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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
Commission File Number 333-88577
NORTHERN BORDER PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-2684967
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1111 South 103rd Street
Omaha, Nebraska 68124-1000
- ------------------------------- -------------------------------
(Address of principal executive (Zip code)
offices)
(402) 398-7700
---------------------------------------------------
(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 [ ]
1 OF 17
NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 3
Statement of Comprehensive Income -
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 3
Balance Sheet - June 30, 2002
and December 31, 2001 4
Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001 5
Statement of Changes in Partners' Equity -
Six Months Ended June 30, 2002 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------------
2002 2001 2002 2001
-------- -------- --------- ---------
OPERATING REVENUES
Operating revenues $80,173 $76,950 $158,328 $156,047
Provision for rate refunds -- -- -- (2,057)
------- ------- -------- --------
Operating revenues, net 80,173 76,950 158,328 153,990
------- ------- -------- --------
OPERATING EXPENSES
Operations and maintenance 7,198 8,989 14,404 17,538
Depreciation and amortization 14,493 14,239 28,987 28,693
Taxes other than income 6,468 7,016 13,028 10,735
------- ------- -------- --------
Operating expenses 28,159 30,244 56,419 56,966
------- ------- -------- --------
OPERATING INCOME 52,014 46,706 101,909 97,024
------- ------- -------- --------
INTEREST EXPENSE 13,756 13,716 26,776 28,771
------- ------- -------- --------
OTHER INCOME (EXPENSE) 248 (1,358) 1,043 (732)
------- ------- -------- --------
NET INCOME TO PARTNERS $38,506 $31,632 $ 76,176 $ 67,521
======= ======= ======== ========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income to partners $38,506 $31,632 $76,176 $67,521
Other comprehensive income:
Transition adjustment from
adoption of SFAS No. 133 -- -- -- 10,347
Change associated with current
period hedging transactions (2,882) 5,165 (1,637) 7,606
------- ------- ------- -------
Total comprehensive income $35,624 $36,797 $74,539 $85,474
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
3
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
- ------ ---------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 5,501 $ 11,003
Accounts receivable 30,874 29,704
Materials and supplies, at cost 4,710 4,873
Prepaid expenses and other 1,112 1,731
---------- ----------
Total current assets 42,197 47,311
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,429,407 2,432,553
Less: Accumulated provision for
depreciation and amortization 769,234 746,888
---------- ----------
Property, plant and equipment, net 1,660,173 1,685,665
---------- ----------
OTHER ASSETS 23,779 18,893
---------- ----------
Total assets $1,726,149 $1,751,869
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 78,000 $ 350,000
Accounts payable 7,391 5,293
Accrued taxes other than income 23,626 27,167
Accrued interest 16,443 16,526
---------- ----------
Total current liabilities 125,460 398,986
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 767,123 513,666
---------- ----------
RESERVES AND DEFERRED CREDITS 5,386 5,623
---------- ----------
PARTNERS' EQUITY
Partners' capital 820,644 824,421
Accumulated other comprehensive income 7,536 9,173
---------- ----------
Total partners' equity 828,180 833,594
---------- ----------
Total liabilities and partners' equity $1,726,149 $1,751,869
========== ==========
The accompanying notes are an integral part of these financial statements.
4
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 76,176 $ 67,521
--------- ---------
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 29,170 28,877
Provision for rate refunds -- 2,036
Rate refunds paid -- (6,762)
Changes in components of working capital (1,914) (1,102)
Other (468) (694)
--------- ---------
Total adjustments 26,788 22,355
--------- ---------
Net cash provided by operating activities 102,964 89,876
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (3,177) (15,637)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners (79,953) (69,870)
Issuance of long-term debt 316,894 40,000
Retirement of long-term debt (342,000) (35,000)
Proceeds received upon termination of
derivatives 2,351 --
Decrease in bank overdraft -- (22,437)
Long-term debt financing costs (2,581) --
--------- ---------
Net cash used in financing activities (105,289) (87,307)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,502) (13,068)
Cash and cash equivalents-beginning of period 11,003 29,046
--------- ---------
Cash and cash equivalents-end of period $ 5,501 $ 15,978
========= =========
- -------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 27,073 $ 30,151
========= =========
Changes in components of working capital:
Accounts receivable $ (1,170) $ 5,873
Materials and supplies 163 105
Prepaid expenses and other 619 247
Accounts payable 2,098 (734)
Accrued taxes other than income (3,541) (5,607)
Accrued interest (83) (986)
--------- ---------
Total $ (1,914) $ (1,102)
========= =========
The accompanying notes are an integral part of these financial statements.
5
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
TC NORTHERN
PIPELINES BORDER ACCUMULATED
INTERMEDIATE INTERMEDIATE OTHER TOTAL
LIMITED LIMITED COMPREHENSIVE PARTNERS'
PARTNERSHIP PARTNERSHIP INCOME EQUITY
----------- ----------- ------ ------
>
Balance at December 31, 2001 $247,326 $577,095 $ 9,173 $833,594
Net income to partners 22,853 53,323 -- 76,176
Change associated with current
period hedging transactions -- -- (1,637) (1,637)
Distributions to partners (23,986) (55,967) -- (79,953)
-------- ------- -------- --------
Balance at June 30, 2002 $246,193 $574,451 $ 7,536 $828,180
======== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
6
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Northern
Border Pipeline Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they reflect all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
However, Northern Border Pipeline believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in Northern Border Pipeline's Annual Report on Form 10-K for the year
ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. CREDIT FACILITIES AND LONG-TERM DEBT
In April 2002, Northern Border Pipeline completed a private offering of
$225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes").
Northern Border Pipeline also entered into a registration rights agreement with
the initial purchasers in the private offering in which Northern Border Pipeline
agreed, among other things, to use its reasonable best efforts to exchange the
2002 Pipeline Senior Notes for notes registered under the Securities Act of 1933
with substantially identical terms. The indenture under which the 2002 Pipeline
Senior Notes was issued does not limit the amount of unsecured debt Northern
Border Pipeline may incur, but it does include restrictions on incurrence of
secured indebtedness. The proceeds from the 2002 Pipeline Senior Notes of
approximately $223.5 million were used to reduce indebtedness outstanding.
Northern Border Pipeline entered into a $175 million three-year credit
agreement ("2002 Pipeline Credit Agreement") with certain financial institutions
in May 2002. The 2002 Pipeline Credit Agreement is to be used to refinance
existing indebtedness and for general business purposes. The 2002 Pipeline
Credit Agreement permits Northern Border Pipeline to choose among various
interest rate options, to specify the portion of the borrowings to be covered by
specific interest rate options and to specify the interest rate period. Northern
Border Pipeline is required to pay a fee on the principal commitment amount of
$175 million. At June 30, 2002, $22.0 million was outstanding under the 2002
Pipeline Credit Agreement at an average interest rate of 2.47%.
Northern Border Pipeline's debt and credit facilities contain material
financial covenants. At June 30, 2002, Northern Border Pipeline was in
compliance with these covenants.
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Northern Border Pipeline uses financial instruments in the management of
its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. Northern Border Pipeline has
entered into various interest rate swap agreements with major financial
institutions to hedge its interest rate risk.
In 2001, Northern Border Pipeline adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was subsequently amended by SFAS No. 137 and SFAS
No. 138. All derivative instruments are recorded on the balance sheet as either
assets or liabilities measured at fair value. Any change in the derivative's
fair value is recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying cash flow hedges allows a
derivative's gains and losses to be recorded in accumulated other comprehensive
income.
Northern Border Pipeline records in accumulated other comprehensive income
amounts related to terminated interest rate swap agreements for cash flow
hedges. During the three months and six months ended June 30, 2002, Northern
Border Pipeline amortized approximately $0.3 million and $0.6 million,
respectively, related to the terminated interest rate swap agreements, as a
reduction to interest expense from accumulated other comprehensive income and
expects to amortize comparable amounts in each of the remaining quarters of
2002.
In November 2001, Northern Border Pipeline entered into forward starting
interest rate swap agreements with notional amounts totaling $150 million
related to the planned issuance of senior notes. Upon issuance of the 2002
Pipeline Senior Notes, Northern Border Pipeline terminated the forward starting
interest rate swap agreements and received approximately $2.4 million, which was
recorded in accumulated other comprehensive income and will be recognized as a
reduction in interest expense over the life of the 2002 Pipeline Senior Notes.
Northern Border Pipeline entered into interest rate swap agreements with
notional amounts totaling $225 million in May 2002. Under the interest rate swap
agreements, Northern Border Pipeline makes payments to counterparties at
variable rates based on the London Interbank Offered Rate and in return receives
payments based on a fixed rate. At June 30, 2002, the average effective interest
rate on the interest rate swap agreements was 3.50%. The interest rate swap
agreements have been designated as fair value hedges as they were entered into
to hedge the fluctuations in the market value of the 2002 Pipeline Senior Notes.
Northern Border Pipeline is reflecting a non-cash gain of approximately $6.5
million in other assets with a corresponding offset in long-term debt on the
accompanying balance sheet at June 30, 2002.
8
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Northern Border Pipeline is in the process of evaluating
the application of this pronouncement.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, No. 44 and No. 64, Amendments to FASB Statements No. 13 and
Technical Corrections." SFAS No. 145 streamlines the reporting of debt
extinguishments and requires that only gains and losses from extinguishments
meeting the criteria in Accounting Principles Board Opinion 30 would be
classified as extraordinary. Thus, gains or losses arising from extinguishments
that are part of a company's recurring operations would not be reported as an
extraordinary item. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002 with earlier adoption encouraged. Northern Border Pipeline does not
expect the adoption of SFAS No. 145 to have a material impact on its financial
position, results of operations or cash flows.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued in June 2002 and addresses accounting and reporting for
costs associated with exit or disposal activities. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under prior accounting requirements, a liability
for an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Northern
Border Pipeline does not expect the adoption of SFAS No. 146 to have a material
impact on its financial position, results of operations or cash flows.
5. SUBSEQUENT EVENTS
Northern Border Pipeline makes distributions to its general partners
approximately one month following the end of the quarter. The distribution for
the second quarter of 2002 of approximately $42.3 million was paid August 1,
2002.
9
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's discussion and analysis of its financial
condition and results of operations is based on its Financial Statements, which
are prepared in accordance with accounting principles generally accepted in the
United States of America. You should read the following discussion and analysis
in conjunction with the Financial Statements included elsewhere in this report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting Northern Border Pipeline's
Financial Statements and related disclosures must be estimated, requiring it to
make certain assumptions with respect to values or conditions that cannot be
known with certainty at the time the financial statements are prepared. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Any effects on Northern Border Pipeline's business, financial position or
results of operations resulting from revisions to these estimates are recorded
in the period in which the facts that give rise to the revision become known.
Northern Border Pipeline's significant accounting policies are summarized
in Note 2 - Notes to Financial Statements included in Northern Border Pipeline's
Annual Report on Form 10-K for the year ended December 31, 2001. Certain of
Northern Border Pipeline's accounting policies are of more significance in its
financial statement preparation process than others. Northern Border Pipeline's
accounting policies conform to Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
Accordingly, certain assets that result from the regulated ratemaking process
are recorded that would not be recorded under generally accepted accounting
principles for nonregulated entities. Northern Border Pipeline's long-lived
assets are stated at original cost. Northern Border Pipeline must use estimates
in determining the economic useful lives of those assets. For utility property,
no retirement gain or loss is included in income except in the case of
extraordinary retirements or sales. The original cost of utility property
retired is charged to accumulated depreciation and amortization, net of salvage
and cost of removal. Finally, Northern Border Pipeline's accounting for
financial instruments follows SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended.
RESULTS OF OPERATIONS
SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001
Net income to partners increased $6.9 million (22%) for the second quarter
of 2002, as compared to the same period in 2001. Northern Border Pipeline's
operating results benefited from increased operating revenues from a pipeline
expansion and extension project completed in October 2001 ("Project 2000") as
well as reductions in operations and maintenance expenses. The 2001 results also
included a write-off for an uncollectible receivable.
10
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
Operating revenues, net increased $3.2 million (4%) for the second quarter
of 2002, as compared to the same period in 2001, due primarily to additional
revenues of approximately $3.4 million related to Project 2000. The impact of
the additional revenues associated with Project 2000 was partially offset by
uncollected revenues associated with the transportation capacity held by Enron
North America Corp. ("ENA"), which filed for Chapter 11 bankruptcy protection in
December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On
Northern Border Pipeline's Business"). For the second quarter of 2002, the
revenues lost on this capacity totaled approximately $0.3 million.
Operations and maintenance expense decreased $1.8 million (20%) for the
second quarter of 2002, as compared to the same period in 2001, due primarily to
a decrease in employee benefits and administrative expenses.
Other income (expense) increased $1.6 million for the second quarter of
2002, as compared to the same period in 2001. The amount for the second quarter
of 2001 includes a charge of approximately $1.7 million for an uncollectible
receivable from a telecommunications company that had purchased excess capacity
on Northern Border Pipeline's communication system.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
Net income to partners increased $8.7 million (13%) for the first half of
2002, as compared to the same period in 2001. Northern Border Pipeline's
operating results benefited from increased operating revenues from Project 2000,
reductions in interest expense due to lower interest rates as well as reductions
in operations and maintenance expenses. The 2001 results also included a
write-off for an uncollectible receivable.
Operating revenues, net increased $4.3 million (3%) for the first half of
2002, as compared to the same period in 2001, due primarily to additional
revenues of approximately $6.8 million related to Project 2000. The impact of
the additional revenues associated with Project 2000 was partially offset by
uncollected revenues associated with the transportation capacity held by ENA,
which filed for Chapter 11 bankruptcy protection in December 2001 (see "Update
On The Impact Of Enron's Chapter 11 Filing On Northern Border Pipeline's
Business"). For the first half of 2002, the revenues lost on this capacity
totaled approximately $1.8 million.
Operations and maintenance expense decreased $3.1 million (18%) for the
first half of 2002, as compared to the same period in 2001, due primarily to a
decrease in employee benefits and administrative expenses.
Taxes other than income increased $2.3 million (21%) for the first half of
2002, as compared to the same period in 2001. Both the 2002 and 2001 expense
included reductions to previous estimates of ad valorem taxes. Northern Border
Pipeline periodically reviews and adjusts its estimates of ad valorem taxes.
Reductions to previous estimates in 2001 exceeded reductions to previous
estimates in 2002 by approximately $1.6 million. In addition, the estimates for
2002 ad valorem taxes have increased due to the completion of Project 2000 in
2001.
11
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
Interest expense decreased $2.0 million (7%) for the first half of 2002,
as compared to the same period in 2001, due primarily to a decrease in Northern
Border Pipeline's average interest rate between 2001 and 2002.
Other income (expense) increased $1.8 million for the first half of 2002,
as compared to the same period in 2001. The amount for 2001 includes a charge of
approximately $1.7 million for an uncollectible receivable from a
telecommunications company that had purchased excess capacity on Northern Border
Pipeline's communication system.
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND CREDIT FACILITIES
Northern Border Pipeline's debt and credit facilities outstanding at June
30, 2002, are as follows:
Payments Due by Period
--------------------------------------------
Current Portion
(Less Than Long-Term
Total 1 Year) Portion
- ------------------------------------------------------------------------------------------------
(In Thousands)
2002 Pipeline Credit
Agreement, average 2.47% $ 22,000 $ -- $ 22,000
1992 Series C and D
Senior Notes, average 8.53% 143,000 78,000 65,000
6.25% Senior Notes due 2007 225,000 -- 225,000
7.75% Senior Notes due 2009 200,000 -- 200,000
7.50% Senior Notes due 2021 250,000 -- 250,000
-------- -------- --------
Total $840,000 $ 78,000 $762,000
======== ======== ========
Northern Border Pipeline entered into a $175 million three-year credit
agreement ("2002 Pipeline Credit Agreement") with certain financial institutions
in May 2002. The 2002 Pipeline Credit Agreement replaced a credit agreement
entered into in 1997. The 2002 Pipeline Credit Agreement is to be used to
refinance existing indebtedness and for general business purposes. At June 30,
2002, $22 million was outstanding under the 2002 Pipeline Credit Agreement at an
average interest rate of 2.47%.
At June 30, 2002, Northern Border Pipeline had outstanding $143 million of
senior notes issued in a $250 million private placement under a July 1992 note
purchase agreement. The Series C Notes, with a principal amount of $78 million,
mature in August 2002. The Series D Notes will mature in August 2003. Northern
Border Pipeline anticipates borrowing under the 2002 Pipeline Credit Agreement
to repay the Series C Notes.
In April 2002, Northern Border Pipeline completed a private offering of
$225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes"). The
indenture under which the 2002 Pipeline Senior Notes was issued does not limit
the amount of unsecured debt Northern Border Pipeline may incur, but it does
include restrictions on incurrence of secured indebtedness. The proceeds from
the 2002 Pipeline Senior Notes of approximately $223.5 million were used to
reduce indebtedness outstanding under a previous credit agreement.
12
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
Short-term liquidity needs will be met by operating cash flows and the
2002 Pipeline Credit Agreement. Long-term capital needs may be met through the
ability to issue long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $13.1 million to
$103.0 million for the first half of 2002, as compared to the same period in
2001, primarily due to increases in operating income and lower interest expense
and the impact of rate case refunds in 2001. Operating income has increased $4.9
million between 2001 and 2002 primarily due to Project 2000 and decreases in
operations and maintenance expenses and interest expense has decreased $2.0
million between 2001 and 2002 due to lower average interest rates. Additionally
in the first quarter of 2001, Northern Border Pipeline realized net cash
outflows of approximately $4.7 million related to its rate case refunds. During
the first quarter of 2001, Northern Border Pipeline made refunds to its shippers
totaling $6.8 million, which included approximately $2.1 million collected in
the first quarter of 2001 with the remainder collected previously.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $3.2 million for the first half of 2002 as
compared to $15.6 million for the same period in 2001. The 2002 and 2001 amounts
include $0.2 million and $12.4 million, respectively, for Project 2000. The
remaining capital expenditures for 2002 and 2001 were primarily related to
renewals and replacements of existing facilities.
Total capital expenditures for 2002 are estimated to be $14 million,
including $2 million for Project 2000. Northern Border Pipeline currently
anticipates funding its 2002 capital expenditures primarily by borrowing on debt
facilities and using operating cash flows.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities were $105.3 million for the first
half of 2002 as compared $87.3 million for the same period in 2001.
Distributions to partners increased $10.1 million to $80.0 million for the first
half of 2002, as compared to the same period in 2001. The distribution amount
paid is determined from the quarterly operating results. For the second quarter
of 2002, Northern Border Pipeline declared a distribution of $42.3 million,
which was paid on August 1, 2002. For 2002, Northern Border Pipeline received
net proceeds from the 2002 Pipeline Senior Notes of approximately $223.5 million
that were used to reduce indebtedness outstanding under a previously outstanding
credit agreement. During the first half of 2002, Northern Border Pipeline had
net repayments under its credit agreements of $250.0 million as compared to net
borrowings in 2001 of $5.0 million. In April 2002, Northern Border Pipeline
received $2.4 million from the termination of forward starting interest rate
swaps (see Note 3 - Notes to Financial Statements). For the first half of 2001,
Northern Border Pipeline recognized a decrease in bank overdraft of $22.4
million. At December 31, 2000, Northern Border Pipeline reflected the bank
overdraft primarily due to rate refund checks outstanding.
13
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NEW ACCOUNTING PRONOUNCEMENTS
See Note 4 - Notes to Financial Statements.
UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S
BUSINESS
As more fully discussed in Northern Border Pipeline's Annual Report on
Form 10-K for the year ended December 31, 2001, on December 2, 2001, Enron Corp.
filed a voluntary petition for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Certain wholly owned Enron subsidiaries,
including ENA, have also filed for Chapter 11 bankruptcy protection. ENA was a
party to shipper contracts obligating ENA to pay demand charges for
approximately 3.4% of Northern Border Pipeline's capacity. On June 13, 2002, the
Bankruptcy Court approved a Stipulation and Order entered into on May 15, 2002,
by ENA and Northern Border Pipeline pursuant to which ENA agreed that all but
one of the shipper contracts, representing 1.7% of pipeline capacity, will be
deemed rejected and terminated. ENA must effect a permanent release of the
remaining contract capacity or assume or reject the remaining contract by
October 31, 2002. Northern Border Pipeline posted the available capacity and
awarded approximately 94% of the capacity at maximum rates for varying terms.
Payment received by Northern Border Pipeline for the capacity awarded will
mitigate claims against ENA. For the period from January to June 2002, Northern
Border Pipeline has realized lost revenues of approximately $1.8 million related
to ENA's capacity. If it is unable to market the remaining capacity, Northern
Border Pipeline has estimated its financial exposure remaining for 2002 to be
approximately $1.7 million in revenues. Northern Border Pipeline is uncertain
regarding the amount of damages for breach of contract or other claims that it
will be able to establish in the bankruptcy proceeding, and it cannot predict
the amounts, if any, that it will collect or the timing of collection. Northern
Border Pipeline believes, however, that any such failure to collect will not
have a material adverse effect on its financial condition, and any amounts
collected will not be material.
On May 3, 2002, Enron presented to the creditors committee a proposal
under which certain of Enron's core energy assets would be separated from
Enron's bankruptcy estate and operated prospectively as a new integrated power
and pipeline company. Northern Plains Natural Gas Company and Pan Border Gas
Company are proposed to be included in this company. Northern Plains and Pan
Border are general partners of Northern Border Intermediate Limited Partnership,
which owns a 70% interest in Northern Border Pipeline. If the creditors
committee endorses this proposal, the inclusion of Northern Plains and Pan
Border in the new company would be subject to a Section 363 auction under the
supervision of the Bankruptcy Court. There is no assurance that Enron's proposal
will be adopted as proposed. Even if adopted as proposed, there is no assurance
as to whether Northern Plains and Pan Border would ultimately be included in the
new company or sold to a different bidder in a Section 363 auction. Northern
Border Pipeline plans to continue to monitor developments at Enron, to continue
to assess the impact on Northern Border Pipeline of its existing agreements and
relationships with Enron.
14
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report that are not historical
information are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are identified as any statement that does
not relate strictly to historical or current facts. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results of Northern Border Pipeline's operations may
differ materially from those expressed in these forward-looking statements. Such
forward-looking statements include the discussions in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" regarding Northern Border Pipeline's estimated capital
expenditures for 2002. Although Northern Border Pipeline believes that its
expectations regarding future events are based on reasonable assumptions within
the bounds of its knowledge of its business, it can give no assurance that its
goals will be achieved or that its expectations regarding future developments
will be realized. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include the
December 2, 2001 filing by Enron of a voluntary petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code, industry
results, future demand for natural gas, availability of supplies of Canadian
natural gas, the ability to market pipeline capacity on favorable terms,
political and regulatory developments that impact FERC proceedings involving
Northern Border Pipeline, Northern Border Pipeline's success in sustaining its
positions in such proceedings or the success of intervenors in opposing Northern
Border Pipeline's positions, competitive developments by Canadian and U.S.
natural gas transmission peers, political and regulatory developments in Canada,
and conditions of the capital markets and equity markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's interest rate exposure results from variable
rate borrowings from commercial banks. To mitigate potential fluctuations in
interest rates, Northern Border Pipeline attempts to maintain a significant
portion of its debt portfolio in fixed rate debt. There have not been any
material changes in market risk exposures that would affect the quantitative and
qualitative disclosures presented as of December 31, 2001, in Item 7a of
Northern Border Pipeline's Annual Report on Form 10-K. For more information on
risk management activities, see Note 3 to Northern Border Pipeline's financial
statements included elsewhere in this report.
15
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1) Northern Border Pipeline filed a Current Report on Form 8-K, dated
April 9, 2002, reporting a press release issued by Northern Border Pipeline that
announced that Moody's Investors Service had affirmed the A3 rating of Northern
Border Pipeline's senior unsecured notes.
2) Northern Border Pipeline filed a Current Report on Form 8-K, dated May
15, 2002, reporting a Stipulation and Order entered into by Northern Border
Pipeline and Enron North America Corp.
3) Northern Border Pipeline filed a Current Report on Form 8-K, dated June
26, 2002, filing a $175 million credit agreement dated as of May 16, 2002, as
an exhibit.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN BORDER PIPELINE COMPANY
(A Texas General Partnership)
Date: August 14, 2002 By: /s/ Jerry L. Peters
---------------------------------
Jerry L. Peters
Vice President, Finance and
Treasurer
17
INDEX TO EXHIBIT
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.