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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 Quarter Ended March 31, 2003 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 (IRS Employer
of Incorporation) Identification No.)
5400 Westheimer Court
P.O. Box 1642
Houston, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
713-627-5400
(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 [___]
---
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part I, Item 3 and Part
II, Items 2, 3, and 4 have been omitted in accordance with such Instruction H.
All of the registrant's limited partnership interests and all of the limited
liability company interests of its general partner 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-Q FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements ............................................................................ 1
Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 ........ 1
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003
and 2002 ........................................................................................ 2
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 .......................... 3
Notes to Consolidated Financial Statements ...................................................... 4
2. Management's Discussion and Analysis of Results of Operations and Financial Condition ........... 5
4. Controls and Procedures ......................................................................... 6
PART II. OTHER INFORMATION
1. Legal Proceedings ............................................................................... 7
6. Exhibits and Reports on Form 8-K ................................................................ 7
Signature ....................................................................................... 8
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Market Hub Partners Storage, L.P.'s (the Company's) reports, filings and other
public announcements may contain or incorporate by reference statements that do
not directly or exclusively relate to historical facts. Such statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You can typically identify forward-looking
statements by the use of forward-looking words, such as "may," "will," "could,"
"project," "believe," "anticipate," "expect," "estimate," "continue,"
"potential," "plan," "forecast" and other similar words. Those statements
represent the Company's intentions, plans, expectations, assumptions and beliefs
about future events and are subject to risks, uncertainties and other factors.
Many of those factors are outside the Company's control and could cause actual
results to differ materially from the results expressed or implied by those
forward-looking statements. Those factors include:
. State and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures, and
affect the speed at and degree to which competition enters the natural
gas industry
. The outcomes of litigation and regulatory investigations, proceedings
or inquiries
. Industrial, commercial and residential growth in its customers' service
territories
. The weather and other natural phenomena
. The timing and extent of changes in interest rates
. General economic conditions, including any potential effects arising
from terrorist attacks, the situation in Iraq and any consequential
hostilities or other hostilities
. Changes in environmental and other laws and regulations to which the
Company and its subsidiaries are 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 various
factors, including the Company's credit ratings, the credit ratings of
its parents, and general economic conditions
. The level of creditworthiness of counterparties to the Company's
transactions
. Growth in opportunities for the Company's business
. The performance of pipeline and storage facilities
. The extent of success in connecting and expanding gas markets and
. The effect of accounting pronouncements issued periodically by
accounting standard-setting bodies.
i
In light of these risks, uncertainties and assumptions, the events described in
the forward-looking statements might not occur or might occur to a different
extent or at a different time than the Company has described. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
----------------------------
2003 2002
----------- -----------
Operating Revenues
Salt cavern storage revenues $ 12,796 $ 10,739
Hub service revenues 3,389 4,971
--------- ---------
Total operating revenues 16,185 15,710
--------- ---------
Operating Expenses
Operation and maintenance 1,226 1,592
Depreciation and amortization 1,611 1,536
Property and other taxes 816 559
--------- ---------
Total operating expenses 3,653 3,687
--------- ---------
Operating Income 12,532 12,023
Other Income and Expenses - 1
Interest Expense 390 660
--------- ---------
Net Income $ 12,142 $ 11,364
========= =========
See Notes to Consolidated Financial Statements.
1
MARKET HUB PARTNERS STORAGE, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ 11,764 $ 9,592
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,298) (555)
Net decrease in advances payable - affiliates (8,466) (9,037)
--------- ---------
Net cash used in investing activities (11,764) (9,592)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES - -
--------- ---------
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
========= =========
Cash and cash equivalents at end of period $ - $ -
========= =========
See Notes to Consolidated Financial Statements.
2
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2003 2002
(unaudited)
--------------- -------------
ASSETS
Current Assets
Accounts receivable $ 3,989 $ 4,017
Accounts receivable - affiliates 1,168 1,174
Natural gas imbalance receivable 44,887 33,056
Other 1,358 623
--------------- -------------
Total current assets 51,402 38,870
--------------- -------------
Property, Plant and Equipment
Cost 253,751 250,453
Less accumulated depreciation and amortization 41,182 39,571
--------------- -------------
Net property, plant and equipment 212,569 210,882
--------------- -------------
Goodwill, Net of Accumulated Amortization 212,616 212,616
Other Assets 286 294
--------------- -------------
Total Assets $ 476,873 $ 462,662
=============== =============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 1,203 $ 484
Accrued interest 186 748
Accrued property tax 1,567 2,191
Natural gas imbalance payable 44,887 33,056
Other accrued liabilities 1,392 2,221
--------------- -------------
Total current liabilities 49,235 38,700
--------------- -------------
Long-term Debt
Advances payable - affiliates 11,088 19,554
Other 27,110 27,110
--------------- -------------
Total long-term debt 38,198 46,664
--------------- -------------
Partners' Capital 389,440 377,298
--------------- -------------
Total Liabilities and Partners' Capital $ 476,873 $ 462,662
=============== =============
See Notes to Consolidated Financial Statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 storage facilities: Moss Bluff, located near Houston,
Texas and Egan, located in Acadia Parish, Louisiana. These facilities provide
producers, end-users, local distribution companies, pipelines and energy
marketers with high deliverability storage services, as well as hub services,
such as park and loan services, wheeling and title transfer. The Company's Egan
facilities are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC). Moss Bluff, as a Hinshaw pipeline, must also
comply with the Texas Railroad Commission's rules and regulations and some
requirements under FERC regulations.
2. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of the
Company and all majority-owned subsidiaries, after eliminating significant
intercompany transactions and balances. These Consolidated Financial Statements
reflect all normal recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position and results of operations for
the respective periods. Amounts reported in the interim Consolidated Statements
of Operations are not necessarily indicative of amounts expected for the
respective annual periods due to the effects of seasonal temperature variations
on energy consumption.
Conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and notes. Although these estimates are based on management's best
available knowledge of current and expected future events, actual results could
be different from those estimates.
Asset Retirement Obligations. As of January 1, 2003, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," which addressed financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
Since the Company is not able to determine the expected retirement date of its
property, plant and equipment, the Company was not able to make a reasonable
estimate of any asset retirement obligations.
3. Related Party Transactions
- ------------------------------------------------------------------------------
Balance Sheet Transactions (in thousands)
- ------------------------------------------------------------------------------
March 31, December 31,
2003 2002
--------------------------------
Accounts receivable $ 1,168 $ 1,174
Other current assets - gas imbalances - 28,391
Other current liabilities - gas imbalances 36,484 19,253
- ------------------------------------------------------------------------------
4
- -----------------------------------------------------------------------
Income Statement Transactions (in thousands)
- -----------------------------------------------------------------------
For the Three Months
Ended March 31,
-------------------------
2003 2002
-------------------------
Storage revenue/a/ $ 3,524 $ 2,138
Operation and maintenance 1,196 1,063
- -----------------------------------------------------------------------
/a/ In the normal course of business, the Company provides storage services to
affiliates such as Duke Energy Trading and Marketing, LLC.
Advances payable - affiliates do not bear interest. Advances are carried as open
accounts and are not segregated between current and non-current amounts.
Increases and decreases in advances result from the movement of funds to provide
for operations, capital expenditures, and debt payments.
4. Regulatory Matters
Notice of Proposed Rulemaking (NOPR). NOPR on Standards of Conduct. In September
2001, the FERC issued a NOPR announcing they would substantially modify the
current standards of conduct uniformly applicable to natural gas pipelines and
electric transmitting public utilities currently subject to differing standards.
The proposal impacts how companies and their affiliates interact and share
information by broadening the definition of "affiliate" covered by the standards
of conduct. Various entities filed extensive comments on the NOPR with the FERC
in December 2001. In April 2002, the FERC Staff issued an analysis of all
comments received which reflected important progress in several areas. With
regard to corporate governance, however, the FERC Staff's analysis recommended
adoption of an automatic imputation rule which could impact parent company
oversight of subsidiaries with storage functions (such as the Company). A public
conference was held in May 2002 to discuss the proposed revisions to the gas and
electric standards of conduct. Duke Energy filed supplemental comments with
respect to the FERC Staff's analysis in June 2002. The FERC is expected to take
further action on the NOPR in the first half of 2003.
Item 2. 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. The Company markets high deliverability natural gas
storage services and hub services to pipelines, local distribution companies,
producers, end-users, power generators, and energy 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 also
receives fees for interruptible hub services, including balancing, wheeling,
title transfer, parking and loaning of natural gas.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements. Because all of the outstanding partnership
interests of the Company are owned indirectly by Duke Energy, the following
discussion has been prepared in accordance with the reduced disclosure format
permitted by Form 10-Q for certain issuers that are wholly owned subsidiaries of
reporting companies under the Securities Exchange Act of 1934 set forth in
General Instruction (H)(1)(a) and (b) of Form 10-Q.
5
CAPACITY
The Company's financial condition and results of operations are directly related
to the working storage capacity of the Company's storage facilities.
- ------------------------------------------------------------------------------
March 31, March 31,
(Billion cubic feet (Bcf)) 2003 2002
- ------------------------------------------------------------------------------
Combined Facility Totals
Working gas capacity (1) 29.5 26.0
Average working gas capacity (2) 29.1 25.2
Average leased capacity (2) 27.5 25.5
- ------------------------------------------------------------------------------
(1) As of the date indicated.
(2) For the three-month period ended as of the date indicated.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2003 increased $778 thousand
compared to the same period in 2002. The increase was due primarily to increased
storage revenues resulting from increased leased capacity, and fuel cost
collections recognized in 2003 partially offset by decreased hub service
revenues due to lower parking and loaning activities. Also contributing to the
increase in net income was lower interest expense primarily resulting from
interest cost capitalized in 2003 in conjunction with increased capital
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003 and 2002, the Company had no cash or cash equivalents since
all cash is managed collectively at the parent-company level and is therefore
advanced to/from affiliates as cash is generated or paid by the Company. The
Company's working capital was a $2,167 thousand surplus as of March 31, 2003,
compared to a $170 thousand surplus as of December 31, 2002.
Operating Cash Flows
Net cash provided by operations increased $2,172 thousand in 2003 when compared
to the same period in 2002. The increase in cash provided by operations was
primarily a result of increased earnings and favorable changes in working
capital compared to the 2002 period. The Company believes that funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
Investing Cash Flows
Net cash used in investing activities increased $2,172 thousand in 2003 when
compared to the same period in 2002. Capital expenditures increased $2,743
thousand in 2003 compared to 2002 primarily due to investments in a new cavern
at Egan and continued capacity expansion.
Item 4. Controls and Procedures.
During April and May 2003, the Company's management, including the President and
Chief Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-14. Based on that
evaluation, they concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. The required
information was effectively recorded, processed, summarized and reported within
the time period necessary to prepare this quarterly report. The Company's
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in the Company's reports under the Exchange Act are
accumulated and communicated to management, including the President and the
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls, after
the President and Chief Financial Officer completed their evaluation.
6
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the
President and Chief Financial Officer completed their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first quarter of
2003.
7
SIGNATURE
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.
MARKET HUB PARTNERS STORAGE, L.P.
By: MARKET HUB PARTNERS STORAGE, L.L.C,
its general partner
Date: May 15, 2003 /s/ Dorothy M. Ables
-----------------------------------------
Dorothy M. Ables
Senior Vice President and Chief Financial
Officer
8
CERTIFICATIONS
I, Gregory J. Rizzo certify that:
1) I have reviewed this quarterly report on Form 10-Q of Market Hub Partners
Storage, L.P.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Gregory J. Rizzo
---------------------------------------
Gregory J. Rizzo
President
Market Hub Partners Storage, L.L.C.
General Partner of Market Hub Partners
Storage, L.P.
9
CERTIFICATIONS
I, Dorothy M. Ables certify that:
1) I have reviewed this quarterly report on Form 10-Q of Market Hub Partners
Storage, L.P.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Dorothy M. Ables
--------------------------------------
Dorothy M. Ables
Senior Vice President and Chief
Financial Officer
Market Hub Partners Storage, L.L.C.
General Partner of Market Hub Partners
Storage, L.P.
10