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 September 30, 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 18
<PAGE>
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 September 30, 1998 and 1997
and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheet - September 30, 1998
and December 31, 1997 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in Partners'
Capital - Nine Months Ended September 30, 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
<PAGE>
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUE $54,442 $52,738 $161,044 $147,453
OPERATING EXPENSES
Operations and maintenance 8,275 10,625 28,221 26,266
Depreciation and amortization 10,915 10,369 31,982 29,832
Taxes other than income 5,530 6,007 17,752 18,045
Operating expenses 24,720 27,001 77,955 74,143
OPERATING INCOME 29,722 25,737 83,089 73,310
INTEREST EXPENSE 13,441 8,951 34,046 25,002
OTHER INCOME
Allowance for funds used
during construction
Debt 5,811 1,023 12,022 1,874
Equity 3,408 369 7,921 801
Other income (expense), net 625 (87) 2,014 4,207
Other income 9,844 1,305 21,957 6,882
MINORITY INTERESTS IN NET INCOME 8,083 5,362 21,615 16,237
NET INCOME TO PARTNERS $18,042 $12,729 $ 49,385 $ 38,953
NET INCOME PER UNIT $ .60 $ .47 $ 1.65 $ 1.45
NUMBER OF UNITS USED IN COMPUTATION 29,347 26,325 29,344 26,256
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<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>
September 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 43,001 $ 106,757
Accounts receivable 18,709 19,919
Materials and supplies, at cost 4,564 4,458
Under recovered cost of service 1,381 --
Total current assets 67,655 131,134
TRANSMISSION PLANT
Property, plant and equipment 2,228,814 1,749,862
Less: Accumulated provision for
depreciation and amortization 609,534 631,498
Net property, plant and equipment 1,619,280 1,118,364
OTHER ASSETS 21,673 17,419
Total assets $1,708,608 $1,266,917
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,732 $ 2,523
Accounts payable 104,726 64,668
Accrued taxes other than income 21,920 20,508
Accrued interest 6,922 10,766
Over recovered cost of service -- 4,601
Total current liabilities 136,300 103,066
LONG-TERM DEBT, net of current maturities 819,756 478,832
MINORITY INTERESTS IN PARTNERS' CAPITAL 236,777 174,424
RESERVES AND DEFERRED CREDITS 9,857 9,867
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
General Partners 10,119 10,015
Common Units 400,233 394,587
Subordinated Units 95,566 96,126
Total partners' capital 505,918 500,728
Total liabilities and partners' capital $1,708,608 $1,266,917
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 49,385 $ 38,953
Adjustments to reconcile net income to partners
to net cash provided by operating activities:
Depreciation and amortization 31,994 29,835
Minority interests in net income 21,615 16,237
Provision for rate refunds -- 40,403
Allowance for equity funds used
during construction (7,921) (801)
Changes in other current assets and liabilities (7,155) (1,326)
Other (4,201) 485
Total adjustments 34,332 84,833
Net cash provided by operating activities 83,717 123,786
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment, net (485,086) (69,887)
Acquisition and consolidation of businesses -- 3,374
Other -- 465
Net cash used in investing activities (485,086) (66,048)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to Unitholders and
General Partners (51,657) (44,182)
Contributions received from
(distributions to) Minority Interests, net 40,738 (17,938)
Issuance of partnership interests, net 7,462 71
Issuance of long-term debt 343,000 160,000
Long-term debt financing costs (63) (682)
Retirement of long-term debt (1,867) (128,075)
Repayment of note payable -- (10,000)
Net cash provided by
(used in) financing activities 337,613 (40,806)
NET CHANGE IN CASH AND CASH EQUIVALENTS (63,756) 16,932
Cash and cash equivalents-beginning of period 106,757 41,390
Cash and cash equivalents-end of period $ 43,001 $ 58,322
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized) $ 25,502 $ 29,449
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<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>
Total
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 988 37,809 10,588 49,385
Issuance of partnership interests, net 149 7,387 (74) 7,462
Distributions to partners (1,033) (39,550) (11,074) (51,657)
Partners' Capital at September 30, 1998 $10,119 $400,233 $95,566 $505,918
<FN>
The accompanying notes are an integral part of this consolidated
financial statement.
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have
been prepared by Northern Border Partners, L.P. (the
"Partnership") without audit pursuant to the rules and
regulations of the Securities and Exchange Commission.
Accordingly, they reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
financial results for the interim periods. Certain information
and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations.
However, the Partnership believes that the disclosures are
adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto
included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 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").
The remaining general partner interests in Northern Border
Pipeline are owned by wholly-owned subsidiaries of TransCanada
PipeLines Limited ("TransCanada"). Black Mesa Holdings, Inc.,
Black Mesa Pipeline Operations, L.L.C. and Williams Technologies,
Inc. are wholly-owned subsidiaries of the Partnership.
2. Property, plant and equipment balances include construction
work in progress of approximately $649.2 million and $211.4
million at September 30, 1998 and December 31, 1997,
respectively. Approximately $648.1 million and $197.9 million of
construction work in progress at September 30, 1998 and December
31, 1997, respectively, represent 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
September 30, 1998 and December 31, 1997, respectively,
approximately $84.1 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 budgeted 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 December
1998.
3. In June 1998, Pan-Alberta Gas (U.S.) Inc. ("PAGUS"), Northern
Border Pipeline's largest shipper, signed amendments to its
transportation contracts covering 741 million cubic feet per day
of capacity. The amendments extend the contracts for two years
through October 2003.
PAGUS became an affiliate of Northern Border Pipeline after
the merger of NOVA Corporation and TransCanada effective July 2,
1998. At the time of the merger, the parent company of PAGUS was
a subsidiary of NOVA Corporation. On August 6, 1998, Pan-Alberta
Gas Ltd., the parent company of PAGUS, announced the pending sale
of its business, once certain conditions are met.
4. During September 1998, Northern Border Pipeline executed
anticipatory hedge transactions with an aggregate notional amount
of $150 million to lock in the interest rate for a planned
issuance of fixed rate debt during 1999. The average effective
interest rate on the transactions, based on ten-year U.S.
Treasury Notes, is 4.90%. At September 30, 1998, the estimated
fair value which would be payable to terminate the anticipatory
hedge transactions, taking into account current interest rates,
was approximately $5 million.
5. On October 19, 1998, the Partnership declared a cash
distribution of $0.575 per unit for the third quarter ended
September 30, 1998. The distribution is payable November 13,
1998, to unitholders of record as of October 30, 1998. The
indicated annual distribution rate is $2.30 per unit.
6. In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No.
133), which establishes accounting and reporting standards
requiring that every derivative instrument be recorded on the
balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999, but may be implemented as of the beginning
of any fiscal quarter after issuance. Adoption of the statement
is not expected to have a material effect on the Partnership's
consolidated financial position or results of operation.
7. Certain balances in the 1997 financial statements have been
reclassified to be consistent with current presentation.
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES
Results of Operations
Northern Border Partners, L.P. (the "Partnership") owns a 70%
general partner interest in Northern Border Pipeline Company
("Northern Border Pipeline"). Northern Border Pipeline's revenue
is derived from agreements with various shippers for the
transportation of natural gas. It transports gas under a Federal
Energy Regulatory Commission ("FERC") regulated tariff that
provides an opportunity to recover all of the operations and
maintenance costs of the pipeline, taxes other than income taxes,
interest, depreciation and amortization, an allowance for income
taxes and a regulated return on equity. Northern Border Pipeline
is generally allowed to collect from its shippers a return on
regulated rate base as well as recover that rate base through
depreciation and amortization. The return amount Northern Border
Pipeline may collect from its shippers declines as the rate base
is recovered. 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). Northern Border Pipeline is
projecting completion of The Chicago Project in December 1998.
The completion date is sensitive to weather conditions that would
be adverse to construction activity or other problems in
completing physical construction of the pipeline facilities. The
budgeted cost of The Chicago Project, as filed with the FERC, is
$839 million. As a result of certain events and conditions
encountered during construction activities on The Chicago
Project, Northern Border Pipeline expects the final cost of the
project to exceed the budgeted cost currently on file with the
FERC. In 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. However, the settlement agreement requires the
budgeted cost be adjusted for costs attributable to changes in
project scope, as defined by the settlement agreement. Northern
Border Pipeline is in the process of evaluating ongoing
construction activities on The Chicago Project for changes in
project scope. Until the final cost of the project and the
budgeted cost, as adjusted for changes in project scope, are
determined, Northern Border Pipeline is unable to quantify what
amounts, if any, could be excluded from rate base.
As a result of acquisitions during 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 reflects Black Mesa in the Partnership's
consolidated financial statements. Prior to June 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.
Williams 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.
Third Quarter 1998 Compared With Third Quarter 1997
Operating revenue increased $1.7 million for the third quarter
of 1998, as compared to the same period in 1997. Operating
revenue for Northern Border Pipeline increased $1.6 million due
primarily to returns on higher levels of invested equity.
Operations and maintenance expense decreased $2.4 million for
the third quarter of 1998, as compared to the same period in
1997, primarily due to a regulatory credit of $2.5 million
recorded by Northern Border Pipeline in the third quarter of
1998. During the construction of The Chicago Project, Northern
Border Pipeline has placed certain new facilities into service to
maintain gas flow at firm contracted capacity while existing
facilities are being modified. The regulatory credit offsets the
increase in cost of service for the new facilities placed in
service to date. Northern Border Pipeline is allowed to recover
the regulatory credit from its shippers over a ten-year period
commencing with the in-service date of The Chicago Project.
Taxes other than income decreased $0.5 million for the third
quarter of 1998, as compared to the same period in 1997,
primarily due to true-ups made in 1998 for prior year ad valorem
taxes and lower estimated current year ad valorem taxes for
Northern Border Pipeline.
Interest expense increased $4.5 million for the third quarter
of 1998, as compared to the same period in 1997. Interest
expense attributable to Northern Border Pipeline and the
Partnership increased $4.6 million due primarily to an increase
in average debt outstanding, reflecting amounts borrowed to
finance a portion of the capital expenditures for The Chicago
Project.
Other income increased $8.5 million for the third quarter of
1998, as compared to the same period in 1997. The increase was
primarily due to a $7.8 million increase in the debt and equity
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").
Nine Months September 30, 1998 Compared With Nine Months Ended
September 30, 1997
Operating revenue increased $13.6 million for the nine months
ended September 30, 1998, as compared to the same period in 1997.
Operating revenue from the combined operations of Black Mesa and
WTI was $15.6 million in 1998 as compared to $7.1 million in
1997, which represented four months of revenue. Operating
revenue attributable to Northern Border Pipeline increased $5.1
million due primarily to returns on higher levels of invested
equity.
Operations and maintenance expense increased $2.0 million for
the nine months ended September 30, 1998, as compared to the same
period in 1997. Operations and maintenance expense from the
combined operations of Black Mesa and WTI was $10.4 million in
1998 as compared to $4.4 million in 1997, which represented four
months of expense. Operations and maintenance expense
attributable to Northern Border Pipeline decreased $4.1 million
primarily due to a regulatory credit recorded in 1998. During
the construction of The Chicago Project, Northern Border Pipeline
has placed certain new facilities into service to maintain gas
flow at firm contracted capacity while existing facilities are
being modified. A regulatory credit of approximately $4.7
million, recorded in the nine months ended September 30, 1998,
offsets the increase in cost of service for the new facilities
placed in service to date. Northern Border Pipeline is allowed
to recover the regulatory credit from its shippers over a ten-
year period commencing with the in-service date of The Chicago
Project.
Depreciation and amortization expense increased $2.2 million
for the nine months ended September 30, 1998, as compared to the
same period in 1997. Depreciation and amortization expense from
the combined operations of Black Mesa and WTI was $1.9 million in
1998 as compared to $0.8 million in 1997, which represented four
months of expense. Depreciation and amortization expense
attributable to Northern Border Pipeline increased $1.1 million
primarily due to facilities that were placed in service in 1998.
Interest expense increased $9.0 million for the nine months
ended September 30, 1998, as compared to the same period in 1997.
Interest expense attributable to Northern Border Pipeline and the
Partnership increased $8.1 million due primarily to an increase
in average debt outstanding, reflecting amounts borrowed 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, which was
$1.7 million for 1998 as compared to $0.8 million for four months
in 1997.
Other income increased $15.1 million for the nine months ended
September 30, 1998, as compared to the same period in 1997. The
increase was primarily due to a $17.3 million increase in the
debt and equity 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 $2.8 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 September 30, 1998, $127.5 million and
$346.5 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. At September 30, 1998, $78 million had been borrowed
on the Partnership Credit Agreement.
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 $40.1
million to $83.7 million for the nine month period ended
September 30, 1998, as compared to the same period in 1997.
Operating activities for the 1997 period included $40.4 million
collected by Northern Border Pipeline that was subsequently
refunded to its shippers in October 1997 in accordance with its
rate case settlement.
Cash Flows From Investing Activities
Capital expenditures of $485.1 million for the nine months
ended September 30, 1998 include $474.4 million for The Chicago
Project and $10.0 million for linepack gas acquired from Northern
Border Pipeline's shippers. The remaining capital expenditures
for 1998 are primarily related to renewals and replacements of
the existing facilities. For the comparable period in 1997,
capital expenditures were $69.9 million, which included $57.2
million for The Chicago Project.
Total capital expenditures for 1998 are estimated to be $683
million for The Chicago Project, $12 million for linepack gas and
$10 million for renewals and replacements of the existing
facilities. 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 $337.6
million for the nine months ended September 30, 1998, as compared
to cash flows used in financing activities of $40.8 million for
the comparable period in 1997. Cash distributions to the common
and subordinated unitholders and the general partners increased
$7.5 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 $40.7 million for the nine months
ended September 30, 1998, which included amounts needed to
finance a portion of the capital expenditures for The Chicago
Project, as compared to net cash distributions of $17.9 million
for the comparable period in 1997. Financing activities for 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 nine months
ended September 30, 1998, borrowings under the Pipeline Credit
Agreement and Partnership Credit Agreement totaled $343.0 million
and were used to finance a portion of the capital expenditures for
The Chicago Project. For the comparable period in 1997, borrowings
under the Pipeline Credit Agreement of $160.0 million were used
primarily to retire amounts related to Northern Border Pipeline's
existing bank loan and credit agreements of $137.5 million.
Year 2000
The Partnership and its subsidiaries, similar to most
businesses, rely heavily on information systems technology to
operate in an efficient and effective manner. Much of this
technology takes the form of computers and associated hardware
for data processing and analysis, but, in addition, a great deal
of information processing technology is embedded in
microelectronic devices. The Year 2000 problem results from the
use in computer hardware and software of two digits rather than
four digits to define the applicable year. As a result, computer
programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If not
corrected, many computer applications could fail or create
erroneous results. The effects of the Year 2000 problem are
compounded because of the interdependence of computer and
telecommunication systems in the United States and throughout the
world. This interdependence is true for the Partnership, its
subsidiaries and their respective suppliers and customers.
The Partnership and its subsidiaries have developed a plan,
which will be modified as events warrant, to address Year 2000
problems (the "Plan"). The aim of the Plan is to take reasonable
steps to prevent mission-critical functions from being impaired
due to the Year 2000 problem. "Mission-critical" functions are
those critical functions whose loss would cause an immediate
stoppage of or significant impairment to major business areas
(a major business area is one of material importance to the
Partnership's and its subsidiaries' businesses). The Partnership
and its subsidiaries are committed to allocating the resources
necessary to implement the Plan. A core team of employees has
been established to implement the Plan ("the Y2K Team"). The
Plan includes developing a comprehensive component inventory of
computer hardware, software, embedded chips and third-party
interfaces; assessing the risk of non-compliance of each component;
identifying the impact of any component failure; assessing Year
2000 compliance of each component; identifying and implementing
solutions for non-compliance of components; testing of solutions
implemented; and developing contingency plans for critical
components and systems. The Y2K Team expects to complete
development of the component inventory during the fourth quarter
of 1998. The testing of components related to computer hardware,
software and embedded chips, remediation of problems identified
and testing of corrections made, to the maximum practical extent,
is planned to be completed by the first quarter of 1999.
The Plan recognizes that the computer, telecommunications and
other systems ("Outside Systems") of outside entities ("Outside
Entities") have the potential for major, mission-critical, adverse
effects on the conduct of the Partnership's and its subsidiaries'
businesses. The Partnership and its subsidiaries do not have
control of these Outside Systems. However, the Plan includes an
ongoing process of identifying and contacting Outside Entities
whose systems have or may have a substantial effect on the
Partnership's and its subsidiaries' ability to continue to
conduct the mission-critical aspects of their businesses without
disruption from Year 2000 problems. The Plan envisions the
Partnership and its subsidiaries attempting to inventory and
assess the extent to which these Outside Systems may not be
Year 2000 compatible. The Y2K Team will attempt reasonably to
coordinate with these Outside Entities in an ongoing effort to obtain
assurances these Outside Systems will be Year 2000 compatible well
before January 1, 2000.
It is important to recognize that the process of inventorying,
assessing, analyzing, converting (where necessary), testing,
and developing contingency plans for mission-critical items in
anticipation of the Year 2000 event are necessarily iterative
processes. That is, the steps are repeated as the Y2K Team learns
more about the Year 2000 problem and its effects on internal systems
and on Outside Systems, and about the effects that embedded chips may
have on the Partnership's and its subsidiaries' systems and Outside
Systems. As the steps are repeated, it is likely that new problems
will be identified and addressed. The Partnership and its subsidiaries
anticipate that they will continue with these processes through
January 1, 2000 and, if necessary based on experience, into the Year
2000 in order to assess and remediate problems that reasonably can
be identified only after the start of the new century.
As part of the implementation of the Plan, the Y2K Team
will develop a contingency plan to minimize the consequences of
potential problems that have not been identified or that cannot
be remediated before January 1, 2000. The contingency plan will
concentrate on those areas that are essential to continuing
business operations and/or safety of the public and company
personnel. These areas include, but are not limited to, systems
that are used to operate and control the pipeline system and
enable the physical transportation of natural gas. The contingency
plans include the creation of teams that will be standing by on
the eve of the new millennium, prepared to respond rapidly and
otherwise as necessary to mission-critical Year 2000-related
problems as soon as they become known. The composition of teams
that are assigned to deal with Year 2000 problems will vary
according to the nature, mission-criticality, and location of
the problem.
The Partnership and its subsidiaries have not incurred
material historical costs associated with the Year 2000 issue.
Further, the Partnership and its subsidiaries anticipate that
their future costs of implementing the Plan will not be material.
Although management believes its estimates are reasonable, there
can be no assurance, for the reasons stated in the following
paragraph, that the actual costs of implementing the Plan will
not differ materially from the estimated costs or that the
Partnership and its subsidiaries will not be adversely affected
by Year 2000 issues.
The extent and magnitude of the Year 2000 problem as it may
affect the Partnership and its subsidiaries, both before and for
some period after January 1, 2000, are difficult to predict or
quantify for a number of reasons. Among the most important is
the potential complexity of locating embedded microprocessors
that may be in a great variety of hardware used for process or
flow control, environmental, transportation, access,
communications and other systems. The Partnership and its
subsidiaries believe that they will be able to identify and
remediate critical systems containing embedded microprocessors or
will have contingency plans to deal with these systems. Other
important difficulties relate to the lack of control over and
difficulty inventorying, assessing, remediating, verifying and
testing Outside Systems; the complexity of evaluating all
software (computer code) internal to the Partnership and its
subsidiaries that may not be Year 2000 compatible; and the
potential limited availability of certain necessary internal or
external resources, including but not limited to trained hardware
and software engineers, technicians and other personnel to
perform adequate remediation, verification and testing of
internal systems or Outside Systems. Year 2000 costs are
difficult to estimate accurately because of unanticipated vendor
delays, technical difficulties, the impact of tests of Outside
Systems, and similar events. There can be no assurance for
example that all Outside Systems will be adequately remediated so
that they are Year 2000 ready by January 1, 2000, or by some
earlier date, so as not to create a material disruption to
business. If, despite diligent, prudent efforts under its Year
2000 course of action being pursued, there are Year 2000-related
failures that create substantial disruptions to the Partnership
and its subsidiaries' businesses, the adverse impact could be
material. Moreover, the estimated costs of pursuing the current
course of action do not take into account the costs, if any, that
might be incurred as a result of Year 2000-related failures that
occur despite implementation of the Plan, as it may be modified
over time.
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 and the discussions in "Year 2000". 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 weather conditions that
would be adverse to construction, the failure of vendors and
contractors to adhere to contract delivery and timing
specifications, political and regulatory developments that impact
FERC 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 5. Other Information
In October 1998, Northern Border Pipeline Company ("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 by November
2000 ("Project 2000"). In addition to providing incremental
Canadian natural gas to U.S. markets, Project 2000 would afford
shippers on the extended pipeline system access to industrial gas
consumers in northern Indiana. Project 2000 capital expenditures
are estimated at $190 million and, with timely approval from the
FERC, Northern Border Pipeline anticipates construction
activities to begin in late 1999.
In its Quarterly Report on Form 10-Q for the period ended June
30, 1998, Northern Border Partners, L.P. (the "Partnership")
indicated that it planned to participate in a joint venture, the
proposed Illinois-Wisconsin Express Project, to develop a $220
million to $280 million pipeline to serve Northern Illinois and
Wisconsin markets. The parties to the joint venture have
mutually decided not to pursue this particular project.
In November 1998, Northern Plains Natural Gas Company
("Northern Plains"), a wholly-owned subsidiary of Enron Corp.
("Enron") and a general partner of the Partnership, signed a
definitive agreement to acquire Pan Border Gas Company ("Pan
Border") from subsidiaries of Duke Energy Corporation.
The closing of this transaction, which is expected to occur on
or prior to December 31, 1998, is conditioned upon customary closing
conditions, including expiration or early termination of the
waiting period under the Hart-Scott-Rodino Act. The agreement
may be terminated by the parties, if the transaction does not
close by December 31, 1998. At closing, Pan Border's assets
will consist of general partnership interests in the Partnership.
Collectively, all general partners in the Partnership hold an
aggregate 2% general partner interst in the Partnership. After
closing, the combined general partner interest of Enron (through
Northern Plains and Pan Border) will be 1.65%, resulting in an
82.5% voting interest on the Partnership Policy Committee, the
governing body of the Partnership, and Enron will effectively
have control of the Partnership. The remaining general partner
of the Partnership is Northwest Border Pipeline Company, a
wholly-owned subsidiary of The Williams Companies, Inc.
("Williams"). With respect to Northern Border Pipeline,
the voting interest of Enron, Williams and TransCanada PipeLines
Ltd. (through their subsidiaries) on the Northern Border Pipeline
Management Committee will be 57.75%, 12.25% and 30%, respectively.
Generally, the Northern Border Pipeline Management Committee acts
by majority vote, although unanimity is required with respect to
certain matters, such as expansions or extensions of the pipeline
system, settlement of rate cases and changes in Northern Border
Pipeline's cash distribution policy.
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 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: November 12, 1998 By: JERRY L. PETERS
Jerry L. Peters
Chief Financial and Accounting
Officer
