10-Q 1 h99119e10vq.txt NORTHERN BORDER PARTNERS, L.P. - DATED 6/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2002 Commission File Number 1-12202 NORTHERN BORDER PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 93-1120873 ------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1111 South 103rd St. Omaha, Nebraska 68124-1000 ------------------------------------- ----------------------------------- (Address of principal executive (Zip code) offices) (402) 398-7700 -------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 1 of 24 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 June 30, 2002 and 2001 and Six Months Ended June 30, 2002 and 2001 3 Consolidated Statement of Comprehensive Income - Three Months Ended June 30, 2002 and 2001 and Six Months Ended June 30, 2002 and 2001 3 Consolidated Balance Sheet - June 30, 2002 and December 31, 2001 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 2002 and 2001 5 Consolidated Statement of Changes in Partners' Equity - Six Months Ended June 30, 2002 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 6. Exhibits and Reports on Form 8-K 23
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ----------------------- 2002 2001 2002 2001 -------- -------- -------- -------- OPERATING REVENUES, NET $123,303 $125,474 $241,310 $213,434 -------- -------- -------- -------- OPERATING EXPENSES Product purchases 11,965 17,516 22,718 17,516 Operations and maintenance 24,375 24,636 49,240 40,653 Depreciation and amortization 18,721 20,164 37,154 35,858 Taxes other than income 7,352 7,549 14,823 11,642 -------- -------- -------- -------- Operating expenses 62,413 69,865 123,935 105,669 -------- -------- -------- -------- OPERATING INCOME 60,890 55,609 117,375 107,765 -------- -------- -------- -------- INTEREST EXPENSE 21,909 24,632 42,947 46,328 -------- -------- -------- -------- OTHER INCOME (EXPENSE) Equity earnings in unconsolidated affiliates 3,304 772 6,524 555 Other expense (627) (578) (24) (2,081) -------- -------- -------- -------- Other income (expense) 2,677 194 6,500 (1,526) -------- -------- -------- -------- MINORITY INTERESTS IN NET INCOME 11,552 9,489 22,853 20,256 -------- -------- -------- -------- NET INCOME BEFORE EXTRAORDINARY ITEMS 30,106 21,682 58,075 39,655 EXTRAORDINARY LOSS FROM DEBT RESTRUCTURING -- (1,213) -- (1,213) -------- -------- -------- -------- NET INCOME TO PARTNERS $ 30,106 $ 20,469 $ 58,075 $ 38,442 ======== ======== ======== ======== NET INCOME PER UNIT $ 0.67 $ 0.48 $ 1.28 $ 1.02 ======== ======== ======== ======== NUMBER OF UNITS USED IN COMPUTATION 41,623 39,341 41,623 35,453 ======== ======== ======== ========
NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ---------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Net income to partners $30,106 $20,469 $58,075 $38,442 Other comprehensive income: Transition adjustment from adoption of SFAS No. 133 -- -- -- 22,183 Change associated with current period hedging transactions (857) 9,088 (4,931) 6,073 Change associated with current period foreign currency translation 2,418 1,894 2,395 1,894 ------- ------- ------- ------- Total comprehensive income $31,667 $31,451 $55,539 $68,592 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 3 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31, ASSETS 2002 2001 ------ ---------- ------------ CURRENT ASSETS Cash and cash equivalents $ 14,268 $ 16,755 Accounts receivable 55,737 49,740 Materials and supplies, at cost 5,242 5,584 Prepaid expenses and other 7,654 6,572 ---------- ---------- Total current assets 82,901 78,651 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 2,852,268 2,829,691 Less: Accumulated provision for depreciation and amortization 819,665 789,592 ---------- ---------- Property, plant and equipment, net 2,032,603 2,040,099 ---------- ---------- INVESTMENTS AND OTHER ASSETS Investment in unconsolidated affiliates 243,384 239,729 Goodwill 295,441 295,402 Assets from price risk management activities 20,402 9,635 Other 26,839 23,839 ---------- ---------- Total investments and other assets 586,066 568,605 ---------- ---------- Total assets $2,701,570 $2,687,355 ========== ========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 80,445 $ 352,395 Accounts payable 38,054 39,246 Accrued taxes other than income 25,707 28,730 Accrued interest 19,757 20,550 Liabilities from price risk management activities 519 -- ---------- ---------- Total current liabilities 164,482 440,921 ---------- ---------- LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,375,476 1,070,832 ---------- ---------- MINORITY INTERESTS IN PARTNERS' EQUITY 248,454 250,078 ---------- ---------- RESERVES AND DEFERRED CREDITS 14,260 10,566 ---------- ---------- PARTNERS' EQUITY Partners' capital 880,905 894,429 Accumulated other comprehensive income 17,993 20,529 ---------- ---------- Total partners' equity 898,898 914,958 ---------- ---------- Total liabilities and partners' equity $2,701,570 $2,687,355 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income to partners $ 58,075 $ 38,442 -------- -------- Adjustments to reconcile net income to partners to net cash provided by operating activities: Depreciation and amortization 37,337 36,041 Minority interests in net income 22,853 20,256 Provision for rate refunds -- 2,036 Rate refunds paid -- (6,762) Changes in components of working capital, net of the effect of the acquired businesses (10,432) 8,011 Non-cash gains from risk management activities (2,693) -- Other 536 369 -------- -------- Total adjustments 47,601 59,951 -------- -------- Net cash provided by operating activities 105,676 98,393 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in unconsolidated affiliates (2,355) (6,229) Acquisitions of businesses (1,154) (340,197) Capital expenditures for property, plant and equipment (27,498) (48,033) -------- -------- Net cash used in investing activities (31,007) (394,459) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions to Unitholders and General Partners (71,599) (53,448) Distributions to Minority Interests (23,986) (20,960) Issuance of long-term debt 361,894 485,703 Retirement of long-term debt (343,228) (264,811) Decrease in bank overdraft -- (22,437) Issuance of partnership interests, net -- 173,165 Proceeds (payments) upon termination of derivatives 2,351 (4,346) Long-term debt financing costs (2,588) (2,859) -------- -------- Net cash provided by (used in) financing activities (77,156) 290,007 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,487) (6,059) Cash and cash equivalents-beginning of period 16,755 35,363 -------- -------- Cash and cash equivalents-end of period $ 14,268 $ 29,304 ======== ======== ------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid for: Interest (net of amount capitalized) $ 44,235 $ 44,052 ======== ======== Changes in components of working capital: Accounts receivable $ (5,997) $ 9,540 Materials and supplies, prepaid expenses and other (740) (1,432) Accounts payable 8 1,693 Accrued taxes other than income (3,023) (4,999) Other 113 38 Accrued interest (793) 3,171 -------- -------- Total $(10,432) $ 8,011 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY (IN THOUSANDS) (UNAUDITED)
ACCUMULATED OTHER TOTAL GENERAL COMMON COMPREHENSIVE PARTNERS' PARTNERS UNITS INCOME EQUITY -------- -------- ------------- --------- Balance at December 31, 2001 $17,889 $876,540 $20,529 $914,958 Net income to partners 4,732 53,343 -- 58,075 Change associated with current period hedging transactions -- -- (4,931) (4,931) Change associated with current period foreign currency translation -- -- 2,395 2,395 Distributions to partners (5,002) (66,597) -- (71,599) ------- -------- ------- -------- Balance at June 30, 2002 $17,619 $863,286 $17,993 $898,898 ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 6 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by Northern Border Partners, L.P. (the "Partnership") without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Partnership believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership owns a 70% general partner interest in Northern Border Pipeline Company. Crestone Energy Ventures, L.L.C.; Bear Paw Energy, L.L.C.; Border Midstream Services, Ltd.; Midwestern Gas Transmission Company; and Black Mesa Pipeline, Inc. are wholly-owned subsidiaries of the Partnership. The Partnership also owns a 49% common membership interest and a 100% class A share interest in Bighorn Gas Gathering, L.L.C.; a 33% interest in Fort Union Gas Gathering, L.L.C.; a 35% interest in Lost Creek Gathering, L.L.C.; and a 36% interest in the Gregg Lake/Obed Pipeline. 2. GOODWILL In the third quarter of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and reporting of goodwill and intangible assets. It requires entities to discontinue the amortization of goodwill, reallocate goodwill among its reporting segments and perform impairment tests by applying a fair-value-based analysis on the goodwill in each reporting segment. At December 31, 2001, the Partnership's balance sheet included goodwill of approximately $475 million with approximately $180 million recorded in the Partnership's investment in unconsolidated affiliates. The Partnership adopted SFAS No. 142 effective January 1, 2002. During the second quarter of 2002, the Partnership completed its evaluation of approximately $295 million recorded goodwill in accordance with SFAS No. 142 and determined that it did not have a transitional impairment loss that needed to be recognized as the cumulative effect of a change in accounting principle. Beginning January 1, 2002, the Partnership is no longer recording amortization expense related to goodwill. The following information discloses the effect of goodwill amortization on the Partnership's net income to partners and net income per unit. 7 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Six Months Ended June 30, June 30, (Amounts in thousands, ----------------------- ---------------------- except per unit amounts) 2002 2001 2002 2001 -------------------------- ------- ------- ------- ------- Reported net income to partners $30,106 $20,469 $58,075 $38,442 Add back: goodwill amortization -- 3,882 -- 5,700 ------- ------- ------- ------- Adjusted net income to partners $30,106 $24,351 $58,075 $44,142 ======= ======= ======= ======= Reported net income per unit $ .67 $ .48 $ 1.28 $ 1.02 Add back: goodwill amortization -- .10 -- .16 ------- ------- ------- ------- Adjusted net income per unit $ .67 $ .58 $ 1.28 $ 1.18 ======= ======= ======= =======
3. CREDIT FACILITIES AND LONG-TERM DEBT In April 2002, Northern Border Pipeline completed a private offering of $225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes"). Northern Border Pipeline also entered into a registration rights agreement with the initial purchasers in the private offering in which Northern Border Pipeline agreed, among other things, to use its reasonable best efforts to exchange the 2002 Pipeline Senior Notes for notes registered under the Securities Act of 1933 with substantially identical terms. The indenture under which the 2002 Pipeline Senior Notes was issued does not limit the amount of unsecured debt Northern Border Pipeline may incur, but it does include restrictions on incurrence of secured indebtedness. The proceeds from the 2002 Pipeline Senior Notes of approximately $223.5 million were used to reduce indebtedness outstanding. Northern Border Pipeline entered into a $175 million three-year credit agreement ("2002 Pipeline Credit Agreement") with certain financial institutions in May 2002. The 2002 Pipeline Credit Agreement is to be used to refinance existing indebtedness and for general business purposes. The 2002 Pipeline Credit Agreement permits Northern Border Pipeline to choose among various interest rate options, to specify the portion of the borrowings to be covered by specific interest rate options and to specify the interest rate period. Northern Border Pipeline is required to pay a fee on the principal commitment amount of $175 million. At June 30, 2002, $22.0 million was outstanding under the 2002 Pipeline Credit Agreement at an average interest rate of 2.47%. All of the debt and credit facilities of the Partnership and Northern Border Pipeline contain material financial covenants. Both the Partnership and Northern Border Pipeline are in compliance with these covenants at June 30, 2002. 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Partnership uses financial instruments in the management of its interest rate and commodity price exposure. A control environment has been established which includes policies and procedures for risk assessment and the approval, reporting and monitoring of financial instrument activities. In 2001, the Partnership adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 and SFAS No. 138. All derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value. Any change in the derivative's fair value is recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying cash flow hedges allows a derivative's gains and losses to be recorded in accumulated other comprehensive income. The Partnership is reflecting in consolidated accumulated 8 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS other comprehensive income its 70% share of Northern Border Pipeline's accumulated other comprehensive income. The remaining 30% is reflected as an adjustment to minority interests in partners' equity. The Partnership records in accumulated other comprehensive income amounts related to terminated interest rate swap agreements for cash flow hedges. During the three months and six months ended June 30, 2002, the Partnership amortized approximately $0.5 million and $1.0 million, respectively, related to the terminated interest rate swap agreements, as a reduction to interest expense from accumulated other comprehensive income and expects to amortize comparable amounts in each of the remaining quarters of 2002. During the third quarter of 2001, the Partnership entered into interest rate swap agreements with notional amounts totaling $225 million. Under the interest rate swap agreements, the Partnership makes payments to counterparties at variable rates based on the London Interbank Offered Rate and in return receives payments based on a fixed rate. At June 30, 2002, the average effective interest rate on the interest rate swap agreements was 3.24%. In November 2001, Northern Border Pipeline entered into forward starting interest rate swap agreements with notional amounts totaling $150 million related to the planned issuance of senior notes. Upon issuance of the 2002 Pipeline Senior Notes, Northern Border Pipeline terminated the forward starting interest rate swap agreements and received approximately $2.4 million, which was recorded in accumulated other comprehensive income and will be recognized as a reduction in interest expense over the life of the 2002 Pipeline Senior Notes. Northern Border Pipeline entered into interest rate swap agreements with notional amounts totaling $225 million in May 2002. Under the interest rate swap agreements, Northern Border Pipeline makes payments to counterparties at variable rates based on the London Interbank Offered Rate and in return receives payments based on a fixed rate. At June 30, 2002, the average effective interest rate on the interest rate swap agreements was 3.50%. Both the Partnership's and Northern Border Pipeline's interest rate swap agreements have been designated as fair value hedges as they were entered into to hedge the fluctuations in the market value of the senior notes issued by the Partnership in 2001 and by Northern Border Pipeline in 2002. The accompanying consolidated balance sheet at June 30, 2002, is reflecting a non-cash gain of approximately $20.4 million in assets from price risk management activities with a corresponding offset in long-term debt. Bear Paw Energy periodically enters into commodity derivatives contracts and fixed-price physical contracts. Bear Paw Energy primarily utilizes price swaps and collars, which have been designated as cash flow hedges, to hedge its exposure to gas and natural gas liquid price volatility. During the three months and six months ended June 30, 2002, Bear Paw Energy recognized losses of $0.7 million and $0.6 million, respectively, from the settlement of derivative contracts. At June 30, 2002, Bear Paw Energy reflected a non-cash loss of approximately $0.5 million in liabilities from price risk management activities with a corresponding offset in accumulated other comprehensive income. The ineffective portion of Bear Paw Energy's cash flow hedges was minimal. At September 30, 2001, Bear Paw Energy had outstanding commodity price swap contracts with Enron North America Corp. ("ENA"), a subsidiary of Enron Corp., which had been accounted for as cash flow hedges, and resulted in Bear Paw Energy 9 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recording a non-cash gain of approximately $6.7 million in accumulated other comprehensive income. As a result of ENA's filing for Chapter 11 bankruptcy protection during the fourth quarter of 2001, Bear Paw Energy terminated the contracts and ceased to account for these derivatives as hedges when it determined the hedges were no longer effective. The gain previously recorded in accumulated other comprehensive income is being recorded into earnings in the same periods during which the hedged forecasted transactions will affect earnings. During the three months and six months ended June 30, 2002, the Partnership amortized approximately $1.2 million and $2.7 million, respectively, into earnings from accumulated other comprehensive income and expects to amortize approximately $4.6 million for the year 2002. 5. BUSINESS SEGMENT INFORMATION The Partnership's reportable segments are strategic business units that offer different services. The Partnership evaluates performance based on EBITDA (net income before minority interests; interest expense; income taxes; and depreciation and amortization).
Natural Interstate Gas Natural Gathering Gas and Pipelines Processing Coal (In thousands) (a) (b) Slurry Other(c) Total ---------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, 2002 ------------------ Revenues from external customers $84,619 $33,243 $5,441 $ -- $123,303 EBITDA 69,469 13,436 1,980 (1,795) 83,090 THREE MONTHS ENDED JUNE 30, 2001 ------------------ Revenues from external customers $79,106 $40,769 $5,599 $ -- $125,474 EBITDA 60,875 15,398 1,814 (933) 77,154 SIX MONTHS ENDED JUNE 30, 2002 ------------------ Revenues from external customers $166,816 $63,833 $10,661 $ -- $241,310 EBITDA 137,352 25,085 2,801 (3,187) 162,051 SIX MONTHS ENDED JUNE 30, 2001 ------------------ Revenues from external customers $156,146 $46,268 $11,020 $ -- $213,434 EBITDA 126,090 17,978 4,072 (3,321) 144,819
10 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total assets by segment are as follows:
June 30, December 31, (In thousands) 2002 2001 --------------------------------------------------------------------------------------------- Interstate Natural Gas Pipelines $1,833,229 $1,858,902 Natural Gas Gathering and Processing 821,133 792,249 Coal Slurry 21,557 22,009 Other (c) 25,651 14,195 ---------- ---------- Total Assets $2,701,570 $2,687,355 ========== ==========
(a) Interstate natural gas pipeline operating results for 2002 include results of Midwestern Gas Transmission, which was acquired by the Partnership effective May 2001. (b) Natural gas gathering and processing operating results for 2002 include results of Bear Paw Energy and Border Midstream, which were acquired by the Partnership effective late March 2001 and April 2001, respectively. (c) Includes other items not allocable to segments. 6. NET INCOME PER UNIT Net income per unit is computed by dividing net income, after deduction of the general partners' allocation, by the weighted average number of outstanding common units. The general partners' allocation is equal to an amount based upon their collective 2% general partner interest adjusted for incentive distributions. The distribution to partners amount shown on the accompanying consolidated statement of changes in partners' equity includes incentive distributions to the general partners of approximately $3.6 million. On July 22, 2002, the Partnership declared a cash distribution of $0.80 per unit ($3.20 per unit on an annualized basis) for the quarter ended June 30, 2002. The distribution is payable August 14, 2002, to unitholders of record at July 31, 2002. 7. ACCOUNTING PRONOUNCEMENTS In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Partnership is in the process of evaluating the application of this pronouncement. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, No. 44 and No. 64, Amendments to FASB Statements No. 13 and Technical Corrections." SFAS No. 145 streamlines the reporting of debt extinguishments and requires that only gains and losses from extinguishments meeting the criteria in Accounting Principles Board Opinion 30 would be classified as extraordinary. Thus, gains or losses arising from extinguishments that are part of a company's 11 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 1. FINANCIAL STATEMENTS - (CONCLUDED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recurring operations would not be reported as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. The Partnership does not expect the adoption of SFAS No. 145 to have a material impact on its financial position, results of operations or cash flows. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued in June 2002 and addresses accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under prior accounting requirements, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Partnership does not expect the adoption of SFAS No. 146 to have a material impact on its financial position, results of operations or cash flows. 8. SUBSEQUENT EVENTS In July 2002, the Partnership sold 2,186,700 common units. In conjunction with the issuance of additional common units, the Partnership's general partners are required to make capital contributions to the Partnership to maintain a 2% general partner interest in accordance with the partnership agreements. The net proceeds from the sale of common units and the general partners' capital contributions totaled approximately $75.9 million and were primarily used to repay amounts borrowed under a 2001 credit agreement. 12 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES Management's discussion and analysis of financial condition and results of operations is based on the Consolidated Financial Statements of Northern Border Partners, L.P. (the "Partnership"). The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. You should read the following discussion and analysis in conjunction with the Consolidated Financial Statements included elsewhere in this report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Certain amounts included in or affecting the Partnership's Consolidated Financial Statements and related disclosures must be estimated, requiring it to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Any effects on the Partnership's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. The Partnership's significant accounting policies are summarized in Note 2 - Notes to Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. Certain of the Partnership's accounting policies are of more significance in its financial statement preparation process than others. Northern Border Pipeline's accounting policies conform to Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." Accordingly, certain assets that result from the regulated ratemaking process are recorded that would not be recorded under generally accepted accounting principles for nonregulated entities. The Partnership's long-lived assets are stated at original cost. The Partnership must use estimates in determining the economic useful lives of those assets. For utility property, no retirement gain or loss is included in income except in the case of extraordinary retirements or sales. The original cost of utility property retired is charged to accumulated depreciation and amortization, net of salvage and cost of removal. With respect to the Partnership's acquisitions, the excess of the purchase price over the fair value of the net assets acquired or goodwill was being amortized over 30 years prior to 2002. Effective January 1, 2002, the Partnership is no longer amortizing goodwill due to its adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." Finally, the Partnership's accounting for financial instruments follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. RESULTS OF OPERATIONS The Partnership owns a 70% general partner interest in Northern Border Pipeline Company. Crestone Energy Ventures, L.L.C.; Bear Paw Energy, L.L.C.; Border Midstream Services, Ltd.; Midwestern Gas Transmission Company; and Black Mesa Pipeline, Inc. are wholly-owned subsidiaries of the Partnership. The Partnership also owns a 49% common membership interest and a 100% class A share 13 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES interest in Bighorn Gas Gathering, L.L.C.; a 33% interest in Fort Union Gas Gathering, L.L.C.; a 35% interest in Lost Creek Gathering, L.L.C.; and a 36% interest in the Gregg Lake/Obed Pipeline. During 2001, the following acquisitions were made by the Partnership: Bear Paw Energy on March 30; the Mazeppa and Gladys gas processing plants, gas gathering systems and a minority interest in the Gregg Lake/Obed Pipeline on April 4, which are included in the operating results of Border Midstream Services; and Midwestern Gas Transmission effective May 1. SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001 The Partnership's net income increased $9.6 million (47%) for the second quarter of 2002, as compared to the same period in 2001. Net income from the interstate natural gas pipeline segment increased approximately $5.4 million, primarily due to Northern Border Pipeline. Northern Border Pipeline's operating results benefited from a pipeline expansion and extension project completed in October 2001 ("Project 2000"). The Partnership's interest expense decreased $2.4 million from 2001 to 2002, primarily due to lower average interest rates. As a result of adopting SFAS No. 142, the Partnership is no longer amortizing goodwill (see Note 2 - Notes to Consolidated Financial Statements). The 2001 operating results included $3.9 million of goodwill amortization or $0.10 per unit. Goodwill amortization by business segment was as follows: interstate natural gas pipelines - $0.4 million; natural gas gathering and processing - $3.4 million; and coal slurry - $0.1 million. Operating revenues, net decreased $2.2 million (2%) for the second quarter of 2002, as compared to the same period in 2001. Operating revenues from the natural gas gathering and processing segment decreased $7.5 million (18%) primarily due to reductions in commodity prices between 2001 and 2002. Operating revenues from the interstate natural gas pipelines increased $5.5 million due to a $3.2 million (4%) increase in Northern Border Pipeline's revenues and a $2.3 million increase in Midwestern Gas Transmission's revenues. Northern Border Pipeline reflected additional revenues of approximately $3.4 million related to Project 2000. The impact of the additional revenues associated with Project 2000 was partially offset by uncollected revenues associated with the transportation capacity held by Enron North America Corp. ("ENA"), which filed for Chapter 11 bankruptcy protection in December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On The Partnership's Business"). For the second quarter of 2002, the revenues lost on this capacity totaled approximately $0.3 million. Midwestern Gas Transmission's revenues in 2002 include an additional month. Product purchases decreased $5.6 million (32%) for the second quarter of 2002 as compared to the same period in 2001 due to lower commodity prices. In conjunction with its gathering and processing activities, Bear Paw Energy receives the natural gas stream from producers. Upon sale of the natural gas liquids and residue that it processes in its facilities, Bear Paw Energy pays the producers based upon a percentage of the gross proceeds. Depreciation and amortization expense decreased $1.4 million (7%) for the second quarter of 2002, as compared to the same period in 2001. Depreciation and amortization expense in the second quarter of 2001 includes goodwill amortization of $2.3 million, which is not being recorded in 2002 (see Note 2 - Notes to Consolidated Financial Statements). 14 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES Consolidated interest expense decreased $2.7 million (11%) for the second quarter of 2002, as compared to the same period in 2001. Interest expense for the Partnership decreased approximately $2.4 million (23%) for the second quarter of 2002, as compared to the same period in 2001, due to lower average interest rates partially offset by additional borrowings for acquisitions made in 2001. Other income (expense) increased $2.5 million for second quarter of 2002, as compared to the same period in 2001, primarily due to an increase in equity earnings of unconsolidated affiliates. The 2001 amount included goodwill amortization of approximately $1.6 million, which is not being recorded in 2002 (see Note 2 - Notes to Consolidated Financial Statements). Minority interests in net income increased $2.1 million (22%) for the second quarter of 2002, as compared to the same period in 2001, primarily due to higher operating results for Northern Border Pipeline. The extraordinary loss from debt restructuring of $1.2 million recorded in the second quarter of 2001 relates to Black Mesa's 10.7% Secured Senior Notes, which were repaid by the Partnership prior to maturity. SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001 The Partnership's net income increased $19.6 million (51%) for the first half of 2002, as compared to the same period in 2001. Net income from the interstate natural gas pipeline segment, excluding the impact of goodwill amortization, increased approximately $8.8 million, of which $6.1 million is due to Northern Border Pipeline and $2.7 million is due to Midwestern Gas Transmission. Northern Border Pipeline's operating results benefited from Project 2000. Since Midwestern Gas Transmission was acquired effective May 1, 2001, the first half of 2001 included two months of operating results as compared to six months in 2002. Net income from the natural gas gathering and processing segment, excluding the impact of goodwill amortization, increased approximately $3.1 million. Operating results for Bear Paw Energy include an additional three months in 2002 and operating results for Border Midstream Services include an additional four months in 2002. As a result of adopting SFAS No. 142, the Partnership is no longer amortizing goodwill (see Note 2 - Notes to Consolidated Financial Statements). The 2001 operating results included $5.7 million of goodwill amortization or $0.16 per unit. Goodwill amortization by business segment was as follows: interstate natural gas pipelines - $0.4 million; natural gas gathering and processing - $5.1 million; and coal slurry - $0.2 million. Operating revenues, net increased $27.9 million (13%) for the first half of 2002, as compared to the same period in 2001. Operating revenues from the natural gas gathering and processing segment increased $17.6 million primarily due to the acquisitions made beginning in late March 2001. Operating revenues from the interstate natural gas pipelines increased $10.7 million due to a $6.4 million increase in Midwestern Gas Transmission's revenues and a $4.3 million (3%) increase in Northern Border Pipeline's revenues. Northern Border Pipeline reflected additional revenues of approximately $6.8 million related to Project 2000. The impact of the additional revenues associated with Project 2000 was partially offset by uncollected revenues associated with the transportation capacity held by ENA, which filed for Chapter 11 bankruptcy protection in 15 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On The Partnership's Business"). For the first half of 2002, the revenues lost on this capacity totaled approximately $1.8 million. Midwestern Gas Transmission's revenues in 2002 include an additional four months. Product purchases increased $5.2 million (30%) for the first half of 2002 as compared to the same period in 2001, primarily due to an additional three months of Bear Paw Energy's operating results in 2002. In conjunction with its gathering and processing activities, Bear Paw Energy receives the natural gas stream from producers. Upon sale of the natural gas liquids and residue that it processes in its facilities, Bear Paw Energy pays the producers based upon a percentage of the gross proceeds. Operations and maintenance expense increased $8.6 million (21%) for the first half of 2002, as compared to the same period in 2001. Operations and maintenance expense for the natural gas gathering and processing segment increased $7.0 million, primarily due to the businesses acquired in 2001. Operations and maintenance expense from the interstate natural gas pipelines decreased $0.9 million due primarily to a decrease in Northern Border Pipeline's expense by $3.1 million (18%) partially offset by an increase in Midwestern Gas Transmission's expense by $2.2 million. Northern Border Pipeline's operations and maintenance expense decreased due primarily to a decrease in employee benefits and administrative expenses. Midwestern Gas Transmission's expense for 2002 includes an additional four months of activity. The Partnership's operations and maintenance expense increased $1.7 million (116%), primarily due to administrative expenses associated with the acquisitions made in 2001. Operations and maintenance expense for Black Mesa Pipeline increased $0.8 million (12%) primarily due to costs associated with several unplanned coal slurry discharges in the first quarter of 2002. Depreciation and amortization expense increased $1.3 million (4%) for the first half of 2002, as compared to the same period in 2001. Depreciation and amortization expense for the natural gas gathering and processing segment, excluding the impact of goodwill amortization, increased by $3.4 million, due primarily to the acquisitions made in 2001. Depreciation and amortization expense for the interstate natural gas pipelines, excluding the impact of goodwill amortization, increased $1.0 million due primarily to expense from Midwestern Gas Transmission. Depreciation and amortization expense in the first half of 2001 includes goodwill amortization of $2.6 million, which is not being recorded in 2002 (see Note 2 - Notes to Consolidated Financial Statements). Taxes other than income increased $3.2 million (27%) for the first half of 2002, as compared to the same period in 2001. Taxes other than income for the interstate natural gas pipelines increased $2.5 million due primarily to expense from Northern Border Pipeline. Northern Border Pipeline periodically reviews and adjusts its estimates of ad valorem taxes. Reductions to previous estimates in 2001 exceeded reductions to previous estimates in 2002 by approximately $1.6 million. In addition, the estimates for 2002 ad valorem taxes have increased due to the completion of Project 2000 in 2001. Taxes other than income for the natural gas gathering and processing segment increased $0.7 million, primarily due to the businesses acquired in 2001. Consolidated interest expense decreased $3.4 million (7%) for the first half of 2002, as compared to the same period in 2001. Interest expense attributable 16 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES to Northern Border Pipeline decreased $2.0 million (7%) for the first half of 2002, as compared to the same period in 2001, due to a decrease in Northern Border Pipeline's average interest rate. Interest expense for the Partnership decreased approximately $0.9 million (5%) for the first half of 2002, as compared to the same period in 2001, due to lower average interest rates partially offset by additional borrowings for acquisitions made in 2001. Other income (expense) increased $8.0 million for first half of 2002, as compared to the same period in 2001. Equity earnings of unconsolidated affiliates increased $6.0 million to $6.5 million for 2002 as compared to 2001. The 2001 amount included goodwill amortization of approximately $3.1 million, which is not being recorded in 2002 (see Note 2 - Notes to Consolidated Financial Statements). Other income (expense) for 2001 included non-recurring charges of $2.4 million, primarily related to a loss on a forward purchase of Canadian dollars to fund the acquisition of Border Midstream's gathering and processing assets. In addition, the amount for 2001 includes a charge of approximately $1.7 million for an uncollectible receivable from a telecommunications company that had purchased excess capacity on Northern Border Pipeline's communication system. Minority interests in net income increased $2.6 million (13%) for the first half of 2002, as compared to the same period in 2001, primarily due to improved operating results for Northern Border Pipeline. The extraordinary loss from debt restructuring of $1.2 million recorded in the first half of 2001 relates to Black Mesa's 10.7% Secured Senior Notes, which were repaid by the Partnership prior to maturity. LIQUIDITY AND CAPITAL RESOURCES DEBT AND CREDIT FACILITIES The Partnership's debt and credit facilities outstanding at June 30, 2002, are as follows:
Payments Due by Period -------------------------- Current Portion (Less Than Long-Term Total 1 Year) Portion -------------------------------------------------------------------------------------- (In Thousands) Northern Border Pipeline $175 million Pipeline Credit Agreement, average 2.47% $ 22,000 $ -- $ 22,000 1992 Series C and D Senior Notes, average 8.53% 143,000 78,000 65,000 6.25% Senior Notes due 2007 225,000 -- 225,000 7.75% Senior Notes due 2009 200,000 -- 200,000 7.50% Senior Notes due 2021 250,000 -- 250,000 Northern Border Partners, L.P. 8 7/8% Senior Notes due 2010 250,000 -- 250,000 7.10% Senior Notes due 2011 225,000 -- 225,000 $200 million Partnership Credit Agreement, average 2.69%, due 2004 109,000 -- 109,000 ---------- ------- ---------- Total $1,424,000 $78,000 $1,346,000 ========== ======= ==========
17 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES Northern Border Pipeline entered into a $175 million three-year credit agreement ("2002 Pipeline Credit Agreement") with certain financial institutions in May 2002. The 2002 Pipeline Credit Agreement replaced a credit agreement entered into in 1997. The 2002 Pipeline Credit Agreement is to be used to refinance existing indebtedness and for general business purposes. At June 30, 2002, $22 million was outstanding under the 2002 Pipeline Credit Agreement at an average interest rate of 2.47%. At June 30, 2002, Northern Border Pipeline had outstanding $143 million of senior notes issued in a $250 million private placement under a July 1992 note purchase agreement. The Series C Notes, with a principal amount of $78 million, mature in August 2002. The Series D Notes will mature in August 2003. Northern Border Pipeline anticipates borrowing under the 2002 Pipeline Credit Agreement to repay the Series C Notes. In April 2002, Northern Border Pipeline completed a private offering of $225 million of 6.25% Senior Notes due 2007 ("2002 Pipeline Senior Notes"). The indenture under which the 2002 Pipeline Senior Notes was issued does not limit the amount of unsecured debt Northern Border Pipeline may incur, but it does include restrictions on incurrence of secured indebtedness. The proceeds from the 2002 Pipeline Senior Notes of approximately $223.5 million were used to reduce indebtedness outstanding under a previous credit agreement. The indentures under which the Partnership's 8 7/8% Senior Notes and the 7.10% Senior Notes (collectively "Partnership Senior Notes") were issued do not limit the amount of unsecured debt the Partnership may incur, but they do include restrictions on incurrence of secured indebtedness. The indentures also contain provisions that would require the Partnership to offer to repurchase the Partnership Senior Notes, if either Standard & Poor's Rating Services or Moody's Investors Service ("Moody's") rate the notes as below investment grade. In addition, if one or more holders of the Partnership Senior Notes elect to require the Partnership to repurchase, then a default will result under the Partnership Credit Agreement. In April 2002, Moody's downgraded the Partnership's senior unsecured debt to a rating of Baa2 and affirmed the A3 rating of Northern Border Pipeline's senior unsecured debt, both with a negative rating outlook. Northern Border Pipeline's and the Partnership's credit ratings remain above investment grade. In July 2002, the Partnership sold 2,186,700 common units. In conjunction with the issuance of additional common units, the Partnership's general partners are required to make capital contributions to the Partnership to maintain a 2% general partner interest in accordance with the partnership agreements. The net proceeds from the sale of common units and the general partners' capital contributions totaled approximately $75.9 million and were primarily used to repay amounts borrowed under the Partnership Credit Agreement. Short-term liquidity needs will be met by operating cash flows, the Partnership Credit Agreement and the 2002 Pipeline Credit Agreement. Long-term capital needs may be met through the ability to issue long-term indebtedness as well as additional limited partner interests of the Partnership. CASH FLOWS FROM OPERATING ACTIVITIES Cash flows provided by operating activities increased $7.3 million to $105.7 million for the first half of 2002, as compared to the same period in 2001. Net income to partners before depreciation and amortization increased $20.9 million 18 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES primarily due to the natural gas gathering and processing businesses and Midwestern Gas Transmission acquired in 2001. In 2002, working capital decreased $10.4 million as compared to an increase in 2001 of $8.0 million. The working capital change for 2001 reflected a $9.5 million decrease in accounts receivable, primarily related to Northern Border Pipeline. Northern Border Pipeline had been billing its shippers subject to refund until its rate case was settled. Cash flows from operating activities for 2001 included net cash outflows of approximately $4.7 million related to Northern Border Pipeline's rate case. During the first quarter of 2001, Northern Border Pipeline made refunds to its shippers totaling $6.8 million, which included approximately $2.1 million collected in the first quarter of 2001 with the remainder collected previously. CASH FLOWS FROM INVESTING ACTIVITIES The investment in unconsolidated affiliates of $2.4 million and $6.2 million for the first half of 2002 and 2001, respectively, primarily reflects capital contributions to Bighorn. Acquisitions of businesses decreased $339.0 million to $1.2 million for the first half of 2002 as compared to the same period in 2001. The 2001 amount represents acquisitions of Midwestern Gas Transmission and the assets of Border Midstream Services in April 2001 and the cash portion of the purchase price of Bear Paw Energy in March 2001. The purchase of Bear Paw Energy also involved the issuance of 5.7 million common units valued at $183.0 million, for a total purchase price of $381.7 million. Capital expenditures of $27.5 million for the first half of 2002 included $21.9 million for the natural gas gathering and processing segment and $5.2 million for the interstate natural gas pipelines segment. For the same period in 2001, capital expenditures were $48.0 million, which includes $31.7 million for gas gathering and processing facilities and $16.3 million for interstate natural gas pipeline facilities. The expenditures for interstate natural gas pipeline facilities in 2001 include $12.4 million for Northern Border Pipeline's Project 2000. Total capital expenditures and investments in unconsolidated affiliates for 2002 are estimated to be $70 million, which includes $31 million expended through the first half of 2002. Capital expenditures for the interstate natural gas pipelines are estimated to be $23 million, including approximately $14 million for Northern Border Pipeline. Northern Border Pipeline currently anticipates funding its 2002 capital expenditures primarily by borrowing on debt facilities and using operating cash flows. Capital expenditures for natural gas gathering and processing facilities are estimated to be $36 million and additional investments in unconsolidated affiliates are estimated to be $11 million for 2002. Funds required to meet the capital requirements for 2002 are anticipated to be provided from debt borrowings, issuance of additional limited partner interests in the Partnership and operating cash flows. The estimated capital expenditures and investments do not include any amounts for acquisitions. If any such acquisitions are made, the Partnership's estimated capital requirements would be increased, which the Partnership would anticipate funding from debt borrowings and the issuance of additional limited partner interests in the Partnership. 19 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES CASH FLOWS FROM FINANCING ACTIVITIES Cash flows used in financing activities was $77.2 million for the first half of 2002 as compared to cash flows provided by financing activities of $290.0 million for the first half of 2001. Cash distributions to the unitholders and the general partners increased $18.2 million to $71.6 million. The increase is due to both an increase in the number of common units outstanding and an increase in the distribution rate. The distribution paid in the first quarter and second quarter of 2002 was $0.80 per unit as compared to $0.70 per unit paid in the first quarter of 2001 and $0.7625 per unit paid in the second quarter of 2001. For 2002, Northern Border Pipeline received net proceeds from the 2002 Pipeline Senior Notes of approximately $223.5 million that were used to reduce indebtedness outstanding under a previously outstanding credit agreement. During the first half of 2002, Northern Border Pipeline had net repayments under its credit agreements of $250.0 million as compared to net borrowings in 2001 of $5.0 million. For the first half of 2002, borrowings under the Partnership Credit Agreement totaled $45.0 million as compared to borrowings of $200.0 million in the first half of 2001. The net proceeds in the first half of 2001 from the private offering of the 7.10% Senior Notes totaled approximately $223.2 million. The proceeds from the 7.10% Senior Notes and the Partnership Credit Agreement were primarily used to fund the acquisition of Bear Paw Energy, the assets of Border Midstream Services and Midwestern Gas Transmission discussed previously and to repay $47.3 million of indebtedness outstanding on a prior credit facility. For the first half of 2001, Northern Border Pipeline recognized a decrease in bank overdraft of $22.4 million. At December 31, 2000, Northern Border Pipeline reflected the bank overdraft primarily due to rate refund checks outstanding. Financing activities for 2001 reflect the issuance of partnership interests of $173.2 million, which was primarily used to repay amounts borrowed on the Partnership Credit Agreement of $168.0 million. In March 2001, the Partnership paid approximately $4.3 million to terminate forward starting interest rate swap agreements and in April 2002, Northern Border Pipeline received $2.4 million from the termination of forward starting interest rate swap agreements (see Note 4 - Notes to Consolidated Financial Statements). NEW ACCOUNTING PRONOUNCEMENTS See Note 7 - Notes to Consolidated Financial Statements. UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON THE PARTNERSHIP'S BUSINESS As more fully discussed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001, on December 2, 2001, Enron Corp. filed a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Certain wholly owned Enron subsidiaries, including ENA, have also filed for Chapter 11 bankruptcy protection. ENA was a party to shipper contracts obligating ENA to pay demand charges for approximately 3.4% of Northern Border Pipeline's capacity. On June 13, 2002, the Bankruptcy Court approved a Stipulation and Order entered into on May 15, 2002, by ENA and Northern Border Pipeline pursuant to which ENA agreed that all but one of the shipper contracts, representing 1.7% of pipeline capacity, will be deemed rejected and terminated. ENA must effect a permanent release of the remaining contract capacity or assume 20 PART I. FINANCIAL INFORMATION - (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED) NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES or reject the remaining contract by October 31, 2002. Northern Border Pipeline posted the available capacity and awarded approximately 94% of the capacity at maximum rates for varying terms. Payment received by Northern Border Pipeline for the capacity awarded will mitigate claims against ENA. For the period from January to June 2002, Northern Border Pipeline has realized lost revenues of approximately $1.8 million for ENA's capacity. If it is unable to market the remaining capacity, Northern Border Pipeline has estimated its financial exposure remaining for 2002 to be approximately $1.7 million in revenues. Northern Border Pipeline is uncertain regarding the amount of damages for breach of contract or other claims that it will be able to establish in the bankruptcy proceeding, and it cannot predict the amounts, if any, that it will collect or the timing of collection. The Partnership believes, however, that any such failure to collect will not have a material adverse effect on its financial condition, and any amounts collected will not be material. On May 3, 2002, Enron presented to the creditors committee a proposal under which certain of Enron's core energy assets would be separated from Enron's bankruptcy estate and operated prospectively as a new integrated power and pipeline company. Northern Plains Natural Gas Company and Pan Border Gas Company, general partners of the Partnership, are proposed to be included in this company. If the creditors committee endorses this proposal, the inclusion of Northern Plains and Pan Border in the new company would be subject to a Section 363 auction under the supervision of the Bankruptcy Court. There is no assurance that Enron's proposal will be adopted as proposed. Even if adopted as proposed, there is no assurance as to whether Northern Plains and Pan Border would ultimately be included in the new company or sold to a different bidder in a Section 363 auction. The Partnership plans to continue to monitor developments at Enron, to continue to assess the impact on the Partnership of its existing agreements and relationships with Enron. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS The statements in this Quarterly Report that are not historical information are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results of the Partnership's operations may differ materially from those expressed in these forward-looking statements. Such forward-looking statements include the discussions in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" regarding the Partnership's estimated capital expenditures and equity investments in 2002. Although the Partnership believes that its expectations regarding future events are based on reasonable assumptions within the bounds of its knowledge of its business, it can give no assurance that its goals will be achieved or that its expectations regarding future developments will be realized. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the December 2, 2001 filing by Enron of a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, industry results, future demand for natural gas, availability of supplies of Canadian natural gas, the ability to market pipeline capacity on favorable terms, political and regulatory developments that impact FERC proceedings involving the interstate natural gas pipelines, the interstate natural gas pipelines' success in sustaining their positions in such proceedings or the success of intervenors in opposing their positions, competitive developments by Canadian and U.S. natural gas transmission peers, political and regulatory developments in Canada, and conditions of the capital markets and equity markets. 21 PART I. FINANCIAL INFORMATION - (CONCLUDED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES The Partnership may be exposed to market risk through changes in commodity prices, exchange rates and interest rates, as discussed below. A control environment has been established which includes policies and procedures for risk assessment and the approval, reporting and monitoring of financial instrument activities. The Partnership has utilized and expects to continue to utilize financial instruments in the management of interest rate risks and natural gas and natural gas liquids marketing activities to achieve a more predictable cash flow by reducing its exposure to interest rate and price fluctuations. There have not been any material changes in market risk exposures that would affect the quantitative and qualitative disclosures presented as of December 31, 2001, in Item 7a of the Partnership's Annual Report on Form 10-K. For more information on risk management activities, see Note 4 to the Partnership's consolidated financial statements included elsewhere in this report. 22 PART II. OTHER INFORMATION NORTHERN BORDER PARTNERS, L.P. AND SUBSIDIARIES ITEM 1. Legal Proceedings An unanticipated release of coal slurry from the pipeline owned by Black Mesa Pipeline occurred on August 6, 2002. As required under the Consent Decree entered into by Black Mesa, notification of this release was provided to the United States Environmental Protection Agency and the Arizona Department of Environmental Quality. Black Mesa Pipeline will be subject to stipulated penalties for this release. To date, stipulated penalties have not been assessed for prior unanticipated releases of coal slurry. Although no assurance can be given, we believe that such penalties under the terms of the Consent Decree for all releases will not exceed $100,000. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. 1) The Partnership filed a Current Report on Form 8-K, dated April 9, 2002, reporting a press release issued by the Partnership that announced that Moody's Investors Service had assigned a debt rating of Baa2 to the Partnership's public debt and had affirmed the A3 rating of Northern Border Pipeline's senior unsecured notes. 2) The Partnership filed a Current Report on Form 8-K, dated May 15, 2002, reporting a Stipulation and Order entered into by Northern Border Pipeline and Enron North America Corp. 3) The Partnership filed a Current Report on Form 8-K, dated June 5, 2002, reporting the consent of KPMG LLP to incorporation by reference in certain registration statements of its report dated March 8, 2002 which appears in the December 31, 2001 Annual Report on Form 10-K. 4) The Partnership filed a Current Report on Form 8-K, dated June 26, 2002, reporting the public offering of common units. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHERN BORDER PARTNERS, L.P. (A Delaware Limited Partnership) Date: August 14, 2002 By: /s/ Jerry L. Peters -------------------------------- Jerry L. Peters Chief Financial and Accounting Officer 24 INDEX TO EXHIBITS 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.