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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 the quarterly period ended June 30, 2002
Commission File Number 333-42578
IROQUOIS GAS TRANSMISSION SYSTEM, L.P.
(Exact name of registrant as specified in its charter)
Delaware 06-1285387
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Corporate Drive
Suite 600
Shelton, Connecticut 06484-6211
(Address of principal executive (Zip code)
offices)
(203) 925-7200
(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 [ ]
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001 3
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 5
Consolidated Statement of Changes in Partners'
Equity - Six Months Ended June 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 5. Other Information 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
OPERATING REVENUES, NET $30,960 $31,214 $63,842 $65,218
OPERATING EXPENSES
Operation and maintenance 5,534 5,819 11,055 10,169
Depreciation and amortization 5,836 5,886 11,726 11,794
Taxes other than income taxes 2,793 2,759 5,574 5,513
Operating expenses 14,163 14,464 28,355 27,476
OPERATING INCOME 16,797 16,750 35,487 37,742
OTHER INCOME/(EXPENSES)
Allowance for equity funds
used during construction 497 62 856 115
Other, net 82 392 163 848
Other income/(expenses) 579 454 1,019 963
INTEREST EXPENSE
Interest Expense 6,298 7,386 12,624 15,407
Interest Expense Capitalized (579) (94) (1,036) (164)
Interest expense, net 5,719 7,292 11,588 15,243
INCOME BEFORE TAXES 11,657 9,912 24,918 23,462
PROVISION FOR TAXES 4,589 4,019 9,903 9,512
NET INCOME 7,068 5,893 15,015 13,950
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
ASSETS 2002 2001
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments $ 22,903 $ 21,715
Accounts receivable - trade, net 6,169 6,480
Accounts receivable - affiliates 5,176 5,267
Other current assets 2,336 3,505
Total Current Assets 36,584 36,967
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 778,205 776,961
Construction work in progress 61,653 40,659
839,858 817,620
Accumulated depreciation and amortization (295,975) (284,401)
Natural Gas Transmission Plant, Net 543,883 533,219
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 13,382 13,298
Regulatory assets - other 1,755 1,850
Other assets and deferred charges 5,770 6,411
Total Other Assets and Deferred Charges 20,907 21,559
TOTAL ASSETS $ 601,374 $ 591,745
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,144 $ 7,655
Accrued interest 2,893 2,909
Current portion of long-term debt 22,222 22,222
Accrued property tax 3,807 4,001
Other current liabilities 2,798 3,377
Total Current Liabilities 35,864 40,164
LONG-TERM DEBT 333,333 344,444
OTHER NON-CURRENT LIABILITIES
Unrealized loss-interest rate hedge, net of tax 1,833 1,783
Other 1,329 1,292
Total Other Non-Current Liabilities 3,162 3,075
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 93,350 88,623
Payable by Partners (79,968) (75,325)
Total Amounts Equivalent to Deferred
Income Taxes 13,382 13,298
Commitments and Contingencies - -
Total Liabilities 385,741 400,981
Partners' Equity 215,633 190,764
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 601,374 $ 591,745
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
OPERATING ACTIVITIES:
Net Income $ 15,015 $ 13,950
Adjusted for the following:
Depreciation and amortization 11,726 11,794
Allowance for equity funds used during construction (856) (115)
Deferred regulatory asset-income tax related (84) 329
Amounts equivalent to deferred income taxes 84 (329)
Income and other taxes payable by partners 9,903 9,512
Other assets and deferred charges 641 237
Other non-current liabilities 37 135
CHANGES IN WORKING CAPITAL:
Accounts receivable 402 2,675
Other current assets 1,169 972
Accounts payable (3,511) (2,729)
Accrued interest (16) 49
Other current liabilities (771) (35)
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,739 36,445
INVESTING ACTIVITIES:
Capital expenditures (21,440) (4,058)
NET CASH USED IN INVESTING ACTIVITIES (21,440) (4,058)
FINANCING ACTIVITIES:
Partner distributions -- (10,000)
Repayments of long-term debt (11,111) (11,112)
NET CASH PROVIDED BY FINANCING ACTIVITIES (11,111) (21,112)
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS 1,188 11,275
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 21,715 25,013
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 22,903 $ 36,288
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 12,277 $ 14,999
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
For the Six Months Ended June 30, 2002
(In Thousands)
(Unaudited)
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 2001 $190,764
Year-to-date net income 15,015
Taxes payable by Partners 9,903
Other comprehensive loss, net of tax (49)
PARTNERS' EQUITY
BALANCE AT JUNE 30, 2002 $215,633
The accompanying notes are an integral part of this consolidated
financial statement.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been prepared
by Iroquois Gas Transmission System, L.P., ("Iroquois" or "Company") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in Iroquois' Annual Report on Form
10-K for the year ended December 31, 2001("Iroquois' Form 10-K").
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make assumptions and estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Comprehensive income consisted of the following:
(in thousands) Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
Net income $7,068 $5,893 $15,015 $13,950
Other comprehensive income/(loss)
Unrealized income/(loss)on interest
rate hedge, net of tax (417) 357 (49) (1,175)
Comprehensive income $6,651 $6,250 $14,966 $12,775
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company owns an interstate natural gas pipeline system extending from the
United States-Canada border near Waddington, New York through Connecticut to
South Commack, Long Island, New York. Iroquois' pipeline system commenced
full operations on January 25, 1992, and is operated by the Company's wholly
owned subsidiary, Iroquois Pipeline Operating Company.
During the later part of 1999, the Company held negotiations with its
shippers, which led to the settlement of certain remaining issues from
previous rate cases between the Company and its shippers. The settlement
received Federal Energy Regulatory Commission (FERC or Commission) approval
on February 10, 2000. The settlement provides for a schedule of rate
reductions through the year 2003, generally precludes additional rate cases
during this period initiated by Iroquois or by any shipper that was a
settling party, and resolves all rate matters outstanding from the Company's
previous two rate cases.
Results of Operations
The components of Operating Revenues and Volumes Transported are provided in
the following table:
Three months ended Six months ended
Revenues and Volumes Delivered June 30, June 30,
2002 2001 2002 2001
Revenues (dollars in millions)
Long-term firm reserved service $ 28.1 $ 29.1 $ 58.3 $ 59.5
Short-term firm 1.4 1.4 2.9 4.3
Interruptible/other(1) 1.5 0.7 2.6 1.4
Total revenues $ 31.0 $ 31.2 $ 63.8 $ 65.2
Volumes delivered (million dekatherms)
Long-term firm reserved service 71.3 60.4 147.9 132.8
Short-term firm 1.7 0.9 6.5 13.8
Interruptible/other 8.1 4.1 14.2 7.7
Total volumes delivered 81.1 65.4 168.6 154.3
____________________
(1)Other revenue includes deferred asset surcharges, park and loan service
revenue and marketing fees.
The Company receives revenues under long-term firm reserved transportation
service contracts with shippers in accordance with service rates approved by
the FERC. The Company also has interruptible transportation service revenues
which, although small relative to overall revenues, are at the margin and
thus can have a significant impact on net income. Such revenues include
short-term firm reserved transportation service contracts having terms of
less than one year as well as standard interruptible transportation service
contracts. While it is common for pipelines to be obligated under their
FERC-approved rate structures to share some of their interruptible
transportation service revenues with long-term firm reserved service
shippers, Iroquois is not currently obligated to do so under the terms of its
currently effective rate settlement described above. However, there can be
no assurance that this will be the case in the future.
Three-month period ended June 30, 2002 compared to the three-month period
ended June 30, 2001.
Revenues. Total revenues for the three-month period ended June 30, 2002
decreased $0.2 million or 0.6% compared to the three-month period ended
June 30, 2001. The decrease in long-term firm revenues of $1.0 million was
attributable to the rate decrease effective January 1, 2002 of approximately
$0.024 per Dekatherm, partially offset by increased volumes due to new long-
term firm contracts in place in 2002. The increase in interruptible/other
revenues of $0.8 million was attributable primarily to increased volumes for
interruptible service during the three-month period ended June 30, 2002.
Other Income/(Expenses). Other income/(expenses) increased $0.1 million for
the three-month period ended June 30, 2002 compared to the three-month period
ended June 30, 2001 due to an increase in the allowance for equity funds used
during construction ("equity AFUDC") of $0.4 million and a decrease in
interest income of $0.3 million. The increase in the equity AFUDC primarily
related to Iroquois' expenditures for the Eastchester Extension. The
decrease in interest income was primarily the result of declining interest
rates and investment balances.
Interest Expense, Net. Interest expense, net decreased $1.6 million for the
three-month period ended June 30, 2002 compared to the three-month period
ended June 30, 2001 due to a decrease in interest expense of $1.1 million and
an increase in interest expense capitalized of $0.5 million. The decrease in
interest expense primarily reflects lower interest rates on floating rate
debt as well as a lower average long-term debt balance due to scheduled debt
repayments. The increase in interest expense capitalized was primarily due
to Iroquois' expenditures for the Eastchester Extension.
Provision for Taxes. Income tax expense increased approximately $0.6 million
for the three-month period ended June 30, 2002 as compared to the same period
in 2001. This increase was due primarily to an increase in taxable income.
Six-month period ended June 30, 2002 compared to the six-month period ended
June 30, 2001.
Revenues. Total revenues for the six-month period ended June 30, 2002
decreased $1.4 million or 2.2% compared to the six-month period ended
June 30, 2001. The decrease in long-term firm revenues of $1.2 million was
attributable to the rate decrease effective January 1, 2002 of approximately
$0.024 per Dekatherm, partially offset by increased volumes due to new long-
term firm contracts in place in 2002. The net decrease in short-term firm
and interruptible/other revenues of $0.2 million was attributable primarily
to decreased volumes due to warmer winter temperatures and the consequent
decrease in demand for natural gas during the first three months of 2002,
partially offset by increased volumes for interruptible service during the
second quarter of 2002.
Operation and Maintenance Expense. Operation and Maintenance expense includes
operating, maintenance and administrative expenses for the Company's
corporate office in Shelton, Connecticut and field support for the mainline,
metering and compression facilities. Operations expense increased $0.9
million for the six-month period ended June 30, 2002 compared to the six-
month period ended June 30, 2001, primarily due to increased payroll and
benefits expense.
Other Income/(Expenses). Other income/(expenses) for the six-month period
ended June 30, 2002 increased $0.1 million over the six-month period ended
June 30, 2001. The increase was primarily due to an increase in the equity
AFUDC recorded on the Eastchester Extension of $0.7 million, partially offset
by a decrease in interest income of $0.6 million resulting from declining
interest rates and investment balances.
Interest Expense, Net. Interest expense, net decreased $3.7 million for the
six-month period ended June 30, 2002 compared to the six-month period ended
June 30, 2001, due to a decrease in interest expense of $2.8 million and an
increase in interest expense capitalized of $0.9 million. The decrease in
interest expense primarily reflects lower interest rates on floating rate
debt as well as a lower average long-term debt balance due to scheduled debt
repayments. The increase in interest expense capitalized was primarily due
to Iroquois' expenditures for the Eastchester Extension.
Provision for Taxes. Income tax expense increased approximately $0.4 million
for the six-month period ended June 30, 2002 as compared to the same period
in 2001. This increase was due primarily to an increase in taxable income.
Liquidity and capital resources
Capital expenditures for the first six months of 2002 were $21.4 million
compared to $4.1 million in 2001 reflecting the increased level of
construction activity over the period. Capital expenditures for both 2001
and 2002 related primarily to the Eastchester Extension, various general
plant purchases and other minor projects.
Approvals are still pending at FERC regarding the Company's Eastern Long
Island Project (expenditures to date of $1.8 million) and its Brookfield
Project (expenditures to date of $1.1 million). The Company continues to
monitor their progress.
See Iroquois' Form 10-K, Part I, Item 1, "Business" for a discussion of these
projects.
Cash flow (defined as net income adjusted for non-cash items such as
depreciation and deferred income taxes) represents the cash generated from
operations available for capital expenditures, partner distributions and
other operational needs. Net cash provided by operating activities decreased
by $2.7 million for the second quarter of 2002, as compared to the same
period in 2001, partially due to the effect on the June 2002 receivable
balance of approximately $1.2 million in unpaid charges from transportation
contracts with a firm shipper. Enron Corporation, a company currently
undergoing bankruptcy proceedings, assumed a portion of the firm shipper's
capacity under a firm contract. The general terms and conditions of Iroquois'
tariff provide that unless Iroquois otherwise agrees in writing (which
Iroquois has not, in this case), a releasing shipper shall remain liable for
the demand charge, any other fixed charges associated with the released
capacity and any late charges resulting from a replacement shipper's failure
to pay the replacement demand charge. Consequently, Iroquois expects to
collect the entire balance due from the releasing shipper. In addition, the
decrease in rates for long-term firm service has contributed to the decline
in net cash provided by operating activities.
Iroquois is party to a $10.0 million revolving line of credit to support
working capital requirements. Funds may be borrowed on a short-term basis at
variable rates. As of December 31, 2001 and June 30, 2002 there were no
borrowings outstanding under this facility.
Total capital expenditures for 2002 are estimated to be approximately $156.3
million, including approximately $140.2 million for the Eastchester
Extension. The remaining capital expenditures planned for 2002 are primarily
for construction of a meter station and tap, two compressor stations to
accommodate future growth, and various general plant purchases and other
minor projects. Iroquois expects to fund the proposed expansion projects
currently under consideration through the issuance of additional
indebtedness, modifications to our existing credit facilities, and internal
sources, including cash from operations and capital contributions by our
partners in accordance with the partnership agreement. Iroquois' management
team makes recommendations to its management committee regarding
distributions to partners. These recommendations are based on general
guidelines that have been established by Iroquois' management committee.
Under the partnership agreement, these guidelines may be suspended during
periods of construction to allow Iroquois to forego making distributions to
its partners and to fund projects with existing equity funds instead of
direct equity contributions from its partners. Iroquois' 2002 capital
expenditures to date have been funded with such existing equity funds.
On June 19, 2002, the Company entered into forward interest rate agreements
in the aggregate notional amount of $120.0 million. The forward interest
rate agreements were entered into to hedge the underlying interest rate at
which the Company may issue fixed rate debt in the third quarter of 2002.
Any gain or loss on settlement will be amortized over the life of the fixed
rate debt. At June 30, 2002, the fair value of the forward interest rate
agreements, net of taxes, was $0.2 million.
At June 30, 2002, the Company had no off-balance sheet transactions,
arrangements or other relationships with unconsolidated entities or persons
that would adversely affect liquidity, availability of capital resources,
financial position or results of operations.
Information Regarding Forward Looking Statements
This quarterly report contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are based on current expectations, are not guarantees of future
performance and include assumptions about future market conditions,
operations and results. They are made in reliance on the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Iroquois
can give no assurance that such expectations will be achieved. Among the
many factors that could cause actual results to differ materially from those
in the forward-looking statements herein are: future demand and prices for
natural gas; availability of supplies of Canadian natural gas; regulatory,
political, legislative and judicial developments, particularly with regard to
regulation by the Federal Energy Regulatory Commission; competitive
conditions in the marketplace; changes in the receptivity of the financial
markets to Iroquois or other oil and gas credits similar to Iroquois and,
accordingly, our strategy for financing any such change in business strategy
or expansion. A discussion of these and other factors which may affect our
actual results, performance, achievements or financial position is contained
in the "Risk Factors" section of Iroquois' Annual Report on Form 10-K, which
is on file with the United States Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION - (Concluded)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
The Company's interest rate exposure results from the portion of its
consolidated debt portfolio subject to variable rates. To mitigate potential
fluctuations in interest rates, the Company maintains a significant portion
of its consolidated debt portfolio in fixed rate debt. As of June 30, 2002,
the Company had $155.6 million of variable rate debt outstanding. Holding
other variables constant, including levels of indebtedness, a one percentage
point increase in interest rates would impact pre-tax earnings by
approximately $1.2 million. The Company also uses interest rate swap
agreements to manage its level of exposure to interest rate changes. For a
further discussion about the Company's interest rate swaps, see Iroquois'
Form 10-K, Note 3 to the Consolidated Financial Statements.
The Partnership's pension plan assets are made up of equity and fixed income
investments. Fluctuations in those markets could cause the Partnership to
recognize increased or decreased pension income or expense.
PART II. OTHER INFORMATION
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
ITEM 1. Legal Proceedings
A description of the Company's legal proceedings is contained in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
For information regarding legal proceedings arising in 2002, see Part II.
Item 1., "Legal Proceedings," in the Form 10-Q filed for the quarter ending
March 31, 2002.
No further material legal proceedings or material developments occurred since
March 31, 2001.
ITEMS 2-6 are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IROQUOIS GAS TRANSMISSION SYSTEM, L.P.
(A Delaware Limited Partnership)
Date: (July 26, 2002) By: Iroquois Pipeline Operating Company,
as its Agent
/S/ Craig Frew
_________________
Craig Frew
President
/S/ Paul Bailey
_________________
Paul Bailey
Vice President & Chief Financial Officer