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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 SEPTEMBER 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 20
NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended September 30, 2002 and 2001
and Nine Months Ended September 30, 2002 and 2001 3
Statement of Comprehensive Income -
Three Months Ended September 30, 2002 and 2001
and Nine Months Ended September 30, 2002 and 2001 3
Balance Sheet - September 30, 2002
and December 31, 2001 4
Statement of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Statement of Changes in Partners' Equity -
Nine Months Ended September 30, 2002 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 16
ITEM 4. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- -------- --------
OPERATING REVENUES
Operating revenues $81,553 $77,932 $239,881 $233,979
Provision for rate refunds -- -- -- (2,057)
------- ------- -------- --------
Operating revenues, net 81,553 77,932 239,881 231,922
------- ------- -------- --------
OPERATING EXPENSES
Operations and maintenance 7,540 7,182 21,944 24,720
Depreciation and amortization 14,514 14,234 43,501 42,927
Taxes other than income 7,656 8,433 20,684 19,168
------- ------- -------- --------
Operating expenses 29,710 29,849 86,129 86,815
------- ------- -------- --------
OPERATING INCOME 51,843 48,083 153,752 145,107
------- ------- -------- --------
INTEREST EXPENSE 13,153 12,699 39,929 41,470
------- ------- -------- --------
OTHER INCOME (EXPENSE) 507 153 1,550 (579)
------- ------- -------- --------
NET INCOME TO PARTNERS $39,197 $35,537 $115,373 $103,058
======= ======= ======== ========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2002 2001 2002 2001
------- ------- -------- --------
Net income to partners $39,197 $ 35,537 $115,373 $103,058
Other comprehensive income:
Transition adjustment from
adoption of SFAS No. 133 -- -- -- 10,347
Change associated with current
period hedging transactions (389) (12,045) (2,026) (4,439)
------- -------- -------- --------
Total comprehensive income $38,808 $ 23,492 $113,347 $108,966
======= ======== ======== ========
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)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,964 $ 11,003
Accounts receivable 30,999 29,704
Materials and supplies, at cost 4,703 4,873
Prepaid expenses and other 2,195 1,731
---------- ----------
Total current assets 65,861 47,311
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,430,714 2,432,553
Less: Accumulated provision for
depreciation and amortization 781,426 746,888
---------- ----------
Property, plant and equipment, net 1,649,288 1,685,665
---------- ----------
OTHER ASSETS
Derivative financial instruments 19,340 3,366
Other 16,995 15,527
---------- ----------
36,335 18,893
---------- ----------
Total assets $1,751,484 $1,751,869
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 65,000 $ 350,000
Accounts payable 13,643 5,293
Accrued taxes other than income 26,548 27,167
Accrued interest 15,206 16,526
---------- ----------
Total current liabilities 120,397 398,986
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 801,005 513,666
---------- ----------
RESERVES AND DEFERRED CREDITS 5,386 5,623
---------- ----------
PARTNERS' EQUITY
Partners' capital 817,549 824,421
Accumulated other comprehensive income 7,147 9,173
---------- ----------
Total partners' equity 824,696 833,594
---------- ----------
Total liabilities and partners' equity $1,751,484 $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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 115,373 $ 103,058
--------- ---------
Adjustments to reconcile net income to partners to
net cash provided by operating activities:
Depreciation and amortization 43,776 43,201
Provision for rate refunds -- 2,036
Rate refunds paid -- (6,762)
Changes in components of working capital 4,822 (1,420)
Other (588) (794)
--------- ---------
Total adjustments 48,010 36,261
--------- ---------
Net cash provided by operating activities 163,383 139,319
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (6,651) (51,087)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners (122,245) (104,795)
Issuance of long-term debt 416,894 365,400
Retirement of long-term debt (434,000) (337,000)
Proceeds (payments) upon termination of
derivatives 2,351 (4,070)
Decrease in bank overdraft -- (22,437)
Long-term debt financing costs (2,771) (2,188)
--------- ---------
Net cash used in financing activities (139,771) (105,090)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,961 (16,858)
Cash and cash equivalents-beginning of period 11,003 29,046
--------- ---------
Cash and cash equivalents-end of period $ 27,964 $ 12,188
========= =========
- -----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 41,579 $ 51,221
========= =========
Changes in components of working capital:
Accounts receivable $ (1,295) $ 5,045
Materials and supplies 170 (190)
Prepaid expenses and other (464) (2,067)
Accounts payable 8,350 5,479
Accrued taxes other than income (619) (512)
Accrued interest (1,320) (9,175)
--------- ---------
Total $ 4,822 $ (1,420)
========= =========
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 34,612 80,761 -- 115,373
Change associated with current
period hedging transactions -- -- (2,026) (2,026)
Distributions to partners (36,674) (85,571) -- (122,245)
-------- -------- ------- ---------
Balance at September 30, 2002 $245,264 $572,285 $ 7,147 $ 824,696
======== ======== ======= =========
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 ("SEC"). 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. ORGANIZATION AND MANAGEMENT
On August 16, 2002, TransCanada PipeLines Limited, parent of the
general partner of TC PipeLines, LP, acquired the outstanding common stock of
Northwest Border Pipeline Company from The Williams Companies, Inc. Northwest
Border Pipeline is one of the three general partners of Northern Border
Partners, L.P., which owns, through a subsidiary limited partnership, a 70%
general partner interest in Northern Border Pipeline. TC PipeLines owns the
remaining 30% general partner interest in Northern Border Pipeline. Northern
Plains Natural Gas Company and Pan Border Gas Company, general partners of
Northern Border Partners, L.P. and affiliates of Enron Corp., have 57.75% of
the voting power on the Northern Border Pipeline management committee. As a
result of the acquisition, in the aggregate, TransCanada and TC PipeLines have
42.25% of the voting power on the management committee.
3. 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. In October 2002,
Northern Border Pipeline filed a registration statement with the SEC for the
offer to exchange the 2002 Pipeline Senior Notes and expects to complete the
exchange in November 2002. 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
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
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 September 30, 2002, $108.0 million was
outstanding under the 2002 Pipeline Credit Agreement at an average interest
rate of 2.45%.
Northern Border Pipeline's debt and credit facilities contain material
financial covenants. At September 30, 2002, Northern Border Pipeline was in
compliance with these covenants.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Northern Border Pipeline uses derivative 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 nine months ended September 30, 2002,
Northern Border Pipeline amortized approximately $0.4 million and $1.0 million,
respectively, related to the terminated interest rate swap agreements, as a
reduction to interest expense from accumulated other comprehensive income.
Northern Border Pipeline expects to amortize approximately $0.4 million in the
fourth quarter 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
8
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
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 September 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 $19.3 million in derivative financial instruments with a
corresponding offset in long-term debt on the accompanying balance sheet at
September 30, 2002.
5. 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.
9
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
6. SUBSEQUENT EVENTS
Northern Border Pipeline makes distributions to its general partners
approximately one month following the end of the quarter. The distribution for
the third quarter of 2002 of approximately $41.9 million was paid November 1,
2002.
10
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
THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001
Net income to partners increased $3.7 million (10%) for the third
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").
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
Operating revenues, net increased $3.6 million (5%) for the third
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.
Taxes other than income decreased $0.8 million (9%) for the third
quarter of 2002, as compared to the same period in 2001. The 2001 amount
included adjustments to previous estimates of ad valorem taxes for increases in
property valuations.
Other income (expense) increased $0.4 million for the third quarter of
2002, as compared to the same period in 2001. The amount for the third quarter
of 2002 includes income of approximately $0.6 million for previously vacated
microwave frequency bands.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
Net income to partners increased $12.3 million (12%) for the first
nine months 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 $8.0 million (3%) for the first nine
months of 2002, as compared to the same period in 2001, due primarily to
additional revenues of approximately $10.2 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 first nine months of
2002, the revenues lost on this capacity totaled approximately $1.8 million.
Operations and maintenance expense decreased $2.8 million (11%) for
the first nine months of 2002, as compared to the same period in 2001, due
primarily to a decrease in employee benefits and administrative expenses
partially offset by an increase in regulatory commission expense.
Taxes other than income increased $1.5 million (8%) for the first nine
months of 2002, as compared to the same period in 2001. Northern Border
Pipeline periodically reviews and adjusts its estimates of ad valorem taxes.
Net reductions to previous estimates in 2001 exceeded reductions to previous
estimates in 2002 by approximately $1.6 million.
Interest expense decreased $1.5 million (4%) for the first nine months
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.
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
Other income (expense) increased $2.1 million for the first nine
months of 2002, as compared to the same period in 2001. The 2002 amount
includes income of approximately $0.6 million for previously vacated microwave
frequency bands. 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
September 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 2.45% $108,000 $ -- $108,000
1992 Series D Senior Notes, 8.57% 65,000 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 $848,000 $ 65,000 $783,000
======== ======== ========
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
September 30, 2002, $108 million was outstanding under the 2002 Pipeline Credit
Agreement at an average interest rate of 2.45%.
At September 30, 2002, Northern Border Pipeline had outstanding $65
million of Series D Senior Notes issued in a $250 million private placement
under a July 1992 note purchase agreement. The Series D Senior Notes mature in
August 2003. Northern Border Pipeline anticipates borrowing under the 2002
Pipeline Credit Agreement to repay the Series D Senior 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.
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.
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
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $24.1 million to
$163.4 million for the first nine months of 2002, as compared to the same period
in 2001, primarily due to increases in operating revenues, decreases in
operating expenses, lower interest payments and the impact of rate case refunds
in 2001. Interest payments have decreased $9.6 million between 2001 and 2002 due
to lower average interest rates and changes in timing of interest payments.
Additionally in the first nine months 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 $6.7 million for the first nine months of
2002 as compared to $51.1 million for the same period in 2001. The 2002 and 2001
amounts include $0.4 million and $46.3 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 $11 million.
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 $139.8 million for the
first nine months of 2002 as compared $105.1 million for the same period in
2001. Distributions to partners increased $17.5 million to $122.2 million for
the first nine months of 2002, as compared to the same period in 2001. The
distribution amount paid is determined from the quarterly operating results. For
the third quarter of 2002, Northern Border Pipeline declared a distribution of
$41.9 million, which was paid on November 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. The net proceeds from the
issuance of the 7.50% Senior Notes totaled approximately $247.2 million in 2001
and were used for repayment of amounts borrowed under a previously outstanding
credit agreement. In August 2002 and August 2001, Northern Border Pipeline
repaid its 1992 Series C and B Senior Notes of $78 million and $41 million,
respectively, primarily by borrowing under its credit agreements. During the
first nine months of 2002, Northern Border Pipeline had net repayments under its
credit agreements of $164.0 million as compared to net repayments in 2001 of
$180.0 million. In April 2002, Northern Border Pipeline received $2.4 million
from the termination of forward starting interest rate swaps (see Note 4 - Notes
to Financial Statements). For the first nine months 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.
14
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 5 - 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. The remaining contract capacity was terminated
in the third quarter of 2002. Northern Border Pipeline has posted the available
capacity and contracted portions of the capacity for varying terms. At November
1, 2002, approximately 2% of Northern Border Pipeline's available capacity was
not contracted under firm transportation agreements. For the period from January
to September 2002, Northern Border Pipeline has experienced lost revenues of
approximately $1.8 million related to ENA's capacity. Northern Border Pipeline
has filed proofs of claims regarding the amount of damages for breach of
contract and other claims in the bankruptcy proceeding. However, Northern Border
Pipeline cannot predict the amounts, if any, that it will collect or the timing
of collection. Northern Border Pipeline believes, however, that any amounts
collected will not be material.
Northern Plains Natural Gas Company, as operator for Northern Border
Pipeline, has advised that under the Operating Agreement, increased costs may be
incurred for health care expenses and pension benefits. Such costs are projected
to increase as a result of actual medical claims experience, pension investment
returns and effects of the Enron bankruptcy filing. While the determination of
reimbursement of such costs by Northern Border Pipeline under the Operating
Agreement will be made at the time of occurrence, for its 2003 forecasts,
Northern Border Pipeline estimated an increase of $3 million over 2002 levels.
The actual amount of increased costs that Northern Border Pipeline incurs in
2003 for these items may vary depending upon actual expenses and developments in
Enron's bankruptcy.
On May 3, 2002, Enron presented to the creditors' committee a proposal
under which specified core energy assets of Enron 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 the majority general partners of Northern Border Intermediate Limited
Partnership, which owns a 70% interest in Northern Border Pipeline. On August
27, 2002, Enron announced that it had commenced a formal sales process for its
interests in certain major assets and that it had extended invitations to visit
electronic data rooms containing information on 12 of its most valuable
businesses, with Northern Plains and Pan Border comprising one of those
businesses, to potential bidders with whom Enron has executed confidentiality
agreements. The announcement also stated that Enron and its advisors, in
consultation with the creditors' committee and its advisors, will evaluate all
offers received to determine the combination of bids that maximizes the value of
all assets. Enron stated that it reserves the right not to sell any of its
assets if the bids received are not deemed fully reflective of the assets'
value. Enron and its advisors have received initial indications of interest in
the businesses in October 2002. Northern Border Pipeline cannot predict whether
Northern Plains and Pan Border will be sold to a bidder in the auction process
or ultimately included in the new
15
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
integrated power and pipeline company under the proposal presented by Enron.
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, and to take appropriate action
to protect Northern Border Pipeline's interests.
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. As of September 30, 2002,
approximately 61% of Northern Border Pipeline's debt portfolio is in fixed rate
debt. If average interest rates change by one percentage point compared to rates
in effect as of September 30, 2002, annual interest expense would change by
approximately $3.3 million. This amount has been determined by considering the
impact of the hypothetical interest rates on variable rate borrowings
outstanding as of September 30, 2002. For more information on risk management
activities, see Note 4 to Northern Border Pipeline's financial statements
included elsewhere in this report.
16
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 4. CONTROLS AND PROCEDURES
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's principal executive officer and principal
financial officer have evaluated the effectiveness of Northern Border Pipeline's
"disclosure controls and procedures," as such term is defined in Rule 13a-14(c)
of the Securities Exchange Act of 1934, as amended, within 90 days of the filing
date of this Quarterly Report on Form 10-Q. Based upon their evaluation, the
principal executive officer and principal financial officer concluded that
Northern Border Pipeline's disclosure controls and procedures are effective.
There were no significant changes in Northern Border Pipeline's internal
controls or in other factors that could significantly affect these controls,
since the date the controls were evaluated.
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 August 16, 2002, reporting the acquisition of Northwest Border Pipeline
Company by TransCanada PipeLines Limited.
17
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: November 14, 2002 By: /s/ Jerry L. Peters
------------------------------
Jerry L. Peters
Vice President, Finance and
Treasurer
18
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jerry L. Peters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northern Border
Pipeline Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Jerry L. Peters
-----------------------------------
Jerry L. Peters
Vice President, Finance
and Treasurer
Northern Plains Natural Gas Company
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and
not for any other purpose.
19
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, William R. Cordes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northern Border
Pipeline Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ William R. Cordes
----------------------------------
William R. Cordes
President, Northern Plains Natural
Gas Company
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and
not for any other purpose.
20
EXHIBIT INDEX
(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