UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File Number 1-12202
NORTHERN BORDER PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 93-1120873
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Enron Building
1400 Smith Street
Houston, Texas 77002
(Address of principal executive (Zip Code)
offices)
(713) 853-6161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
1 of 14
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months Ended June 30, 1996 and 1995
and Six Months Ended June 30, 1996 and 1995 3
Consolidated Balance Sheet - June 30, 1996
and December 31, 1995 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statement of Changes in Partners'
Capital - Six Months Ended June 30, 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Unit Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
OPERATING REVENUE $52,918 $52,587 $105,871 $104,775
OPERATING EXPENSES
Operations and maintenance 6,984 6,993 13,773 13,327
Depreciation and amortization 13,799 11,792 27,234 23,600
Taxes other than income 6,192 6,194 12,596 12,504
Operating expenses 26,975 24,979 53,603 49,431
OPERATING INCOME 25,943 27,608 52,268 55,344
INTEREST EXPENSE ON LONG-TERM DEBT 8,334 8,827 16,797 17,853
OTHER INCOME (EXPENSE)
Other income (expense), net 1,174 (257) 1,635 (404)
Allowance for equity funds used
during construction 74 30 136 52
Other income (expense) 1,248 (227) 1,771 (352)
MINORITY INTERESTS IN NET INCOME 6,120 5,585 11,658 11,210
NET INCOME TO PARTNERS $12,737 12,969 $ 25,584 $ 25,929
NET INCOME PER UNIT $ .48 $ .49 $ .96 $ .97
NUMBER OF UNITS USED IN COMPUTATION 26,200 26,200 26,200 26,200
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 43,350 $ 39,418
Accounts receivable 15,978 18,928
Related party receivables 1,557 2,883
Materials and supplies, at cost 3,654 4,437
Total current assets 64,539 65,666
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 1,499,016 1,499,893
Less: Accumulated provision for
depreciation and amortization 559,023 542,306
Net property, plant and equipment 939,993 957,587
OTHER ASSETS 11,624 18,086
Total assets $1,016,156 $1,041,339
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt $ 22,500 $ 15,000
Accounts payable 407 1,193
Accrued taxes other than income 16,553 19,903
Accrued interest 10,374 10,516
Over recovered cost of service 1,107 2,508
Other 581 -
Total current liabilities 51,522 49,120
LONG-TERM DEBT, net of current maturities 377,500 395,000
MINORITY INTERESTS IN PARTNERS' CAPITAL 162,780 166,789
OTHER RESERVES AND DEFERRED CREDITS 9,061 11,313
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
General Partners 8,306 8,382
Common Units 307,260 310,089
Subordinated Units 99,727 100,646
Total partners' capital 415,293 419,117
Total liabilities and partners' capital $1,016,156 $1,041,339
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 25,584 $ 25,929
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 27,249 23,600
Minority interests in net income 11,658 11,210
Changes in other current assets and liabilities (620) (3,465)
Other (1,274) 1,952
Total adjustments 37,013 33,297
Net cash provided by operating activities 62,597 59,226
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment, net (3,590) (2,045)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions
Common Units (21,758) (21,758)
Subordinated Units (7,062) (7,062)
General Partners (588) (588)
Minority Interests (15,667) (14,656)
Retirement of long-term debt (10,000) (20,000)
Net cash used in financing activities (55,075) (64,064)
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,932 (6,883)
Cash and cash equivalents-beginning of period 39,418 44,122
Cash and cash equivalents-end of period $ 43,350 $ 37,239
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 16,257 $ 17,433
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(In Thousands)
(Unaudited)
Total
General Common Subordinated Partners'
Partners Units Units Capital
Partners' Capital at December 31, 1995 $8,382 $310,089 $100,646 $419,117
Net income to partners 512 18,929 6,143 25,584
Distributions to partners (588) (21,758) (7,062) (29,408)
Partners' Capital at June 30, 1996 $8,306 $307,260 $ 99,727 $415,293
<FN>
The accompanying notes are an integral part of this consolidated
financial statement.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have
been prepared by Northern Border Partners, L.P. (the
"Partnership") without audit pursuant to the rules and
regulations of the Securities and Exchange Commission.
Accordingly, they reflect all adjustments which 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 generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations.
However, the Partnership believes that the disclosures are
adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto
included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1995.
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
The Partnership owns a 70% general partner interest in
Northern Border Pipeline Company ("Northern Border Pipeline").
2. In May 1996, the Federal Energy Regulatory Commission ("FERC")
granted rehearing of its May 1994 order on Northern Border
Pipeline's methodology for recording in its books and reflecting
in its rates amounts related to alternative minimum tax ("AMT").
The FERC Audit Staff ("Staff"), in December 1991 after an
examination of Northern Border Pipeline's records for the period
January 1, 1987 through December 31, 1989, took exception to
Northern Border Pipeline's established method of accounting for
AMT for ratemaking purposes. Northern Border Pipeline did not
agree with the exception noted by the Staff and proceeded with a
hearing before an Administrative Law Judge ("ALJ") who concluded
Northern Border Pipeline had properly accounted for AMT.
Ultimately in the May 1996 order, the FERC accepted the ALJ's
conclusions and vacated its May 1994 order which had held that
the AMT component of Northern Border Pipeline's rate base should
reflect the particular tax circumstances of each Northern Border
Pipeline partner. There were no accounting adjustments or rate
refunds required in resolution of this issue.
In May 1996, Staff issued its audit report on its examination
of Northern Border Pipeline's records for the three year period
subsequent to January 1, 1990. The audit report required
Northern Border Pipeline to record certain adjustments to its
accounts including the reclassification of $3.9 million of costs
from utility plant in service to a regulatory asset. In
accordance with Northern Border Pipeline's FERC tariff, the
regulatory asset is includable in rate base, however Northern
Border Pipeline must file with the FERC for the future recovery
of this asset through amortization to its cost of service. The
adjustments made to Northern Border Pipeline's accounts as a
result of the audit report did not materially affect the
Partnership's financial position or results of operations.
In November 1995, Northern Border Pipeline filed a rate case
in compliance with its FERC tariff for the determination of its
allowed equity rate of return. In December 1995, the FERC issued
an order that permitted Northern Border Pipeline to begin
collecting the requested increase in the equity rate of return
effective June 1, 1996, subject to refund. Northern Border
Pipeline has reduced its operating revenue and recorded a reserve
for billings subject to refund, which is reflected in other
current liabilities on the consolidated balance sheet. A
prehearing conference established the procedural schedule with a
hearing scheduled for September 1996.
In August 1996, the FERC issued an order which contained a
preliminary determination favorable to Northern Border Pipeline's
application with the FERC for the expansion of its existing
system and an extension of its pipeline from its current terminus
near Harper, Iowa to a point near Manhattan, Illinois. Northern
Border Pipeline's project proposes construction and operation of
243 miles of pipeline, 182 miles of pipeline loop and a total of
293,000 compressor horsepower at 12 compressor stations. The
preliminary determination found that Northern Border Pipeline's
proposed project is required by the public convenience and
necessity and authorizes the project facility costs to be
included with existing facility costs in the determination of
rates. The preliminary determination contemplates issuance of a
final order by the FERC, subject to completion of the
environmental review. The project is expected to cost
approximately $800 million in 1995 dollars and be ready for
service in 1998.
3. On July 18, 1996, the Partnership declared a cash distribution
of $0.55 per unit for the second quarter ended June 30, 1996.
The distribution is payable August 14, 1996, to unitholders of
record as of July 31, 1996. This quarterly distribution is
consistent with the previously announced indicated annual rate of
$2.20 per unit.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
Results of Operations
Northern Border Partners, L.P. (the "Partnership") owns a 70%
general partner interest in Northern Border Pipeline Company
("Northern Border Pipeline"). Northern Border Pipeline's revenue
is derived from agreements with various shippers for the
transportation of natural gas. It transports gas under a Federal
Energy Regulatory Commission ("FERC") regulated tariff that
provides an opportunity to recover all of the operations and
maintenance costs of the pipeline, taxes other than income taxes,
interest, depreciation and amortization, an allowance for income
taxes and a regulated return on equity. Northern Border Pipeline
is generally allowed to collect from its shippers a return on
regulated rate base as well as recover that rate base through
depreciation and amortization. The return amount Northern Border
Pipeline may collect from its shippers declines as the rate base
is recovered. The firm transportation contract shippers are
obligated to pay their allocable share of the cost of service
regardless of the volumes actually transported. Based on
existing contracts and capacity, 100% of the pipeline system's
capacity is contractually committed through October 2001.
In November 1995, Northern Border Pipeline filed a rate case
in compliance with its FERC tariff for the determination of its
allowed equity rate of return. In this proceeding, Northern
Border Pipeline proposed, among other items, to increase its
allowed equity rate of return from 12.75% to 14.25%. Pursuant to
a December 1995 FERC order, Northern Border Pipeline began
collecting the proposed increase in rate of return on equity
effective June 1, 1996, subject to refund (see Note 2 - Notes to
Consolidated Financial Statements of this Form 10-Q). Besides
objecting to the increase in the allowed equity rate of return,
issues identified by the FERC staff and intervenors include,
among other items, depreciation rates for the existing operations
and the level of allowance for income taxes includable in cost of
service.
Regarding the issue of the allowance for income taxes, the
FERC staff and intervenors refer to a FERC order issued in June
1995, and on which the FERC denied rehearing in pertinent part in
May 1996, in a case involving Lakehead Pipe Line Company L.P.
("Lakehead"). Lakehead is an oil pipeline for which the FERC
determined that an income tax allowance would not be allowed with
respect to income attributable to the limited partnership
interests held by individuals. Testimonies filed by both FERC
staff and certain intervenors maintain Northern Border Pipeline's
tariff should be changed to apply the policy established in
Lakehead which, as proposed, may result in an annual reduction to
the cost of service of between $11 million and $30 million. In
its answering testimony, Northern Border Pipeline states its
tariff provisions, consistently utilized since inception, require
Northern Border Pipeline to include in its cost of service an
allowance for income taxes calculated as if Northern Border
Pipeline were a corporation and do not require Northern Border
Pipeline to reflect the particular tax circumstances of each of
its partners. These tariff provisions were approved by the FERC,
have been relied upon by lenders and investors, and have provided
significant benefits to its shippers through substantial
reductions to rate base for amounts recorded as accumulated
deferred income taxes. If Lakehead were applied, Northern Border
Pipeline believes these accumulated deferred income tax balances
would be eliminated in whole or in part and would result in increases
to rate base and to cost of service. A hearing on the rate case is
scheduled for September 1996. The Partnership is unable to predict
at this time the effect of these rate proceedings on future operating
results of Northern Border Pipeline.
Second Quarter 1996 Compared With Second Quarter 1995
Operating revenue increased $0.3 million (1%) for the second
quarter of 1996, as compared to the same period in 1995, due to
recoveries of higher depreciation and amortization expense.
These recoveries were partially offset by returns on a lower rate
base and lower interest expense on long-term debt.
Depreciation and amortization expense increased $2.0 million
(17%) for the second quarter of 1996, as compared to the same
period in 1995. The increase is primarily due to an increase in
the depreciation rate for Northern Border Pipeline's transmission
plant from 4.4% for the three months ended June 30, 1995 to 5.0%
for the comparable period in 1996, as authorized in its FERC
tariff.
Interest expense on long-term debt decreased $0.5 million (6%)
for the second quarter of 1996, as compared to the same period in
1995, due to a decrease in average debt outstanding reflecting
principal payments made by Northern Border Pipeline under its
bank loan agreement.
Other income increased $1.5 million for the second quarter of
1996, as compared to the same period in 1995. Other income in
1995 reflected a reserve provision for regulatory issues recorded
by Northern Border Pipeline. In 1996, the reserve for regulatory
issues was adjusted to reflect the resolution of the FERC audit
on the results of the examination of Northern Border Pipeline's
books for the three year period subsequent to January 1, 1990
(see Note 2 - Notes to Consolidated Financial Statements of this
Form 10-Q).
Six Months Ended June 30, 1996 Compared With Six Months Ended
June 30, 1995
Operating revenue increased $1.1 million (1%) for the six
months ended June 30, 1996, as compared to the same period in
1995, due to recoveries of higher operations and maintenance
expense and depreciation and amortization expense. These
recoveries were partially offset by returns on a lower rate base
and lower interest expense on long-term debt.
Depreciation and amortization expense increased $3.6 million
(15%) for the six months ended June 30, 1996, as compared to the
same period in 1995. The increase is primarily due to an
increase in the depreciation rate for Northern Border Pipeline's
transmission plant from 4.4% for the six months ended June 30,
1995 to 5.0% for the comparable period in 1996, as authorized in
its FERC tariff.
Interest expense on long-term debt decreased $1.1 million (6%)
for the six months ended June 30, 1996, as compared to the same
period in 1995, due to a decrease in average debt outstanding
reflecting principal payments made by Northern Border Pipeline
under its bank loan agreement.
Other income increased $2.1 million for the six months ended
June 30, 1996, as compared to the same period in 1995. Other
income in 1995 reflected a reserve provision for regulatory
issues recorded by Northern Border Pipeline. In 1996, the
reserve for regulatory issues was adjusted to reflect the
resolution of the FERC audit on the results of the examination of
Northern Border Pipeline's books for the three year period
subsequent to January 1, 1990 (see Note 2 - Notes to Consolidated
Financial Statements of this Form 10-Q).
Liquidity and Capital Resources
General
Short-term liquidity needs of the Partnership will be met by
internal sources. In addition, the Partnership has the ability
to establish lines of credit with one or more financial
institutions. Long-term capital needs can be met by the
Partnership's ability to issue additional limited partner
interests in the Partnership.
Cash Flows From Operating Activities
The Partnership generated cash flows from operations of $62.6
million for the six month period ended June 30, 1996 reflecting,
among other things, net income and depreciation and amortization
for the period of $25.6 million and $27.2 million, respectively.
For the comparable period in 1995, the Partnership generated cash
flows from operations of $59.2 million reflecting, among other
things, net income and depreciation and amortization for the
period of $25.9 million and $23.6 million, respectively.
Cash Flows From Investing Activities
In October 1995, Northern Border Pipeline filed an application
with the FERC to expand its existing system and to extend its
pipeline from its current terminus near Harper, Iowa to a point
near Manhattan, Illinois at an estimated cost of $800 million in
1995 dollars. Subject to the receipt of FERC final approval, the
project is expected to be ready for service in 1998 (see Note 2 -
Notes to Consolidated Financial Statements of this Form 10-Q).
Net plant additions of $3.6 million for the six months ending
June 30, 1996 include $1.8 million for the proposed expansion and
extension project. The remaining $1.8 million of net plant
additions in 1996 are primarily related to renewals and
replacements of existing facilities. For the comparable period
in 1995, net plant additions were $2.0 million which included
$1.1 million for the proposed expansion and extension project.
Total capital expenditures for 1996 are estimated to be $24.0
million for the proposed expansion and extension project and
$11.1 million for renewals and replacements for the existing
facilities. Funds required to meet the 1996 capital expenditures
are anticipated to be provided from additional debt borrowings,
internal sources and equity contributions from minority interest
holders.
Cash Flows From Financing Activities
Cash flows used in financing activities of $55.1 million for
the six month period ended June 30, 1996 reflect distributions
made to partners and minority interests of $29.4 million and
$15.7 million, respectively, and $10.0 million in principal
payments under the Northern Border Pipeline bank loan agreement.
For the comparable period in 1995, cash flows used in financing
activities totaled $64.1 million and reflect distributions made
to partners and minority interests of $29.4 million and $14.7
million, respectively, and $20.0 million in principal payments
under the Northern Border Pipeline bank loan agreement.
Information Regarding Forward Looking Statements
The statements in this Quarterly Report that are not
historical 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. Such forward looking statements
include the discussions in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of
Operations" on Northern Border Pipeline's rate case and in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" on
Northern Border Pipeline's proposed expansion and extension
project. Although the Partnership 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 political and regulatory developments that impact FERC
and state utility commission proceedings, Northern Border
Pipeline's success in sustaining its positions in such
proceedings or the success of intervenors in opposing Northern
Border Pipeline's positions, competitive developments by Canadian
and U.S. natural gas transmission peers, political and regulatory
developments in Canada and conditions of the capital markets and
equity markets during the periods covered by the forward looking
statements.
PART II. OTHER INFORMATION
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
As reported in Item 3 of the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1995, Northern Border
Pipeline was involved in a legal proceeding on its method of
accounting for alternative minimum tax for ratemaking purposes.
During the second quarter of 1996, this issue was resolved in
favor of Northern Border Pipeline (see Note 2 of Notes to
Consolidated Financial Statements included in Part I, Item 1 of
this Form 10-Q).
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities and 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 PARTNERS, L.P.
(A Delaware Limited Partnership)
Date: August 13, 1996 By: Jerry L. Peters
Jerry L. Peters
Chief Financial and Accounting
Officer