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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
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)
Not applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Not applicable.
1 OF 22
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, 2004 and 2003
and Nine Months Ended September 30, 2004 and 2003 3
Statement of Comprehensive Income -
Three Months Ended September 30, 2004 and 2003
and Nine Months Ended September 30, 2004 and 2003 3
Balance Sheet - September 30, 2004
and December 31, 2003 4
Statement of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
Statement of Changes in Partners' Equity -
Nine Months Ended September 30, 2004 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 19
ITEM 4. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 6. Exhibits 21
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,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
OPERATING REVENUES $ 81,609 $ 81,192 $ 246,448 $ 241,743
--------- --------- --------- ---------
OPERATING EXPENSES
Operations and maintenance 11,036 11,009 29,861 30,291
Depreciation and amortization 14,594 14,405 43,650 43,325
Taxes other than income 8,085 7,728 22,388 22,523
--------- --------- --------- ---------
Operating expenses 33,715 33,142 95,899 96,139
--------- --------- --------- ---------
OPERATING INCOME 47,894 48,050 150,549 145,604
--------- --------- --------- ---------
INTEREST EXPENSE 10,064 11,005 30,208 34,436
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Other income 541 286 1,674 1,029
Other expense (791) (136) (1,381) (651)
--------- --------- --------- ---------
Other income (expense) (250) 150 293 378
--------- --------- --------- ---------
NET INCOME TO PARTNERS $ 37,580 $ 37,195 $ 120,634 $ 111,546
========= ========= ========= =========
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income to partners $ 37,580 $ 37,195 $ 120,634 $ 111,546
Other comprehensive income:
Change associated with current
period hedging transactions (360) (389) (1,163) (1,167)
--------- --------- --------- ---------
Total comprehensive income $ 37,220 $ 36,806 $ 119,471 $ 110,379
========= ========= ========= =========
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,
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,003 $ 28,732
Accounts receivable (net of 4,816 allowance 33,250 33,687
for doubtful accounts of $4,816 and
$4,815 in 2004 and 2003, respectively)
Materials and supplies, at cost 3,590 4,818
Prepaid expenses and other 2,379 2,267
---------- ----------
Total current assets 72,222 69,504
---------- ----------
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,444,101 2,438,816
Less: Accumulated provision for
depreciation and amortization 889,045 847,061
---------- ----------
Property, plant and equipment, net 1,555,056 1,591,755
---------- ----------
OTHER ASSETS
Derivative financial instruments 10,784 16,648
Other 17,047 13,402
---------- ----------
Total other assets 27,831 30,050
---------- ----------
Total assets $1,655,109 $1,691,309
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 10,000 $ --
Accounts payable 19,323 22,637
Accrued taxes other than income 27,819 28,947
Accrued interest 12,750 10,717
---------- ----------
Total current liabilities 69,892 62,301
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 684,746 821,498
---------- ----------
RESERVES AND DEFERRED CREDITS 4,561 5,072
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
PARTNERS' EQUITY
Partners' capital 891,871 797,236
Accumulated other comprehensive income 4,039 5,202
---------- ----------
Total partners' equity 895,910 802,438
---------- ----------
Total liabilities and partners' equity $1,655,109 $1,691,309
========== ==========
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,
--------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 120,634 $ 111,546
--------- ---------
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 43,924 43,598
Provision for regulatory refunds -- 261
Regulatory refunds paid -- (10,261)
Reserves and deferred credits 115 581
Changes in components of working capital (730) (8,862)
Other (5,457) (381)
--------- ---------
Total adjustments 37,852 24,936
--------- ---------
Net cash provided by operating activities 158,486 136,482
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (7,216) (3,812)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners 130,000 --
Distributions to partners (155,999) (113,023)
Issuance of debt 10,000 121,000
Retirement of long-term debt (131,000) (149,000)
--------- ---------
Net cash used in financing activities (146,999) (141,023)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,271 (8,353)
Cash and cash equivalents-beginning of period 28,732 25,358
--------- ---------
Cash and cash equivalents-end of period $ 33,003 $ 17,005
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 28,441 $ 35,050
========= =========
Changes in components of working capital:
Accounts receivable $ 1,736 $ (2,306)
Materials and supplies 516 (101)
Prepaid expenses and other (113) (426)
Accounts payable (3,774) (6,523)
Accrued taxes other than income (1,127) 757
Accrued interest 2,032 (263)
--------- ---------
Total $ (730) $ (8,862)
========= =========
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, 2003 $ 239,171 $ 558,065 $ 5,202 $ 802,438
Net income to partners 36,190 84,444 -- 120,634
Change associated with current
period hedging transactions -- -- (1,163) (1,163)
Contributions from partners 39,000 91,000 -- 130,000
Distributions to partners (46,800) (109,199) -- (155,999)
--------- --------- --------- ---------
Balance at September 30, 2004 $ 267,561 $ 624,310 $ 4,039 $ 895,910
========= ========= ========= =========
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. The financial statements reflect all
normal and recurring 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 ("GAAP") 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, 2003.
The preparation of financial statements in conformity with GAAP 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Northern Border Pipeline uses financial instruments in the management of
its interest rate exposure. A control environment has been established which
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of financial instrument activities. Northern Border Pipeline does
not use these instruments for trading purposes.
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 hedged
debt. During the three months and nine months ended September 30, 2004, 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 a comparable amount in the fourth quarter of 2004.
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
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
and in return receives payments based on a 6.25% fixed rate. At September 30,
2004, the average effective interest rate on Northern Border Pipeline's interest
rate swap agreements was 2.46%. 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, 2004, reflects derivative
financial instrument assets of approximately $10.8 million with a corresponding
increase in long-term debt.
3. COMMITMENTS AND 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 related 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, reached a settlement
on pipeline right-of-way lease and taxation issues documented through an Option
Agreement and Expanded Facilities Lease ("Agreement"). Through the terms of the
Agreement, the settlement grants to Northern Border Pipeline, among other
things: (i) an option to renew the pipeline right-of-way lease upon agreed terms
and conditions on or before April 1, 2011 for a term of 25 years with a renewal
right for an additional 25 years; (ii) a right to use additional tribal lands
for expanded facilities; and (iii) release and satisfaction of all tribal taxes
against Northern Border Pipeline. In consideration of this option and other
benefits, Northern Border Pipeline paid a lump sum amount of $7.4 million and
will make additional annual option payments of approximately $1.5 million
thereafter through March 31, 2011. Of the amount paid in 2004, $1.0 million was
determined to be a settlement of previously accrued property taxes. The
remainder has been recorded in other assets on the balance sheet. Northern
Border Pipeline intends to seek regulatory recovery of the costs resulting from
the settlement.
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.
4. 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 2004 of approximately $49.6 million were paid November 1,
2004.
8
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.
OVERVIEW
There are several major business drivers that have an impact on Northern
Border Pipeline's business. These factors are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" in Northern Border Pipeline's 2003 Annual Report on Form 10-K for the
year ended December 31, 2003.
As reported previously, firm transportation contracts covering 778 million
cubic feet per day ("MMcf/d"), were scheduled to expire late in 2004. By the end
of the second quarter, Northern Border Pipeline successfully extended contracts
for approximately 18% of that capacity with existing shippers at maximum
transportation rates for terms of at least one year. During the third quarter,
Northern Border Pipeline recontracted all but approximately 1% of its capacity
at maximum rates for terms of five to six months. With contracts scheduled to
expire through May 2005, approximately 800 MMcf/d or 30% of capacity will become
available on the pipeline system from Port of Morgan, Montana to the Ventura,
Iowa delivery point. Northern Border Pipeline believes it will continue to
provide economic value for gas flows from Western Canada over the long-term and,
therefore, will maintain its relatively high utilization levels. However, in any
given month, current conditions of weather and storage in supply and market
areas may affect the utilization level.
Northern Border Pipeline's objective is to recontract the remaining
pipeline capacity at maximum transportation rates for the longest terms
possible. Because the forward natural gas basis differentials between Western
Canada and Northern Border Pipeline's market centers continue to be less than
the total transportation cost at maximum tariff rates, Northern Border Pipeline
may again sell a significant portion of this capacity on a short-term basis. In
addition, this could result in lower revenues in some months if the forward
basis differentials do not support maximum rates. Northern Border Pipeline
believes a reduction in expected 2005 net income and cash flow of $7 million to
$14 million is possible. The impact on net income and cash flow may vary outside
this range depending on actual natural gas basis differentials experienced
during the year.
9
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
On September 23, 2004, Northern Border Pipeline announced it had received
commitments from shippers sufficient to support a proposed expansion of the
pipeline system into the Chicago market area. The "Chicago Expansion III"
project, with an estimated 130 MMcf/d of capacity, would involve construction of
a new compressor station and minor modifications to other compressor stations,
and is estimated to cost approximately $20 million. The projected in-service
date is April 1, 2006. Approval of this project by the Federal Energy Regulatory
Commission ("FERC") is required and Northern Border Pipeline anticipates filing
a certificate application with the FERC in January 2005.
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, 2003. 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, 2004, Northern Border Pipeline
has recorded regulatory assets of $7.5 million, which are being recovered from
its shippers over varying periods of time.
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 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,"
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, 2004,
Northern Border Pipeline's balance sheet reflects derivative financial
instrument assets of approximately $10.8 million with a corresponding increase
in long-term debt.
RESULTS OF OPERATIONS
THIRD QUARTER 2004 COMPARED WITH THIRD QUARTER 2003
Net income to partners increased $0.4 million for the third quarter of
2004, as compared to the same period in 2003. Higher operating revenues and
reductions in interest expense increased Northern Border Pipeline's net income.
Operating revenues increased $0.4 million for the third quarter of 2004,
as compared to the same period in 2003. Under a condition of Northern Border
Pipeline's previous rate case settlement, it was required to share interruptible
transportation and new services revenues with its shippers. This condition
expired in October 2003 and allowed Northern Border Pipeline to realize an
additional $0.5 million of revenue during the third quarter of 2004.
Operations and maintenance expenses were unchanged for the third quarter
of 2004, as compared to the same period in 2003. In the third quarter of 2004,
Northern Border Pipeline expensed $0.6 million for the option to renew a
pipeline right-of-way lease with the Fort Peck Indian Reservation (see Note
3-Notes to Financial Statements). Offsetting this increase was a $0.6 million
reduction in benefits costs.
Taxes other than income increased $0.3 million for the third quarter of
2004, as compared to the same period in 2003. This was a result of an adjustment
for prior year Iowa property taxes, which had been estimated.
11
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
Interest expense decreased $1.0 million for the third quarter of 2004, as
compared to the same period in 2003, due primarily to a decrease in Northern
Border Pipeline's average debt outstanding partially offset by an increase in
average interest rates.
Other income (expense) decreased $0.4 million for the third quarter of
2004, as compared to the same period in 2003, due primarily to reserves
established for costs associated with a potential future project.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003
Net income to partners increased $9.1 million for the nine months ended
September 30, 2004, as compared to the same period in 2003. Higher operating
revenues and reductions in interest expense increased Northern Border Pipeline's
net income.
Operating revenues increased $4.7 million for the nine months ended
September 30, 2004, as compared to the same period in 2003. Northern Border
Pipeline was able to generate and retain additional revenue from the sale of
short-term capacity, which represented approximately $2.0 million of the
increase. The leap year added an additional day of transportation, which
approximated $0.9 million of the revenue increase. Under a condition of Northern
Border Pipeline's previous rate case settlement, it was required to share
interruptible transportation and new services revenues with its shippers. This
condition expired in October 2003 and allowed Northern Border Pipeline to
realize an additional $1.8 million of revenue for the nine months ended
September 30, 2004.
Operations and maintenance expenses decreased $0.4 million for the nine
months ended September 30, 2004, as compared to the same period in 2003.
Administrative expenses provided by the operator and its affiliates decreased
$1.8 million primarily related to the settlement of previous accrued charges. In
addition, benefits costs were reduced approximately $1.2 million compared to the
same period in 2003. Partially offsetting these reductions was $0.8 million of
higher electric costs for Northern Border Pipeline's electricity powered
compressors and $1.3 million of expense for the option to renew a pipeline
right-of-way lease with the Fort Peck Indian Reservation (see Note 3-Notes to
Financial Statements).
Interest expense decreased $4.2 million for the nine months ended
September 30, 2004, as compared to the same period in 2003, primarily due to a
decrease in Northern Border Pipeline's average debt outstanding.
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, 2004, are as follows:
Payments Due by Period
----------------------
Current Portion
Total (Less Than Long-Term
(In Thousands) 1 Year) Portion
-------------- --------------- ---------
$175 million Pipeline Credit
Agreement, 2.29%, due 2005(a) $ 10,000 $ 10,000 $ --
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 $685,000 $ 10,000 $675,000
======== ======== ========
(a) Northern Border Pipeline is required to pay a 0.125% fee on the principal
commitment amount of its credit agreement.
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, 2004,
the average effective interest rate on Northern Border Pipeline's interest rate
swap agreements was 2.46%.
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
issuance of long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities were $158.5 million in the
nine months ended September 30, 2004 as compared to $136.5 million for the
comparable period in 2003. Increases in operating revenues and lower interest
expense for 2004 contributed approximately $8.9 million to the increase between
2004 and 2003. The initial lump sum payment, in consideration of the option to
renew the pipeline right-of-way lease and other benefits, to the Fort Peck
Tribes reduced operating cash flows by approximately $7.4 million, which is
included in other cash flows from operating activities on the statement of cash
flows for the nine months ended September 30, 2004. The nine months ended
September 30, 2003 reflects lower cash flows from operating activities of
approximately $9.5 million due to the discontinuance of certain shipper
transportation prepayments and refunds to shippers of $10.3 million due to the
FERC rejecting Northern Border Pipeline's proposed tariff sheet revision for
company use gas.
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 $7.2 million for the nine months ended September
30, 2004 as compared to $3.8 million for the comparable period in 2003. The
capital expenditures for 2004 and 2003 were primarily related to renewals and
replacements of existing facilities.
Total capital expenditures for 2004 are estimated to be $14 million,
primarily related to renewals and replacements of existing facilities. Northern
Border Pipeline currently anticipates funding its 2004 capital expenditures
primarily by borrowing under the Pipeline Credit Agreement and using operating
cash flows.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities were $147.0 million for the nine
months ended September 30, 2004 as compared to $141.0 million for the comparable
period in 2003. Distributions to partners were $156.0 million and $113.0 million
in the nine months ended September 30, 2004 and 2003, respectively. The
distributions for 2003 were reduced in accordance with the then approved
distribution formula to reflect the impact of the refunds ordered by the FERC on
March 27, 2003.
Effective January 1, 2004, each quarterly distribution is equal to 100% of
distributable cash flow as determined by the previous quarter's earnings before
interest expense, depreciation and amortization, less interest expense and less
maintenance capital expenditures.
A distribution of approximately $49.6 million was declared for the third
quarter of 2004 and paid on November 1, 2004.
Contributions from partners were $130.0 million in the nine months ended
September 30, 2004. For 2004 and 2003, borrowings on long-term debt totaled
$10.0 million and $121.0 million, respectively. Total payments on debt were
$131.0 million and $149.0 million in 2004 and 2003, respectively.
UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S
BUSINESS
As discussed in Northern Border Pipeline's Annual Report on Form 10-K for
the year ended December 31, 2003, 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. Refer to the
Form 10-K for the year ended December 31, 2003 for the full discussion of
impacts of Enron's Chapter 11 Filing on Northern Border Pipeline's business.
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
On March 31, 2004, Enron transferred its ownership interest in Northern
Plains Natural Gas Company and Pan Border Gas Company to CrossCountry Energy,
LLC ("CrossCountry"). In addition, CrossCountry and Enron entered into a
transition services agreement pursuant to which Enron will provide to
CrossCountry, on an interim, transitional basis, various services, including but
not limited to (i) information technology services, (ii) accounting system usage
rights and administrative support and (iii) payroll, employee benefits and
administrative services. In turn, these services are provided to Northern Border
Pipeline through Northern Plains. The agreement terminates on the earlier of a
sale of CrossCountry or December 31, 2004. The agreement may be extended by
mutual agreement of the parties and approval of Enron's Official Committee of
Unsecured Creditors.
On June 24, 2004, Enron announced that it had reached an agreement with a
joint venture of Southern Union Company and GE Commercial Finance Energy
Financial Services ("CCE Holdings") for the sale of CrossCountry. On September
1, 2004, Enron announced that it reached an amended agreement for the sale of
CrossCountry to CCE Holdings ("CCE Holdings Agreement"). On September 10, 2004,
the Bankruptcy Court issued an order (the "September 10 Order") approving the
CCE Holdings Agreement The acquisition is subject to satisfaction of certain
approvals and other closing conditions and is expected to close no later than
mid-December 2004.
On September 16, 2004, Southern Union Company and ONEOK, Inc. each
announced that ONEOK had entered into an agreement ("ONEOK Agreement") to
purchase Northern Plains Natural Gas Company and Pan Border Gas Company
(collectively the "Transfer Group Companies") from CCE Holdings. This
acquisition, which is subject to satisfaction of certain approvals and other
closing conditions, is expected to close concurrently with the CCE Holdings
purchase of CrossCountry.
Under the CCE Holdings Agreement, Enron has agreed to extend certain of
the terms of the transition services agreement and transition services
supplemental agreement between CrossCountry and Enron (together the "TSA") for a
period of six months from the closing date. Under the ONEOK Agreement, CCE
Holdings and ONEOK have agreed to use reasonable commercial efforts to
memorialize a transition services agreement referred to as the "Northern Border
Transition Services Agreement" covering certain transition services by and among
ONEOK, the Transfer Group Companies, CCE Holdings and Enron. There is no
obligation on the part of Enron to enter into such arrangement and there can be
no assurance that any such agreement will be entered into by Enron. In the event
the Northern Border Transition Services Agreement is not entered into, then the
ONEOK Agreement provides that certain transition services will be provided to
the parties on substantially the same basis as provided prior to closing.
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
Northern Border Pipeline expects that most of the services it received in
the past from Enron and CrossCountry will continue to be provided through the
term of the transition services agreement(s) or until those services can be
provided directly by Northern Plains or indirectly by ONEOK. As services are
transitioned to Northern Plains or ONEOK, it is possible that additional costs
for computer hardware, software and personnel may result. Any such costs have
not been determined. Additionally, it is not known at this time what rights
Enron, CrossCountry or CCE Holdings may have to use third party software and
what personnel will be available to provide the transition services to Northern
Plains.
As previously reported in Northern Border Pipeline's Form 10-K for the
year ended December 31, 2003, on December 31, 2003, Enron filed a motion seeking
approval of the Bankruptcy Court to provide additional funding to, and for
authority to terminate, the Enron Corp. Cash Balance Plan ("Cash Balance Plan")
and certain other defined benefit plans of Enron's affiliates (collectively the
"Plans") in "standard terminations" within the meaning of Section 4041 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Such
standard terminations would satisfy all of the obligations of Enron and its
affiliates with respect to funding liabilities under the Plans. In addition, a
standard termination would eliminate the contingent claims of the Pension
Benefit Guaranty Corporation ("PBGC") against Enron and its affiliates with
respect to funding liabilities under the Plans. On January 30, 2004, the
Bankruptcy Court entered an order authorizing the termination, additional
funding and other actions necessary to effect the relief requested. Pursuant to
the Bankruptcy Court order, any contributions to the Plans are subject to the
prior receipt of a favorable determination by the Internal Revenue Service that
the Plans are tax-qualified as of their respective dates of termination.
On June 2, 2004, the PBGC issued a notice to Enron stating that it had
determined that the Plans will be unable to pay benefits when due and should be
terminated in order to protect the interests of the participants in the Plans,
and/or that the risk of loss to the PBGC would increase unreasonably if the
Plans were not so terminated. On June 3, 2004, the PBGC filed a complaint in the
District Court for the Southern District of Texas against Enron as the sponsor
and/or administrator of the Plans (the "Action") which complaint was served on
Enron on July 19, 2004. By filing the Action, the PBGC is seeking an order (i)
terminating the Plans; (ii) appointing the PBGC the statutory trustee of the
Plans; (iii) requiring transfer to the PBGC of all records, assets or other
property of the Plans required to determine the benefits payable to the Plans'
participants; and (iv) establishing June 2, 2004 as the termination date of the
Plans.
Enron management previously informed Northern Plains Natural Gas Company
that Enron will seek funding contributions from each member of its ERISA
controlled group of corporations that employs, or employed, individuals who are,
or were, covered under the Cash Balance Plan. Northern Plains is considered a
member of Enron's ERISA controlled group of
16
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
corporations. As of December 31, 2003, an amount of approximately $3.1 million
was estimated for Northern Border Pipeline's share of Northern Plains'
proportionate share of the up to $200 million estimated termination costs for
the Plans authorized by the Bankruptcy Court order. Under the operating
agreement with Northern Plains, these costs may be Northern Border Pipeline's
responsibility. In December of 2003, Northern Border Pipeline accrued $3.1
million to satisfy claims of reimbursement for these termination costs.
In the Bankruptcy Court September 10 Order, Enron was authorized to enter
into an escrow agreement with CCE Holdings and PBGC. Upon closing, Enron will
deposit the amount of $321.8 million to an escrow account, which is intended to
ensure that none of CCE Holdings or its affiliates are exposed to liability to
the PBGC under Title IV of the Employee Retirement Income Security Act of 1974,
as amended, for which CCE Holdings may otherwise be indemnified pursuant to the
CCE Holdings Agreement. In addition, the form of escrow agreement approved
pursuant to the September 10 Order provides that, under certain circumstances
and upon approval by or notice to the parties to the escrow agreement, some or
all of the funds placed in escrow may be paid directly in respect of the Cash
Balance Plan or to the PBGC. However, the September 10 Order also provides that
PBGC retains any rights or claims it may have against the Transfer Group
Companies.
Under both the CCE Holdings Agreement and the ONEOK Agreement, neither
Northern Plains nor Northern Border Pipeline will be required to contribute to
or otherwise be liable for any contributions to Enron in connection with the
Cash Balance Plan. The purchase price under the agreements will be deemed to
include all contributions which otherwise would have been allocable to Northern
Plains.
While the final amounts chargeable to us under the operating agreement for
the termination of the Cash Balance Plan cannot be determined at this time,
Northern Border Pipeline believes the ultimate settlement of this matter may be
for an amount less than the $3.1 million accrual.
On July 15, 2004, the Bankruptcy Court approved the amended joint Chapter
11 plan and related disclosure statement ("Chapter 11 Plan"). Under the approved
Chapter 11 Plan, assuming the previously announced sales of Portland General
Electric and CrossCountry are consummated, Enron creditors, which should include
Northern Border Pipeline, will receive a combination of cash and equity of
Prisma Energy International, Enron's international energy asset business.
Northern Border Pipeline anticipates reaching approved settlements of its claims
and may realize recoveries of up to $5 million related to claims filed in the
Enron bankruptcy proceedings. Currently, Northern Border Pipeline has fully
reserved these claims. However, the Chapter 11 Plan has not yet become effective
and a number of parties have filed Notices of Appeal, which could delay the
effective date and/or change the terms of the Plan. There can be no assurances
on the amounts of the claims recovered or timing of distributions under the
Chapter 11 Plan.
17
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PIPELINE COMPANY
PUBLIC UTILITY HOLDING COMPANY ACT ("PUHCA") REGULATION
As more fully discussed in the Partnership's Annual Report on Form 10-K
for the year ended December 31, 2003, on March 9, 2004, Enron registered as a
holding company under the Public Utility Holding Company Act of 1935 ("PUHCA").
Under PUHCA, Northern Border Pipeline is a subsidiary of a registered holding
company. Immediately after Enron registered, the Securities and Exchange
Commission ("SEC") issued an order granting Enron and its subsidiaries authority
to undertake certain transactions without further authorization from the SEC
under PUHCA ("Omnibus Order"). Upon consummation of the sale to CCE Holdings and
to ONEOK, Northern Border Pipeline will no longer be a subsidiary of a
registered holding company.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report that are not historical
information are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are identified as any statement that does
not relate strictly to historical or current facts. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results of Northern Border Pipeline's operations may
differ materially from those expressed in these forward-looking statements. Such
forward-looking statements include, among other things, the discussions in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in (i) - "Liquidity and Capital Resources" regarding Northern Border
Pipeline's estimated capital expenditures for 2004; (ii) "Overview" regarding
recontracting and expansion project; and (iii) "The Impact of Enron's Chapter 11
Filing On The Partnership's Business" regarding transition services and
potential costs 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, among other things,
developments in the December 2, 2001 filing by Enron of a voluntary petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, and
outcome of Enron's Chapter 11 process; sale of CrossCountry and subsequent sale
of Northern Plains and Pan Border to ONEOK; transition of certain services by
Enron and CrossCountry to Northern Plains; Enron's regulation under PUHCA;
ability to recontract available capacity at maximum transportation rates;
ability to recover the costs in pipeline rates related to the settlement with
the Fort Peck Tribes on rights-of-way and tax issues, ability to control
operating costs; performance of contractual obligations by the shippers;
industry results; future demand for natural gas; availability of supplies of
Canadian natural gas; legislative 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; timely receipt of
FERC approval and other regulatory
18
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PIPELINE COMPANY
approvals of the expansion project; 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
These and other risks are described in greater detail in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors and Information Regarding Forward-Looking
Statements" included in Northern Border Pipeline's Annual Report on Form 10-K
for the year ended December 31, 2003. All forward-looking statements
attributable to Northern Border Pipeline or persons acting on its behalf are
expressly qualified in their entirety by these factors. Other than as required
under the securities laws, Northern Border Pipeline does not assume a duty to
update these forward-looking statements, whether as a result of new information,
subsequent events or circumstances, changes in expectations or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline may be exposed to market risk through changes in
interest rates, as discussed below. A control environment has been established
which includes policies and procedures for risk assessment and the approval,
reporting and monitoring of financial instrument activities. Northern Border
Pipeline has utilized and expects to continue to utilize derivative financial
instruments in the management of interest rate risks to achieve a more
predictable cash flow by reducing its exposure to interest rate fluctuations.
For more information on risk management activities, see Note 2 to Northern
Border Pipeline's financial statements included elsewhere in this report.
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. At September 30, 2004, Northern Border Pipeline had
$225.0 million of variable rate debt outstanding (approximately 33% of its debt
portfolio) that was previously fixed rate debt that had been converted to
variable rate debt through the use of interest rate swaps. For additional
information on Northern Border Pipeline's derivative instruments, see Note 2 to
the Financial Statements, included elsewhere in this report. If average interest
rates change by one percent compared to rates in effect as of September 30,
2004, annual interest expense would change by approximately $2.3 million. This
amount has been determined by considering the impact of the hypothetical
interest rates on Northern Border Pipeline's variable rate borrowings
outstanding as of September 30, 2004.
19
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 4. CONTROLS AND PROCEDURES
NORTHERN BORDER PIPELINE COMPANY
Those officers of Northern Plains that are the equivalent of 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-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the date of
the end of the period covered by this Quarterly Report on Form 10-Q. Based upon
their evaluation, they have concluded that Northern Border Pipeline's disclosure
controls and procedures are effective.
Except as discussed below, there were no changes in Northern Border
Pipeline's internal controls over financial reporting that occurred during its
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
In conjunction with Northern Border Partners' requirements to comply with
Section 404 of the Sarbanes Oxley Act of 2002, Northern Border Pipeline is
currently undergoing a comprehensive review of its internal controls. This
effort includes internal control documentation and review under the direction of
those officers of Northern Plains that are the equivalent of Northern Border
Pipeline's principal executive officer and principal financial officer. During
the course of these activities, certain control issues were identified that
Northern Border Pipeline believes can be improved. These control issues in large
part are related to documentation of the operation and execution of internal
controls. Northern Border Pipeline has implemented a number of improvements in
its internal controls over financial reporting as a result of its review
efforts.
In addition, certain critical business systems, including information
technology applications, third party software licenses and computer and
communication hardware, supporting Northern Border Pipeline's financial
accounting and reporting systems are owned by Enron and/or CrossCountry.
Northern Border Pipeline's rights to utilize these systems and hardware may be
impacted by the sale of CrossCountry. Northern Border Pipeline's access to these
business systems is currently being provided through services agreements,
including a transition services agreement between Enron and CrossCountry.
Although that agreement terminates upon the sale of CrossCountry, in the
purchase and sale agreement with CCE Holdings, Enron has agreed to extend the
terms of the transition services agreement for certain services for a period of
six months from the closing date, which is expected to occur no later than
mid-December 2004. Also, in the purchase and sale agreement with CCE Holdings
and ONEOK, CCE Holdings has agreed to provide certain transition services. Until
these agreements are finalized, Northern Plains will be unable to advise
Northern Border Pipeline which critical business systems of Enron, CCE Holdings,
CrossCountry or ONEOK will be utilized for Northern Border Pipeline.
See also Item 2. "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations - Update On The Impact of Enron's Chapter 11
Filing On Northern Border Pipeline's Business."
20
PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 1. LEGAL PROCEEDINGS
In Northern Border Pipeline's pending proceeding before the FERC on
procedures for awarding capacity, an order was issued on April 15, 2004 in which
the FERC requested comments from interested parties on whether the FERC's
current policy on awarding available capacity to a short-haul shipper
appropriately balances the risks to the pipeline, bidding shippers and other
shippers on the pipeline. Comments were filed on June 15, 2004. The timing of
the issuance of the FERC's order in this proceeding is not known. On September
21, 2004, Northern Border Pipeline filed a motion to expedite the order in this
proceeding.
Also, see Note 3 to the Financial Statements for an update on certain
legal proceedings involving Northern Border Pipeline.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial and
Accounting Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial and Accounting
Officer.
21
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 9, 2004 By:/s/ Jerry L. Peters
--------------------------------
Jerry L. Peters
Vice President, Finance and
Treasurer
22
Index to Exhibits
Exhibit No Description
- ---------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial and
Accounting Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial and Accounting
Officer.