Research Associate: Payal Jalan, M. Fin. Editor: Lynnette Woolery, M Sc.(Fin), CFA

May 11, 2006 Research Digest Research Associate: Payal Jalan, M. Fin. Editor: Lynnette Woolery, M Sc.(Fin), CFA Sr. Editor: Ian Madsen, CFA [email protected] 800-767-3771 x417 www.zackspro.com 155 North Wacker Drive  Chicago, IL 60606

Northern Border Partners LP (NBP - NYSE) $49.50

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q06 earnings update. Previous Edition: April 3, 2006.

Overview

Omaha, Nebraska-based Northern Border Partners L.P. (NBP) is one of the largest publicly-traded limited partnerships and a leading transporter of natural gas imported from Canada into the United States. Its business operations consist of Interstate Natural Gas Pipelines and Natural Gas Gathering and Processing. The Interstate Natural Gas Pipelines segment provides natural gas transmission services in mid western United States. The Gas Gathering and Processing segment provides services for gathering, treating, processing and compressing natural gas and fractions natural gas liquids for third parties and related field services. On December 31, 2005, the company shut down its third business segment, the Coal Slurry Pipeline which consisted of operations of the company's wholly owned subsidiary, Black Mesa Pipeline Inc. It expects it to resume in the future. Recently, ONEOK, Inc. (NYSE:OKE) acquired 0.35% general partnership (GP) interest in NBP from TransCanada PipeLines Limited, thereby holding the entire 2% GP interest of NBP. For more information about the company, visit its website at www.northernborderpartners.com. Northern Border Partners operates on a calendar year basis.

On May 2, 2006 NBP released its financial results for the period ended March 31, 2006. The partnership reported earnings of $0.67 per unit (vs. $0.68 in 1Q05). During the quarter, the partnership shifted its focus to its midstream assets with the purchase of OKE assets, the sale of 20% of Northern Border Pipeline (NBPL), and the joint venture with Williams Cos.

Analysts have identified the following factors for evaluating the investment merits of NBP: Key Positive Arguments Key Negative Arguments

Compelling Fundamentals Fundamental Issues  Rising pipeline integrity costs and general corporate  Contracts may be renewed at rates unfavorable to expenses have not affected NBP’s cash flow like other NBP. partnerships. Macro Issues  The acquisition of OKE assets will result in greater  Volatile oil and gas prices. asset and revenue diversity and a stronger balance  The partnership business is subject to environmental sheet. and other regulations, and any changes may Growth Opportunities increase the costs for companies in the energy  Volumes in the Powder River Basin continue to industry. rebound with an improvement in drilling activities.  Gas Gathering & Processing segment to benefit from high gas prices and natural gas liquids.  100% ownership of Guardian Pipeline would add strategic benefits to the company along with significant fee-based revenue under long-term contracts.  Joint venture with Williams Cos. would boost cash flow in the future.

Revenue 1Q05A 1Q06A 2Q06E 3Q06E 4Q06E 2006E 2007E 2008E Digest Average $160 $171 $166↑ $170↑ $170↑ $929↑ $1,068↑ $1,613↓ Digest High $160 $171 $245 $249 $249 $1,417 $1,874 $2,193 Digest Low $160 $171 $87 $90 $91 $439 $280 $1,069 Y-o-Y Growth 6.5% 11.3% -7.3% -8.6% 36.9% 15.0% 52.7% Q-o-Q Growth -8.0% -2.6% 2.0% 0.1% * Note: None of the brokerage firms have provided any revenue estimate on the partnership’s primary business segment.

The company reported total revenue of $171M in 1Q06, up 6.5% from $160M reported in the comparable period of 2005. The $11M of increase was due to higher Natural Gas Gathering and Processing segment revenue which offset lower revenue from Interstate Natural Gas Pipeline segment and the loss of Coal Slurry Pipeline revenue resulting from the shut down of Black Mesa on December 31, 2005.

Interstate Natural Gas Pipeline (consists of 50% interest in Northern Border Pipeline, 100% interest in Guardian Pipeline, Midwestern Gas Transmission and Viking Gas Transmission) – Revenue from this segment averaged $96M, down from $97M in 1Q05. The results were driven by a decline in revenue at Northern Border Pipeline of $3M in 1Q06, primarily related to discounted transportation capacity that was sold for shorter distances. Revenue also includes an increase of $2.1M in 1Q06, related to expanded southbound capacity on Midwestern Gas Transmission that went into service in late 2005. Average daily throughput for the segment was down q/q at 3,468 mmcf/d in 1Q06, compared with 3,501 mmcf/d in 1Q05.

The management expects revenue on Northern Border Pipeline to be seasonal and may require some discounting to maximize the revenue. It expects demand for NBPL’s transportation capacity to be comparable to 2005 demand based on its expectations for Canadian natural gas supply and demand for natural gas in the Midwestern US.

Natural Gas Gathering and Processing (consists of Bear Paw Energy and Crestone Energy) – For the first quarter, revenue from the segment increased $16M to $73M, an increase of 28% from $58M in 1Q05. Results benefited from increased revenue from Williston Basin operations, derived primarily from the sale of natural gas and natural gas liquids gathered and processed under percentage-of- proceeds contracts. However, the increase more than offset decreased gathered volumes from NBP’s wholly owned Powder River Basin operations.

The management believes the favorable natural gas and natural gas liquids volumes and prices will generate strong results for its Natural Gas Gathering and Processing segment.

Coal Slurry Pipeline – On December 31, 2005, NBP shut down its Coal Slurry Pipeline operation. The partnership expects the operation to resume in the future and as such did not include the first quarter results of the segment in discontinued operations.

NBP’s consensus model forecasts total revenue of $929M for 2006, $1,068M for 2007 and $1,613M for 2008, which represents y/y growth of 36.9% in 2006, 15.0% in 2007 and 52.7% in 2008. This also represents a compound annual growth rate (CAGR) of 21.8% on realized 2004 revenue.

Zacks Investment Research Page 2 www.zackspro.com Please refer to the Zacks Research Digest spreadsheet of NBP for specific revenue estimates.

Margins

Margin 4Q05A 1Q06A 2Q06E 3Q06E 4Q06E 2006E 2007E 2008E EBITDA Margin 56.5% 51.8% 88.4% 89.4% 90.0% 52.4% 52.4% 37.7% Operating margin 42.8% 37.3% 84.8% 64.5% 65.5% 43.2% 40.6% 33.0% Pre-Tax Margin 21.9% 21.5% 53.9% 51.1% 51.8% 32.8% 35.1% Net margin 19.7% 18.1% 69.7% 41.5% 41.9% 31.0% 13.0%

NBP’s first quarter EBITDA averaged $91.8M, up from $90.7M in the first quarter of 2005 while depreciation of $21.3M was roughly in-line with the comparable quarter year ago. Operating income averaged $64M, representing a decline of 7.1% from $69M earned in 1Q05. Interest expense jumped 7.1% from $21.2M to $22.7M. First quarter net income totaled $34.7M with $3.8M and $30.9M allocated to the general and limited partners. Allocation to the general partner during the quarter increased 40.7% y/y to $3.8M while those allocated to the limited partner declined 2.2% y/y to $30.9M.

The company expects EBITDA in 2006 to range within $630-$650M. NBP’s consensus model forecasts operating income of $401M for 2006, $434M for 2007 and $538M for 2008, which represents a y/y growth of 40.8% in 2006, 8.1% in 2007 and 24.0% in 2008; and net income to limited partners of $288M for 2006 and $270M for 2007, which represents a y/y growth of 126.0% in 2006 and y/y decline of 6.2%in 2007.

Please refer to the Zacks Research Digest spreadsheet of NBP for more details on margin estimates.

Earnings per Unit

EPU 1Q05A 1Q06A 2Q06E 3Q06E 4Q06E 2006E 2007E 2008E Zacks Consensus $0.68 Company Guidance $4.43-$4.69 Digest Average $0.68 $0.67 $0.95↓ $0.84↑ $0.84↑ $3.31↑ $3.29↑ $3.37↓ Digest High $0.68 $0.67 $1.99 $0.92 $0.92 $4.64 $3.58 $3.71 Digest Low $0.68 $0.67 $0.73 $0.77 $0.75 $3.04 $3.20 $3.05 Y-o-Y Growth -1.5% 85.4% -1.8% 18.3% 20.3% -0.5% 2.4% Q-o-Q Growth -5.6% 41.1% -11.7% 0.6%

NBP’s 1Q06 operating income from continuing operations of $0.67 per unit (or $30.9M) declined 1.5% from $0.68 per unit (or $31.6M) earned in 1Q05. First quarter EPU reflects an increase in income allocated to the general partners as a result of a significant recent increase in the quarterly cash distribution.

Management reaffirmed its previous 2006 guidance for EPU of $4.43 – 4.69 per unit (or $426-$446M). Net income includes $1.44 per unit (or $108M) of expected one-time gain from the sale of 20% interest in Northern Border Pipeline. With the shutdown of the Coal Slurry Pipeline operations, the partnership expects $6M of reduction in net income in 2006 compared with 2005, including approximately $2M-$4M of operations and maintenance expense related to standby costs.

Zacks Investment Research Page 3 www.zackspro.com NBP’s consensus model forecasts an average EPS of $3.31 for 2006, $3.29 for 2007 and $3.37 for 2008, which reflects a y/y growth of 20.3% in 2006 and 2.4% in 2008 and y/y decline of 0.5% in 2007. The CAGR on realized 2004 EPS is 8.2%.

2006 forecasts (11 of them in total) range from $3.04 (Zacks Investment Research) to $4.64 (RBC Cap.); the average is $3.31. 2007 forecasts (11 of them in total) range from $3.20 (Friedman, Billings and Merrill) to $3.58 (UnionBankSwitz.); the average is $3.29. 2008 forecasts (3 of them in total) range from $3.05 (Smith Barney) to $3.71(UnionBankSwitz.); the average is $3.37.

Based on strong prospects for organic growth, near term sustainability of natural gas and NGL prices and the expectation of increased distribution in the future, the majority of the analysts increased their 2006 per unit earnings estimate. But, most of the analysts lowered their 2007 per unit earnings estimate based on the expectation of higher GP interest in net income.

Please refer to the Zacks Research Digest spreadsheet of NBP for more extensive EPS figures.

Target Price/Valuation

Of the 11 brokerage firms covering NBP, four rated the stock with a positive rating and seven rated the stock neutral. The Digest average target price of $53.31 (↑ from the previous report, 8% upside from the current price) lies between the Digest high of $56.00 (UnionBankSwitz.; 13% upside from the current price) and the Digest low of $51 (Friedman, Billings; RBC Cap.; 3% upside from the current price). The analysts based their price targets on cash distribution ranging $3.75-3.80 per share and target yields ranging 6.75-7.25%. After the earnings results release three analysts (Merrill, RBC Cap. and UnionBankSwitz.) raised their target price. Driven by strong prospects for organic growth, and near term sustainability of natural gas and NGL prices, one analyst (Merrill) raised the target price from $51 to $55 per share. While based on increased distribution expectation, going forward, one firm (RBC Cap.) increased its price objective from $50 to $51 per share.

Rating Distribution Positive 36% Neutral 64% Negative 0% Average Target Price $53.31↑ Digest High $56.00 Digest Low $51.00 Number of Analysts with Target Price/Total 10/11

The risks to the price objective include volatile oil and gas prices, rising interest rates, energy sector market sentiment and fundamentals, pipeline operational risks, contract expirations, competing pipelines, regulatory risk, potential environmental liabilities and acquisition risk.

Please refer to the Zacks Research Digest Spreadsheet of NBP for further details on valuation.

Capital Structure/Solvency/Cash Flow/Governance/Other

Cash Flow Distributable cash flow for the period ended March 31, 2006, was $52.9M, or $1.05 per unit, compared with $44.1M, or $0.89 per unit, in 1Q05. Management expects distributable cash flow to lie in the range of $3.96 – $4.23 per unit (or $324-$344M).

Zacks Investment Research Page 4 www.zackspro.com On April 18, 2006 the partnership declared a 10% increase in the partnership’s quarterly cash distribution to $0.88 per unit for 1Q06. The indicated annual rate was $3.52 per unit. The distribution is payable on May 15, 2006 to unit holders of record on April 28, 2006. The partnership policy committee announced that it is targeting an indicative annual distribution of within $3.72-$3.80 per unit by the end of 2006.

One of the analysts (Lehman) believes that the management has improved its visibility into longer-term distribution growth prospects following the OKE deal, with the support of the purchase of the additional 2/3rd interest in Guardian pipeline and $200-$250M expansion project coupled with the Overland Pass Pipeline project.

Balance Sheet In March 2006, the partnership entered into a $750M amended and restated revolving credit agreement and terminated its existing $500M revolving credit agreement.

Others On November 1, 2005, Northern Border Pipeline filed a rate case with FERC proposing a $24M or 7.8% increase in overall revenue. The filing incorporates 10.6% in overall cost of capital based on a return on equity of 14.2% and a capital structure comprised of 51% long-term debt and 49% equity. In December 2005, FERC issued an order that identified the issues raised in the proceedings and accepted the proposed rates but suspended their effectiveness until May 1, 2006, when the new rates will be collected subject to refund until final resolution of the rate case. A procedural schedule was established setting a hearing commencement date of October 4, 2006. An initial decision is scheduled for February 2007, unless resolved earlier with a settlement between FERC staff, Northern Border Pipeline and a majority of the customers and subsequently approved by the Commission. In the meantime, increased revenues from the new rates will be reserved, thereby resulting in minimal impact to Northern Border Pipeline's financial results.

Chicago III Expansion Project In April 2006, the Chicago III Expansion project went into service, adding 130 mmcf/d of transportation capacity on the eastern portion of the pipeline into the Chicago area. The addition is fully subscribed by four shippers under long-term firm agreements with terms ranging from five and a half years to 10 years.

Eastern Expansion Project On March 24, 2006, Midwestern Gas Transmission Company accepted the certificate of public convenience and necessity issued by the Federal Energy Regulatory Commission on March 10, 2006, for its Eastern Extension Project. The certificate authorizes Midwestern to construct and operate approximately 31 miles of 16-inch natural gas transportation pipeline with a capacity of 120,000 dekatherms per day (Dth/d) to provide Piedmont Natural Gas Company, Inc. (Piedmont), an energy services company headquartered in Charlotte, North Carolina, with a reliable and diversified transportation source.

The extension would move Chicago-sourced natural gas in a southeast direction from Midwestern's current terminus at Portland, Tennessee to interconnects with Columbia Gulf Transmission Company (Columbia Gulf) and East Tennessee Natural Gas LLC (East Tennessee) near Hartsville, Tennessee. Capital costs are estimated to be approximately $28M. The target in-service date is November 2006.

Purchase of assets from ONEOK and sale of 20% interest in NBPL to TC PipeLines In April 2006, the partnership acquired all of ONEOK’s (OKE) gathering and processing and pipelines and storage assets for approximately 36.5 million Class B units. The Class B limited partner units and the related GP interest contribution were valued at $1.65B. Subsequent to this transaction, OKE owns approximately 37 million of NBP’s limited partner units, which combined with its GP interest in NBP,

Zacks Investment Research Page 5 www.zackspro.com increases total interest to 45.7%. In addition, NBP also purchased OKE’s natural gas liquids assets for $1.35B in cash.

During the same period, the partnership disposed its 20% in Northern Border Pipeline (NBPL) to TC Pipelines, for approximately $297M. NBP now owns 50% interest in NBPL with the other 50% with TC Pipelines.

OKE acquires entire 2% GP interest in NBP In April 2006, OKE acquired 0.35% of GP interest in NBP by acquiring Northwest Border, an affiliate of TransCanada. OKE now owns the entire 2% GP interest in NBP.

Rocky Mountain Natural Gas Liquids Pipeline Joint Venture In May 2006, NBP entered into an agreement with a subsidiary of Williams Cos. to form a joint venture named Overland Pass Pipeline Company, L LC. The joint venture will build a 750 mile natural gas liquids pipeline that will transport up to 110 thousand bbl/d of unprocessed natural gas liquids. Initially, NBP will own 99% of joint venture with the rest 1% with Williams. However, Williams will have the option to increase its interest in the joint venture in the future. The proposed project is expected to cost $450M and generate annual cash flows of approximately $83M. Pending all necessary approvals, the target in-service date for the natural gas liquids pipeline is early 2008. Additionally, NBP intends to invest $160M to expand its fractionation capabilities at Conway, Kansas and NGL distribution pipelines in the mid-continent.

One of the analysts (Wachovia) considers the above-mentioned projects positive for the company, going forward as they believe:-  The Overland Pipeline capacity can be expanded from its initial design capacity of 110 thousand bbl/d to 150 thousand bbl/d by adding pump facilities. The incremental cost is expected to be modest.  The projected cash return of 18%+ appears very attractive.  Combined, the $610M of projected expenditures should add $0.35 to $0.40 to distributable cash flow in 2008.  The projects are supported by long term agreements with Williams Cos., which has dedicated NGL production from its two processing plants. The joint venture is also pursuing third party production.  There is a high probability that Williams will exercise its option to acquire 50% of the Overland Pipeline. The structure of the transaction appears to be just a financing vehicle for Williams to get the NGL pipeline constructed.

NBP owns 100% of Guardian Pipeline, LLC. In April 2006, NBP purchased interests of 33 1/3 % from Wisconsin Energy Corporation (WEC) and 33 1/3 % from a subsidiary of WPS Resources Corporation (WPS) of Guardian Pipeline for approximately $77M, thereby owning 100% of the pipeline.

On February 7, 2006, Guardian Pipeline, 143-mile interstate natural gas pipeline system signed precedent agreements with two major Wisconsin utility companies for an expansion of its existing pipeline system in eastern Wisconsin. The proposed project, extending 106 miles from Ixonia to the Green Bay area, would bring an additional 537,200 dekatherms per day of capacity to the area. Guardian Pipeline’s capital costs for the project are estimated to range within $220-$240M. Pending all necessary approvals, the target in-service date is November 2008. One analyst (Wachovia) expects the project to add approximately $0.07-$0.12 to the partnership’s DCF per unit.

Zacks Investment Research Page 6 www.zackspro.com Long-Term Growth

The average long-term growth rate provided by the brokerage firms is 6.5%, lying in between the range of 5% (provided by four analysts) to 13.1% (Friedman, Billings).

Organic growth for Northern Border Partners primarily includes increasing the capacity and efficiency of its pipeline, gathering, and processing assets, and aggressively controlling costs. Expansion projects of the partnership will be supported by long-term, fee-based or fixed-rate contracts.

Analysts believe NBP purchasing OKE’s midstream businesses and selling 20 percent interest in Northern Border Pipeline to TransCanada will significantly diversify the partnership’s asset mix by reducing its dependence on any one asset or geographic area, as well as open the door for potential growth opportunities across its system. The transaction would align the interests of the general and limited partners. OKE’s overall ownership percent in NBP increases following the close of the transaction, which signifies that OKE is invested in the long-term well-being of the MLP. However, this transaction increases the partnership’s commodity price exposure and distribution growth challenges.

Individual Analyst Opinions

POSITIVE RATINGS (36%)

AG Edwards – Buy ($53) – (5/4/06): The firm reiterated a Buy rating and price objective of $53 based on NBP’s attractive yield, strong total unit distribution coverage and solid growth outlook.

Merrill – Buy ($55) – (5/5/06): Driven by recent acquisitions, prospects for organic growth, and the near-term sustainability of natural gas and NGL prices, the firm reaffirmed a Buy rating and increased the 12-month target price from $51 to $55.

Wachovia – Outperform ($52-$56) – (5/3/06): The firm opines that NBP is poised to accelerate its distribution growth with the $3B acquisition of midstream assets from its general partner ONEOK, Inc. It reiterated an Outperform rating and valuation range of $52-$56.

NEUTRAL RATINGS (64%)

Zacks Investment Research – Hold ($53.10) – (5/9/06): The firm reaffirmed a Hold rating and price target of $53.10.

Friedman, Billings – Market Perform ($51) – (5/4/06): The analysts reiterated a Market Perform rating and price objective of $51. Given full credit for distribution growth, they expect the partnership to perform in line with peers over the next twelve months.

Goldman – In-Line ($53) – (5/3/06): The firm opines that NBP is well positioned to go for accretive acquisitions in future, which will provide it with a platform for long-term organic growth.

Lehman – Equal Weight ($55) – (5/4/06): The firm reiterated an Equal Weight rating and target price of $55. The firm believes that NBP’s pipeline project would reduce its risk profile by adding fee-based cash flows and would increase its near and long term growth prospects.

Zacks Investment Research Page 7 www.zackspro.com Oppenheimer – Neutral – (5/4/06): The analysts maintained a Neutral rating on the stock as they view the units as fairly valued.

RBC Cap. – Sector Perform ($51) – (5/4/06): The firm maintained a Sector Perform rating and raised the target price from $50 of $51 based on an increased distribution outlook.

Smith Barney – Hold ($52) – (5/8/06): The firm believes there is some upside potential and income- oriented investors could find its yield attractive in the current low interest rate environment. The firm maintained a Hold rating and target price of $52.

UnionBankSwitz. – Buy ($56) – (5/4/06): The analysts reaffirmed a Buy rating on the stock but raised the target price estimate from $54 to $56 based on the positive outlook for the partnership in the future.

NEGATIVE RATINGS (0%)

No negative rating for the stock at present

DROPPED COVERAGE

Harris Nesbitt – (3/3/06): The firm has dropped coverage on the company due to a change in personnel.

Copy Editor: Ian Madsen, CFA

Zacks Investment Research Page 8 www.zackspro.com