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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period
from to
-------------- ---------------------
Commission file number 333-51713
MARKET HUB PARTNERS STORAGE, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0558052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Westheimer Court P.O. Box 1642 Houston, Texas 77251-1642
(Address of principal executive offices) (Zip Code)
713-627-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
8 1/4% Notes Due 2008 The New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
None
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
-
The registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 6, 10, 11, 12 and 13 have been omitted in accordance
with Instruction (I)(2)(c) and Item 7 has been reduced in accordance with
Instruction (I)(2)(a).
All of the Registrant's interests are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
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MARKET HUB PARTNERS STORAGE, L.P.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business......................................................................................................1
General...................................................................................................1
Natural Gas Storage.......................................................................................1
Competition...............................................................................................1
Regulation................................................................................................2
Environmental Matters.....................................................................................2
Other Matters.............................................................................................2
2. Properties....................................................................................................2
3. Legal Proceedings.............................................................................................2
PART II.
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................3
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.........................3
7A. Quantitative and Qualitative Disclosures About Market Risk....................................................5
8. Financial Statements and Supplementary Data...................................................................6
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................17
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................17
Signatures...................................................................................................18
Exhibit Index................................................................................................19
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. For a discussion of some factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Current Issues - Forward-Looking
Statements."
i
PART I.
Item 1. Business.
GENERAL
Market Hub Partners Storage, L.P. (the Company) was formed on December 31, 1997
as a Delaware limited partnership. The Company is wholly owned by indirect
subsidiaries of Duke Energy Corporation (Duke Energy). The Company owns and
operates two natural gas market hubs, Moss Bluff and Egan, located near Houston,
Texas and Acadia Parish, Louisiana, respectively. These hubs provide producers,
end-users, local distribution companies, pipelines and natural gas marketers
with high deliverability storage services, real time title tracking and other
hub services.
Executive offices of the Company are located at 5400 Westheimer Court, Houston,
Texas 77056-5310, and the telephone number is (713) 627-5400.
NATURAL GAS STORAGE
The Company markets natural gas storage services to pipelines, local
distribution companies, producers, end-users and natural gas marketers. The
Company receives fees for use of its salt cavern storage facilities, which
generally include a contractual demand charge for the reservation of storage
space and injection and withdrawal fees for the actual use of the space.
A salt cavern is formed by drilling and leaching an underground cavern in a
naturally existing salt formation and installing related surface equipment. The
typical salt cavern storage facility consists of a solution mining plant, which
provides fresh water to dissolve cavities within the underlying salt, brine
handling and disposal facilities, and the necessary surface facilities to
compress natural gas into the cavity and allow it to flow back into a pipeline.
The Moss Bluff facility consists of three storage caverns located in Liberty and
Chambers counties near Houston, Texas and provided approximately 11.6 billion
cubic feet (Bcf) of working gas storage capacity at December 31, 2000. The Moss
Bluff facility has access to five pipelines, three of which are intrastate and
two of which are interstate. The three intrastate pipeline interconnects are
with Channel Industries Gas Company, Midcon Texas and Tejas Energy, LLC. The
interstate pipeline interconnects are with Natural Gas Pipeline Company of
America and Texas Eastern Transmission Corporation, an affiliate.
The Egan facility consists of two storage caverns located in Acadia Parish in
the south central part of Louisiana that provided the Company with approximately
11.5 Bcf of working gas storage capacity at December 31, 2000. The Egan facility
matches Gulf Coast production to market demand in the midwestern and
northeastern U.S. since it is located in the supply area and has proximity to
the interstate and intrastate pipeline grids.
COMPETITION
The natural gas storage industry is highly competitive. The Company competes
most directly with other independent, stand-alone facilities and interstate
pipelines which offer storage services. Competitive factors include (i) the
quantity, location and physical flow characteristics of interconnected
pipelines, (ii) the costs, service and rates of the Company's competitors, (iii)
the ability to offer service from multiple locations and (iv) ancillary
services, such as title tracking.
1
REGULATION
Various aspects of the transportation, sale and marketing of natural gas are
subject to or affected by extensive federal regulation under the Natural Gas Act
(NGA), the Natural Gas Policy Act of 1978 (NGPA), regulations promulgated by the
Federal Energy Regulatory Commission (FERC) and certain statutes and regulations
promulgated as state laws.
Certain of the operations of the Moss Bluff facility are subject to FERC
regulation and other of its activities are subject to regulation by the Texas
Railroad Commission. The Moss Bluff facility is classified by the FERC as a
so-called "Hinshaw pipeline", exempt from the FERC's interstate pipeline rates
and service jurisdiction under the NGA. The Moss Bluff facility is subject to
regulation under the utility statutes of Texas as to its intrastate activity.
Under regulations promulgated by the FERC, Hinshaw pipelines can engage in
certain interstate transactions.
The Egan facility is subject to FERC regulation under the NGA and NGPA. In 1996
Egan received a certificate of public convenience and necessity from the FERC
for its storage facility. Egan's natural gas storage and hub services are
offered at market-based rates.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard to
air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental regulations affecting the Company
include, but are not limited to:
o The Comprehensive Environmental Response, Compensation and Liability Act,
which can require any individual or entity which may have owned or operated
a disposal site, as well as transporters or generators of hazardous wastes
which were sent to such site, to share in remediation costs for the site.
o The Texas Natural Resource Conservation Commission;
o The Louisiana Office of Conservation
o The Environmental Protection Agency
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
protecting the environment, is not expected to have a material adverse effect on
the consolidated results of operations, cash flows or financial position of the
Company.
OTHER MATTERS
At December 31, 2000, the Company had approximately 20 employees.
Item 2. Properties.
For information concerning natural gas storage properties, see "Business,
Natural Gas Storage."
Item 3. Legal Proceedings.
None
2
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company does not have any established public trading market for any class of
its common equity.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Introduction
Market Hub Partners Storage, L.P. (the Company) was formed on December 31, 1997
as a Delaware limited partnership. The Company is wholly owned by indirect
subsidiaries of Duke Energy Corporation (Duke Energy). The Company markets
natural gas storage services to pipelines, local distribution companies,
producers, end-users and natural gas marketers. The Company receives fees for
use of its salt cavern storage facilities, which generally include a contractual
demand charge for the reservation of storage space and injection and withdrawal
fees for the actual use of the space. The Company offers short-term firm and
interruptible hub services to its customers. These services include balancing,
wheeling, title transfer, imbalance trading, parking and loaning of natural gas.
The following information is provided to facilitate increased understanding of
the 2000 and 1999 consolidated financial statements and accompanying notes of
the Company, and should be read in conjunction therewith. Because all of the
outstanding common stock of the Company is owned indirectly by Duke Energy, the
following discussion has been prepared in accordance with the reduced disclosure
format permitted by Form 10-K for certain issuers that are wholly owned
subsidiaries of reporting companies under the Securities Exchange Act of 1934
set forth in General Instruction I (1)(a) and (b) for Form 10-K.
Business Strategy. The Company plans to continue to grow its revenue base by
offering superior deliverability and innovative services and by increasing the
overall asset portfolio through expansion of existing facilities, new project
development and acquisitions.
CAPACITY EXPANSIONS
The Company's financial condition and results of operations are directly related
to the working storage capacity of the Company's storage facilities.
------------------------------------------------------------------------------
(Billion cubic feet (Bcf)) December 31, 2000 December 31, 1999
------------------------------------------------------------------------------
Consolidated Facility Totals
Working gas capacity (1) 23.1 22.7
Average working gas capacity (2) 22.8 21.8
Average leased capacity (2) 19.4 21.2
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(1) As of the date indicated.
(2) From January 1 to December 31 of the years indicated.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $11.2 million in 2000 compared
to net income of $11.3 million in 1999. Operating income was $19.3 million in
2000 and $19.2 million in 1999
3
The $0.5 million decrease in revenues in 2000 compared to 1999 was a result of
lower leased capacity and was mostlyoffset by lower operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for the year ended December 31, 2000 and
1999 were $2.9 million and $9.6 million, respectively, and primarily represent
the capital expenditure program that commenced in 1997 to expand working gas
capacity to a combined 24 Bcf. The Company believes that funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future. The Company anticipates expanding both Moss Bluff and Egan
to 16 Bcf each during 2001 through 2004. Capital expenditures associated with
this expansion are estimated to be $26 million.
As described in Note 7 to the Consolidated Financial Statements, the Change of
Control of the Company during the third quarter of 2000 gave holders of the
Company's $115 million of outstanding long-term notes payable the right to
require the Company to repurchase the notes at a price equal to 101% of their
outstanding principal amount plus accrued and previously unpaid interest. As a
result, during the fourth quarter 2000, the Company repurchased $87.8 million in
notes payable primarily using funds advanced by its parent. These advances are
carried as open accounts and do not bear interest.
CURRENT ISSUES
New Accounting Standard. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company was required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and changes in the fair
value of derivatives are reported in current earnings, unless the derivative is
designated and effective as a hedge. If the intended use of the derivative is to
hedge the exposure to changes in the fair value of an asset, a liability or a
firm commitment, then changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. However, if the intended use of the derivative is to hedge the
exposure to variability in expected future cash flows, then changes in the fair
value of the derivative instrument will generally be reported in Other
Comprehensive Income (OCI). The gains and losses on the derivative instrument
that are reported in OCI will be reclassified to earnings in the periods in
which earnings are impacted by the hedged item.
The Company has determined there was no effect of implementing SFAS No. 133 on
the consolidated results of operations, cash flows or financial position on
January 1, 2001.
4
Forward-Looking Statements. From time to time, the Company's reports, filings
and other public announcements may include assumptions, projections,
expectations, intentions or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. The Company cautions that assumptions, projections,
expectations, intentions or beliefs about future events may and often do vary
from actual results and the differences between assumptions, projections,
expectations, intentions or beliefs and actual results can be material.
Accordingly, there can be no assurance that actual results will not differ
materially from those expressed or implied by the forward-looking statements.
Some of the factors that could cause actual achievements and events to differ
materially from those expressed or implied in such forward-looking statements
include state and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures and affect the
speed and degree to which competition enters the natural gas industry; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; changes in environmental and other laws and
regulations to which the Company is subject or other external factors over which
the Company has no control; the results of financing efforts, including the
Company's ability to obtain financing on favorable terms, which can be affected
by the Company's credit rating and general economic conditions; growth in
opportunities for the Company; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any material risk exposure to market rate changes that
affect market risk sensitive instruments.
5
Item 8. Financial Statements and Supplementary Data.
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
2000 1999 1998
-------- -------- -------
Operating Revenues
Salt cavern storage revenues $ 30,617 $ 32,208 $ 29,008
Hub service revenues 2,413 1,347 2,248
Other revenues - - 898
-------- -------- -------
Total operating revenues 33,030 33,555 32,154
-------- -------- -------
Operating Expenses
Operation and maintenance 5,514 6,380 6,139
Depreciation and amortization 6,939 6,772 6,020
Property and other taxes 1,306 1,171 1,086
-------- -------- -------
Total operating expenses 13,759 14,323 13,245
-------- -------- -------
Operating Income 19,271 19,232 18,909
Other Income and Expenses 1,136 1,246 1,667
Interest Expense 9,181 9,176 7,557
-------- -------- -------
Income Before Extraordinary Item 11,226 11,302 13,019
Extraordinary Loss on Early Extinguishment of Debt - - (6,702)
-------- -------- -------
Net Income $ 11,226 $ 11,302 $ 6,317
======== ======== ========
See Notes to Consolidated Financial Statement.
6
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,226 $ 11,302 $ 6,317
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,939 6,772 6,020
Extraordinary loss on early extinguishment of debt - - 6,702
(Increase) decrease in
Accounts receivable 1,630 (1,349) (4,035)
Other current assets 52 (98) (69)
Deferred debits 428 83 90
Increase (decrease) in
Accounts payable and other accrued liabilites (1,303) (5,337) 1,188
Accrued interest (2,322) - 3,151
Accrued property tax 59 132 249
Payable to partners and affiliates - - (943)
------ ------ ------
Net cash provided by operating activities 16,709 11,505 18,670
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,860) (9,568) (26,950)
Proceeds from property, plant and equipment - - 1,362
Net increase in advances payable - parent 70,223 - -
Issuance note to Tioga project - - (5,000)
------ ------ ------
Net cash provided by (used in) investing activities 67,363 (9,568) (30,588)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - - 110,939
Repayments of long-term debt (87,790) - (53,492)
Extraordinary loss on early extinguishment of debt - - (5,057)
Receipt of restricted cash - - 2,084
Distributions to partners (9,500) (7,500) (25,117)
------ ------ ------
Net cash provided by (used in) financing activities (97,290) (7,500) 29,357
------ ------ ------
Net increase (decrease) in cash and cash equivalents (13,218) (5,563) 17,439
Cash and cash equivalents at beginning of period 14,029 19,592 2,153
------ ------ ------
Cash and cash equivalents at end of period $ 811 $ 14,029 $ 19,592
====== ====== ======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 11,503 $ 9,176 $ 4,406
See Notes to Consolidated Financial Statements.
7
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-----------------
2000 1999
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 811 $ 14,029
Accounts receivable 3,623 8,802
Accounts receivable, affiliate 1,339 -
Note receivable, affiliate 5,000 5,000
Other 120 172
--------- ---------
Total current assets 10,893 28,003
--------- ---------
Property, Plant and Equipment
Cost 198,410 195,550
Less accumulated depreciation and amortization 28,081 22,584
--------- ---------
Net property, plant and equipment 170,329 172,966
--------- ---------
Goodwill, net 151,361 -
Deferred Debits 3,246 3,868
--------- ---------
Total Assets $ 335,829 $ 204,837
========= =========
LIABILITIES AND PARTNER'S CAPITAL
Current Liabilities
Accounts payable $ 16 $ 166
Accrued interest 829 3,151
Accrued property tax 1,152 1,093
Other accrued liabilities 2,471 512
--------- ---------
Total current liabilities 4,468 4,922
Long-term Debt
Advance payable - parent 73,623 -
Other 27,210 115,000
--------- ---------
Total long-term debt 100,833 115,000
Partner's Capital 230,528 84,915
--------- ---------
Total Liabilities and Partner's Capital $ 335,829 $ 204,837
========= =========
See Notes to Consolidated Financial Statements.
8
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S CAPITAL
(In thousands)
Partner's
Capital
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ 99,913
- -----------------------------------------------------------------------------------------------------------
Partner Distributions prior to acquisition by Duke Energy Corporation (25,117)
Net Income 6,317
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $ 81,113
- -----------------------------------------------------------------------------------------------------------
Partner Distributions prior to acquisition by Duke Energy Corporation (7,500)
Net Income 11,302
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ 84,915
- -----------------------------------------------------------------------------------------------------------
Partner Distributions prior to acquisition by Duke Energy Corporation (9,500)
Net Income 11,226
Allocation of Purchase Price by Duke Energy Corporation 143,887
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $230,528
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
9
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2000, 1999 and 1998
Note 1. Nature of Operations
Market Hub Partners Storage, L.P. (the Company) was formed on December 31, 1997
as a Delaware limited partnership. The Company is wholly owned by indirect
subsidiaries of Duke Energy Corporation (Duke Energy). The Company owns and
operates two natural gas market hubs, Moss Bluff and Egan, located near Houston,
Texas and Acadia Parish, Louisiana, respectively. These hubs provide producers,
end-users, local distribution companies, pipelines and natural gas marketers
with high deliverability storage services, real time title tracking and other
hub services.
Note 2. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of all
of the Company's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current and
expected future events, actual results could differ from those estimates.
Cash and Cash Equivalents. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
Goodwill. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The goodwill created by the
Company's acquisition is amortized on a straight-line basis over the useful life
of the asset. See Note 3 to the Consolidated Financial Statements for more
information about the goodwill resulting from the purchase of the Company by
Duke Energy. .
Property, Plant and Equipment. Depreciation of storage facilities and equipment
is provided using the straight-line method over estimated useful lives of the
assets ranging from 15 to 40 years. Effective January 1, 2000, the Company
changed the estimated lives of the storage caverns from 30 to 40 years. The
Company capitalizes all construction-related direct labor and material costs, as
well as indirect construction costs. Indirect costs include general engineering,
taxes and the cost of money. The costs of renewals and betterments that extend
the useful life of property, plant and equipment is also capitalized. The cost
of repairs and replacements is charged to expense as incurred.
Impairment of Long-Lived Assets. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flows.
Revenues. Storage revenues consist of demand charges for the reservation of
storage space or the use of injection and withdrawal facilities and usage fees
for the actual use of storage space or injection and withdrawal facilities.
Demand fees are recognized as revenue over the term of the related storage
agreement while usage fees and hub services revenues, which consist of a variety
of other storage injection and withdrawal services, are recognized as services
are performed. During 2000, the Company adopted the provisions of Staff
Accounting Bulletin (SAB) 101 issued by the Securities and Exchange Commission.
The impact of adopting SAB 101 did not affect the Company's consolidated results
of operations, cash flows or financial position.
10
New Accounting Standard. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company was required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and changes in the fair
value of derivatives are reported in current earnings, unless the derivative is
designated and effective as a hedge. If the intended use of the derivative is to
hedge the exposure to changes in the fair value of an asset, a liability or a
firm commitment, then changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. However, if the intended use of the derivative is to hedge the
exposure to variability in expected future cash flows, then changes in the fair
value of the derivative instrument will generally be reported in Other
Comprehensive Income (OCI). The gains and losses on the derivative instrument
that are reported in OCI will be reclassified to earnings in the periods in
which earnings are impacted by the hedged item.
The Company has determined there was no effect of implementing SFAS No. 133 on
the consolidated results of operations, cash flows or financial position on
January 1, 2001.
Reclassifications. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
Note 3. Acquisition
On September 18, 2000, Duke Energy Gas Transmission Corporation (DEGT), an
indirect wholly owned subsidiary of Duke Energy, acquired from subsidiaries of
NiSource, Inc. (NiSource) all of the outstanding stock and limited partnership
interests in Market Hub Partners, L.P. (MHP) for approximately $250 million in
cash and the assumption of $150 million in debt. MHP indirectly owns all
partnership interests in the Company. This acquisition was accounted for by DEGT
utilizing the purchase method of accounting for acquisitions. As a result, the
Company's assets and liabilities have been adjusted to reflect preliminary
estimated fair values and the excess of the purchase price over the estimated
fair value of the net identifiable assets and liabilities has been recorded as
goodwill. Purchase price allocations are subject to adjustment when additional
information concerning asset and liability valuations becomes available within
one year after the acquisition. Approximately $153 million of goodwill was
recorded in the transaction and is being amortized on a straight-line basis over
35 years.
Note 4. Related Party Transactions
The note receivable balance of $5 million is due from a wholly owned indirect
subsidiary of Duke Energy and is payable on demand, bearing interest at prime
plus 2%. The note was used to fund a portion of the pre-construction
expenditures associated with a development project in Tioga County,
Pennsylvania. The Company expects that the note will be repaid when financing is
secured for the Tioga project. For the years ended December 31, 2000 ,1999 and
1998, interest income included $525 thousand, $525 thousand and $403 thousand,
respectively, associated with this note receivable.
Advances payable - parent do not bear interest. Advances are carried as open
accounts and are not segregated between current and non-current amounts. During
the fourth quarter of 2000, the Company received advances of $87.8 million to
repurchase a portion of the long-term notes payable. See Note 7 to the
Consolidated Financial Statements for further discussion of note payable. Other
increases and decreases in advances result from the movement of funds to provide
for operations and capital expenditures.
11
Note 5. Property, Plant and Equipment
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment (in thousands)
- --------------------------------------------------------------------------------
December 31,
-------------------------
2000 1999
------------ ------------
Natural gas storage facilities $184,176 $192,519
Land 2,712 2,706
Construction in progress 11,087 325
Other 435 -
------------ ------------
Total property, plant, and equipment 198,410 195,550
Less accumulated depreciation and amortization 28,081 22,584
------------ ------------
Net property, plant and equipment $170,329 $172,966
- --------------------------------------------------------------------------------
Note 6. Financial Instruments and Risk Management
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables derived principally from uncollateralized sales to customers in the
pipeline and natural gas utility industries. The concentration of credit risk in
these industries affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other conditions.
The carrying value of the Company's financial instruments with respect to cash
and cash equivalents and trade receivables and payables, approximates the fair
value of these instruments at December 31, 2000 and 1999.
The Company's financial instruments also include $27 million and $115 million of
long-term debt as of December 31, 2000 and 1999, respectively. The fair value
and the carrying value of the debt were approximately the same as of December
31, 2000. The fair value of such debt was approximately $98.4 million at
December 31, 1999.
Note 7. Long-term Debt
As defined in the indenture governing the Company's long-term 8.25% notes
payable (the Indenture), the acquisition described in Note 3 to the Consolidated
Financial Statements resulted in a Change of Control of the Company. Pursuant to
the Indenture, holders of the notes had the right to require the Company to
repurchase the notes following the Change of Control, at a price equal to 101%
of their outstanding principal amount plus accrued and previously unpaid
interest. As a result, during the fourth quarter of 2000, the Company
repurchased $87.8 million of these notes.
As permitted by the Indenture, the Company may make permitted distributions not
to exceed, in the aggregate: 1) 35% of net income before extraordinary item for
any period, as well as; 2) 50% of the difference between net income for the
period beginning on January 1, 1998 and ending on the last day of the Company's
last fiscal quarter for which quarterly or annual consolidated financial
statements are available before the date the permitted distributions are made
for that same period. For the years ended December 31, 2000 and 1999, the
Company paid distributions of $9.5 million and $7.5 million, respectively.
Note 8. Significant Customers
Significant customers are those that individually account for more than 10% of
the Company's combined revenues. For the year ended December 31, 2000, Northen
Indiana Public Service Company (NIPSCO) accounted for approximately 29% of the
Company's total revenues. For the year ended December 31, 1999, NIPSCO and
EnergyUSA-TPC (TPC) accounted for approximately 27% and 12%,
12
respectively of the Company's total revenues. For the year ended December 31,
1998, NIPSCO, TPC and Aquila Energy Marketing Corporation accounted for
approximately 27%, 11% and 10%, respectively of the Company's total revenues.
Note 9. Employee Benefit Plans
Retirement Plan. The Company participates in Duke Energy's non-contributory
defined benefit retirement plan covering most employees with minimum service
requirements using a cash balance formula. Under a cash balance formula, a plan
participant accumulates a retirement benefit based upon a percentage, which may
vary with age and years of service, of current eligible earnings and current
interest credits.
Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis to
provide assets sufficient to meet benefits to be paid to plan participants. With
respect to the entire plan, the fair value of the plan assets of $3,038 million
at December 31, 2000 exceeded the projected benefit obligations of $2,586
million , as of December 31, 2000.
- --------------------------------------------------------------------------------
Assumptions Used in Duke Energy's Pension and Other Postretirement Benefits
Accounting (a)
- --------------------------------------------------------------------------------
(Percent) 2000
- --------------------------------------------------------------------------------
Discount rate 7.50
Salary increase 4.53
Expected long-term rate of return on plan assets 9.25
- --------------------------------------------------------------------------------
(a) Reflects weighted averages across all plans.
Duke Energy also sponsors, and the Company participates in, an employee savings
plan that covers substantially all employees.
Prior to the Company's acquisition by DEGT, the Company provided a 401(k)
savings plan (the "Plan") for all of its employees. In 1999 and 1998, the
Company contributed $44 thousand and $58 thousand, respectively, on behalf of
Plan participants.
Other Postretirement Benefits. The Company, in conjunction with Duke Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans.
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. With respect to the
entire plan, the fair value of the plan assets was $325 million at December 31,
2000 and the accumulated postretirement benefit obligation was $614 million at
December 31, 2000.
13
Note 10. Quarterly Financial Data (Unaudited)
- ------------------------------------------------------------------
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------
2000
Operating revenues $8,239 $7,711 $7,909 $9,171 $33,030
Operating income 4,799 4,306 4,666 5,500 19,271
Net income 2,603 2,132 2,508 3,983 11,226
1999
Operating revenues $8,046 $8,654 $8,250 $8,605 $33,555
Operating income 4,298 5,136 4,591 5,207 19,232
Net income 2,275 3,136 2,646 3,245 11,302
- ------------------------------------------------------------------
14
Independent Auditors' Report
Market Hub Partners Storage, L.P.:
We have audited the accompanying consolidated balance sheets of Market Hub
Partners Storage, L.P. and subsidiaries (the Company) as of December 31, 2000
and 1999, and the related consolidated statements of operations, cash flows and
partner's capital for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
January 18, 2001
15
Responsibility for Financial Statements
The financial statements of Market Hub Partners Storage, L.P. and subsidiaries
(the Company) are prepared by management, who are responsible for their
integrity and objectivity. The statements are prepared in conformity with
generally accepted accounting principles in all material respects and
necessarily include judgments and estimates of the expected effects of events
and transactions that are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements are
prevented or are detected by employees within a timely period as they perform
their assigned functions. The Company's accounting controls are continually
reviewed for effectiveness. In addition, written policies, standards and
procedures, and a strong internal audit program augment the Company's accounting
controls.
/s/ Alan N. Harris
Alan N. Harris
Vice President, Controller, Treasurer and Assistant Secretary
16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data included
in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Partner's Capital for the Years Ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Financial Data (unaudited) (included in Note 10 to the
Consolidated Financial Statements)
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on October 6, 2000 contained
disclosures under Item 1, Change in Control of Registrant and Item 7, Exhibits.
A Current Report on Form 8-K filed on December 11, 2000 contained
disclosures under Item 5, Other Events.
(c) Exhibits - See Exhibit Index immediately following the signature page.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 30, 2001 MARKET HUB PARTNERS STORAGE, L.P.
(registrant)
By: MARKET HUB PARTNERS STORAGE, LLC., its
general partner
By /s/ Gregory J. Rizzo
--------------------
Gregory J. Rizzo
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
(i) Principal executive officer:
By: /s/ Gregory J. Rizzo
--------------------
Gregory J. Rizzo
President
(ii) Principal financial officer:
By: /s/ Dorothy M. Ables
--------------------
Dorothy M. Ables
Senior Vice President, Finance and Administration
Chief Financial Officer
(iii) Principal accounting officer:
By: /s/ Alan N. Harris
------------------
Alan N. Harris
Vice President, Controller, Treasurer and Assistant Secretary
(iv) A majority of the Directors:
By: /s/ Dorothy M. Ables
--------------------
Dorothy M. Ables
By: /s/ Robert B. Evans
-------------------
Robert B. Evans
By: /s/ Theopolis Holeman
---------------------
Theopolis Holeman
Date: March 30, 2001
18
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not so
designated are incorporated by reference to a prior filing, as indicated.
- --------------------- -----------------------------------------
Exhibit Number Description
3.1 Certificate of Limited Partnership of
Market Hub Partners Storage, L.P., as
amended January 30, 1998. (Form S-4
(Reg. No. 333-51713), Exh. 3.1)
3.2 Limited Partnership Agreement of Market
Hub Partners Storage, L.P., as amended
as of December 31, 1997, by and between
Market Hub Partners Finance, L.L.C. and
Market Hub Partners, L.P. (Form S-4
(Reg. No. 333-51713), Exh. 3.2)
4.1 Indenture dated March 1, 1998 by and
among Market Hub Partners Storage,
L.P., Market Hub Partners Finance,
Inc., the Subsidiary Guarantors and IBJ
Schroder Bank & Trust Company, as
Trustee. (Form S-4 (Reg. No.
333-51713), Exh. 4.1)
4.2 Note Purchase Agreement dated April 11,
1997 by and among Market Hub Partners,
L.P. and the Note Purchasers Party
Thereto. (Form S-4 (Reg. No.
333-51713), Exh. 4.3)
4.3 Waiver and Amendment Agreement dated
February 11, 1998 and among Market Hub
Partners, L.P. and the Note Purchasers
Party Thereto of the Note Purchase
Agreement dated April 11, 1997. (Form
S-4 (Reg. No. 333-51713, Exh. 4.4)
10.1 Assumption Agreement dated March 1,
1998 by and among Market Hub Partners
Storage, L.P. and Market Hub Partners
Finance, Inc. (Form S-4 (Reg. No.
333-51713), Exh. 10.1)
*12 Computation of Ratio of Earnings to
Fixed Charges
21.1 Subsidiaries of Market Hub Partners
Storage, L.P. (Form S-4 (Reg. No.
333-51713), Exh. 21.1)
- --------------------- -----------------------------------------
19