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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, 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 September 30, 2003 and 2002 and
Nine Months Ended September 30, 2003 and 2002 ............. 3
Statement of Comprehensive Income -
Three Months Ended September 30, 2003 and 2002 and
Nine Months Ended September 30, 2003 and 2002 ............. 3
Balance Sheet - September 30, 2003
and December 31, 2002 ....................................... 4
Statement of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 ............... 5
Statement of Changes in Partners' Equity -
Nine Months Ended September 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 .................................... 18
PART II. OTHER INFORMATION
ITEM 5. Other Information ........................................ 18
ITEM 6. Exhibits and Reports on Form 8-K ......................... 19
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,
------------- -------------
2003 2002 2003 2002
--------- --------- --------- ---------
OPERATING REVENUES $ 81,192 $ 81,553 $ 241,743 $ 239,881
--------- --------- --------- ---------
OPERATING EXPENSES
Operations and maintenance 11,009 7,540 30,291 21,944
Depreciation and amortization 14,405 14,514 43,325 43,501
Taxes other than income 7,728 7,656 22,523 20,684
--------- --------- --------- ---------
Operating expenses 33,142 29,710 96,139 86,129
--------- --------- --------- ---------
OPERATING INCOME 48,050 51,843 145,604 153,752
--------- --------- --------- ---------
INTEREST EXPENSE 11,005 13,153 34,436 39,929
--------- --------- --------- ---------
OTHER INCOME 150 507 378 1,550
--------- --------- --------- ---------
NET INCOME TO PARTNERS $ 37,195 $ 39,197 $ 111,546 $ 115,373
========= ========= ========= =========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income to partners $ 37,195 $ 39,197 $ 111,546 $ 115,373
Other comprehensive income:
Change associated with current
period hedging transactions (389) (389) (1,167) (2,026)
--------- --------- --------- ---------
Total comprehensive income $ 36,806 $ 38,808 $ 110,379 $ 113,347
========= ========= ========= =========
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,
ASSETS 2003 2002
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 17,005 $ 25,358
Accounts receivable 29,384 34,326
Materials and supplies, at cost 4,821 4,721
Prepaid expenses and other 2,271 1,844
---------- ----------
Total current assets 53,481 66,249
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,430,077 2,431,486
Less: Accumulated provision for
depreciation and amortization 833,630 795,525
---------- ----------
Property, plant and equipment, net 1,596,447 1,635,961
---------- ----------
OTHER ASSETS
Derivative financial instruments 19,035 21,204
Other 15,190 16,623
---------- ----------
Total other assets 34,225 37,827
---------- ----------
Total assets $1,684,153 $1,740,037
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ -- $ 65,000
Accounts payable 10,168 24,426
Accrued taxes other than income 29,132 28,374
Accrued interest 12,910 13,173
---------- ----------
Total current liabilities 52,210 130,973
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 818,848 783,906
---------- ----------
RESERVES AND DEFERRED CREDITS 5,967 15,386
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Partners' capital 801,537 803,014
Accumulated other comprehensive income 5,591 6,758
---------- ----------
Total partners' equity 807,128 809,772
---------- ----------
Total liabilities and partners' equity $1,684,153 $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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 111,546 $ 115,373
--------- ---------
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 43,598 43,776
Reserves and deferred credits (9,419) (237)
Changes in components of working capital (8,862) 4,822
Other (381) (351)
--------- ---------
Total adjustments 24,936 48,010
--------- ---------
Net cash provided by operating activities 136,482 163,383
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (3,812) (6,651)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (113,023) (122,245)
Issuance of long-term debt 121,000 416,894
Retirement of long-term debt (149,000) (434,000)
Proceeds received upon termination of derivatives -- 2,351
Long-term debt financing costs -- (2,771)
--------- ---------
Net cash used in financing activities (141,023) (139,771)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,353) 16,961
Cash and cash equivalents-beginning of period 25,358 11,003
--------- ---------
Cash and cash equivalents-end of period $ 17,005 $ 27,964
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 35,050 $ 41,579
========= =========
Changes in components of working capital:
Accounts receivable $ (2,306) $ (1,295)
Materials and supplies (101) 170
Prepaid expenses and other (426) (464)
Accounts payable (6,523) 8,350
Accrued taxes other than income 757 (619)
Accrued interest (263) (1,320)
--------- ---------
Total $ (8,862) $ 4,822
========= =========
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 33,464 78,082 -- 111,546
Change associated with current
period hedging transactions -- -- (1,167) (1,167)
Distributions to partners (33,907) (79,116) -- (113,023)
--------- --------- --------- ---------
Balance at September 30, 2003 $ 240,461 $ 561,076 $ 5,591 $ 807,128
========= ========= ========= =========
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 nine months ended September 30, 2003,
Northern Border Pipeline amortized $0.4 million and $1.2 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
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 September 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 September 30, 2003, reflects a non-cash
gain of approximately $19.0 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. SFAS
No. 149 did not have a material impact on Northern Border Pipeline's 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 third quarter of 2003 of approximately $41.0 million were paid November 3,
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 September 30, 2003, Northern Border Pipeline
has recorded regulatory assets of $9.8 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
As discussed in Note 5, Notes to Financial Statements, effective January 1,
2003, Northern Border Pipeline adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," which did not have a material impact on its financial
position or results of operations. 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. 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.
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 September 30, 2003,
Northern Border Pipeline's balance sheet reflects a non-cash gain of
approximately $19.0 million in derivative financial instruments with a
corresponding increase in long-term debt.
RESULTS OF OPERATIONS
THIRD QUARTER 2003 COMPARED WITH THIRD QUARTER 2002
Net income to partners decreased $2.0 million for the third 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 reductions in
interest expense.
Operations and maintenance expenses increased $3.5 million for the third
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.
Interest expense decreased $2.1 million for the third 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 decreased $0.4 million for the third quarter of 2003, as
compared to the same period in 2002. The amount for the third quarter of 2002
includes income of $0.6 million for previously vacated microwave frequency
bands.
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
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
Net income to partners decreased $3.8 million for the nine months ended
September 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 $1.9 million for the nine months ended
September 30, 2003, as compared to the same period in 2002. The 2002 results
were reduced 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 nine months
ended September 30, 2002, the revenues lost on this capacity totaled
approximately $1.8 million.
Operations and maintenance expenses increased $8.3 million for the nine
months ended September 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 nine months ended
September 30, 2003, as compared to the same period in 2002. The 2002 amount
included a $1.0 million 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 $5.5 million for the nine months ended September
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 $1.2 million for the nine months ended September 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 and
income of $0.6 million for previously vacated microwave frequency bands.
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
September 30, 2003, are as follows:
Payments Due by Period
----------------------------
Current Portion
(Less Than Long-Term
Total 1 Year) Portion
- -------------------------------------------------------------------------
(In Thousands)
$175 million Pipeline Credit
Agreement, average 1.92%,
due 2005 $126,000 $ -- $126,000
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 $801,000 $ -- $801,000
======== ==== ========
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 September 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 $19.0 million in derivative financial instruments
with a corresponding increase in long-term debt at September 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.
After Northern Border Partners, L.P., which owns a 70% general partner
interest in Northern Border Pipeline, announced it would record impairment
charges in the third quarter, Standard & Poor's Ratings Services announced that
it placed its `A-' corporate credit ratings of Northern Border Pipeline and
Northern Border Partners, L.P. on CreditWatch with negative implications. These
impairment charges did not result from the business of Northern Border Pipeline.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities were $136.5 million in the nine
months ended September 30, 2003 as compared to $163.4 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 $3.8 million for the nine months ended September
30, 2003 as compared to $6.7 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 $17 million.
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 $141.0 million for the nine
months ended September 30, 2003 as compared to $139.8 million for the comparable
period in 2002. Distributions to partners were $113.0 million and $122.2 million
in the nine months ended September 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 nine months ended September 30, 2003 and 2002, borrowings on
long-term debt totaled $121.0 million and $416.9 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 $149.0 million and $434.0 million in the nine months ended September 30,
2003 and 2002, respectively.
OUTLOOK UPDATE
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 assumed 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.
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.
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
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 Energy. That motion was approved by the Bankruptcy Court on
September 25, 2003. The transfer of ownership interests to CrossCountry Energy
is pending.
On September 18, 2003, Enron announced that Enron and its
debtor-in-possession subsidiaries (collectively with Enron, the "Debtors") filed
their proposed amended joint Chapter 11 plan (the "Plan") and related disclosure
statement (the "Disclosure Statement") with the Bankruptcy Court which amended
the Plan and Disclosure Statement previously filed with the Bankruptcy Court on
July 11, 2003. Financial projections for three going-forward businesses,
including CrossCountry Energy, were included in the Plan. Also, under the Plan,
it is anticipated that, if CrossCountry Energy is not sold to a third party, as
permitted by the Plan, shares of CrossCountry Energy would be distributed
directly or indirectly to creditors of the Debtors. Enron has indicated that the
Plan and Disclosure Statement may be further amended. In addition, a number of
objections to the Plan have been filed, including an objection by the
court-appointed examiner for Enron North America Corp.
When the transfer of interests in Northern Plains and Pan Border to
CrossCountry Energy as contemplated above takes place, the articles of
incorporation of Northern Plains and Pan Border will be amended to reflect
certain shareholder protections that will be retained by Enron until a
distribution of any common stock of CrossCountry Energy pursuant to the Plan.
Northern Plains and Pan Border, subject to any applicable fiduciary duties
and/or contractual obligations, will need the affirmative vote of Enron to vote
its interest at the Management Committee to, among other things, (a) enter into
any business other than owning and operating natural gas pipelines and related
businesses and (b) enter into any compromise or settlement of any action, suit,
litigation, arbitration or proceeding or any governmental investigation or audit
relating to the assets, liabilities or business of the entities or Northern
Border Pipeline, in excess of $2 million.
UPDATE TO POTENTIAL PUBLIC UTILITY HOLDING COMPANY ACT ("PUHCA") REGULATION
Further to the discussion of potential impacts to Northern Border Pipeline
provided in the quarterly report on Form 10-Q for the periods ended March 31,
2003 and June 30, 2003, on October 21, 2003, the SEC granted Enron's motion for
oral argument and set the hearing for December 4, 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
15
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
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 Northern Border Pipeline's 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.
UPDATE ON POTENTIAL INCREASED HEALTH CARE AND PENSION EXPENSES
Further to the discussion 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 Enron Gas Pipeline
Employee Benefit Trust (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.
Further to the discussion of potential cost impacts to Northern Border
Pipeline as a result of increased health care expenses and pension benefits in
the annual report on Form 10-K for the period ended December 31, 2002, Enron has
advised Northern Plains that it intends to file to terminate Enron's Cash
Balance Plan, its pension benefit plan. It is possible that costs incurred by
Northern Plains related to termination of the plan could be material. While the
determination of reimbursement of such termination costs by Northern Border
Pipeline under its operating agreement will be made at the time of occurrence,
such costs could be material to Northern Border Pipeline.
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
16
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
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, without limitation: impacts of
developments in Enron's voluntary petition for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code proceeding including ongoing
investigations of Enron, its affiliates and their advisors; Enron's formation of
CrossCountry Energy of which Northern Plains and Pan Border would be a part; 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;
actions by rating agencies; 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;
performance of contractual obligations by Northern Border Pipeline's shippers;
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; Northern
Border Pipeline's ability to control operating costs; 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's objective is 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. At September 30, 2003, Northern Border
Pipeline had $351.0 million of variable rate debt outstanding, $225.0 million of
which was previously fixed rate debt that had been converted to variable rate
debt through the use of interest rate swaps. As of September 30, 2003,
approximately 56% of Northern Border Pipeline's debt portfolio was in fixed rate
debt.
If average interest rates change by one percent compared to rates in
effect as of September 30, 2003, annual interest expense would change by
approximately $3.5 million. This amount has been determined by considering the
impact of the hypothetical interest rates on variable rate borrowings
outstanding as of September 30, 2003. For more information on risk management
activities, see Note 3 to Northern Border Pipeline's financial statements
included elsewhere in this report.
17
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, as of September 30, 2003.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that Northern Border Pipeline's disclosure controls
and procedures are effective. During the last fiscal quarter, there were no
changes in Northern Border Pipeline's internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
Northern Border Pipeline's internal control over financial reporting.
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 5. OTHER INFORMATION
Max Feldman is TC PipeLines, LP's designated member on Northern Border
Pipeline Company's Management Committee as of September 2003. Mr. Feldman is
Vice-President, Gas Transmission, West of TransCanada PipeLines Limited, a
position he has held since April 2003. From 1999 to 2003, he was Senior
Vice-President, Customer, Sales and Service, and from 1995 to 1999, Mr. Feldman
held several Vice-President positions in the operations, customer service and
marketing areas of TransCanada PipeLines Limited. Mr. Feldman is 55 years old.
In September 2003, Northwest Border Pipeline Company designated Paul E.
Miller as its member on the Northern Border Partners, L.P. Policy Committee.
Mr. Miller is also Northwest Border's representative on the Northern Border
Pipeline Management Committee. Additionally, Mr. Miller serves as Director
Corporate Development of TransCanada PipeLines Limited, a position he has held
since February 2003. From July 1998 to January 2003, Mr. Miller was Director
Finance of TransCanada Pipelines Limited. Prior to July 1998, Mr. Miller was
Manager Finance of TransCanada PipeLines Limited. Mr. Miller is 45 years old.
18
PART II. OTHER INFORMATION - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
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 Company filed a Current Report on Form 8-K,
dated July 10, 2003, including a copy of a press release discussing its
contracted transportation capacity.
2) Northern Border Pipeline Company filed a Current Report on Form 8-K,
dated July 11, 2003, discussing an announcement by Enron Corp. that a proposed
joint plan of reorganization and related disclosure statement had been filed
with the U.S. Bankruptcy Court for the Southern District of New York.
3) Northern Border Pipeline Company filed a Current Report on Form 8-K,
dated July 15, 2003, including a copy of a press release discussing its
contracted transportation capacity.
4) Northern Border Pipeline Company filed a Current Report on Form 8-K,
dated September 18, 2003, discussing an announcement by Enron Corp. that a
proposed amended joint plan of reorganization and related disclosure statement
had been filed with the U.S. Bankruptcy Court for the Southern District of New
York.
19
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 13, 2003 By: /s/ Jerry L. Peters
------------------------------------
Jerry L. Peters
Vice President, Finance and
Treasurer
20
Exhibit Index
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.