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Gathering, Processing Gains Help Offset Uncontracted Capacity on Northern Border

Improvements in gathering and processing, mainly in the Williston Basin, should help offset the impact of having a significant amount of firm transportation capacity on Northern Border Pipeline uncontracted this year, Northern Border Partners reported on Wednesday. The company said it expects the market conditions that led to the 600 MMcf/d of uncontracted capacity, or one-quarter of its total pipeline capacity, in April to continue through the second quarter, possibly longer. As a result, it lowered its 2005 earnings guidance by about 4%.

Northern Border Partners' first quarter 2005 financial results slipped 5.2% with net income of $34.7 million, or $0.69 per unit, compared to $36.6 million, or $0.73 per unit, in the first quarter 2004.

"Our first quarter results exceeded our expectations," said CEO Bill Cordes. "Those results were driven by strong performance primarily in the gathering and processing business segment. The pipeline segment also had solid performance in the first quarter when you take into account certain items that impact the comparison to last year.

"Looking at the total year 2005, we recently announced that for the remainder of the year, the effects of unsold capacity on Northern Border Pipeline were greater than expected. Therefore, we're reducing earnings guidance for the year by approximately $0.10 per unit to a range of $2.40-2.50 per unit."

For May, about 304 MMcf/d of the unsold capacity on the 2.4 Bcf/d pipeline system, which runs from Monchy, SK, to Ventura, IA and extends to Chicago, was contracted at a discounted rate equal to 78% of the 29.6-cent maximum firm transportation rate, Cordes said. "Our decision to start some short-term discounting was really based on experience in April and our view of the best overall strategy to maximize our revenues for the long term and for 2005.

"The long-term fundamentals for the western Canadian supplies and markets still indicate that there should be favorable demand for capacity on Northern Border Pipeline on an annual basis, but as we have seen recently these fundamentals can be masked under certain conditions." Cordes explained that the primary reason for reduced flows on Northern Border Pipeline in April and May has been increased storage injections in Canada due to unusually high summer-to-winter price spreads.

"We believe that by early third quarter storage injections in Canada will physically have to slow as storage builds, which should result in resumed transportation demand on Northern Border Pipeline's capacity," he said. "Therefore, we expect that the second quarter will probably have most of the impact of this unsold or discounted capacity."

However, the company estimates that uncontracted capacity could reach nearly 700 MMcf/d in June and peak at more than 900 MMcf/d by November.

"When you work all that out, our current opinion of the total revenue reduction on Northern Border Pipeline from our maximum rate levels is a range of $15-28 million and that works out to be $11-20 million net to the partnership," said Cordes.

"Fortunately the increasing [gathering] results from the Williston Basin should somewhat offset what's going on in Northern Border Pipeline. Therefore our net income, excluding the acquisitions, is expected to be in range of $122-126 million, that's $2.40-2.50 per unit.

"We do continue to have strong cash flow and with these results we believe our distribution is well supported. We are continuing evaluating various growth opportunities and acquisitions that may be appropriate for the [master limited partnership]. These assets may include assets from Oneok but it's also important to keep in mind that they include an active search for assets from others as well."

Northern Border Partners LP's cash flow was $90.7 million in the first quarter 2005 down from $91.3 million in the first quarter of 2004. The company reported increased operating income of $63.6 million, compared with $61.7 million one year ago. The interstate natural gas pipeline segment contributed reported net income of $32.1 million in first quarter 2005, compared to $34.3 million in first quarter 2004.

The gathering and processing segment reported net income of $13.7 million, an increase of 29% or $3.1 million, quarter over quarter. Gathering and processing volumes in the Williston Basin were 60 MMcf/d compared to 50 MMcf/d in first quarter 2004, a 20% increase, due to expansions and increased utilization of the Grasslands and Marmarth systems. Total gathered volumes for the segment increased to 1,049 MMcf/d as compared to 975 MMcf/d for 2004. Volumes on the gathering systems in the Powder River Basin rose to 210 MMcf/d versus 194 MMcf/d in first quarter 2004. Higher commodity prices also helped boost profits.

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