillette, Wyoming to Northern Border's pipeline system in Morton County, North Dakota. GTN and Bison are both Delaware limited liability companies regulated by the FERC, and they are operated by subsidiaries of TransCanada.

The total purchase price of the Acquisitions was $605.0 million (the Purchase Price). The Purchase Price consisted of (i) $405.0 million for the GTN membership interest (less $81.3 million, which reflected 25 percent of GTN's outstanding debt at the time of the acquisition), (ii) $200.0 million for the membership interest in Bison (less a $9.1 million future capital commitment to complete the Bison pipeline) (iii) $23.5 million at closing and (iv) $0.6M in working capital adjustments paid in the fourth quarter of 2011. The resulting $538.7 million paid by the Partnership was financed through a combination of (i) an issuance of 7,245,000 common units offered to the public at $47.58 per common unit resulting in net proceeds of $330.9 million, (ii) a draw of $61.0 million on the Partnership's committed $400.0 million bridge loan facility, (iii) a draw of $125.0 million on the Partnership's then existing $250.0 million senior revolving credit facility, (iv) a capital contribution from the General Partner of $6.7 million, which was required to maintain the General Partner's effective two percent general partner interest in the Partnership, and (v) approximately $15.1 million of cash on hand.

The Acquisitions were accounted for as transactions between entities under common control, whereby the equity investments in both GTN and Bison were recorded at TransCanada's carrying values of $246.2 million and $161.3 million, respectively. As the fair market value paid for the membership interests in GTN and Bison was greater than the recorded equity investments in GTN and Bison, the total excess purchase price paid of $131.2 million was recorded as a reduction to Partners' Equity.

Yuma Lateral Asset Acquisition

At the time of the July 1, 2009 acquisition of North Baja, TransCanada had begun an expansion project of the North Baja pipeline from the Mexico/Arizona border to Yuma, Arizona (Yuma Lateral). The Partnership agreed to acquire the expansion facilities and contracts for an additional sum up to $10.0 million, if TransCanada completed the project by June 30, 2010. On March 5, 2010, the Partnership acquired the expansion facilities and contracts in place at that time for a purchase price of $7.6 million. The Yuma Lateral was placed into service on March 13, 2010. The North Baja Acquisition Agreement provided that an additional payment of up to $2.4 million be made to TransCanada in the event that any other shippers contracted for services on the Yuma Lateral before June 30, 2010. A potential shipper signed a precedent agreement with North Baja on June 29, 2010 to enter into agreements for service on the Yuma Lateral. Accordingly, an amendment to the Acquisition Agreement between the Partnership and TransCanada was entered into on June 29, 2010 to allow TransCanada to continue to pursue additional contracts until December 31, 2010. On July 28, 2010, TransCanada secured additional contracts and, as a result, the Partnership paid $2.4 million to TransCanada on March 25, 2011 when the facilities associated with the additional contracts were completed.

The Yuma Lateral asset purchase was accounted for as a transaction between entities under common control whereby the assets acquired were recorded at TransCanada's carrying value. As the fair value paid for the Yuma Lateral assets of $10.0 million was greater than the $7.7 million recorded as plant, property and equipment, the excess of $2.3 million was recorded as a decrease to Partners' Equity at December 31, 2011.

North Baja Acquisition

On July 1, 2009, the Partnership acquired a 100 percent interest in North Baja, a Delaware limited liability company, from TransCanada. The North Baja pipeline system extends from an interconnection with EPNG near Ehrenberg, Arizona to a point near Ogilby, California on the California/Mexico border where it connects with the Gasoducto Rosarito natural gas pipeline system owned by Sempra Energy International. North Baja is regulated by the FERC and is operated by TransCanada.

The purchase price of $271.4 million was financed through a combination of (i) a draw of $170.0 million on the Partnership's then existing $250.0 million senior revolving credit facility (ii) issuance of 2,609,680 common units at $30.042 per common unit to TransCanada for net proceeds of $78.4 million, (iii) issuance of additional general partner interest to the General Partner of $1.6 million, which was required to maintain the General Partner's effective two percent general partner interest in the Partnership, and (iv) approximately $21.4 million of cash on hand.

The acquisition of North Baja was accounted for as a transaction between entities under common control whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods presented. The purchase price was allocated as follows: Working capital of $2.0 million; Plant, property and equipment of $193.5 million; Goodwill of $48.5 million; Other assets of $0.1 million; and Other long-term liabilities of $0.4 million. As the fair value paid for North Baja was greater than the recorded net assets of North Baja, the excess purchase price paid of $27.7 million was recorded as a reduction to Partners' Equity. The effect of recasting the Partnership's consolidated financial statements to account for the common control transaction increased the Partnership's net income by $8.3 million for the year ended December 31, 2009 from amounts previously reported.

Concurrent with the acquisition of North Baja, the Partnership entered into an exchange agreement with its General Partner whereby the Partnership issued 3,762,000 common units to the General Partner and provided for revised incentive distribution rights (Revised IDRs) in exchange for the cancellation of the incentive distribution rights available to the General Partner (Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership.

Under the terms of the Revised IDRs, the distributions to the General Partner were reset to two percent, down from the General Partner distribution levels of the Old IDRs at 50 percent (for combined general partner interest and incentive distribution interest). The incentive distribution levels of the Revised IDRs will result in increased combined distributions to the General Partner (for general partner interest and incentive distribution interest) of 15 percent and a maximum of 25 percent when quarterly distributions increase to $0.81 and $0.88 per common unit or $3.24 and $3.52 per common unit on an annualized basis, respectively.