10-Q 1 nbp10-q.txt FORM 10-Q 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, 2001 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 19 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, 2001 and 2000 3 Consolidated Statement of Comprehensive Income - Three Months Ended March 31, 2001 and 2000 3 Consolidated Balance Sheet - March 31, 2001 and December 31, 2000 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 2001 and 2000 5 Consolidated Statement of Changes in Partners' Equity - Three Months Ended March 31, 2001 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 18 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands, Except Per Unit Amounts) (Unaudited)
Three Months Ended March 31, 2001 2000 OPERATING REVENUES, NET $87,960 $81,517 OPERATING EXPENSES Operations and maintenance 16,017 12,874 Depreciation and amortization 15,694 15,589 Taxes other than income 4,093 7,883 Operating expenses 35,804 36,346 OPERATING INCOME 52,156 45,171 INTEREST EXPENSE 21,696 18,691 OTHER INCOME (EXPENSE) Equity earnings (losses) of unconsolidated affiliates (217) (357) Other income (expense) (1,503) 466 Total other income (expense) (1,720) 109 MINORITY INTERESTS IN NET INCOME 10,767 8,623 NET INCOME TO PARTNERS $17,973 $17,966 NET INCOME PER UNIT $ .54 $ .59 NUMBER OF UNITS USED IN COMPUTATION 31,565 29,347
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)
Three Months Ended March 31, 2001 2000 Net income to partners $17,973 $17,966 Other comprehensive income: Transition adjustment from adoption of SFAS No. 133 22,183 -- Change associated with current period hedging transactions (3,015) -- Total comprehensive income $37,141 $17,966 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Continued) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands) (Unaudited)
March 31, December 31, ASSETS 2001 2000 CURRENT ASSETS Cash and cash equivalents $ 67,072 $ 35,363 Accounts receivable 35,229 40,617 Materials and supplies, at cost 5,372 5,736 Total current assets 107,673 81,716 TRANSMISSION PLANT Property, plant and equipment 2,480,366 2,454,918 Less: Accumulated provision for depreciation and amortization 738,013 722,842 Property, plant and equipment, net 1,742,353 1,732,076 INVESTMENTS AND OTHER ASSETS Investment in unconsolidated affiliates 223,600 221,625 Investment in gas gathering and processing businesses 381,690 -- Goodwill 28,160 28,405 Other 24,650 18,898 Total investments and other assets 658,100 268,928 Total assets $2,508,126 $2,082,720 LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 44,557 $ 44,464 Accounts payable 12,658 35,413 Accrued taxes other than income 26,447 28,493 Accrued interest 12,991 15,635 Accumulated provision for rate refunds -- 4,726 Total current liabilities 96,653 128,731 LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,378,861 1,127,498 MINORITY INTERESTS IN PARTNERS' EQUITY 253,281 248,098 RESERVES AND DEFERRED CREDITS 6,119 6,119 PARTNERS' EQUITY Partner's capital 754,044 572,274 Accumulated other comprehensive income 19,168 -- Total partners' equity 773,212 572,274 Total liabilities and partners' equity $2,508,126 $2,082,720 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Continued) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Unaudited)
Three Months Ended March 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income to partners $ 17,973 $ 17,966 Adjustments to reconcile net income to partners to net cash provided by operating activities: Depreciation and amortization 15,785 15,641 Minority interests in net income 10,767 8,623 Provision for rate refunds 2,036 6,916 Rate refunds paid (6,762) -- Changes in components of working capital (152) (11,685) Other (421) (74) Total adjustments 21,253 19,421 Net cash provided by operating activities 39,226 37,387 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in unconsolidated affiliates (3,161) (2,109) Acquisition of gas gathering and processing businesses (198,659) -- Capital expenditures for property, plant and equipment (25,391) (380) Net cash used in investing activities (227,211) (2,489) CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions to Unitholders and General Partners (22,969) (19,671) Distributions to Minority Interests (9,420) (9,261) Issuance of long-term debt 335,703 20,000 Decrease in bank overdraft (22,437) -- Issuance of partnership interests, net 3,735 -- Payments on termination of derivatives (4,346) -- Long-term debt financing costs (2,440) (101) Retirement of long-term debt (58,132) (749) Net cash provided by (used in) financing activities 219,694 (9,782) NET CHANGE IN CASH AND CASH EQUIVALENTS 31,709 25,116 Cash and cash equivalents-beginning of period 35,363 22,927 Cash and cash equivalents-end of period $ 67,072 $ 48,043 Supplemental Disclosures of Cash Flow Information: Cash paid for: Interest (net of amount capitalized) $ 24,898 $ 27,820 Changes in components of working capital: Accounts receivable $ 5,388 $ (5,554) Materials and supplies 364 (1,430) Under/over recovered cost of service -- 2,335 Accounts payable (1,214) (256) Accrued taxes other than income (2,046) 2,196 Accrued interest (2,644) (8,976) Total $ (152) $(11,685) The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION (Continued) ITEM 1. FINANCIAL STATEMENTS (Continued) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY (In Thousands) (Unaudited)
Accumulated Other General Common Comprehensive Total Partners Units Income Equity Balance at December 31, 2000 $11,445 $560,829 $ -- $572,274 Net income to partners 818 17,155 -- 17,973 Transition adjustment from adoption of SFAS No. 133 -- -- 22,183 22,183 Change associated with current period hedging transactions -- -- (3,015) (3,015) Issuance of partnership interests, net 3,735 183,031 -- 186,766 Distributions to partners (917) (22,052) -- (22,969) Balance at March 31, 2001 $15,081 $738,963 $19,168 $773,212 The accompanying notes are an integral part of this consolidated financial statement.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by Northern Border Partners, L.P. (the "Partnership") without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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, 2000. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Crestone Energy Ventures, L.L.C.; Bear Paw Energy, L.L.C.; Border Midstream Services, Ltd., a Canadian company; Midwestern Gas Transmission Company; and Black Mesa Holdings, Inc. are wholly-owned subsidiaries of the Partnership. Crestone Energy Ventures owns a 49% common membership interest and a 100% class A share interest in Bighorn Gas Gathering, L.L.C.; a 33% interest in Fort Union Gas Gathering, L.L.C.; and a 35% interest in Lost Creek Gathering, L.L.C. Crestone Gathering Services, L.L.C. is a wholly- owned subsidiary of Crestone Energy Ventures. 2. ACQUISITION On March 30, 2001, the Partnership completed the acquisition of Bear Paw Energy for $381.7 million. The purchase price consisted of $198.7 million in cash and the issuance of 5.7 million common units valued at $183.0 million. Bear Paw Energy has extensive gathering and processing operations in the Powder River Basin in Wyoming and the Williston Basin in Montana and North Dakota. Bear Paw Energy has approximately 226,000 acres under dedication and 600 miles of gathering pipelines in the Powder River Basin. In the Williston Basin, Bear Paw Energy has over 2,800 miles of gathering pipelines and four processing plants with 90 million cubic feet per day of capacity. At March 31, 2001, the acquisition of Bear Paw Energy is reflected as an investment in gas gathering and processing businesses on the accompanying consolidated balance sheet. The Partnership is currently in the process of allocating the purchase price. In connection with the issuance of the common units for Bear Paw Energy, the Partnership's general partners made capital contributions to the Partnership of $3.7 million to maintain a 2% general partner interest in accordance with the partnership agreement. 3. RATE CASE Northern Border Pipeline filed a rate proceeding with the Federal Energy Regulatory Commission ("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 was 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 September 2000, Northern Border Pipeline filed a stipulation and agreement with the FERC that documented the proposed settlement of its pending rate case. The settlement was approved by the FERC in December 2000. Under the approved settlement, effective December 1, 1999, shippers will pay stated transportation rates based on a straight-fixed variable rate design. From December 1, 1999, through and including December 31, 2000, the rates were based upon an annual revenue level of $307 million. Beginning January 1, 2001, the rates are based upon an annual revenue level of $305 million. After the FERC approved the rate case settlement and prior to the end of 2000, Northern Border Pipeline made estimated refund payments to its shippers totaling approximately $22.7 million, primarily related to the period from December 1999 to November 2000. During the first quarter of 2001, Northern Border Pipeline paid the remaining refund obligation to its shippers totaling approximately $6.8 million, which related to periods through January 2001. 4. CERTIFICATE APPLICATION On March 16, 2000, the FERC issued an order granting Northern Border Pipeline's application for a certificate to construct and operate the proposed expansion and extension of its pipeline system into Indiana ("Project 2000"). The FERC approved Northern Border Pipeline's request 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 budgeted to be approximately $94 million, of which $14.7 million had been incurred through March 31, 2001. 5. CREDIT FACILITIES AND LONG-TERM DEBT In March 2001, the Partnership completed a private offering of $225 million of 7.10% Senior Notes due 2011 ("2001 Partnership Senior Notes"). The Partnership will register an exchange offer with the SEC to exchange the 2001 Partnership Senior Notes for notes with substantially identical terms. The indenture under which the 2001 Partnership Senior Notes were issued does not limit the amount of unsecured debt the Partnership may incur, but does contain material financial covenants, including restrictions on incurrence of secured indebtedness. The proceeds from the 2001 Partnership Senior Notes were used to fund a portion of the acquisition of Bear Paw Energy (see Note 2). In March 2001, the Partnership entered into a $200 million three- year revolving credit agreement with certain financial institutions ("2001 Partnership Credit Agreement"). The 2001 Partnership Credit Agreement is to be used for capital expenditures, acquisitions and general business purposes. The 2001 Partnership Credit Agreement permits the Partnership to choose among various interest rate options, to specify the portion of the borrowings to be covered by specific interest rate options and to specify the interest rate period. The Partnership is required to pay a fee on the principal commitment amount of $200 million. The 2001 Partnership Credit Agreement replaced revolving credit agreements entered into in June 2000. At March 31, 2001, $73.0 million was outstanding under the 2001 Partnership Credit Agreement at an average effective interest rate of 6.35%. 6. BUSINESS SEGMENT INFORMATION The Partnership's reportable segments are strategic business units that offer different services. The Partnership evaluates performance based on EBITDA (net income before minority interests; interest expense; and depreciation and amortization, including goodwill amortization, which is netted against equity earnings of unconsolidated affiliates).
Gas Interstate Coal Gathering (In thousands) Pipeline Slurry (a) Other(b) Total Three Months Ended March 31, 2001 Revenues from external customers $ 77,040 $ 5,421 $ 5,499 $ -- $ 87,960 EBITDA 65,398 2,112 2,580 (2,388) 67,702 Total assets $1,743,720 $28,293 $682,769 $53,344 $2,508,126
Gas Interstate Coal Gathering (In thousands) Pipeline Slurry (a) Other(b) Total Three Months Ended March 31, 2000 Revenues from external customers $ 76,241 $ 5,276 $ -- $ -- $ 81,517 EBITDA 59,870 1,684 (189) (328) 61,037 Total assets $1,805,436 $31,005 $ 33,647 $ 6,086 $1,876,174 (a) Gas gathering operating results commence from the date of the acquisition of gas gathering and processing businesses in September 2000, except for equity earnings of Bighorn Gas Gathering, which commenced in January 2000. (b) Includes other items not allocable to segments.
7. NET INCOME PER UNIT Net income per unit is computed by dividing net income, after deduction of the general partners' allocation, by the weighted average number of outstanding common units. The general partners' allocation is equal to an amount based upon their collective 2% general partner interest adjusted for incentive distributions. The distribution to partners amount shown on the accompanying consolidated statement of changes in partners' equity includes incentive distributions to the general partners of approximately $0.5 million. On April 19, 2001, the Partnership declared a cash distribution of $0.7625 per unit ($3.05 per unit on an annualized basis) for the quarter ended March 31, 2001. The distribution is payable May 15, 2001, to unitholders of record at April 30, 2001. 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Partnership uses financial instruments in the management of its interest rate exposure. A control environment has been established which includes policies and procedures for risk assessment and the approval, reporting and monitoring of financial instrument activities. As a result, the Partnership has entered into various interest rate swap agreements with major financial institutions to hedge its interest rate risk. In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement 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, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Partnership adopted SFAS No. 133 beginning January 1, 2001. At December 31, 2000, the Partnership had classified $26.0 million of unamortized proceeds from the termination of derivatives in long-term debt. This included unamortized proceeds of $14.9 million from the termination of interest rate swap agreements by the Partnership in December 2000 and $11.1 million from the termination of interest rate forward agreements by Northern Border Pipeline in August 1999. As a result of the adoption of SFAS No. 133, the Partnership reclassified $22.7 million from long-term debt to accumulated other comprehensive income and $3.3 million from long- term debt to minority interests in partners' equity. The Partnership is reflecting in consolidated accumulated other comprehensive income its 70% share of Northern Border Pipeline's accumulated other comprehensive income. The remaining 30% is reflected as an adjustment to minority interests in partners' equity. Also upon adoption of SFAS No. 133, Northern Border Pipeline designated an outstanding interest rate swap agreement with a notional amount of $40.0 million as a cash flow hedge. As a result, the Partnership recorded a non-cash loss of $0.5 million in accumulated other comprehensive income and $0.3 million as an adjustment to minority interests in partners' equity. In February 2001, the Partnership entered into forward starting interest rate swaps with notional amounts totaling $150 million related to the anticipated issuance of fixed rate debt. Upon issuance of the 2001 Partnership Senior Notes in March 2001, the Partnership paid approximately $4.3 million to terminate the swaps, which was recorded in accumulated other comprehensive income. The swaps were designated as cash flow hedges as they were entered into to hedge the fluctuations in Treasury rates and spreads between the execution date of the swaps and the issuance of the 2001 Partnership Senior Notes. During the first quarter of 2001, the Partnership amortized approximately $0.6 million related to the terminated derivatives from accumulated other comprehensive income to interest expense, and expects to amortize comparable amounts in each of the remaining quarters of 2001. In March 2001, Northern Border Pipeline entered into forward starting interest rate swaps with notional amounts totaling $200 million related to the planned issuance of 10-year and 30-year senior notes. The swap instruments may be settled any time prior to their expiration date on October 1, 2001. The swaps have been designated as cash flow hedges as they were entered into to hedge the fluctuations in Treasury rates and spreads between the execution date of the swaps and the issuance date of the senior notes. At March 31, 2001, Northern Border Pipeline recognized a non-cash gain in accumulated other comprehensive income of approximately $2.7 million, with a corresponding amount reflected in other assets on the accompanying consolidated balance sheet. 9. SUBSEQUENT EVENTS In April 2001, the Partnership sold 407,550 common units. In conjunction with the issuance of the additional 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 the sale and the general partners'capital contributions totaled approximately $14.7 million and were primarily used to repay amounts borrowed under the 2001 Partnership Credit Agreement. On April 4, 2001, Border Midstream Services completed the acquisition of the Mazeppa and Gladys sour gas processing plants, gas gathering systems and a minority interest in the Gregg Lake/Obed Pipeline for $70 million (Canadian) or $45 million (U.S.). The Partnership had previously entered into a forward purchase of Canadian dollars to fund the acquisition and recognized a loss of approximately $2.0 million due to movements in the exchange rate, which is included in other income (expense) on the accompanying consolidated statement of income. The Mazeppa and Gladys plants, which are located near Calgary, Alberta, have a combined capacity of 87 million cubic feet per day. The Gregg Lake/Obed Pipeline system, which is located near Edmonton, Alberta, is comprised of 85 miles of gathering lines with a capacity of approximately 150 million cubic feet per day. On April 30, 2001, the Partnership acquired Midwestern Gas Transmission for approximately $100 million. The system is a 350- mile interstate natural gas pipeline extending from Portland, Tennessee to Joliet, Illinois with a capacity of 650 million cubic feet per day. Midwestern Gas Transmission connects to seven other major interstate pipeline systems, including Northern Border Pipeline. 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'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. Northern Border Pipeline had used a cost of service form of tariff since its inception but agreed to convert to a stated rate form of tariff as part of the settlement of its current rate case discussed below. Under the cost of service tariff, Northern Border Pipeline was provided 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 was generally allowed to collect from its shippers a return on regulated rate base as well as recover that rate base through depreciation and amortization. Billings for the firm transportation agreements were based on contracted volumes to determine the allocable share of the cost of service and were 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. In September 2000, Northern Border Pipeline filed a stipulation and agreement with the FERC that documented the proposed settlement of its pending rate case. The settlement was approved by the FERC in December 2000. Under the approved settlement, effective December 1, 1999, shippers will pay stated transportation rates based on a straight-fixed variable rate design. Under the straight-fixed variable rate design, approximately 98% of the agreed upon revenue level is attributed to demand charges, based upon contracted firm capacity, and the remaining 2% is attributed to commodity charges, based on the volumes of gas actually transported on the system. As of December 31, 2000, the termination dates of the shippers' contracts ranged from October 31, 2003 to December 21, 2013 and the weighted average contract life was approximately six years with just under 99% of capacity contracted through mid-September 2003. Contracts for approximately 44% of the capacity will expire between mid-September 2003 and the end of October 2005. Crestone Energy Ventures acquired its interests in Fort Union Gas Gathering, L.L.C., Lost Creek Gathering, L.L.C., Crestone Gathering Services, L.L.C. and a portion of Bighorn Gas Gathering, L.L.C. in September 2000. Prior to that time, Crestone Energy Ventures sole asset was its investment in Bighorn Gas Gathering. First Quarter 2001 Compared With First Quarter 2000 Operating revenues, net increased $6.4 million (8%) for the first quarter of 2001, as compared to the same period in 2000, due primarily to $5.5 million of revenues from Crestone Energy Ventures. Net operating revenues attributable to Northern Border Pipeline increased $0.8 million for the first quarter of 2001, from the same period in 2000. Northern Border Pipeline's net operating revenues for 2001 reflect the rate case settlement discussed above. Net operating revenues for 2000 were determined under Northern Border Pipeline's cost of service tariff. Operations and maintenance expense increased $3.1 million (24%) for the first quarter of 2001, as compared to the same period in 2000, due primarily to $4.1 million of expense from Crestone Energy Ventures. Operations and maintenance expense attributable to Northern Border Pipeline decreased $0.5 million. Taxes other than income decreased $3.8 million (48%) for the first quarter of 2001, as compared to the same period in 2000, due primarily to Northern Border Pipeline's adjustments to previous estimates of ad valorem taxes. Consolidated interest expense increased $3.0 million (16%) for the first quarter of 2001, as compared to the same period in 2000. Interest expense for the Partnership increased approximately $4.3 million (222%) for the first quarter of 2001, as compared to the same period in 2000, due to additional borrowings and an increase in interest rates. The additional borrowings were made primarily for the acquisition of gas gathering businesses in the Powder River and Wind River basins in Wyoming in June 2000 and September 2000 and the acquisition of Bear Paw Energy, L.L.C. in March 2001 (see Note 2 - Notes to Consolidated Financial Statements). Interest expense attributable to Northern Border Pipeline decreased $1.2 million (8%) for the first quarter of 2001, as compared to the same period in 2000, due primarily to a decrease in average debt outstanding. Other income (expense) decreased $1.8 million for the first quarter of 2001, as compared to the same period in 2000. The results for 2001 included non-recurring charges of $2.4 million, primarily related to a loss on a forward purchase of Canadian dollars to fund the acquisition of gathering and processing assets in Alberta (see Note 9 - Notes to Consolidated Financial Statements). Liquidity and Capital Resources General Northern Border Pipeline had previously entered into a 1997 credit agreement ("Pipeline Credit Agreement") with certain financial institutions, which is comprised of a $200 million five-year revolving credit facility and a $414 million term loan, both maturing in June 2002. At March 31, 2001, $62 million was outstanding under the five-year revolving credit facility. At March 31, 2001, Northern Border Pipeline also had outstanding $184 million of senior notes issued in a $250 million 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 were repaid in August 2000. The Series B Notes with a principal amount of $41 million mature in August 2001. Northern Border Pipeline anticipates borrowing on the Pipeline Credit Agreement to repay the Series B Notes. In March 2001, Northern Border Pipeline entered into forward starting interest rate swaps with notional amounts totaling $200 million related to the planned issuance of 10-year and 30-year senior notes. The swap instruments may be settled any time prior to their expiration date on October 1, 2001. The proceeds from the senior notes will be used to repay outstanding indebtedness. The Partnership completed a private offering of $150 million of 8 7/8% Senior Notes due 2010 ("2000 Partnership Senior Notes") in June 2000. In September 2000, the Partnership completed an additional private offering of $100 million of 2000 Partnership Senior Notes. The 2000 Partnership Senior Notes were subsequently exchanged in a registered offering for notes with substantially identical terms. The proceeds from the 2000 Partnership Senior Notes were used in acquisitions made by the Partnership in June 2000 and September 2000. In March 2001, the Partnership completed a private offering of $225 million of 7.10% Senior Notes due 2011 ("2001 Partnership Senior Notes"). The Partnership will register an exchange offer with the Securities and Exchange Commission to exchange the 2001 Partnership Senior Notes for notes with substantially identical terms. The indenture under which the 2001 Partnership Senior Notes were issued does not limit the amount of unsecured debt the Partnership may incur, but does contain material financial covenants, including restrictions on incurrence of secured indebtedness. The proceeds from the 2001 Partnership Senior Notes were used to fund a portion of the acquisition of Bear Paw Energy (see Note 2 - Notes to Consolidated Financial Statements). In March 2001, the Partnership entered into a $200 million three- year revolving credit agreement with certain financial institutions ("2001 Partnership Credit Agreement"). The 2001 Partnership Credit Agreement is to be used for capital expenditures, acquisitions and general business purposes. The 2001 Partnership Credit Agreement replaced revolving credit agreements entered into in June 2000. At March 31, 2001, $73.0 million was outstanding under the 2001 Partnership Credit Agreement. The Partnership sold 407,550 common units in April 2001. In conjunction with the issuance of the additional 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 the sale and the general partners'capital contributions totaled approximately $14.7 million and were primarily used to repay amounts borrowed under the 2001 Partnership Credit Agreement. Short-term liquidity needs will be met by internal sources and through the credit facilities 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. Cash Flows From Operating Activities Cash flows provided by operating activities increased $1.8 million to $39.2 million for the first quarter of 2001, as compared to the same period in 2000, due primarily to a reduction in accounts receivable. This was partially offset by net cash outflows of approximately $4.7 million related to Northern Border Pipeline's rate case. During the first quarter of 2001, Northern Border Pipeline made refunds to its shippers totaling $6.8 million, which included approximately $2.1 million collected in the first quarter of 2001 with the remainder collected previously. Cash Flows From Investing Activities The investment in unconsolidated affiliates of $3.2 million and $2.1 million for the first quarter of 2001 and 2000, respectively, reflects capital contributions to Bighorn Gas Gathering. Acquisition of gas gathering and processing businesses of $198.7 million for the first quarter of 2001 represents the cash portion of the purchase price of Bear Paw Energy in March 2001. The purchase also involved the issuance of 5.7 million common units valued at $183.0 million, for a total purchase price of $381.7 million. Capital expenditures of $25.4 million for the first quarter of 2001 included $3.8 million for Northern Border Pipeline's Project 2000 (see Note 4 - Notes to Consolidated Financial Statements) and $20.7 million for gas gathering facilities for Crestone Energy Ventures. The remaining capital expenditures for 2001 are primarily related to renewals and replacements of Northern Border Pipeline's existing facilities. For the same period in 2000, capital expenditures were $0.4 million primarily related to Project 2000. Total capital expenditures, business acquisitions and investments in unconsolidated affiliates for 2001 are estimated to be $717 million, which includes $410 million completed through the end of the first quarter of 2001. Capital expenditures for the interstate pipelines are estimated to be $80 million, including approximately $62 million for Northern Border Pipeline's Project 2000 and approximately $18 million primarily for renewals and replacements of existing facilities. Northern Border Pipeline currently anticipates funding its 2001 capital expenditures primarily by using internal sources and borrowing on the Pipeline Credit Agreement. Capital expenditures for gas gathering and processing facilities are estimated to be $89 million and additional investments in unconsolidated affiliates are estimated to be $19 million for 2001. Total business acquisitions are estimated to be $529 million. The Partnership anticipates financing its capital requirements primarily by borrowing on the 2001 Partnership Credit Agreements and by issuing partnership interests. Cash Flows From Financing Activities Cash flows provided by financing activities were $219.7 million for the first quarter of 2001 as compared to cash flows used in financing activities of $9.8 million for the first quarter of 2000. Cash distributions to the unitholders and the general partners increased $3.3 million to $23.0 million. The number of common units increased from 29.3 million common units to 31.5 million common units. The distribution paid in the first quarter of 2001 was $0.70 per unit as compared to $0.65 per unit for the first quarter of 2000. The net proceeds from the private offering of the 2001 Partnership Senior Notes totaled approximately $223.2 million. Borrowings under the 2001 Partnership Credit Agreement were $73.0 million for the first quarter of 2001. The proceeds from the 2001 Partnership Senior Notes and the 2001 Partnership Credit Agreement were primarily used to fund the acquisition of Bear Paw Energy discussed previously and to repay $47.3 million of indebtedness outstanding on a prior credit facility. For the first quarter of 2001, Northern Border Pipeline recognized a decrease in bank overdraft of $22.4 million. At December 31, 2000, Northern Border Pipeline reflected the bank overdraft primarily due to refund checks outstanding. In March 2001, the Partnership paid approximately $4.3 million to terminate interest rate swap agreements (see Note 8 - Notes to Consolidated Financial Statements). Financing activities for 2001 reflect $3.7 million in capital contributions by the Partnership's general partners to maintain their 2% general partner interest after the common units were issued for the acquisition of Bear Paw Energy (see Note 2 - Notes to Consolidated Financial Statements). 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" regarding Northern Border Pipeline's efforts to pursue opportunities to further increase its capacity. 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 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, 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. PART I. FINANCIAL INFORMATION - (Concluded) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES The Partnership's interest rate exposure results from variable rate borrowings from commercial banks. To mitigate potential fluctuations in interest rates, the Partnership attempts to maintain a significant portion of its debt portfolio in fixed rate debt. The Partnership also uses interest rate swap agreements to increase the portion of its fixed rate debt. Since December 31, 2000, there has not been any material change to the Partnership's interest rate exposure. The Partnership's recently acquired gas processing facilities are subject to certain contracts that give it quantities of natural gas and natural gas liquids as payment for processing services. The income and cash flow from these contracts will be impacted by changes in these commodity prices. The Partnership has hedged a substantial portion of its commodity price risk under these contracts for 2001 and approximately one-fourth of its commodity price risk for 2002. 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. 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 14, 2001 By: JERRY L. PETERS Jerry L. Peters Chief Financial and Accounting Officer