NOTE 4 REGULATORY

In December 2016, FERC issued a Notice of Inquiry (NOI) Regarding the Commission’s Policy for Recovery of Income Tax Costs (Docket No. PL17-1-000) requesting initial comments regarding how to address any “double recovery” resulting from FERC’s current income tax allowance and rate of return policies that had been in effect since 2005.

Docket No. PL17-1-000 is a direct response to United Airlines, Inc., et al. v. FERC (United), a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit in July 2016 in which the D.C. Circuit directed FERC to explain how a pass-through entity such as an MLP receiving a tax allowance and a return on equity derived from the discounted cash flow (DCF) methodology did not result in “double recovery” of taxes.

On December 22, 2017, the President of the United States signed into law H.R.1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Act”). This legislation provides for major changes to U.S. corporate federal tax law including a reduction of the federal corporate income tax rate. We are a non-taxable limited partnership for federal income tax purposes, and federal income taxes owed as a result of our earnings are the responsibility of our partners, therefore no amounts have been recorded in the Partnership’s financial statements with respect to federal income taxes as a result of the 2017 Tax Act.

On March 15, 2018, FERC issued (1) a revised Policy Statement to address the treatment of income taxes for ratemaking purposes for MLPs, (2) a Notice of Proposed Rulemaking (NOPR) proposing interstate pipelines file a one-time report to quantify the impact of the federal income tax rate reduction and the revised Policy Statement could have on a pipeline’s Return on Equity (ROE) assuming a single-issue adjustment to a pipeline’s rates, and (3) an NOI seeking comment on how FERC should address changes related to accumulated deferred income taxes and bonus depreciation (collectively, the “2018 FERC Actions”). Each is further described below.

FERC Revised Policy Statement on Income Tax Allowance Cost Recovery in MLP Pipeline Rates

FERC changed its long-standing policy on the treatment of income tax amounts to be included in pipeline rates and other assets subject to cost of service rate regulation held within an MLP. The revised Policy Statement no longer permits entities organized as MLPs to recover an income tax allowance in their cost of service rates.

TransCanada filed a Request for Clarification and If Necessary Rehearing of FERC’s revised Policy Statement on April 16, 2018, addressing concerns over the lack of clarity around entities with ownership shared between an MLP and a corporation as well as other related concerns. In the request, TransCanada sought clarification or rehearing on several bases: that FERC erred in not assessing the propriety of income tax allowances for pipelines on a case-by-case basis; that FERC overturned applicable legal precedent expressly not affected by United; that FERC failed to consider the effects of its revised policy on industry; and that FERC failed to exhibit reasoned decision making or to support its decision with substantial evidence on the record.

NOPR on Tax Law Changes for Natural Gas Companies

The NOPR proposes that by a deadline to be set in final rule-making, interstate pipelines must either file a new uncontested settlement or comply with a rule that would require companies to file a one-time report, called FERC Form No. 501-G, that quantifies the rate impact of 2017 Tax Act and, with respect to pipelines held by MLPs, the FERC’s revised Policy Statement. Concurrent with filing the one-time report, each pipeline would have four options:

make a limited Natural Gas Act Section 4 filing to reduce its rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G

commit to file either a pre-packaged uncontested rate settlement or a general Section 4 rate case if it believes that using the limited Section 4 option will not result in just and reasonable rates. If the pipeline commits to file either by December 31, 2018, FERC will not initiate a Natural Gas Act Section 5 investigation of its rates prior to that date

file a statement explaining its rationale for why it does not believe the pipeline’s rates must change

take no action other than filing the one-time 501-G report. FERC would then consider whether to initiate a Section 5 investigation of any pipeline that has not submitted a limited Section 4 rate reduction filing or committed to file a general Section 4 rate case.

TransCanada submitted comments on the NOPR on April 25, 2018. Following the requisite public comment period, we expect FERC to issue final order(s) in the late summer or early fall of 2018. We continue to evaluate this NOPR and our next course of action, however, we do not expect an immediate or a retroactive impact from the NOPR or the revised Policy Statement described above.

NOI Regarding the Effect of the 2017 Tax Act on Commission-Jurisdictional Rates

In the NOI, FERC seeks comment to determine what additional action as a result of the 2017 Tax Act, if any, is required by FERC related to accumulated deferred income taxes collected from shippers in anticipation of ultimately being paid to the Internal Revenue Service, but which no longer accurately reflect the future income tax liability. The NOI also seeks comment on the elimination of bonus depreciation for regulated natural gas pipelines and other effects of the 2017 Tax Act.

We plan to submit comments in response to the NOI by the due date of May 21, 2018.

Impairment Considerations

As noted under Note 2, 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 at the date of the financial statements. Although we believe these estimates and assumptions are reasonable, actual results could differ.

We review plant, property and equipment and equity investments for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.

Goodwill is tested for impairment on an annual basis or more frequently if events or changes in circumstance indicate that it might be impaired. We can initially make this assessment based on qualitative factors. If we conclude that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, an impairment test is not performed.

Until the proposed 2018 FERC Actions are finalized, implementation requirements are clarified, including the applicability to assets partially-owned by a MLP or held in non-MLP structures, and we have fully evaluated our respective alternatives to minimize the potential negative impact of the 2018 FERC Actions on our future operating performance and cash flows, we believe that it is not more likely than not that the fair values of our reporting units are less than their respective carrying values. Therefore, a goodwill impairment test was not performed. Also, we have determined there is no indication that the carrying values of plant, property and equipment and equity investments potentially impacted by the 2018 FERC Actions are not recoverable.

We will continue to monitor developments and assess our goodwill for impairment. We will also review our property, plant and equipment and equity investments for recoverability as new information becomes available.

At December 31, 2017, the estimated fair value of our investment in Great Lakes exceeded its carrying value by less than 10 percent. There is a risk that the 2018 FERC Actions, once finalized, could result in an impairment charge to our equity method goodwill on Great Lakes amounting to $260 million at March 31, 2018 (December 31, 2017 — $260 million). Additionally, since the estimated fair value of Tuscarora exceeded its carrying value by less than 10 percent in its most recent valuation, there is also a risk that the $82 million goodwill at March 31, 2018 (December 31, 2017 - $82 million) related to Tuscarora could be negatively impacted by the 2018 FERC Actions.