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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 19
NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002 3
Statement of Comprehensive Income -
Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002 3
Balance Sheet - June 30, 2003
and December 31, 2002 4
Statement of Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Statement of Changes in Partners' Equity -
Six Months Ended June 30, 2003 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 17
ITEM 4. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2003 2002 2003 2002
------- ------- -------- --------
OPERATING REVENUES $80,659 $80,173 $160,551 $158,328
------- ------- -------- --------
OPERATING EXPENSES
Operations and maintenance 10,363 7,198 19,282 14,404
Depreciation and amortization 14,431 14,493 28,920 28,987
Taxes other than income 6,950 6,468 14,795 13,028
------- ------- -------- --------
Operating expenses 31,744 28,159 62,997 56,419
------- ------- -------- --------
OPERATING INCOME 48,915 52,014 97,554 101,909
------- ------- -------- --------
INTEREST EXPENSE 11,612 13,756 23,431 26,776
------- ------- -------- --------
OTHER INCOME 314 248 228 1,043
------- ------- -------- --------
NET INCOME TO PARTNERS $37,617 $38,506 $ 74,351 $ 76,176
======= ======= ======== ========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income to partners $37,617 $38,506 $74,351 $76,176
Other comprehensive income:
Change associated with current
period hedging transactions (389) (2,882) (778) (1,637)
------- ------- ------- -------
Total comprehensive income $37,228 $35,624 $73,573 $74,539
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
3
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
- ------ ---------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 27,859 $ 25,358
Accounts receivable 29,660 34,326
Materials and supplies, at cost 4,582 4,721
Prepaid expenses and other 1,160 1,844
---------- ----------
Total current assets 63,261 66,249
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,429,097 2,431,486
Less: Accumulated provision for depreciation and amortization 819,728 795,525
---------- ----------
Property, plant and equipment, net 1,609,369 1,635,961
---------- ----------
OTHER ASSETS
Derivative financial instruments 24,555 21,204
Other 15,665 16,623
---------- ----------
Total other assets 40,220 37,827
---------- ----------
Total assets $1,712,850 $1,740,037
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 65,000 $ 65,000
Accounts payable 6,482 24,426
Accrued taxes other than income 24,862 28,374
Accrued interest 13,048 13,173
---------- ----------
Total current liabilities 109,392 130,973
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 788,331 783,906
---------- ----------
RESERVES AND DEFERRED CREDITS 5,990 15,386
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Partners' capital 803,157 803,014
Accumulated other comprehensive income 5,980 6,758
---------- ----------
Total partners' equity 809,137 809,772
---------- ----------
Total liabilities and partners' equity $1,712,850 $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)
SIX MONTHS ENDED
JUNE 30,
----------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 74,351 $ 76,176
--------- ---------
Adjustments to reconcile net income to partners to net
cash provided by operating activities:
Depreciation and amortization 29,103 29,170
Reserves and deferred credits (9,396) (237)
Changes in components of working capital (16,025) (1,914)
Other (249) (231)
--------- ---------
Total adjustments 3,433 26,788
--------- ---------
Net cash provided by operating activities 77,784 102,964
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment (2,075) (3,177)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (74,208) (79,953)
Issuance of long-term debt 39,000 316,894
Retirement of long-term debt (38,000) (342,000)
Proceeds received upon termination of derivatives -- 2,351
Long-term debt financing costs -- (2,581)
--------- ---------
Net cash used in financing activities (73,208) (105,289)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,501 (5,502)
Cash and cash equivalents-beginning of period 25,358 11,003
--------- ---------
Cash and cash equivalents-end of period $ 27,859 $ 5,501
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 23,788 $ 27,073
========= =========
Changes in components of working capital:
Accounts receivable $ (3,885) $ (1,170)
Materials and supplies 139 163
Prepaid expenses and other 684 619
Accounts payable (9,326) 2,098
Accrued taxes other than income (3,512) (3,541)
Accrued interest (125) (83)
--------- ---------
Total $ (16,025) $ (1,914)
========= =========
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 22,305 52,046 -- 74,351
Change associated with current period
hedging transactions -- -- (778) (778)
Distributions to partners (22,262) (51,946) -- (74,208)
-------- -------- ------ --------
Balance at June 30, 2003 $240,947 $562,210 $5,980 $809,137
======== ======== ====== ========
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. Northern Border Pipeline made refunds to
its shippers of $10.3 million 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 and six months ended June 30, 2003,
Northern Border Pipeline amortized $0.4 million and $0.8 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 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 June 30, 2003, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.38%. 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 June 30, 2003, reflects a non-cash gain of
approximately $24.6 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 ("FASB") 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 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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003.
Northern Border Pipeline does not expect SFAS No. 149 to 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 second quarter of 2003 of approximately $38.8 million were paid August 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
future recovery of the regulatory assets is probable 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 June 30, 2003, Northern Border Pipeline has
recorded regulatory assets of $10.0 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.
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
Northern Border Pipeline's accounting for financial instruments follows
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which 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 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 June 30, 2003, Northern
Border Pipeline's balance sheet reflects a non-cash gain of approximately $24.6
million in derivative financial instruments with a corresponding increase in
long-term debt.
RESULTS OF OPERATIONS
SECOND QUARTER 2003 COMPARED WITH SECOND QUARTER 2002
Net income to partners decreased $0.9 million for the second quarter of
2003, as compared to the same period in 2002. Northern Border Pipeline's net
income was reduced by higher operating expenses partially offset by increases in
operating revenues and reductions in interest expense.
Operating revenues increased $0.5 million for the second 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 second quarter of 2002, the
revenues lost on this capacity totaled approximately $0.3 million.
Operations and maintenance expenses increased $3.2 million for the second
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 $0.5 million for the second quarter of
2003, as compared to the same period in 2002, due primarily to adjustments to ad
valorem taxes. Northern Border Pipeline periodically reviews and adjusts its
estimates of ad valorem taxes. Reductions to previous estimates in 2002 exceeded
reductions to previous estimates in 2003 by approximately $0.4 million.
Interest expense decreased $2.1 million for the second 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.
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
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Net income to partners decreased $1.8 million for the six months ended
June 30, 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 partially offset by increases in operating revenues and reductions
in interest expense.
Operating revenues increased $2.2 million for the six months ended June
30, 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 six months ended June
30, 2002, the revenues lost on this capacity totaled approximately $1.8 million.
Operations and maintenance expenses increased $4.9 million for the six
months ended June 30, 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 $1.8 million for the six months ended
June 30, 2003, as compared to the same period in 2002. The 2002 amount included
a refund of use taxes previously paid on exempt purchases. Both 2003 and 2002
also include adjustments to ad valorem taxes. Northern Border Pipeline
periodically reviews and adjusts its estimates of ad valorem taxes. Reductions
to previous estimates in 2002 exceeded reductions to previous estimates in 2003
by approximately $0.4 million.
Interest expense decreased $3.3 million for the six months ended June 30,
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 decreased $0.8 million for the six months ended June 30,
2003, as compared to the same period in 2002. The 2003 amount includes $0.3
million of 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.
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
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND CREDIT FACILITIES
Northern Border Pipeline's debt and credit facilities outstanding at June
30, 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 2.11%, due 2005 90,000 -- 90,000
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 $830,000 $ 65,000 $765,000
======== ======== ========
At June 30, 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 matured in August 2003.
Northern Border Pipeline borrowed 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 June 30, 2003, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.38%. Northern Border Pipeline's balance sheet reflects a
non-cash gain of approximately $24.6 million in derivative financial instruments
with a corresponding increase in long-term debt at June 30, 2003.
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 $77.8 million in the six
months ended June 30, 2003 as compared to $103.0 million for the comparable
period in 2002. The decrease is primarily due to Northern Border Pipeline's
refund to its shippers for $10.3 million in 2003 (see Note 2 - Notes to
Financial Statements) and a reduction in prepayments in 2003 that Northern
Border Pipeline had required certain shippers make in 2002 for transportation
service.
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 INVESTING ACTIVITIES
Capital expenditures were $2.1 million for the six months ended June 30,
2003 as compared to $3.2 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 $13 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 $73.2 million for the six
months ended June 30, 2003 as compared to $105.3 million for the comparable
period in 2002. Distributions to partners were $74.2 million and $80.0 million
in the six months ended June 30, 2003 and 2002, respectively. The distributions
for 2003 were 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 the six months ended June 30, 2003 and 2002, borrowings on long-term
debt totaled $39.0 million and $316.9 million, respectively. The 2002 amount
included proceeds from the $225 million 6.25% Senior Notes, which were primarily
used to repay previously existing indebtedness. Total payments on debt were
$38.0 million and $342.0 million in the six months ended June 30, 2003 and 2002,
respectively.
OUTLOOK UPDATE
As of June 30, 2003, approximately 74% of Northern Border Pipeline's
capacity was under contract at least through December 31, 2003. As a result of
commercial activity during July 2003, essentially all of Northern Border
Pipeline's capacity is under contract at least through December 31, 2003 and,
assuming no extensions of existing contracts or execution of new contracts,
approximately 70% and 59% is under contract at least through December 31, 2004
and 2005, respectively.
On July 15, 2003, Northern Border Pipeline announced that Cargill,
Incorporated had finalized the assignment of all of the firm capacity formerly
held by Mirant Americas Energy Marketing, LP. This represents approximately 10%
of Northern Border Pipeline's contracted firm capacity and extends for terms
into 2006 and 2008. Additionally, Cargill assumed the management services of
Pan-Alberta Gas, Ltd., previously performed by Mirant.
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
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 and TC PipeLines, LP owns the remaining 30%. Northern
Plains Natural Gas Company and Pan Border Gas Company, subsidiaries of Enron,
are two of the general partners of Northern Border Partners, L.P. Northern
Plains is also the operator of our pipeline system. On June 25, 2003, Enron
announced the organization of CrossCountry Energy Corp., a newly formed holding
company that will hold, among other things, Enron's ownership interests in
Northern Plains and Pan Border. Enron also announced it had filed a motion with
the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court") to approve the proposed transfer of those ownership interests to
CrossCountry.
On July 11, 2003, Enron announced that Enron and its debtor-in-possession
subsidiaries (collectively with Enron, the "Debtors") filed their proposed joint
Chapter 11 plan (the "Plan") and related disclosure statement (the "Disclosure
Statement") with the Bankruptcy Court. Under the Plan, it is anticipated that if
CrossCountry is not sold to a third party, as permitted by the Plan, its shares
would be distributed directly or indirectly to creditors of the Debtors. At this
time, Northern Border Pipeline is unable to predict the outcome of the
Bankruptcy Court's ruling on Enron's motion or whether Enron's Plan will be
approved.
UPDATE TO POTENTIAL PUBLIC UTILITY HOLDING COMPANY ACT ("PUHCA") REGULATION
Further to the discussion and disclosure of potential impacts to Northern
Border Pipeline provided in the quarterly report on Form 10-Q for the period
ended March 31, 2003, on June 11, 2003, the SEC granted Enron's petition for
review of the Initial Decision by the administrative law judge which denied
Enron's application for exemption under PUHCA and set a briefing schedule that,
at present, would be completed by September 3, 2003. The Initial Decision is
stayed pending the resolution of the SEC's further review.
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
previously described 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.
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
UPDATE ON ENRON GAS PIPELINE EMPLOYEE BENEFIT TRUST ("TRUST")
Further to the discussion and disclosure in the annual report on Form
10-K for the year ended December 31, 2002, on July 22, 2003, Enron filed a
motion with the bankruptcy court requesting authority to terminate the Trust and
to apportion the Trust's assets among certain identified pipeline companies, one
being Northern Plains. In the motion, it states that, as of June 30, 2002, the
asset/liability allocation percentage for Northern Plains was 2.7% with a
liability allocation of $1.89 million and asset allocation of $846,000. If
approved as filed, the assets of the Trust will be transferred to one or more
qualifying trusts maintained for the benefit of the pipeline company retirees in
accordance with the Enron Corp. Medical Plan for Inactive Participants.
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 to Enron's exemption and Northern Border Pipeline's ability
to obtain orders or exemptions from the SEC related to PUHCA regulation,
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.
16
PART I. FINANCIAL INFORMATION - (CONCLUDED)
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.
17
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 5. OTHER INFORMATION
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.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial and Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial and Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1) Northern Border Pipeline filed a Current Report on Form 8-K, dated
April 17, 2003, discussing the potential effect of the Public Utility Holding
Company Act.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN BORDER PIPELINE COMPANY
(A Texas General Partnership)
Date: August 14, 2003 By: /s/ Jerry L. Peters
-------------------------------------
Jerry L. Peters
Vice President, Finance and Treasurer
19
INDEX TO EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial and Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial and Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.