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 March 31, 1998
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
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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 March 31, 1998 and 1997 3
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statement of Changes in Partners'
Capital - Three Months Ended March 31, 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
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<TABLE>
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)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
OPERATING REVENUE $52,820 $46,646
OPERATING EXPENSES
Operations and maintenance 10,582 7,125
Depreciation and amortization 10,420 9,626
Taxes other than income 6,168 6,077
Operating expenses 27,170 22,828
OPERATING INCOME 25,650 23,818
INTEREST EXPENSE 9,791 7,861
OTHER INCOME
Allowance for funds used
during construction
Debt 2,726 281
Equity 1,625 117
Other income, net 802 2,716
Other income 5,153 3,114
MINORITY INTERESTS IN NET INCOME 6,079 5,600
NET INCOME TO PARTNERS $14,933 $13,471
NET INCOME PER UNIT $ .50 $ .50
NUMBER OF UNITS USED IN COMPUTATION 29,338 26,200
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 49,701 $ 106,757
Accounts receivable 18,427 19,919
Materials and supplies, at cost 4,506 4,458
Total current assets 72,634 131,134
TRANSMISSION PLANT
Property, plant and equipment 1,817,759 1,749,862
Less: Accumulated provision for
depreciation and amortization 632,466 631,498
Net property, plant and equipment 1,185,293 1,118,364
OTHER ASSETS 17,586 17,419
Total assets $1,275,513 $1,266,917
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,591 $ 2,523
Accounts payable 35,648 64,668
Accrued taxes other than income 22,291 20,508
Accrued interest 5,533 10,766
Over recovered cost of service 6,856 4,601
Total current liabilities 72,919 103,066
LONG-TERM DEBT, net of current maturities 488,158 478,832
MINORITY INTERESTS IN PARTNERS' CAPITAL 198,650 174,424
RESERVES AND DEFERRED CREDITS 9,882 9,867
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
General Partners 10,118 10,015
Common Units 400,223 394,587
Subordinated Units 95,563 96,126
Total partners' capital 505,904 500,728
Total liabilities and partners' capital $1,275,513 $1,266,917
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
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)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 14,933 $ 13,471
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 10,423 9,641
Minority interests in net income 6,079 5,600
Provision for rate refunds -- 20,652
Changes in other current assets and liabilities (586) (7,902)
Other (1,777) (411)
Total adjustments 14,139 27,580
Net cash provided by operating activities 29,072 41,051
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment, net (103,912) (3,131)
Other -- 182
Net cash used in investing activities (103,912) (2,949)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to Unitholders and
General Partners (17,219) (14,704)
Contributions received from
(distributions to) Minority Interests, net 18,147 (9,664)
Issuance of partnership interests, net 7,462 --
Issuance of long-term debt 10,000 --
Retirement of long-term debt (606) --
Net cash provided by
(used in) financing activities 17,784 (24,368)
NET CHANGE IN CASH AND CASH EQUIVALENTS (57,056) 13,734
Cash and cash equivalents-beginning of period 106,757 41,390
Cash and cash equivalents-end of period $ 49,701 $ 55,124
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 12,101 $ 12,837
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
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)
<CAPTION>
General Common Subordinated Partners'
Partners Units Units Capital
<S> <C> <C> <C> <C>
Partners' Capital at December 31, 1997 $10,015 $394,587 $96,126 $500,728
Net income to partners 298 11,432 3,203 14,933
Issuance of partnership interests, net 149 7,387 (74) 7,462
Distributions to partners (344) (13,183) (3,692) (17,219)
Partners' Capital at March 31, 1998 $10,118 $400,223 $95,563 $505,904
<FN>
The accompanying notes are an integral part of this consolidated
financial statement.
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Concluded)
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, 1997.
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").
Black Mesa Holdings, Inc. and Black Mesa Pipeline Operations,
L.L.C. (collectively "Black Mesa") and Williams Technologies,
Inc. ("WTI") are wholly-owned subsidiaries of the Partnership.
2. Property, plant and equipment balances include construction
work in progress of approximately $269.4 million and $211.4
million at March 31, 1998 and December 31, 1997, respectively.
Approximately $254.4 million and $197.9 million of construction
work in progress at March 31, 1998 and December 31, 1997,
respectively, represents project-to-date costs on Northern Border
Pipeline's expansion and extension of its pipeline system from
its current terminus near Harper, Iowa to a point near Manhattan,
Illinois ("The Chicago Project"). At March 31, 1998 and December
31, 1997, respectively, approximately $16.0 million and $44.2
million of project costs incurred but not paid for The Chicago
Project were recorded in accounts payable and property, plant and
equipment on the consolidated balance sheet and were excluded
from the changes in other current assets and liabilities and
capital expenditures for property, plant and equipment, net on
the consolidated statement of cash flows. The estimated cost of
The Chicago Project, as filed with the Federal Energy Regulatory
Commission, is $839 million and it is expected to be ready for
service in the fourth quarter of 1998.
3. On April 20, 1998, the Partnership declared a cash
distribution of $0.575 per unit for the first quarter ended March
31, 1998. The distribution is payable May 15, 1998, to
unitholders of record as of April 30, 1998. The indicated annual
distribution rate is $2.30 per unit.
<PAGE>
PAGE 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. 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.
In August 1997, after receiving final authorization from the
FERC, Northern Border Pipeline commenced construction of
facilities to expand and extend its pipeline system from its
current terminus near Harper, Iowa to a point near Manhattan,
Illinois ("The Chicago Project") (See Note 2 - Notes to
Consolidated Financial Statements). The estimated cost of The
Chicago Project, as filed with the FERC, is $839 million. While
the Partnership expects that Northern Border Pipeline will
complete The Chicago Project in the fourth quarter of 1998 within
the budgeted cost, certain events and conditions could delay
completion or increase the actual cost. These include possible
delays in obtaining necessary rights-of-way and costs and delays
due to inclement weather or other problems in completing the
physical construction of the pipeline facilities. Under a
settlement agreement in a recent rate case, Northern Border
Pipeline agreed to a capital project cost containment mechanism
which would limit its ability to include cost overruns in its
rate base.
As a result of acquisitions in May 1997 and December 1997, the
Partnership increased its ownership position in Black Mesa
Holdings, Inc. and Black Mesa Pipeline Operations, L.L.C.
(collectively "Black Mesa") to 100% and began to reflect Black
Mesa in the Partnership's consolidated financial statements.
Prior to May 1997, the Partnership's investment in Black Mesa had
been accounted for using the equity method. Black Mesa, through
a wholly-owned subsidiary, transports coal slurry through a 273-
mile, 18-inch diameter pipeline (the "Black Mesa Pipeline") that
originates at a coal mine in Kayenta, Arizona and ends at the
1,500 megawatt Mohave Power Station located in Laughlin, Nevada.
Black Mesa Pipeline is the sole source of fuel for the Mohave
plant. The capacity of Black Mesa Pipeline is fully contracted
to the Mohave Power Station coal supplier through the year 2005.
William's Technologies, Inc. ("WTI"), a wholly-owned subsidiary
of the Partnership and a leading consultant in slurry pipeline
technology, is the operator of Black Mesa, pursuant to a
management agreement.
First Quarter 1998 Compared With First Quarter 1997
Operating revenue increased $6.2 million for the first quarter
of 1998, as compared to the same period in 1997, due primarily to
$5.3 million of revenues from the combined operations of Black
Mesa and WTI. Operating revenue attributable to Northern Border
Pipeline increased $0.9 million (2%) due primarily to returns on
higher invested equity.
Operations and maintenance expense increased $3.5 million for
the first quarter of 1998, from the comparable period in 1997,
due primarily to operations and maintenance expense from the
combined operations of Black Mesa and WTI.
Depreciation and amortization expense increased $0.8 million
for the first quarter of 1998, as compared to the same period in
1997, due primarily to depreciation and amortization expense from
the combined operations of Black Mesa and WTI.
Interest expense increased $1.9 million for the first quarter
of 1998, as compared to the same period in 1997. Interest
expense attributable to Northern Border Pipeline increased $1.3
million (16%) due primarily to an increase in average debt
outstanding, reflecting amounts borrowed by Northern Border
Pipeline to finance a portion of the capital expenditures for The
Chicago Project. The remainder of the increase in interest
expense is from the combined operations of Black Mesa and WTI.
Other income increased $2.0 million for the first quarter of
1998, as compared to the same period in 1997. The increase was
primarily due to a $4.0 million increase in the allowance for
funds used during construction. The increase in the allowance
for funds used during construction primarily relates to Northern
Border Pipeline's expenditures for The Chicago Project (See "Cash
Flows From Investing Activities"). Other income for 1997
included $2.0 million received by Northern Border Pipeline for
vacating certain microwave frequency bands.
Liquidity and Capital Resources
General
In June 1997, Northern Border Pipeline entered into a credit
agreement ("Pipeline Credit Agreement") with certain financial
institutions to borrow up to an aggregate principal amount of
$750 million. The Pipeline Credit Agreement is comprised of a
$200 million five-year revolving credit facility to be used for
the retirement of Northern Border Pipeline's bank loan agreements
and for general business purposes, and a $550 million three-year
revolving credit facility to be used for the construction of The
Chicago Project. The three-year revolving credit facility may,
if certain conditions are met, be converted to a term loan
maturing in June 2002. At March 31, 1998, $127.5 million and
$91.5 million had been borrowed on the five-year and three-year
revolving credit facilities, respectively.
In November 1997, the Partnership entered into a credit
agreement ("Partnership Credit Agreement") with certain financial
institutions to borrow up to an aggregate principal amount of
$175 million under a revolving credit facility. The Partnership
Credit Agreement is to be used for interim funding of the
Partnership's required capital contributions to Northern Border
Pipeline for construction of The Chicago Project. The amount
available under the Partnership Credit Agreement is reduced to
the extent the Partnership issues additional limited partner
interests to fund the Partnership's capital contributions for The
Chicago Project in excess of $25 million. The public offerings
of Common Units discussed in the following paragraph reduced the
amount available under the Partnership Credit Agreement to $104
million. After The Chicago Project has been placed in service,
the Partnership Credit Agreement allows the Partnership to borrow
any undrawn amounts up to an aggregate principal amount of $40
million for general business purposes. The maturity date of the
Partnership Credit Agreement will be November 2000 if Northern
Border Pipeline converts its $550 million three-year revolving
credit facility to a term loan; otherwise the maturity date is
June 2000. In May 1998, the Partnership made an initial
borrowing on the Partnership Credit Agreement of $57 million.
In November 1997, the Partnership filed a registration
statement with the Securities and Exchange Commission for a
proposed offering of $225 million in Common Units. In December
1997, the Partnership sold, through an underwritten public
offering, 2,750,000 Common Units. In conjunction with the
issuance of the Common Units, the Partnership's General Partners
made capital contributions to the Partnership to maintain a 2%
general partner interest in accordance with the partnership
agreements. The net proceeds of approximately $90.9 million are
being used by the Partnership to fund a portion of the capital
contributions to Northern Border Pipeline for construction of The
Chicago Project. As part of the underwritten public offering,
the Partnership granted the underwriters an over-allotment option
to purchase a limited number of additional Common Units. This
option was exercised on January 5, 1998, and the Partnership sold
an additional 225,000 Common Units resulting in additional net
proceeds, including the general partners' capital contributions,
of approximately $7.5 million.
Short-term liquidity needs will be met by internal sources and
through the lines of credit discussed above. 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 either through the registration statement filed
in November 1997 or separate registrations.
Cash Flows From Operating Activities
Cash flows provided by operating activities decreased $12.0
million to $29.1 million for the first quarter of 1998, as
compared to the same period in 1997. Operating activities for
1997 included amounts collected by Northern Border Pipeline that
were subsequently refunded to its shippers in October 1997 in
accordance with its rate case settlement.
Cash Flows From Investing Activities
Capital expenditures of $103.9 million for the first quarter
of 1998 include $102.2 million for The Chicago Project. The
remaining capital expenditures for 1998 are primarily related to
renewals and replacements of Northern Border Pipeline's existing
facilities. For the comparable period in 1997, capital
expenditures were $3.1 million, which included $2.9 million for
The Chicago Project.
Total capital expenditures for 1998 are estimated to be $638
million for The Chicago Project and $9 million for renewals and
replacements of the existing facilities. Capital expenditures
for linepack gas, if Northern Border Pipeline's filing to acquire
the linepack gas is approved by the FERC, would be approximately
$12 million in 1998. Northern Border Pipeline anticipates
funding approximately 65% of its 1998 capital expenditures by
borrowing on the Pipeline Credit Agreement. Funds required to
meet the remainder of Northern Border Pipeline's capital
expenditures will be provided primarily from capital
contributions from the Partnership and minority interest holders.
The Partnership intends to use a combination of proceeds from the
sale of Common Units, capital contributions from its general
partners and borrowings on the Partnership Credit Agreement to
finance its capital contributions to Northern Border Pipeline.
The Partnership anticipates selling additional Common Units to
repay amounts borrowed on the Partnership Credit Agreement to
finance capital contributions for The Chicago Project.
Cash Flows From Financing Activities
Cash flows provided by financing activities were $17.8 million
for the first quarter of 1998, as compared to cash flows used in
financing activities of $24.4 million for the comparable period
in 1997. Cash distributions to the common and subordinated
unitholders and the general partners increased $2.5 million
reflecting the additional Common Units outstanding and an
increase in the quarterly distribution from $0.55 per Unit to
$0.575 per Unit. Net cash contributions received from minority
interest holders were $18.1 million for the first quarter of
1998, which included amounts needed to finance a portion of the
capital expenditures for The Chicago Project, as compared to cash
distributions of $9.7 million for the comparable period in 1997.
Financing activities for the first quarter of 1998 reflect $7.5
million in net proceeds from the issuance of 225,000 Common Units
and related capital contributions by the Partnership's general
partners in January 1998. Additionally in the first quarter of
1998, borrowings under the Pipeline Credit Agreement totaled $10
million used to finance a portion of the capital expenditures for
The Chicago Project.
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 Consolidated Financial Statements" on The Chicago
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 extreme weather conditions that could delay construction,
the failure of vendors and contractors to adhere to contract
delivery and timing specifications, the resolution of certain
state and local pipeline right-of-way issues, 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.
<PAGE>
PART II. OTHER INFORMATION
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
<PAGE>
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: May 13, 1998 By: JERRY L. PETERS
Jerry L. Peters
Chief Financial and Accounting
Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 928
<SECURITIES> 48,773
<RECEIVABLES> 18,427
<ALLOWANCES> 0
<INVENTORY> 4,506
<CURRENT-ASSETS> 72,634
<PP&E> 1,817,759
<DEPRECIATION> 632,466
<TOTAL-ASSETS> 1,275,513
<CURRENT-LIABILITIES> 72,919
<BONDS> 488,158
0
0
<COMMON> 0
<OTHER-SE> 505,904
<TOTAL-LIABILITY-AND-EQUITY> 1,275,513
<SALES> 0
<TOTAL-REVENUES> 52,820
<CGS> 0
<TOTAL-COSTS> 27,170
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,791
<INCOME-PRETAX> 14,933
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,933
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
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