Back to GetFilings.com
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 MARCH 31, 2003
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)
13710 FNB Parkway
Omaha, Nebraska 68154-5200
------------------------------- --------------------------------
(Address of principal executive (Zip code)
offices)
(402) 492-7300
---------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
1 OF 20
NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended March 31, 2003 and 2002 .............. 3
Statement of Comprehensive Income -
Three Months Ended March 31, 2003 and 2002 .............. 3
Balance Sheet - March 31, 2003
and December 31, 2002 ................................... 4
Statement of Cash Flows -
Three Months Ended March 31, 2003 and 2002 .............. 5
Statement of Changes in Partners' Equity -
Three Months Ended March 31, 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 ............................................. 16
ITEM 4. Controls and Procedures ................................. 16
PART II. OTHER INFORMATION
ITEM 5. Other Information ....................................... 17
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
MARCH 31,
---------
2003 2002
---- ----
OPERATING REVENUES ............. $ 79,892 $ 78,155
-------- --------
OPERATING EXPENSES
Operations and maintenance ... 8,919 7,206
Depreciation and amortization 14,489 14,494
Taxes other than income ...... 7,845 6,560
-------- --------
Operating expenses ......... 31,253 28,260
-------- --------
OPERATING INCOME ............... 48,639 49,895
-------- --------
INTEREST EXPENSE ............... 11,819 13,020
-------- --------
OTHER INCOME (EXPENSE) ......... (86) 795
-------- --------
NET INCOME TO PARTNERS ......... $ 36,734 $ 37,670
======== ========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
Net income to partners ................. $ 36,734 $ 37,670
Other comprehensive income:
Change associated with current period
hedging transactions ............... (389) 1,245
-------- --------
Total comprehensive income ............. $ 36,345 $ 38,915
======== ========
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)
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............. $ 19,001 $ 25,358
Accounts receivable .................... 48,878 34,326
Materials and supplies, at cost ........ 4,734 4,721
Prepaid expenses and other ............. 1,198 1,844
---------- ----------
Total current assets ................. 73,811 66,249
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment .......... 2,424,785 2,431,486
Less: Accumulated provision for
depreciation and amortization ........ 806,321 795,525
---------- ----------
Property, plant and equipment, net ... 1,618,464 1,635,961
---------- ----------
OTHER ASSETS
Derivative financial instruments ....... 20,227 21,204
Other .................................. 16,144 16,623
---------- ----------
Total other assets ................... 36,371 37,827
---------- ----------
Total assets ......................... $1,728,646 $1,740,037
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt ... $ 65,000 $ 65,000
Accounts payable ....................... 33,558 24,426
Accrued taxes other than income ........ 28,659 28,374
Accrued interest ....................... 14,100 13,173
---------- ----------
Total current liabilities ............ 141,317 130,973
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 776,966 783,906
---------- ----------
RESERVES AND DEFERRED CREDITS ............ 6,013 15,386
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Partners' capital ...................... 797,981 803,014
Accumulated other comprehensive income . 6,369 6,758
---------- ----------
Total partners' equity ............... 804,350 809,772
---------- ----------
Total liabilities and partners' equity $1,728,646 $1,740,037
========== ==========
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)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners ............................ $ 36,734 $ 37,670
-------- --------
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization ................... 14,580 14,585
Reserves and deferred credits ................... (9,373) (237)
Changes in components of working capital ........ 1,487 903
Other ........................................... (124) (124)
-------- --------
Total adjustments ........................... 6,570 15,127
-------- --------
Net cash provided by operating activities ....... 43,304 52,797
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment ................................... (1,894) (2,058)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners ......................... (41,767) (39,178)
Issuance of long-term debt ........................ 22,000 20,000
Retirement of long-term debt ...................... (28,000) (27,000)
Long-term debt financing costs .................... -- (70)
-------- --------
Net cash used in financing activities ........... (47,767) (46,248)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............. (6,357) 4,491
Cash and cash equivalents-beginning of period ....... 25,358 11,003
-------- --------
Cash and cash equivalents-end of period ............. $ 19,001 $ 15,494
======== ========
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) ............ $ 11,007 $ 15,772
======== ========
Changes in components of working capital:
Accounts receivable ............................. $ (5,018) $ 1,694
Materials and supplies .......................... (13) 161
Prepaid expenses and other ...................... 645 386
Accounts payable ................................ 4,661 2,702
Accrued taxes other than income ................. 284 (1,397)
Accrued interest ................................ 928 (2,643)
-------- --------
Total ......................................... $ 1,487 $ 903
======== ========
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, 2002 .... $ 240,904 $ 562,110 $ 6,758 $ 809,772
Net income to partners .......... 11,020 25,714 -- 36,734
Change associated with current
period hedging transactions ... -- -- (389) (389)
Distributions to partners ....... (12,530) (29,237) -- (41,767)
--------- --------- --------- ---------
Balance at March 31, 2003 ....... $ 239,394 $ 558,587 $ 6,369 $ 804,350
========= ========= ========= =========
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, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make 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. RATES AND REGULATORY ISSUES
In February 2003, Northern Border Pipeline filed to amend its Federal
Energy Regulatory Commission ("FERC") tariff to clarify the definition of
company use gas, which is gas supplied by its shippers for its operations, by
adding detailed language to the broad categories that comprise company use gas.
Northern Border Pipeline had included in its collection of company use gas,
quantities that were equivalent to the cost of electric power at its
electric-driven compressor stations during the period of June 2001 through
January 2003. On March 27, 2003, the FERC issued an order rejecting Northern
Border Pipeline's proposed tariff sheet revision and requiring refunds with
interest within 90 days of the order. The refunds with interest are
approximately $10.3 million and are recorded in accounts payable on the
accompanying balance sheet at March 31, 2003. Northern Border Pipeline made the
refunds to its shippers in May 2003.
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. As a result, Northern Border
Pipeline has entered into various interest rate swap agreements with major
financial institutions to hedge its interest rate risk.
Northern Border Pipeline records in accumulated other comprehensive income
amounts related to terminated interest rate swap agreements for cash flow hedges
with such amounts amortized to interest expense over the term of the
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
hedged debt. During the three months ended March 31, 2003, Northern Border
Pipeline amortized $0.4 million 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 comparable
amounts in each of the remaining quarters of 2003.
Northern Border Pipeline has outstanding interest rate swap agreements
with notional amounts totaling $225 million that expire in May 2007. 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 6.25% fixed rate. At March 31, 2003, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.70%. Northern Border Pipeline's 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 fixed rate debt issued in 2002. The
accompanying balance sheet at March 31, 2003, reflects a non-cash gain of
approximately $20.2 million in derivative financial instruments with a
corresponding increase in long-term debt.
4. CONTINGENCIES
On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation ("Tribes") filed a lawsuit in Tribal Court against Northern Border
Pipeline to collect more than $3 million in back taxes, together with interest
and penalties. The lawsuit relates to a utilities tax on certain of Northern
Border Pipeline's properties within the Fort Peck Indian Reservation. The Tribes
and Northern Border Pipeline, through a mediation process, have held settlement
discussions and have reached a settlement in principle on pipeline rights-of-way
lease and taxation issues, subject to final documentation and necessary
government approvals. Northern Border Pipeline believes that the resolution of
this lawsuit will not have a material adverse impact on Northern Border
Pipeline's results of operations or financial position.
Various legal actions that have arisen in the ordinary course of business
are pending. Northern Border Pipeline believes that the resolution of these
issues will not have a material adverse impact on Northern Border Pipeline's
results of operations or financial position.
5. ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, if the liability can be reasonably estimated. When the liability is
initially recorded, the carrying amount of the related asset is increased by the
same amount. Over time, the liability is accreted to its future value and the
accretion is recorded to expense. The initial adjustment to the asset is
depreciated over its useful life. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
In some instances, Northern Border Pipeline is obligated by contractual terms or
regulatory requirements to remove facilities
8
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
or perform other remediation upon retirement. Northern Border Pipeline was
unable to reasonably estimate and record liabilities for its obligations that
fall under the provisions of this statement because it cannot reasonably
estimate when such obligations would be settled. Effective January 1, 2003,
Northern Border Pipeline adopted SFAS No. 143, which did not have a material
impact on its financial position or results of operations.
6. SUBSEQUENT EVENTS
Northern Border Pipeline makes distributions to its general partners
approximately one month following the end of the quarter. The distributions for
the first quarter of 2003 of approximately $32.4 million were paid May 1, 2003.
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, 2002. 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 accounting principles generally
accepted in the United States of America for nonregulated entities. Northern
Border Pipeline continually assesses whether the regulatory assets are probable
of future recovery by considering such factors as regulatory changes and the
impact of competition. If future recovery ceases to be probable, Northern Border
Pipeline would be required to write-off the regulatory assets at that time. At
March 31, 2003, Northern Border Pipeline has reflected regulatory assets of
$10.2 million, which are being recovered from its shippers over varying periods
of time. 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 retirements or sales of entire
regulated operating units. The original cost of utility property retired is
charged to accumulated depreciation and amortization, net of salvage and cost of
removal. Northern Border Pipeline's accounting for financial instruments follows
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that every derivative instrument be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
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
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. At March 31,
2003, Northern Border Pipeline's balance sheet included assets from derivative
financial instruments of $20.2 million.
RESULTS OF OPERATIONS
Net income to partners decreased $0.9 million for the first quarter of
2003, as compared to the same period in 2002. Northern Border Pipeline's net
income was reduced by higher operating expenses and decreases in other income
(expense) partially offset by increases in operating revenues and reductions in
interest expense.
Operating revenues increased $1.7 million for the first quarter of 2003,
as compared to the same period in 2002. The 2002 results were impacted by
uncollected revenues associated with the transportation capacity previously held
by Enron North America Corp., 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 quarter of 2002, the
revenues lost on this capacity totaled approximately $1.5 million.
Operations and maintenance expenses increased $1.7 million for the first
quarter of 2003, as compared to the same period in 2002, due primarily to the
cost for electricity to power Northern Border Pipeline's electric-driven
compressors. Previously, Northern Border Pipeline included in its collection of
company-use gas quantities that were equivalent to the cost of electric power.
Operations and maintenance expenses also include an increase in employee
benefits expenses.
Taxes other than income increased $1.3 million for the first quarter of
2003, as compared to the same period in 2002. The 2002 amount included a refund
of use taxes previously paid on exempt purchases.
Interest expense decreased $1.2 million for the first quarter of 2003, as
compared to the same period in 2002, due to a decrease in Northern Border
Pipeline's average interest rate as well as a decrease in average debt
outstanding.
Other income (expense) decreased $0.9 million for the first quarter of
2003, as compared to the same period in 2002. The 2003 amount includes $0.3
million of estimated interest expense for refunds required by the order issued
by the Federal Energy Regulatory Commission on March 27, 2003 (see Note 2 -
Notes to Financial Statements). The 2002 amount included $0.6 million of income
primarily related to interest received on the refund of use taxes discussed
previously.
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
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND CREDIT FACILITIES
Northern Border Pipeline's debt and credit facilities outstanding at March
31, 2003, are as follows:
Payments Due by Period
----------------------
Current Portion
(Less Than Long-Term
Total 1 Year) Portion
----- ------- -------
(In Thousands)
1992 Series D Senior Notes,
average 8.57%, due 2003 $ 65,000 $ 65,000 --
$175 million Pipeline Credit
Agreement, average 2.18%,
due 2005 83,000 -- 83,000
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 $823,000 $ 65,000 $758,000
======== ======== ========
At March 31, 2003, 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 Pipeline Credit
Agreement to repay the Series D Senior Notes.
Northern Border Pipeline has outstanding interest rate swap agreements
with notional amounts totaling $225 million that expire in May 2007. 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 6.25% fixed rate. At March 31, 2003, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.70%.
Short-term liquidity needs will be met by operating cash flows and through
the 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 were $43.3 million in the
first quarter of 2003 as compared to $52.8 million for the comparable period in
2002. The $9.5 million decrease in 2003 from 2002 was primarily related to a
reduction in prepayments that Northern Border Pipeline had required certain
shippers make for transportation service.
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
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $1.9 million for the first quarter of 2003 as
compared to $2.1 million for the comparable period in 2002. The capital
expenditures for 2003 and 2002 were primarily related to renewals and
replacements of existing facilities.
Total capital expenditures for 2003 are estimated to be $11 million
primarily related to renewals and replacements of existing facilities. Northern
Border Pipeline currently anticipates funding its 2003 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 $47.8 million for the first
quarter of 2003 as compared to $46.2 million for the comparable period in 2002.
Distributions to partners were $41.8 million and $39.2 million in the first
quarter of 2003 and 2002, respectively. Distributions paid in the current
quarter are computed based on the previous quarter's operating results.
A distribution of approximately $32.4 million was declared for the first
quarter of 2003 and paid May 1, 2003. In addition to being impacted by the
operating results for the quarter, the first quarter distribution was reduced to
reflect the impact of the refunds ordered by the FERC on March 27, 2003 (see
Note 2 - Notes to Financial Statements) in accordance with the currently
approved distribution formula.
For 2003 and 2002, borrowings on long-term debt totaled $22.0 million and
$20.0 million, respectively. Total payments on debt were $28.0 million and $27.0
million in 2003 and 2002, respectively.
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, 2002, on December 2, 2001, Enron Corp.
and certain of its wholly-owned subsidiaries filed a voluntary petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.
Northern Border Partners, L.P. owns a 70% general partner interest in
Northern Border Pipeline. Two of Northern Border Partners' general partners,
Northern Plains Natural Gas Company and Pan Border Gas Company, are owned by
Enron. In addition, all of the common stock of Portland General Electric Company
("PGE") is owned by Enron. As the owner of PGE's common stock, Enron is a
holding company for purposes of the Public Utility Holding Company Act
("PUHCA"). Following Enron's acquisition of PGE in 1997, Enron annually filed a
statement claiming an exemption from all provisions of PUHCA (except the
provision which addresses the acquisition of public utility company affiliates)
under Section 3(a)(1). Due to Enron's bankruptcy filing in December 2001, Enron
is no longer able to provide necessary financial
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
information needed to file the exemption statement. As a result, in February
2002, Enron applied to the SEC for an order of exemption under Section 3(a)(1).
To be eligible for this exemption, PGE's utility activities must, among other
things, be predominantly intrastate in character.
Following the submission of testimony by the parties to the proceeding, a
hearing on Enron's application was held on December 5, 2002. On February 6,
2003, the administrative law judge ("ALJ") issued an initial decision ("Initial
Decision") holding that PGE does not meet the criteria to be predominantly
intrastate in character, thereby denying Enron's application for exemption. On
February 27, 2003, Enron filed a petition for review with the SEC requesting
that the SEC review the ALJ's Initial Decision, reverse such Initial Decision,
and find that Enron is entitled to an exemption from PUHCA. Filing of the
petition stays the effect of the Initial Decision until such time as the SEC
acts on the petition. As directed by the SEC, the Division of Investment
Management filed a response to the petition on March 25, 2003 urging the SEC to
reject the petition and affirm the ALJ's Initial Decision. The SEC could act on
the petition at any time. Possible actions that the SEC could take include
setting the matter for further hearings before the full Commission or summarily
affirming, reversing or modifying the Initial Decision. If the SEC affirms the
Initial Decision, Enron would be required to register as a holding company under
PUHCA and Northern Plains and Pan Border would presumptively become subsidiaries
within the newly registered Enron holding company system. Further, because of
the voting interest held by Enron through its general partner interests in
Northern Border Partners, Northern Border Partners and certain of its
subsidiaries, including Northern Border Pipeline, would also presumptively
become subsidiaries within the Enron holding company system.
PUHCA imposes a number of restrictions on the operation of registered
holding companies and their subsidiaries within the registered holding company
system, including the requirement of SEC approval of securities issuances and
certain restrictions on the ability to own or acquire businesses. PUHCA also
regulates transactions between companies in a holding company system. Operations
under PUHCA can become materially more expensive and cumbersome than operations
by companies that are not subject to, or exempt, from PUHCA. If Northern Border
Pipeline was to become a subsidiary of a registered holding company under PUHCA,
it would become subject to regulation by the SEC not only with respect to the
acquisition of the securities of public utilities, but also with respect to,
among other things, the acquisition of assets and interests in any other
business, declaration and payment of certain cash distributions; intra-system
borrowings or indemnifications; sales, services or construction transactions
with other holding company system companies; the issuance of debt or equity
securities; and borrowings under credit facilities. At this time, Northern
Border Pipeline cannot predict how regulations under PUHCA would impact its
operations, although if it receives the exemptions or orders referred to below,
Northern Border Pipeline believes that it will be able to conduct its operations
in a manner consistent with its current operations without material cost or
delay.
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
If Enron's exemption application is denied by the SEC, Northern Border
Pipeline cannot estimate the amount of time that the SEC will provide for Enron
to register as a holding company under PUHCA at which time Enron and its holding
company system would become subject to PUHCA. Northern Border Pipeline intends
to seek orders from the SEC that, if granted, would minimize the impacts as
described above of PUHCA on its operations. Northern Border Pipeline also may
seek exemptions for its operations from regulation under PUHCA. Similar orders
and exemptions have been granted by the SEC to other operating subsidiaries of
holding companies under PUHCA. No assurance can be given that Northern Border
Pipeline will be successful in obtaining all the orders or exemptions that it
intends to seek or that its operations will not be subject to the full
regulatory impact of PUHCA.
Numerous shareholder and employee class action lawsuits have been
initiated against Enron, its former independent accountants, legal advisors,
executives, and board members. Enron has received several requests for
information from different federal and state agencies, including the FERC, and
committees of the United States House of Representatives and Senate. Some of the
information requested from Enron may include information about Northern Border
Pipeline. While Northern Border Pipeline has not been subject to these
investigations or lawsuits, it is possible that in the documentation production
by Enron, confidential, proprietary or commercially sensitive information
concerning us may have been produced. It is also possible that some of this
information may be made available to the public.
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 2003. 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, the PUHCA
proceeding relating
15
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
to Enron's exemption, industry results, future demand for natural gas,
availability of supplies of Canadian natural gas, 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. Northern Border Pipeline also
uses interest rate swaps as a means to manage interest expense by converting a
portion of fixed rate debt into variable rate debt to take advantage of
declining interest rates. There have not been any material changes in market
risk exposures that would affect the quantitative and qualitative disclosures
presented as of December 31, 2002, 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.
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.
16
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 5. Other Information
Mirant Americas Energy Marketing, LP is currently obligated for
approximately 10% of Northern Border Pipeline's contracted firm capacity.
Mirant's firm contracts expire in October 2006 and December 2008. Mirant also
manages the assets of Pan-Alberta Gas, Ltd., including the contracts of
Pan-Alberta Gas (U.S.) ("Pan-Alberta"), which is obligated for approximately 20%
of Northern Border Pipeline's contracted firm capacity. Pan-Alberta's firm
contracts expire October 31, 2003. Mirant has recently announced the sale of its
Canadian natural gas aggregator services contracts and a significant portion of
its natural gas transportation contracts to Cargill Limited. The announcement
did not identify which transportation contracts were included but did state that
Cargill would assume the management services to operate the aggregator business
of Pan-Alberta Gas, Ltd. Mirant's announcement indicates the transaction is
expected to close later this year pending regulatory approvals.
Northern Border Pipeline has recently reached agreement with an investment
grade shipper for approximately 125 million cubic feet per day of transportation
capacity for a one-year period extending from November 1, 2003 through October
31, 2004. The capacity extends from Port of Morgan, Montana to interconnections
in Northern Border Pipeline's market areas, with the majority of the capacity
extending to the Chicago area. The agreement is at the maximum transportation
rate available under Northern Border Pipeline's tariff and is expected to yield
approximately $18.8 million in revenue over its term. With this agreement, the
percentage of system capacity under contracts that expire before November 1,
2003, has been reduced from 42% to 36%.
In Northern Border Pipeline's Annual Report on Form 10-K for the year
ended December 31, 2002, it was reported that Northern Border Pipeline was
selected for an industry-wide audit of FERC-assessed annual charges. On April
10, 2003, the FERC issued its final report finding Northern Border Pipeline was
compliant.
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
January 30, 2003, including a copy of a press release announcing Northern Border
Partners, L.P. earnings for the fourth quarter of 2002 and a reserve of $10
million established by Northern Border Pipeline Company. The information was
furnished under Item 9 of the Form.
2) Northern Border Pipeline filed a Current Report on Form 8-K, dated
March 19, 2003, including a copy of Northern Border Partners, L.P. press release
announcing Enron Corp.'s intention to form a new pipeline operation entity which
will own Enron's general partner interests in Northern Border Partners, L.P.
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: May 15, 2003 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: May 15, 2003 By: /s/ Jerry L. Peters
-------------------------------------
Jerry L. Peters
Vice President, Finance and Treasurer
Northern Plains Natural Gas Company
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: May 15, 2003 By: /s/ William R. Cordes
-------------------------------------
William R. Cordes
President, Northern Plains Natural
Gas Company
20
INDEX TO EXHIBITS
Exhibit
No. Description
--- -----------
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.