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, 2002
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)
1111 South 103rd St.
Omaha, Nebraska 68124-1000
- ------------------------------------- -----------------------------------
(Address of principal executive (Zip code)
offices)
(402) 398-7700
--------------------------------------------------------------------------
(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 [ ]
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NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 3
Consolidated Statement of Comprehensive Income -
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 3
Consolidated Balance Sheet - June 30, 2002
and December 31, 2001 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001 5
Consolidated Statement of Changes in Partners'
Equity - Six Months Ended June 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 6. Exhibits and Reports on Form 8-K 23
</Table>
2
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,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
OPERATING REVENUES, NET $123,303 $125,474 $241,310 $213,434
-------- -------- -------- --------
OPERATING EXPENSES
Product purchases 11,965 17,516 22,718 17,516
Operations and maintenance 24,375 24,636 49,240 40,653
Depreciation and amortization 18,721 20,164 37,154 35,858
Taxes other than income 7,352 7,549 14,823 11,642
-------- -------- -------- --------
Operating expenses 62,413 69,865 123,935 105,669
-------- -------- -------- --------
OPERATING INCOME 60,890 55,609 117,375 107,765
-------- -------- -------- --------
INTEREST EXPENSE 21,909 24,632 42,947 46,328
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Equity earnings in
unconsolidated affiliates 3,304 772 6,524 555
Other expense (627) (578) (24) (2,081)
-------- -------- -------- --------
Other income (expense) 2,677 194 6,500 (1,526)
-------- -------- -------- --------
MINORITY INTERESTS IN NET INCOME 11,552 9,489 22,853 20,256
-------- -------- -------- --------
NET INCOME BEFORE
EXTRAORDINARY ITEMS 30,106 21,682 58,075 39,655
EXTRAORDINARY LOSS FROM
DEBT RESTRUCTURING -- (1,213) -- (1,213)
-------- -------- -------- --------
NET INCOME TO PARTNERS $ 30,106 $ 20,469 $ 58,075 $ 38,442
======== ======== ======== ========
NET INCOME PER UNIT $ 0.67 $ 0.48 $ 1.28 $ 1.02
======== ======== ======== ========
NUMBER OF UNITS USED IN COMPUTATION 41,623 39,341 41,623 35,453
======== ======== ======== ========
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income to partners $30,106 $20,469 $58,075 $38,442
Other comprehensive income:
Transition adjustment from
adoption of SFAS No. 133 -- -- -- 22,183
Change associated with current
period hedging transactions (857) 9,088 (4,931) 6,073
Change associated with
current period foreign
currency translation 2,418 1,894 2,395 1,894
------- ------- ------- -------
Total comprehensive income $31,667 $31,451 $55,539 $68,592
======= ======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
3
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,
ASSETS 2002 2001
- ------ ---------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 14,268 $ 16,755
Accounts receivable 55,737 49,740
Materials and supplies, at cost 5,242 5,584
Prepaid expenses and other 7,654 6,572
---------- ----------
Total current assets 82,901 78,651
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 2,852,268 2,829,691
Less: Accumulated provision for
depreciation and amortization 819,665 789,592
---------- ----------
Property, plant and equipment, net 2,032,603 2,040,099
---------- ----------
INVESTMENTS AND OTHER ASSETS
Investment in unconsolidated affiliates 243,384 239,729
Goodwill 295,441 295,402
Assets from price risk management activities 20,402 9,635
Other 26,839 23,839
---------- ----------
Total investments and other assets 586,066 568,605
---------- ----------
Total assets $2,701,570 $2,687,355
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 80,445 $ 352,395
Accounts payable 38,054 39,246
Accrued taxes other than income 25,707 28,730
Accrued interest 19,757 20,550
Liabilities from price
risk management activities 519 --
---------- ----------
Total current liabilities 164,482 440,921
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,375,476 1,070,832
---------- ----------
MINORITY INTERESTS IN PARTNERS' EQUITY 248,454 250,078
---------- ----------
RESERVES AND DEFERRED CREDITS 14,260 10,566
---------- ----------
PARTNERS' EQUITY
Partners' capital 880,905 894,429
Accumulated other comprehensive income 17,993 20,529
---------- ----------
Total partners' equity 898,898 914,958
---------- ----------
Total liabilities and partners' equity $2,701,570 $2,687,355
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
4
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,
---------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 58,075 $ 38,442
-------- --------
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 37,337 36,041
Minority interests in net income 22,853 20,256
Provision for rate refunds -- 2,036
Rate refunds paid -- (6,762)
Changes in components of working capital,
net of the effect of the acquired businesses (10,432) 8,011
Non-cash gains from risk management activities (2,693) --
Other 536 369
-------- --------
Total adjustments 47,601 59,951
-------- --------
Net cash provided by operating activities 105,676 98,393
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated affiliates (2,355) (6,229)
Acquisitions of businesses (1,154) (340,197)
Capital expenditures for property, plant
and equipment (27,498) (48,033)
-------- --------
Net cash used in investing activities (31,007) (394,459)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to Unitholders and
General Partners (71,599) (53,448)
Distributions to Minority Interests (23,986) (20,960)
Issuance of long-term debt 361,894 485,703
Retirement of long-term debt (343,228) (264,811)
Decrease in bank overdraft -- (22,437)
Issuance of partnership interests, net -- 173,165
Proceeds (payments) upon termination of derivatives 2,351 (4,346)
Long-term debt financing costs (2,588) (2,859)
-------- --------
Net cash provided by (used in)
financing activities (77,156) 290,007
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,487) (6,059)
Cash and cash equivalents-beginning of period 16,755 35,363
-------- --------
Cash and cash equivalents-end of period $ 14,268 $ 29,304
======== ========
- -------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 44,235 $ 44,052
======== ========
Changes in components of working capital:
Accounts receivable $ (5,997) $ 9,540
Materials and supplies, prepaid expenses and other (740) (1,432)
Accounts payable 8 1,693
Accrued taxes other than income (3,023) (4,999)
Other 113 38
Accrued interest (793) 3,171
-------- --------
Total $(10,432) $ 8,011
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
5
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
GENERAL COMMON COMPREHENSIVE PARTNERS'
PARTNERS UNITS INCOME EQUITY
-------- -------- ------------- ---------
Balance at December 31, 2001 $17,889 $876,540 $20,529 $914,958
Net income to partners 4,732 53,343 -- 58,075
Change associated with current
period hedging transactions -- -- (4,931) (4,931)
Change associated with current
period foreign currency translation -- -- 2,395 2,395
Distributions to partners (5,002) (66,597) -- (71,599)
------- -------- ------- --------
Balance at June 30, 2002 $17,619 $863,286 $17,993 $898,898
======= ======== ======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
6
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 accounting principles generally accepted
in the United States of America 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, 2001.
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.
The Partnership owns a 70% general partner interest in Northern Border
Pipeline Company. Crestone Energy Ventures, L.L.C.; Bear Paw Energy, L.L.C.;
Border Midstream Services, Ltd.; Midwestern Gas Transmission Company; and Black
Mesa Pipeline, Inc. are wholly-owned subsidiaries of the Partnership. The
Partnership also owns a 49% common membership interest and a 100% class A share
interest in Bighorn Gas Gathering, L.L.C.; a 33% interest in Fort Union Gas
Gathering, L.L.C.; a 35% interest in Lost Creek Gathering, L.L.C.; and a 36%
interest in the Gregg Lake/Obed Pipeline.
2. GOODWILL
In the third quarter of 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 modifies the accounting and reporting
of goodwill and intangible assets. It requires entities to discontinue the
amortization of goodwill, reallocate goodwill among its reporting segments and
perform impairment tests by applying a fair-value-based analysis on the goodwill
in each reporting segment. At December 31, 2001, the Partnership's balance sheet
included goodwill of approximately $475 million with approximately $180 million
recorded in the Partnership's investment in unconsolidated affiliates. The
Partnership adopted SFAS No. 142 effective January 1, 2002. During the second
quarter of 2002, the Partnership completed its evaluation of approximately $295
million recorded goodwill in accordance with SFAS No. 142 and determined that it
did not have a transitional impairment loss that needed to be recognized as the
cumulative effect of a change in accounting principle. Beginning January 1,
2002, the Partnership is no longer recording amortization expense related to
goodwill. The following information discloses the effect of goodwill
amortization on the Partnership's net income to partners and net income per
unit.
7
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands, ----------------------- ----------------------
except per unit amounts) 2002 2001 2002 2001
-------------------------- ------- ------- ------- -------
Reported net income to partners $30,106 $20,469 $58,075 $38,442
Add back: goodwill amortization -- 3,882 -- 5,700
------- ------- ------- -------
Adjusted net income to partners $30,106 $24,351 $58,075 $44,142
======= ======= ======= =======
Reported net income per unit $ .67 $ .48 $ 1.28 $ 1.02
Add back: goodwill amortization -- .10 -- .16
------- ------- ------- -------
Adjusted net income per unit $ .67 $ .58 $ 1.28 $ 1.18
======= ======= ======= =======
3. CREDIT FACILITIES AND LONG-TERM DEBT
In April 2002, Northern Border Pipeline completed a private offering of
$225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes").
Northern Border Pipeline also entered into a registration rights agreement with
the initial purchasers in the private offering in which Northern Border Pipeline
agreed, among other things, to use its reasonable best efforts to exchange the
2002 Pipeline Senior Notes for notes registered under the Securities Act of 1933
with substantially identical terms. The indenture under which the 2002 Pipeline
Senior Notes was issued does not limit the amount of unsecured debt Northern
Border Pipeline may incur, but it does include restrictions on incurrence of
secured indebtedness. The proceeds from the 2002 Pipeline Senior Notes of
approximately $223.5 million were used to reduce indebtedness outstanding.
Northern Border Pipeline entered into a $175 million three-year credit
agreement ("2002 Pipeline Credit Agreement") with certain financial institutions
in May 2002. The 2002 Pipeline Credit Agreement is to be used to refinance
existing indebtedness and for general business purposes. The 2002 Pipeline
Credit Agreement permits Northern Border Pipeline to choose among various
interest rate options, to specify the portion of the borrowings to be covered by
specific interest rate options and to specify the interest rate period. Northern
Border Pipeline is required to pay a fee on the principal commitment amount of
$175 million. At June 30, 2002, $22.0 million was outstanding under the 2002
Pipeline Credit Agreement at an average interest rate of 2.47%.
All of the debt and credit facilities of the Partnership and Northern
Border Pipeline contain material financial covenants. Both the Partnership and
Northern Border Pipeline are in compliance with these covenants at June 30,
2002.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Partnership uses financial instruments in the management of its
interest rate and commodity price 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.
In 2001, the Partnership adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was subsequently amended by SFAS No.
137 and SFAS No. 138. All derivative instruments are recorded on the balance
sheet as either assets or liabilities measured at fair value. Any change in the
derivative's fair value is recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying cash flow
hedges allows a derivative's gains and losses to be recorded in accumulated
other comprehensive income. The Partnership is reflecting in consolidated
accumulated
8
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other comprehensive income its 70% share of Northern Border Pipeline's
accumulated other comprehensive income. The remaining 30% is reflected as an
adjustment to minority interests in partners' equity.
The Partnership records in accumulated other comprehensive income amounts
related to terminated interest rate swap agreements for cash flow hedges. During
the three months and six months ended June 30, 2002, the Partnership amortized
approximately $0.5 million and $1.0 million, respectively, related to the
terminated interest rate swap agreements, as a reduction to interest expense
from accumulated other comprehensive income and expects to amortize comparable
amounts in each of the remaining quarters of 2002.
During the third quarter of 2001, the Partnership entered into interest
rate swap agreements with notional amounts totaling $225 million. Under the
interest rate swap agreements, the Partnership makes payments to counterparties
at variable rates based on the London Interbank Offered Rate and in return
receives payments based on a fixed rate. At June 30, 2002, the average effective
interest rate on the interest rate swap agreements was 3.24%.
In November 2001, Northern Border Pipeline entered into forward starting
interest rate swap agreements with notional amounts totaling $150 million
related to the planned issuance of senior notes. Upon issuance of the 2002
Pipeline Senior Notes, Northern Border Pipeline terminated the forward starting
interest rate swap agreements and received approximately $2.4 million, which was
recorded in accumulated other comprehensive income and will be recognized as a
reduction in interest expense over the life of the 2002 Pipeline Senior Notes.
Northern Border Pipeline entered into interest rate swap agreements with
notional amounts totaling $225 million in May 2002. 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 fixed rate. At June 30, 2002, the average effective interest
rate on the interest rate swap agreements was 3.50%.
Both the Partnership's and 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 senior notes issued by the
Partnership in 2001 and by Northern Border Pipeline in 2002. The accompanying
consolidated balance sheet at June 30, 2002, is reflecting a non-cash gain of
approximately $20.4 million in assets from price risk management activities with
a corresponding offset in long-term debt.
Bear Paw Energy periodically enters into commodity derivatives contracts
and fixed-price physical contracts. Bear Paw Energy primarily utilizes price
swaps and collars, which have been designated as cash flow hedges, to hedge its
exposure to gas and natural gas liquid price volatility. During the three months
and six months ended June 30, 2002, Bear Paw Energy recognized losses of $0.7
million and $0.6 million, respectively, from the settlement of derivative
contracts. At June 30, 2002, Bear Paw Energy reflected a non-cash loss of
approximately $0.5 million in liabilities from price risk management activities
with a corresponding offset in accumulated other comprehensive income. The
ineffective portion of Bear Paw Energy's cash flow hedges was minimal.
At September 30, 2001, Bear Paw Energy had outstanding commodity price
swap contracts with Enron North America Corp. ("ENA"), a subsidiary of Enron
Corp., which had been accounted for as cash flow hedges, and resulted in Bear
Paw Energy
9
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recording a non-cash gain of approximately $6.7 million in accumulated other
comprehensive income. As a result of ENA's filing for Chapter 11 bankruptcy
protection during the fourth quarter of 2001, Bear Paw Energy terminated the
contracts and ceased to account for these derivatives as hedges when it
determined the hedges were no longer effective. The gain previously recorded in
accumulated other comprehensive income is being recorded into earnings in the
same periods during which the hedged forecasted transactions will affect
earnings. During the three months and six months ended June 30, 2002, the
Partnership amortized approximately $1.2 million and $2.7 million, respectively,
into earnings from accumulated other comprehensive income and expects to
amortize approximately $4.6 million for the year 2002.
5. BUSINESS SEGMENT INFORMATION
The Partnership's reportable segments are strategic business units that
offer different services. The Partnership evaluates performance based on EBITDA
(net income before minority interests; interest expense; income taxes; and
depreciation and amortization).
Natural
Interstate Gas
Natural Gathering
Gas and
Pipelines Processing Coal
(In thousands) (a) (b) Slurry Other(c) Total
----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 2002
------------------
Revenues from
external customers $84,619 $33,243 $5,441 $ -- $123,303
EBITDA 69,469 13,436 1,980 (1,795) 83,090
THREE MONTHS ENDED
JUNE 30, 2001
------------------
Revenues from
external customers $79,106 $40,769 $5,599 $ -- $125,474
EBITDA 60,875 15,398 1,814 (933) 77,154
SIX MONTHS ENDED
JUNE 30, 2002
------------------
Revenues from
external customers $166,816 $63,833 $10,661 $ -- $241,310
EBITDA 137,352 25,085 2,801 (3,187) 162,051
SIX MONTHS ENDED
JUNE 30, 2001
------------------
Revenues from
external customers $156,146 $46,268 $11,020 $ -- $213,434
EBITDA 126,090 17,978 4,072 (3,321) 144,819
10
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total assets by segment are as follows:
June 30, December 31,
(In thousands) 2002 2001
---------------------------------------------------------------------------------------------
Interstate Natural Gas Pipelines $1,833,229 $1,858,902
Natural Gas Gathering and Processing 821,133 792,249
Coal Slurry 21,557 22,009
Other (c) 25,651 14,195
---------- ----------
Total Assets $2,701,570 $2,687,355
========== ==========
(a) Interstate natural gas pipeline operating results for 2002 include results
of Midwestern Gas Transmission, which was acquired by the Partnership
effective May 2001.
(b) Natural gas gathering and processing operating results for 2002 include
results of Bear Paw Energy and Border Midstream, which were acquired by
the Partnership effective late March 2001 and April 2001, respectively.
(c) Includes other items not allocable to segments.
6. NET INCOME PER UNIT
Net income per unit is computed by dividing net income, after deduction of
the general partners' allocation, by the weighted average number of outstanding
common units. The general partners' allocation is equal to an amount based upon
their collective 2% general partner interest adjusted for incentive
distributions. The distribution to partners amount shown on the accompanying
consolidated statement of changes in partners' equity includes incentive
distributions to the general partners of approximately $3.6 million.
On July 22, 2002, the Partnership declared a cash distribution of $0.80
per unit ($3.20 per unit on an annualized basis) for the quarter ended June 30,
2002. The distribution is payable August 14, 2002, to unitholders of record at
July 31, 2002.
7. ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued 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. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The Partnership is in the process of evaluating the
application of this pronouncement.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, No. 44 and No. 64, Amendments to FASB Statements No. 13 and
Technical Corrections." SFAS No. 145 streamlines the reporting of debt
extinguishments and requires that only gains and losses from extinguishments
meeting the criteria in Accounting Principles Board Opinion 30 would be
classified as extraordinary. Thus, gains or losses arising from extinguishments
that are part of a company's
11
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recurring operations would not be reported as an extraordinary item. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002 with earlier
adoption encouraged. The Partnership does not expect the adoption of SFAS No.
145 to have a material impact on its financial position, results of operations
or cash flows.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued in June 2002 and addresses accounting and reporting for
costs associated with exit or disposal activities. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under prior accounting requirements, a liability
for an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Partnership does not expect the adoption of SFAS No. 146 to have a material
impact on its financial position, results of operations or cash flows.
8. SUBSEQUENT EVENTS
In July 2002, the Partnership sold 2,186,700 common units. In conjunction
with the issuance of additional common units, the Partnership's general partners
are required to make capital contributions to the Partnership to maintain a 2%
general partner interest in accordance with the partnership agreements. The net
proceeds from the sale of common units and the general partners' capital
contributions totaled approximately $75.9 million and were primarily used to
repay amounts borrowed under a 2001 credit agreement.
12
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
Management's discussion and analysis of financial condition and results of
operations is based on the Consolidated Financial Statements of Northern Border
Partners, L.P. (the "Partnership"). The Consolidated Financial Statements 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 Consolidated Financial Statements included elsewhere in
this report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting the Partnership's Consolidated
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 the Partnership'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.
The Partnership's significant accounting policies are summarized in Note 2
- - Notes to Consolidated Financial Statements included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2001. Certain of the
Partnership'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 generally accepted accounting principles for
nonregulated entities. The Partnership's long-lived assets are stated at
original cost. The Partnership 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 extraordinary retirements or sales.
The original cost of utility property retired is charged to accumulated
depreciation and amortization, net of salvage and cost of removal. With respect
to the Partnership's acquisitions, the excess of the purchase price over the
fair value of the net assets acquired or goodwill was being amortized over 30
years prior to 2002. Effective January 1, 2002, the Partnership is no longer
amortizing goodwill due to its adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." Finally, the Partnership's accounting for financial
instruments follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended.
RESULTS OF OPERATIONS
The Partnership owns a 70% general partner interest in Northern Border
Pipeline Company. Crestone Energy Ventures, L.L.C.; Bear Paw Energy, L.L.C.;
Border Midstream Services, Ltd.; Midwestern Gas Transmission Company; and Black
Mesa Pipeline, Inc. are wholly-owned subsidiaries of the Partnership. The
Partnership also owns a 49% common membership interest and a 100% class A share
13
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
interest in Bighorn Gas Gathering, L.L.C.; a 33% interest in Fort Union Gas
Gathering, L.L.C.; a 35% interest in Lost Creek Gathering, L.L.C.; and a 36%
interest in the Gregg Lake/Obed Pipeline.
During 2001, the following acquisitions were made by the Partnership: Bear
Paw Energy on March 30; the Mazeppa and Gladys gas processing plants, gas
gathering systems and a minority interest in the Gregg Lake/Obed Pipeline on
April 4, which are included in the operating results of Border Midstream
Services; and Midwestern Gas Transmission effective May 1.
SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001
The Partnership's net income increased $9.6 million (47%) for the second
quarter of 2002, as compared to the same period in 2001. Net income from the
interstate natural gas pipeline segment increased approximately $5.4 million,
primarily due to Northern Border Pipeline. Northern Border Pipeline's operating
results benefited from a pipeline expansion and extension project completed in
October 2001 ("Project 2000"). The Partnership's interest expense decreased $2.4
million from 2001 to 2002, primarily due to lower average interest rates. As a
result of adopting SFAS No. 142, the Partnership is no longer amortizing
goodwill (see Note 2 - Notes to Consolidated Financial Statements). The 2001
operating results included $3.9 million of goodwill amortization or $0.10 per
unit. Goodwill amortization by business segment was as follows: interstate
natural gas pipelines - $0.4 million; natural gas gathering and processing -
$3.4 million; and coal slurry - $0.1 million.
Operating revenues, net decreased $2.2 million (2%) for the second quarter
of 2002, as compared to the same period in 2001. Operating revenues from the
natural gas gathering and processing segment decreased $7.5 million (18%)
primarily due to reductions in commodity prices between 2001 and 2002. Operating
revenues from the interstate natural gas pipelines increased $5.5 million due to
a $3.2 million (4%) increase in Northern Border Pipeline's revenues and a $2.3
million increase in Midwestern Gas Transmission's revenues. Northern Border
Pipeline reflected additional revenues of approximately $3.4 million related to
Project 2000. The impact of the additional revenues associated with Project 2000
was partially offset by uncollected revenues associated with the transportation
capacity held by Enron North America Corp. ("ENA"), which filed for Chapter 11
bankruptcy protection in December 2001 (see "Update On The Impact Of Enron's
Chapter 11 Filing On The Partnership's Business"). For the second quarter of
2002, the revenues lost on this capacity totaled approximately $0.3 million.
Midwestern Gas Transmission's revenues in 2002 include an additional month.
Product purchases decreased $5.6 million (32%) for the second quarter of
2002 as compared to the same period in 2001 due to lower commodity prices. In
conjunction with its gathering and processing activities, Bear Paw Energy
receives the natural gas stream from producers. Upon sale of the natural gas
liquids and residue that it processes in its facilities, Bear Paw Energy pays
the producers based upon a percentage of the gross proceeds.
Depreciation and amortization expense decreased $1.4 million (7%) for the
second quarter of 2002, as compared to the same period in 2001. Depreciation and
amortization expense in the second quarter of 2001 includes goodwill
amortization of $2.3 million, which is not being recorded in 2002 (see Note 2 -
Notes to Consolidated Financial Statements).
14
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
Consolidated interest expense decreased $2.7 million (11%) for the second
quarter of 2002, as compared to the same period in 2001. Interest expense for
the Partnership decreased approximately $2.4 million (23%) for the second
quarter of 2002, as compared to the same period in 2001, due to lower average
interest rates partially offset by additional borrowings for acquisitions made
in 2001.
Other income (expense) increased $2.5 million for second quarter of 2002,
as compared to the same period in 2001, primarily due to an increase in equity
earnings of unconsolidated affiliates. The 2001 amount included goodwill
amortization of approximately $1.6 million, which is not being recorded in 2002
(see Note 2 - Notes to Consolidated Financial Statements).
Minority interests in net income increased $2.1 million (22%) for the
second quarter of 2002, as compared to the same period in 2001, primarily due to
higher operating results for Northern Border Pipeline.
The extraordinary loss from debt restructuring of $1.2 million recorded in
the second quarter of 2001 relates to Black Mesa's 10.7% Secured Senior Notes,
which were repaid by the Partnership prior to maturity.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
The Partnership's net income increased $19.6 million (51%) for the first
half of 2002, as compared to the same period in 2001. Net income from the
interstate natural gas pipeline segment, excluding the impact of goodwill
amortization, increased approximately $8.8 million, of which $6.1 million is due
to Northern Border Pipeline and $2.7 million is due to Midwestern Gas
Transmission. Northern Border Pipeline's operating results benefited from
Project 2000. Since Midwestern Gas Transmission was acquired effective May 1,
2001, the first half of 2001 included two months of operating results as
compared to six months in 2002. Net income from the natural gas gathering and
processing segment, excluding the impact of goodwill amortization, increased
approximately $3.1 million. Operating results for Bear Paw Energy include an
additional three months in 2002 and operating results for Border Midstream
Services include an additional four months in 2002. As a result of adopting SFAS
No. 142, the Partnership is no longer amortizing goodwill (see Note 2 - Notes to
Consolidated Financial Statements). The 2001 operating results included $5.7
million of goodwill amortization or $0.16 per unit. Goodwill amortization by
business segment was as follows: interstate natural gas pipelines - $0.4
million; natural gas gathering and processing - $5.1 million; and coal slurry -
$0.2 million.
Operating revenues, net increased $27.9 million (13%) for the first half
of 2002, as compared to the same period in 2001. Operating revenues from the
natural gas gathering and processing segment increased $17.6 million primarily
due to the acquisitions made beginning in late March 2001. Operating revenues
from the interstate natural gas pipelines increased $10.7 million due to a $6.4
million increase in Midwestern Gas Transmission's revenues and a $4.3 million
(3%) increase in Northern Border Pipeline's revenues. Northern Border Pipeline
reflected additional revenues of approximately $6.8 million related to Project
2000. The impact of the additional revenues associated with Project 2000 was
partially offset by uncollected revenues associated with the transportation
capacity held by ENA, which filed for Chapter 11 bankruptcy protection in
15
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On The
Partnership's Business"). For the first half of 2002, the revenues lost on this
capacity totaled approximately $1.8 million. Midwestern Gas Transmission's
revenues in 2002 include an additional four months.
Product purchases increased $5.2 million (30%) for the first half of 2002
as compared to the same period in 2001, primarily due to an additional three
months of Bear Paw Energy's operating results in 2002. In conjunction with its
gathering and processing activities, Bear Paw Energy receives the natural gas
stream from producers. Upon sale of the natural gas liquids and residue that it
processes in its facilities, Bear Paw Energy pays the producers based upon a
percentage of the gross proceeds.
Operations and maintenance expense increased $8.6 million (21%) for the
first half of 2002, as compared to the same period in 2001. Operations and
maintenance expense for the natural gas gathering and processing segment
increased $7.0 million, primarily due to the businesses acquired in 2001.
Operations and maintenance expense from the interstate natural gas pipelines
decreased $0.9 million due primarily to a decrease in Northern Border Pipeline's
expense by $3.1 million (18%) partially offset by an increase in Midwestern Gas
Transmission's expense by $2.2 million. Northern Border Pipeline's operations
and maintenance expense decreased due primarily to a decrease in employee
benefits and administrative expenses. Midwestern Gas Transmission's expense for
2002 includes an additional four months of activity. The Partnership's
operations and maintenance expense increased $1.7 million (116%), primarily due
to administrative expenses associated with the acquisitions made in 2001.
Operations and maintenance expense for Black Mesa Pipeline increased $0.8
million (12%) primarily due to costs associated with several unplanned coal
slurry discharges in the first quarter of 2002.
Depreciation and amortization expense increased $1.3 million (4%) for the
first half of 2002, as compared to the same period in 2001. Depreciation and
amortization expense for the natural gas gathering and processing segment,
excluding the impact of goodwill amortization, increased by $3.4 million, due
primarily to the acquisitions made in 2001. Depreciation and amortization
expense for the interstate natural gas pipelines, excluding the impact of
goodwill amortization, increased $1.0 million due primarily to expense from
Midwestern Gas Transmission. Depreciation and amortization expense in the first
half of 2001 includes goodwill amortization of $2.6 million, which is not being
recorded in 2002 (see Note 2 - Notes to Consolidated Financial Statements).
Taxes other than income increased $3.2 million (27%) for the first half of
2002, as compared to the same period in 2001. Taxes other than income for the
interstate natural gas pipelines increased $2.5 million due primarily to expense
from Northern Border Pipeline. Northern Border Pipeline periodically reviews and
adjusts its estimates of ad valorem taxes. Reductions to previous estimates in
2001 exceeded reductions to previous estimates in 2002 by approximately $1.6
million. In addition, the estimates for 2002 ad valorem taxes have increased due
to the completion of Project 2000 in 2001. Taxes other than income for the
natural gas gathering and processing segment increased $0.7 million, primarily
due to the businesses acquired in 2001.
Consolidated interest expense decreased $3.4 million (7%) for the first
half of 2002, as compared to the same period in 2001. Interest expense
attributable
16
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
to Northern Border Pipeline decreased $2.0 million (7%) for the first half of
2002, as compared to the same period in 2001, due to a decrease in Northern
Border Pipeline's average interest rate. Interest expense for the Partnership
decreased approximately $0.9 million (5%) for the first half of 2002, as
compared to the same period in 2001, due to lower average interest rates
partially offset by additional borrowings for acquisitions made in 2001.
Other income (expense) increased $8.0 million for first half of 2002, as
compared to the same period in 2001. Equity earnings of unconsolidated
affiliates increased $6.0 million to $6.5 million for 2002 as compared to 2001.
The 2001 amount included goodwill amortization of approximately $3.1 million,
which is not being recorded in 2002 (see Note 2 - Notes to Consolidated
Financial Statements). Other income (expense) for 2001 included non-recurring
charges of $2.4 million, primarily related to a loss on a forward purchase of
Canadian dollars to fund the acquisition of Border Midstream's gathering and
processing assets. In addition, the amount for 2001 includes a charge of
approximately $1.7 million for an uncollectible receivable from a
telecommunications company that had purchased excess capacity on Northern Border
Pipeline's communication system.
Minority interests in net income increased $2.6 million (13%) for the
first half of 2002, as compared to the same period in 2001, primarily due to
improved operating results for Northern Border Pipeline.
The extraordinary loss from debt restructuring of $1.2 million recorded in
the first half of 2001 relates to Black Mesa's 10.7% Secured Senior Notes, which
were repaid by the Partnership prior to maturity.
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND CREDIT FACILITIES
The Partnership's debt and credit facilities outstanding at June 30, 2002,
are as follows:
Payments Due by Period
--------------------------
Current Portion
(Less Than Long-Term
Total 1 Year) Portion
- --------------------------------------------------------------------------------------
(In Thousands)
Northern Border Pipeline
$175 million Pipeline Credit
Agreement, average 2.47% $ 22,000 $ -- $ 22,000
1992 Series C and D
Senior Notes, average 8.53% 143,000 78,000 65,000
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
Northern Border Partners, L.P.
8 7/8% Senior Notes due 2010 250,000 -- 250,000
7.10% Senior Notes due 2011 225,000 -- 225,000
$200 million Partnership Credit
Agreement, average 2.69%,
due 2004 109,000 -- 109,000
---------- ------- ----------
Total $1,424,000 $78,000 $1,346,000
========== ======= ==========
17
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
Northern Border Pipeline entered into a $175 million three-year credit
agreement ("2002 Pipeline Credit Agreement") with certain financial institutions
in May 2002. The 2002 Pipeline Credit Agreement replaced a credit agreement
entered into in 1997. The 2002 Pipeline Credit Agreement is to be used to
refinance existing indebtedness and for general business purposes. At June 30,
2002, $22 million was outstanding under the 2002 Pipeline Credit Agreement at an
average interest rate of 2.47%.
At June 30, 2002, Northern Border Pipeline had outstanding $143 million of
senior notes issued in a $250 million private placement under a July 1992 note
purchase agreement. The Series C Notes, with a principal amount of $78 million,
mature in August 2002. The Series D Notes will mature in August 2003. Northern
Border Pipeline anticipates borrowing under the 2002 Pipeline Credit Agreement
to repay the Series C Notes.
In April 2002, Northern Border Pipeline completed a private offering of
$225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes"). The
indenture under which the 2002 Pipeline Senior Notes was issued does not limit
the amount of unsecured debt Northern Border Pipeline may incur, but it does
include restrictions on incurrence of secured indebtedness. The proceeds from
the 2002 Pipeline Senior Notes of approximately $223.5 million were used to
reduce indebtedness outstanding under a previous credit agreement.
The indentures under which the Partnership's 8 7/8% Senior Notes and the
7.10% Senior Notes (collectively "Partnership Senior Notes") were issued do not
limit the amount of unsecured debt the Partnership may incur, but they do
include restrictions on incurrence of secured indebtedness. The indentures also
contain provisions that would require the Partnership to offer to repurchase the
Partnership Senior Notes, if either Standard & Poor's Rating Services or Moody's
Investors Service ("Moody's") rate the notes as below investment grade. In
addition, if one or more holders of the Partnership Senior Notes elect to
require the Partnership to repurchase, then a default will result under the
Partnership Credit Agreement. In April 2002, Moody's downgraded the
Partnership's senior unsecured debt to a rating of Baa2 and affirmed the A3
rating of Northern Border Pipeline's senior unsecured debt, both with a negative
rating outlook. Northern Border Pipeline's and the Partnership's credit ratings
remain above investment grade.
In July 2002, the Partnership sold 2,186,700 common units. In conjunction
with the issuance of additional common units, the Partnership's general partners
are required to make capital contributions to the Partnership to maintain a 2%
general partner interest in accordance with the partnership agreements. The net
proceeds from the sale of common units and the general partners' capital
contributions totaled approximately $75.9 million and were primarily used to
repay amounts borrowed under the Partnership Credit Agreement.
Short-term liquidity needs will be met by operating cash flows, the
Partnership Credit Agreement and the 2002 Pipeline Credit Agreement. Long-term
capital needs may be met through the ability to issue long-term indebtedness as
well as additional limited partner interests of the Partnership.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $7.3 million to
$105.7 million for the first half of 2002, as compared to the same period in
2001. Net income to partners before depreciation and amortization increased
$20.9 million
18
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
primarily due to the natural gas gathering and processing businesses and
Midwestern Gas Transmission acquired in 2001. In 2002, working capital decreased
$10.4 million as compared to an increase in 2001 of $8.0 million. The working
capital change for 2001 reflected a $9.5 million decrease in accounts
receivable, primarily related to Northern Border Pipeline. Northern Border
Pipeline had been billing its shippers subject to refund until its rate case was
settled. Cash flows from operating activities for 2001 included net cash
outflows of approximately $4.7 million related to Northern Border Pipeline's
rate case. During the first quarter of 2001, Northern Border Pipeline made
refunds to its shippers totaling $6.8 million, which included approximately $2.1
million collected in the first quarter of 2001 with the remainder collected
previously.
CASH FLOWS FROM INVESTING ACTIVITIES
The investment in unconsolidated affiliates of $2.4 million and $6.2
million for the first half of 2002 and 2001, respectively, primarily reflects
capital contributions to Bighorn.
Acquisitions of businesses decreased $339.0 million to $1.2 million for
the first half of 2002 as compared to the same period in 2001. The 2001 amount
represents acquisitions of Midwestern Gas Transmission and the assets of Border
Midstream Services in April 2001 and the cash portion of the purchase price of
Bear Paw Energy in March 2001. The purchase of Bear Paw Energy also involved the
issuance of 5.7 million common units valued at $183.0 million, for a total
purchase price of $381.7 million.
Capital expenditures of $27.5 million for the first half of 2002 included
$21.9 million for the natural gas gathering and processing segment and $5.2
million for the interstate natural gas pipelines segment. For the same period in
2001, capital expenditures were $48.0 million, which includes $31.7 million for
gas gathering and processing facilities and $16.3 million for interstate natural
gas pipeline facilities. The expenditures for interstate natural gas pipeline
facilities in 2001 include $12.4 million for Northern Border Pipeline's Project
2000.
Total capital expenditures and investments in unconsolidated affiliates
for 2002 are estimated to be $70 million, which includes $31 million expended
through the first half of 2002. Capital expenditures for the interstate natural
gas pipelines are estimated to be $23 million, including approximately $14
million for Northern Border Pipeline. Northern Border Pipeline currently
anticipates funding its 2002 capital expenditures primarily by borrowing on debt
facilities and using operating cash flows. Capital expenditures for natural gas
gathering and processing facilities are estimated to be $36 million and
additional investments in unconsolidated affiliates are estimated to be $11
million for 2002. Funds required to meet the capital requirements for 2002 are
anticipated to be provided from debt borrowings, issuance of additional limited
partner interests in the Partnership and operating cash flows. The estimated
capital expenditures and investments do not include any amounts for
acquisitions. If any such acquisitions are made, the Partnership's estimated
capital requirements would be increased, which the Partnership would anticipate
funding from debt borrowings and the issuance of additional limited partner
interests in the Partnership.
19
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities was $77.2 million for the first
half of 2002 as compared to cash flows provided by financing activities of
$290.0 million for the first half of 2001. Cash distributions to the unitholders
and the general partners increased $18.2 million to $71.6 million. The increase
is due to both an increase in the number of common units outstanding and an
increase in the distribution rate. The distribution paid in the first quarter
and second quarter of 2002 was $0.80 per unit as compared to $0.70 per unit paid
in the first quarter of 2001 and $0.7625 per unit paid in the second quarter of
2001.
For 2002, Northern Border Pipeline received net proceeds from the 2002
Pipeline Senior Notes of approximately $223.5 million that were used to reduce
indebtedness outstanding under a previously outstanding credit agreement. During
the first half of 2002, Northern Border Pipeline had net repayments under its
credit agreements of $250.0 million as compared to net borrowings in 2001 of
$5.0 million.
For the first half of 2002, borrowings under the Partnership Credit
Agreement totaled $45.0 million as compared to borrowings of $200.0 million in
the first half of 2001. The net proceeds in the first half of 2001 from the
private offering of the 7.10% Senior Notes totaled approximately $223.2 million.
The proceeds from the 7.10% Senior Notes and the Partnership Credit Agreement
were primarily used to fund the acquisition of Bear Paw Energy, the assets of
Border Midstream Services and Midwestern Gas Transmission discussed previously
and to repay $47.3 million of indebtedness outstanding on a prior credit
facility.
For the first half of 2001, Northern Border Pipeline recognized a decrease
in bank overdraft of $22.4 million. At December 31, 2000, Northern Border
Pipeline reflected the bank overdraft primarily due to rate refund checks
outstanding.
Financing activities for 2001 reflect the issuance of partnership
interests of $173.2 million, which was primarily used to repay amounts borrowed
on the Partnership Credit Agreement of $168.0 million.
In March 2001, the Partnership paid approximately $4.3 million to
terminate forward starting interest rate swap agreements and in April 2002,
Northern Border Pipeline received $2.4 million from the termination of forward
starting interest rate swap agreements (see Note 4 - Notes to Consolidated
Financial Statements).
NEW ACCOUNTING PRONOUNCEMENTS
See Note 7 - Notes to Consolidated Financial Statements.
UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON THE PARTNERSHIP'S BUSINESS
As more fully discussed in the Partnership's Annual Report on Form 10-K
for the year ended December 31, 2001, on December 2, 2001, Enron Corp. filed a
voluntary petition for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code. Certain wholly owned Enron subsidiaries, including ENA,
have also filed for Chapter 11 bankruptcy protection. ENA was a party to shipper
contracts obligating ENA to pay demand charges for approximately 3.4% of
Northern Border Pipeline's capacity. On June 13, 2002, the Bankruptcy Court
approved a Stipulation and Order entered into on May 15, 2002, by ENA and
Northern Border Pipeline pursuant to which ENA agreed that all but one of the
shipper contracts, representing 1.7% of pipeline capacity, will be deemed
rejected and terminated. ENA must effect a permanent release of the remaining
contract capacity or assume
20
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
or reject the remaining contract by October 31, 2002. Northern Border Pipeline
posted the available capacity and awarded approximately 94% of the capacity at
maximum rates for varying terms. Payment received by Northern Border Pipeline
for the capacity awarded will mitigate claims against ENA. For the period from
January to June 2002, Northern Border Pipeline has realized lost revenues of
approximately $1.8 million for ENA's capacity. If it is unable to market the
remaining capacity, Northern Border Pipeline has estimated its financial
exposure remaining for 2002 to be approximately $1.7 million in revenues.
Northern Border Pipeline is uncertain regarding the amount of damages for breach
of contract or other claims that it will be able to establish in the bankruptcy
proceeding, and it cannot predict the amounts, if any, that it will collect or
the timing of collection. The Partnership believes, however, that any such
failure to collect will not have a material adverse effect on its financial
condition, and any amounts collected will not be material.
On May 3, 2002, Enron presented to the creditors committee a proposal
under which certain of Enron's core energy assets would be separated from
Enron's bankruptcy estate and operated prospectively as a new integrated power
and pipeline company. Northern Plains Natural Gas Company and Pan Border Gas
Company, general partners of the Partnership, are proposed to be included in
this company. If the creditors committee endorses this proposal, the inclusion
of Northern Plains and Pan Border in the new company would be subject to a
Section 363 auction under the supervision of the Bankruptcy Court. There is no
assurance that Enron's proposal will be adopted as proposed. Even if adopted as
proposed, there is no assurance as to whether Northern Plains and Pan Border
would ultimately be included in the new company or sold to a different bidder in
a Section 363 auction. The Partnership plans to continue to monitor developments
at Enron, to continue to assess the impact on the Partnership of its existing
agreements and relationships with Enron.
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 the Partnership'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 the Partnership's estimated capital expenditures
and equity investments in 2002. 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 the
December 2, 2001 filing by Enron of a voluntary petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code, industry
results, future demand for natural gas, availability of supplies of Canadian
natural gas, the ability to market pipeline capacity on favorable terms,
political and regulatory developments that impact FERC proceedings involving the
interstate natural gas pipelines, the interstate natural gas pipelines' success
in sustaining their positions in such proceedings or the success of intervenors
in opposing their 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.
21
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
The Partnership may be exposed to market risk through changes in commodity
prices, exchange rates and 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.
The Partnership has utilized and expects to continue to utilize financial
instruments in the management of interest rate risks and natural gas and natural
gas liquids marketing activities to achieve a more predictable cash flow by
reducing its exposure to interest rate and price fluctuations.
There have not been any material changes in market risk exposures that
would affect the quantitative and qualitative disclosures presented as of
December 31, 2001, in Item 7a of the Partnership's Annual Report on Form 10-K.
For more information on risk management activities, see Note 4 to the
Partnership's consolidated financial statements included elsewhere in this
report.
22
PART II. OTHER INFORMATION
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
An unanticipated release of coal slurry from the pipeline owned by Black
Mesa Pipeline occurred on August 6, 2002. As required under the Consent Decree
entered into by Black Mesa, notification of this release was provided to the
United States Environmental Protection Agency and the Arizona Department of
Environmental Quality. Black Mesa Pipeline will be subject to stipulated
penalties for this release. To date, stipulated penalties have not been assessed
for prior unanticipated releases of coal slurry. Although no assurance can be
given, we believe that such penalties under the terms of the Consent Decree for
all releases will not exceed $100,000.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1) The Partnership filed a Current Report on Form 8-K, dated April 9,
2002, reporting a press release issued by the Partnership that announced that
Moody's Investors Service had assigned a debt rating of Baa2 to the
Partnership's public debt and had affirmed the A3 rating of Northern Border
Pipeline's senior unsecured notes.
2) The Partnership filed a Current Report on Form 8-K, dated May 15, 2002,
reporting a Stipulation and Order entered into by Northern Border Pipeline and
Enron North America Corp.
3) The Partnership filed a Current Report on Form 8-K, dated June 5, 2002,
reporting the consent of KPMG LLP to incorporation by reference in certain
registration statements of its report dated March 8, 2002 which appears in the
December 31, 2001 Annual Report on Form 10-K.
4) The Partnership filed a Current Report on Form 8-K, dated June 26,
2002, reporting the public offering of common units.
23
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 PARTNERS, L.P.
(A Delaware Limited Partnership)
Date: August 14, 2002 By: /s/ Jerry L. Peters
--------------------------------
Jerry L. Peters
Chief Financial and Accounting
Officer
24
INDEX TO EXHIBITS
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.