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, 2000
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)
1111 South 103rd Street
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 [ ]
1 of 16
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NORTHERN BORDER PIPELINE COMPANY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income -
Three Months Ended June 30, 2000 and 1999
and Six Months Ended June 30, 2000 and 1999 3
Balance Sheet - June 30, 2000
and December 31, 1999 4
Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Statement of Changes in Partners' Capital -
Six Months Ended June 30, 2000 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES, NET $77,346 $73,022 $153,587 $146,657
OPERATING EXPENSES
Operations and maintenance 10,854 8,950 19,909 18,052
Depreciation and amortization 14,538 12,895 29,375 25,680
Taxes other than income 7,649 7,389 15,370 14,866
Operating expenses 33,041 29,234 64,654 58,598
OPERATING INCOME 44,305 43,788 88,933 88,059
INTEREST EXPENSE 16,369 14,550 32,658 28,949
OTHER INCOME (EXPENSE) 1,477 (305) 1,882 138
NET INCOME TO PARTNERS $29,413 $28,933 $ 58,157 $ 59,248
<FN>
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(In Thousands)
(Unaudited)
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 36,241 $ 17,310
Accounts receivable 31,595 27,049
Materials and supplies, at cost 5,138 3,645
Under recovered cost of service -- 3,068
Total current assets 72,974 51,072
NATURAL GAS TRANSMISSION PLANT
Property, plant and equipment 2,367,491 2,368,021
Less: Accumulated provision for
depreciation and amortization 664,797 636,627
Property, plant and equipment, net 1,702,694 1,731,394
OTHER ASSETS 13,782 14,225
Total assets $1,789,450 $1,796,691
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt $ 66,000 $ 66,000
Accounts payable 1,443 5,588
Accrued taxes other than income 25,132 26,290
Accrued interest 17,110 16,504
Over recovered cost of service 674 --
Accumulated provision for rate refunds 16,090 2,317
Total current liabilities 126,449 116,699
LONG-TERM DEBT, NET OF CURRENT MATURITIES 823,863 834,459
RESERVES AND DEFERRED CREDITS 10,468 10,698
PARTNERS' CAPITAL 828,670 834,835
Total liabilities and partners' capital $1,789,450 $1,796,691
<FN>
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 58,157 $ 59,248
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 29,507 25,686
Provision for rate refunds 13,773 --
Changes in components of working capital (3,471) (2,517)
Other (703) 838
Total adjustments 39,106 24,007
Net cash provided by operating activities 97,263 83,255
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (3,769) (76,958)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners (64,322) (67,773)
Issuance of long-term debt 15,000 65,000
Retirement of long-term debt (25,000) (15,000)
Long-term debt financing costs (241) --
Net cash used in financing activities (74,563) (17,773)
NET CHANGE IN CASH AND CASH EQUIVALENTS 18,931 (11,476)
Cash and cash equivalents-beginning of period 17,310 37,389
Cash and cash equivalents-end of period $ 36,241 $ 25,913
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 32,419 $ 28,845
Changes in components of working capital:
Accounts receivable $ (4,546) $ (7,511)
Materials and supplies (1,493) 492
Over/under recovered cost of service 3,742 6,904
Accounts payable (622) (1,895)
Accrued taxes other than income (1,158) (428)
Accrued interest 606 (79)
Total $ (3,471) $ (2,517)
<FN>
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(In Thousands)
(Unaudited)
<CAPTION>
TC Northern
PipeLines Border
Intermediate Intermediate Total
Limited Limited Partners'
Partnership Partnership Capital
<S> <C> <C> <C>
Partners' Capital at December 31, 1999 $250,450 $584,385 $834,835
Net income to partners 17,447 40,710 58,157
Distributions to partners (19,296) (45,026) (64,322)
Partners' Capital at June 30, 2000 $248,601 $580,069 $828,670
<FN>
The accompanying notes are an integral part of this financial
statement.
</TABLE>
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PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. The financial statements included herein have been prepared by
Northern Border Pipeline Company ("Northern Border Pipeline")
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,
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, 1999.
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.
2. In October 1998, Northern Border Pipeline filed a certificate
application with the Federal Energy Regulatory Commission
("FERC") to seek approval to expand and extend its pipeline
system into Indiana ("Project 2000"). When completed, Project
2000 would afford shippers on the expanded and extended pipeline
system access to industrial gas consumers in northern Indiana.
The certificate application was subsequently amended by Northern
Border Pipeline in March and December 1999. On March 16, 2000,
the FERC issued an order granting Northern Border Pipeline's
application for a certificate to construct and operate the
proposed facilities. The FERC approved Northern Border
Pipeline's request for rolled-in rate treatment based upon the
proposed project costs. The project has a targeted in-service
date of November 2001. The capital expenditures for the project
are estimated to be approximately $94 million.
3. Northern Border Pipeline filed a rate proceeding with the FERC
in May 1999 for, among other things, a redetermination of its
allowed equity rate of return. The total annual cost of service
increase due to Northern Border Pipeline's proposed changes is
approximately $30 million. A number of Northern Border
Pipeline's shippers and competing pipelines have filed
interventions and protests. In June 1999, the FERC issued an
order in which the proposed changes were suspended until December
1, 1999, after which the proposed changes were implemented with
subsequent billings subject to refund. The June order and a
subsequent clarification issued by the FERC in August 1999 set
for hearing not only Northern Border Pipeline's proposed changes
but also several issues raised by intervenors including the
appropriateness of Northern Border Pipeline's cost of service
tariff; rolled-in rate treatment of The Chicago Project, which
was Northern Border Pipeline's expansion and extension project
placed in service in December 1998; capital project cost
containment mechanism ("PCCM") amount recorded for The Chicago
Project; depreciation schedule and creditworthiness standards.
As agreed to in a prior rate case settlement, the PCCM was
implemented to limit Northern Border Pipeline's ability to
include cost overruns on The Chicago Project in rate base and to
provide incentives for cost underruns. The PCCM amount is
computed by comparing the final cost of The Chicago Project to
the budgeted cost, adjusted for the effects of inflation and
project scope changes as defined in the prior rate case
settlement. Testimony filed by the FERC staff and intervenors in
the current rate case proceeding has proposed changes to the PCCM
computation, which would result in rate base reductions ranging
from $32 million to $43 million.
In June 2000, Northern Border Pipeline reached an agreement in
principle with a majority of its customers and the FERC staff to
settle the issues in the rate case. Terms of the settlement are
confidential until a stipulation and agreement is finalized by
the parties and filed with the FERC for approval. For the three
month and six month periods ending June 30, 2000, respectively,
Northern Border Pipeline recorded a $6.7 million and $13.5
million provision for rate refunds, which reflects the
anticipated refund obligation to its customers. The provision
for rate refunds is netted against operating revenues on the
statement of income. Based upon the agreement in principle, the
procedural schedule in the rate case proceeding has been
suspended until October 2000. While the parties in the rate case
are meeting to finalize the stipulation and agreement, Northern
Border Pipeline can give no assurance whether it will be filed
and subsequently approved by the FERC.
4. Income taxes are the responsibility of the partners and are
not reflected in these financial statements. However, the
Northern Border Pipeline FERC tariff establishes the method of
accounting for and calculating income taxes and requires Northern
Border Pipeline to reflect in its cost of service the income
taxes that would have been paid or accrued if Northern Border
Pipeline were organized during the period as a corporation. As a
result, for purposes of calculating the return allowed by the
FERC, partners' capital and rate base are reduced by the amount
equivalent to the net accumulated deferred income taxes. Such
amounts were approximately $321 million and $316 million at
June 30, 2000 and December 31, 1999, respectively, and are
primarily related to accelerated depreciation and other plant-
related differences.
5. Northern Border Pipeline makes distributions to its general
partners approximately one month following the end of the
quarter. The distribution for the second quarter of 2000 of
approximately $33.8 million was paid August 2, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NORTHERN BORDER PIPELINE COMPANY
Results of Operations
Northern Border Pipeline Company's ("Northern Border
Pipeline") 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. Billings for the firm
transportation agreements are based on contracted volumes to
determine the allocable share of the cost of service and are not
dependent upon the percentage of available capacity actually
used.
Northern Border Pipeline filed a rate proceeding with the FERC
in May 1999 for, among other things, a redetermination of its
allowed equity rate of return. The total annual cost of service
increase due to Northern Border Pipeline's proposed changes is
approximately $30 million. In June 1999, the FERC issued an
order in which the proposed changes were suspended until December
1, 1999, after which the proposed changes were implemented with
subsequent billings subject to refund. In June 2000, Northern
Border Pipeline reached an agreement in principle with a majority
of its customers and the FERC staff to settle the issues in the
rate case. Terms of the settlement are confidential until a
stipulation and agreement is finalized by the parties and filed
with the FERC for approval. For the three month and six month
periods ending June 30, 2000, respectively, Northern Border
Pipeline recorded a $6.7 million and $13.5 million provision for
rate refunds, which reflects the anticipated refund obligation to
its customers. The provision for rate refunds is netted against
operating revenues on the statement of income. While the parties
in the rate case are meeting to finalize the stipulation and
agreement, Northern Border Pipeline can give no assurance whether
it will be filed and subsequently approved by the FERC.
Second Quarter 2000 Compared With Second Quarter 1999
Operating revenues, net increased $4.3 million (6%) for the
second quarter of 2000, as compared to the same period in 1999,
due primarily to recovery of increased operations and maintenance
expense, depreciation and amortization expense and interest
expense.
Operations and maintenance expense increased $1.9 million (21%)
for the second quarter of 2000, as compared to the same period in
1999, due primarily to expenses incurred in connection with
Northern Border Pipeline's pending rate case as well as increased
administrative expenses for the pipeline.
Depreciation and amortization expense increased $1.6 million
(13%) for the second quarter of 2000, as compared to the same
period in 1999, due primarily to an increase in the depreciation
rate applied to transmission plant from 2.0% to 2.3%. The
increase in the depreciation rate was approved as part of a
previous rate case settlement.
Interest expense increased $1.8 million (13%) for the second
quarter of 2000, as compared to the same period in 1999, due
primarily to an increase in interest rates between 1999 and 2000.
Other income increased $1.8 million for the second quarter of
2000, as compared to the same period in 1999, due primarily to
income earned from third-party usage of capacity on Northern
Border Pipeline's microwave system.
Six Months June 30, 2000 Compared With Six Months Ended June 30,
1999
Operating revenues, net increased $6.9 million (5%) for the
first half of 2000, as compared to the same period in 1999, due
primarily to recovery of increased operations and maintenance
expense, depreciation and amortization expense and interest
expense.
Operations and maintenance expense increased $1.9 million (10%)
for the first half of 2000, as compared to the same period in
1999, due primarily to expenses incurred in connection with
Northern Border Pipeline's pending rate case as well as increased
administrative expenses for the pipeline.
Depreciation and amortization expense increased $3.7 million
(14%) for the first half of 2000, as compared to the same period
in 1999, due primarily to an increase in the depreciation rate
applied to transmission plant from 2.0% to 2.3%. The increase in
the depreciation rate was approved as part of a previous rate
case settlement.
Interest expense increased $3.7 million (13%) for the first
half of 2000, as compared to the same period in 1999, due
primarily to an increase in interest rates between 1999 and 2000.
Other income increased $1.7 million for the first half of
2000, as compared to the same period in 1999, due primarily to
income earned from third-party usage of capacity on Northern
Border Pipeline's microwave system.
Liquidity and Capital Resources
General
In August 1999, Northern Border Pipeline completed a private
offering of $200 million of 7.75% Senior Notes due 2009, which
notes were subsequently exchanged in a registered offering for
notes with substantially identical terms ("Senior Notes"). The
proceeds from the Senior Notes were used to reduce indebtedness
under a June 1997 credit agreement.
In June 1997, Northern Border Pipeline entered into a credit
agreement ("Pipeline Credit Agreement") with certain financial
institutions. The Pipeline Credit Agreement is comprised of a
term loan and a $200 million five-year revolving credit facility,
both maturing in June 2002. At June 30, 2000, $429.0 million was
outstanding under the term loan. No funds were outstanding under
the revolving credit facility.
At June 30, 2000, Northern Border Pipeline also had
outstanding $250 million of senior notes issued in a private
placement under a July 1992 note purchase agreement. The note
purchase agreement provides for four series of notes, Series A
through D, maturing between August 2000 and August 2003. The
Series A Notes with a principal amount of $66 million mature in
August 2000. Northern Border Pipeline anticipates borrowing on
the revolving credit facility to repay the Series A Notes.
Short-term liquidity needs will be met by internal sources and
through the revolving credit facility discussed above. Long-term
capital needs may be met through the ability to issue long-term
indebtedness.
Cash Flows From Operating Activities
Cash flows provided by operating activities increased $14.0
million to $97.3 million for the first half of 2000, as compared
to the same period in 1999, primarily due to recovery of
increased depreciation and amortization expense and the billings
collected subject to refund related to Northern Border Pipeline's
current rate proceeding (see Note 3 - Notes to Financial
Statements).
Cash Flows From Investing Activities
Capital expenditures of $3.8 million for the first half of
2000 included $2.3 million for Project 2000 (see Note 2 - Notes
to Financial Statements). For the comparable period in 1999,
capital expenditures were $77.0 million and included $70.4 for
The Chicago Project, which was Northern Border Pipeline's
expansion and extension project placed in service in December
1998. The remaining capital expenditures for 2000 and 1999 were
primarily related to renewals and replacements of existing
facilities.
Total capital expenditures for 2000 are estimated to be $21
million, including $10 million for Project 2000. The remaining
capital expenditures planned for 2000 are for renewals and
replacements of existing facilities. Northern Border Pipeline
currently anticipates funding its 2000 capital expenditures
primarily by using internal sources and borrowing on the
revolving credit facility.
Cash Flows From Financing Activities
Cash flows used in financing activities was $74.6 million for
the first half of 2000, as compared to $17.8 million for the same
period in 1999. Distributions paid to the general partners
decreased $3.5 million to $64.3 million for the first half of
2000 as compared to the same period of 1999. The distribution
for 1999 included seven months' activity, rather than six months,
resulting from a change in the timing of distribution payments.
Borrowings under the Pipeline Credit Agreement decreased $50
million for the first half of 2000 as compared to the same period
in 1999. Borrowings in 1999 were used to finance a portion of
the capital expenditures for The Chicago Project. Repayments on
the Pipeline Credit Agreement increased $10.0 million for the
first half of 2000 as compared to the same period in 1999.
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. Such forward looking
statements include the discussions in "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and in "Notes to Financial Statements" regarding Northern Border
Pipeline's efforts to pursue opportunities to further increase
its capacity and Northern Border Pipeline's efforts to finalize
settlement of its rate case. 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 industry results, future demand for
natural gas, availability of supplies of Canadian natural gas,
political and regulatory developments that impact FERC
proceedings involving Northern Border Pipeline, Northern Border
Pipeline's success in sustaining its positions in such
proceedings or the success of intervenors in opposing Northern
Border Pipeline's positions, Northern Border Pipeline's ability
to replace its rate base as it is depreciated and amortized,
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.
<PAGE>
PART I. FINANCIAL INFORMATION - (Concluded)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline's interest rate exposure results from
the portion of its debt portfolio subject to variable rates. To
mitigate potential fluctuations in interest rates, Northern
Border Pipeline maintains a significant portion of its debt
portfolio in fixed rate debt. Northern Border Pipeline also uses
interest rate swap agreements to manage its level of exposure to
interest rate changes. Since December 31, 1999, there has not
been any material change in Northern Border Pipeline's interest
rate exposure.
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PART II. OTHER INFORMATION
NORTHERN BORDER PIPELINE COMPANY
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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 PIPELINE COMPANY
(A Texas General Partnership)
Date: August 11, 2000 By: JERRY L. PETERS
Jerry L. Peters
Vice President, Finance and
Treasurer
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