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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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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, 2003 and 2002 and
Six Months Ended June 30, 2003 and 2002 3
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Consolidated Statement of Changes in Partners'
Equity - Six Months Ended June 30, 2003 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
ITEM 4. Controls and Procedures 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 6. Exhibits and Reports on Form 8K 11
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
2003 2002 2003 2002
OPERATING REVENUES, NET $30,913 $30,960 $68,528 $63,842
OPERATING EXPENSES
Operation and maintenance 6,348 5,534 12,069 11,055
Depreciation and amortization 6,007 5,836 12,021 11,726
Taxes other than income taxes 2,858 2,793 6,014 5,574
Operating expenses 15,213 14,163 30,104 28,355
OPERATING INCOME 15,700 16,797 38,424 35,487
OTHER INCOME/(EXPENSES)
Allowance for equity funds
used during construction 2,045 497 3,460 856
Other, net 38 82 84 163
Other income/(expenses) 2,083 579 3,544 1,019
INTEREST EXPENSE
Interest Expense 8,286 6,298 16,532 12,624
Interest Expense, Capitalized (1,949) (579) (3,601) (1,036)
Interest Expense, Net 6,337 5,719 12,931 11,588
INCOME BEFORE TAXES 11,446 11,657 29,037 24,918
PROVISION FOR TAXES 4,553 4,589 11,555 9,903
NET INCOME 6,893 7,068 17,482 15,015
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 2003 2002
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments $ 23,032 $ 21,620
Accounts receivable - trade, net 5,314 6,384
Accounts receivable - affiliates 4,927 5,470
Other current assets 2,679 3,838
Total Current Assets 35,952 37,312
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 801,599 796,647
Construction work in progress 207,983 125,951
1,009,582 922,598
Accumulated depreciation and amortization (313,024) (301,123)
Natural Gas Transmission Plant, Net 696,558 621,475
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 15,868 14,080
Regulatory assets - other 1,567 1,661
Other assets and deferred charges 13,766 14,857
Total Other Assets and Deferred Charges 31,201 30,598
TOTAL ASSETS $ 763,711 $ 689,385
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,869 $ 16,703
Accrued interest 4,806 6,839
Current portion of long-term debt 22,222 22,222
Accrued property tax 3,817 3,780
Other current liabilities 2,583 3,999
Total Current Liabilities 43,297 53,543
LONG-TERM DEBT 438,889 385,000
OTHER NON-CURRENT LIABILITIES
Unrealized loss-interest rate hedge, net of tax 4,556 4,635
Other 2,139 2,281
Total Other Non-Current Liabilities 6,695 6,916
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 108,732 100,355
Payable by Partners (92,864) (86,275)
Related to Other Comprehensive Income (2,198) (2,227)
Total Amounts Equivalent to Deferred
Income Taxes 13,670 11,853
Commitments and Contingencies - -
Total Liabilities 502,551 457,312
Partners' Equity 261,160 232,073
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 763,711 $ 689,385
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,
2003 2002
OPERATING ACTIVITIES:
Net Income $ 17,482 $ 15,015
Adjusted for the following:
Depreciation and amortization 12,021 11,726
Allowance for equity funds used during construction (3,460) (856)
Deferred regulatory asset-income tax related (1,788) (84)
Amounts equivalent to deferred income taxes 1,788 84
Income and other taxes payable by partners 11,555 9,903
Other assets and deferred charges 1,091 641
Other non-current liabilities (142) 37
CHANGES IN WORKING CAPITAL:
Accounts receivable 1,613 402
Other current assets 1,159 1,169
Accounts payable (6,834) (3,511)
Accrued interest (2,033) (16)
Other current liabilities (1,379) (771)
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,073 33,739
INVESTING ACTIVITIES:
Capital expenditures (83,550) (21,440)
NET CASH USED IN INVESTING ACTIVITIES (83,550) (21,440)
FINANCING ACTIVITIES:
Partner distributions -- --
Long-term debt borrowings 65,000 --
Repayments of long-term debt (11,111) (11,111)
NET CASH PROVIDED BY FINANCING ACTIVITIES 53,889 (11,111)
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS 1,412 1,188
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 21,620 21,715
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 23,032 $ 22,903
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 17,750 $ 12,277
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, 2003
(In Thousands)
(Unaudited)
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 2002 $232,073
Year-to-date net income 17,482
Taxes payable by Partners 11,555
Other comprehensive income, net of tax 50
PARTNERS' EQUITY
BALANCE AT JUNE 30, 2003 $261,160
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., referred to herein as Iroquois or
the 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, 2002 referred to herein
as 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,
2003 2002 2003 2002
Net income $6,893 $7,068 $17,482 $15,015
Other comprehensive income/(loss)
Unrealized income/(loss)on interest
rate hedge, net of tax (75) (417) 50 (49)
Comprehensive income $6,818 $6,651 $17,532 $14,966
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, or FERC, 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,
2003 2002 2003 2002
Revenues (dollars in millions)
Long-term firm reserved service $ 28.1 $ 28.1 $ 59.0 $ 58.3
Short-term firm/interruptible/other 2.8 2.9 9.5 5.5
Total revenues $ 30.9 $ 31.0 $ 68.5 $ 63.8
Volumes delivered (million dekatherms)
Long-term firm reserved service 69.0 71.3 141.3 147.9
Short-term firm/interruptible/other 9.9 9.8 31.6 20.7
Total volumes delivered 78.9 81.1 172.9 168.6
Short-term firm represents firm service contracts of less than one year.
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 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, 2003 compared to the three-month period
ended June 30, 2002.
Revenues. Total revenues for the three-month period ended June 30, 2003
decreased $0.1 million or 0.3% compared to the three-month period ended
June 30, 2002. An increase in long-term firm revenues primarily attributable
to additional capacity provided by Eastchester upstream facilities was offset
by the rate decrease effective January 1, 2003 of approximately $0.01 per
dekatherm. The slight decrease in short-term firm/interruptible/other
revenues of approximately $0.1 million was attributable primarily to softer
demand for interruptible services during the three-month period ended June
30, 2003 as compared to the same period in 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. Operation and maintenance expense
increased $0.8 million for the three-month period ended June 30, 2003
compared to the three-month period ended June 30, 2002. This increase was
primarily due to increased insurance costs and outside services.
Other Income/(Expenses). Other income/(expenses) increased $1.5 million for
the three-month period ended June 30, 2003 compared to the three-month period
ended June 30, 2002 due primarily to an increase in the allowance for equity
funds used during construction, or equity AFUDC, of $1.5 million. The
increase in the equity AFUDC primarily related to Iroquois' expenditures for
the Eastchester Extension.
Interest Expense, Net. Interest expense, net increased $0.6 million for the
three-month period ended June 30, 2003 compared to the three-month period
ended June 30, 2002 due to an increase in interest expense of $2.0 million
partially offset by an increase in interest expense capitalized of $1.4
million. The increase in interest expense reflects an increase in Iroquois'
average debt balance due to borrowings associated with construction of the
Eastchester Extension. A $170.0 million bond offering was completed in
August 2002 at which time $144.2 million was used to pay down Iroquois'
existing bank facility and the credit agreement was amended to permit draws,
up to an aggregate of $120.0 million, to match construction expenditures.
The increase in interest expense capitalized was primarily due to Iroquois'
expenditures for the Eastchester Extension.
Six-month period ended June 30, 2003 compared to the six-month period ended
June 30, 2002.
Revenues. Total revenues for the six-month period ended June 30, 2003
increased $4.7 million or 7.4% compared to the six-month period ended
June 30, 2002. The increase in long-term firm revenues of $0.7 million was
primarily attributable to additional capacity provided by Eastchester
upstream facilities and a new negotiated rate long-term firm contract in the
first quarter of 2003, partially offset by the rate decrease effective
January 1, 2003 of approximately $0.01 per Dekatherm. The increase in short-
term firm/interruptible/other revenues of approximately $4.0 million was
attributable primarily to increased volumes for short-term firm and
interruptible services resulting from stronger market demand for natural gas
due to colder weather during the first quarter of 2003 as compared to the
same period in 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. Operation and maintenance expense
increased $1.0 million for the six-month period ended June 30, 2003 compared
to the six-month period ended June 30, 2002, primarily due to increased
insurance costs, and outside services.
Other Income/(Expenses). Other income/(expenses) for the six-month period
ended June 30, 2003 increased $2.5 million over the six-month period ended
June 30, 2002. The increase was primarily due to an increase in the equity
AFUDC recorded for the Eastchester Extension of $2.6 million, partially
offset by a decrease in interest income of $0.1 million resulting from
declining interest rates and investment balances.
Interest Expense, Net. Interest expense, net increased $1.3 million for the
six-month period ended June 30, 2003 compared to the six-month period ended
June 30, 2002, due to a increase in interest expense of $3.9 million
partially offset by an increase in interest expense capitalized of $2.6
million. The increase in interest expense reflects an increase in Iroquois'
average debt balance due to borrowings associated with construction of the
Eastchester Extension. A $170.0 million bond offering was completed in
August 2002 at which time $144.2 million was used to pay down Iroquois'
existing bank facility and the credit agreement was amended to permit draws,
up to an aggregate of $120.0 million, to match construction expenditures.
The increase in interest expense capitalized was primarily due to Iroquois'
expenditures for the Eastchester Extension.
Provision for Taxes. Income tax expense increased approximately $1.7 million
for the six-month period ended June 30, 2003 as compared to the same period
in 2002. This increase was due primarily to an increase in taxable income.
Liquidity and Capital Resources
For the first six months of 2003, Iroquois' primary source of financing has
been bank borrowings under its amended credit agreement and cash flow from
operations. Iroquois' ongoing operations will require the availability of
funds to service debt, fund working capital, and make capital expenditures on
Iroquois' existing facilities and expansion projects.
Net cash provided by operating activities decreased to $31.1 million in the
second quarter of 2003 compared to $33.7 million in the second quarter of
2002, primarily due to a decrease in working capital partially offset by an
increase in net income. Net cash flow related to financing activities
increased by $65.0 million during the first six months of 2003, as compared
to the same period in 2002, due to bank borrowings under Iroquois' amended
credit agreement.
Iroquois also is party to a $10.0 million, 364-day, variable rate revolving
line of credit to support working capital requirements. As of June 30, 2003
and December 31, 2002, there were no borrowings outstanding under this
facility.
Capital expenditures for the first six months of 2003 were $84.0 million,
compared to $21.4 million in 2002, reflecting primarily the increased
construction activity related to the Eastchester Extension during the period.
Total capital expenditures for 2003 are estimated to be approximately $167.0
million, including approximately $162.0 million for the Eastchester
Extension. (See Part II, Item I, 'Legal Proceedings' for a further discussion
of the Eastchester Extension Project). The remaining capital expenditures
for 2003 are primarily for the purchase of land for a compressor site, a
meter station and interconnect, and various general plant purchases. Iroquois
expects to fund its 2003 capital expenditures through additional borrowings
under its existing credit facilities, and internal sources, including cash
from operations and increased equity contributions (including limiting
distributions to partners) in accordance with the partnership agreement.
Iroquois' management makes recommendations to the partnership management
committee regarding the amount and timing of distributions to partners. The
amount and timing of distributions is subject to internal cash requirements
for construction, financing and operational requirements. Distributions and
cash calls require the approval of the management committee. There were no
cash distributions to partners during the second quarter of 2003 or during
the same period in 2002.
Off-Balance Sheet Transactions
At June 30, 2003, 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; the timing and cost
of Iroquois' expansion projects, including the Eastchester Extension,
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 - (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates and prices. The following discussion of Iroquois' risk management
activities includes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
contemplated in the forward-looking statements. Iroquois handles market
risks in accordance with established policies, which may include various
derivative transactions.
The financial instruments held or issued by Iroquois are for purposes other
than trading or speculation. Iroquois is exposed to risk resulting from
interest rate changes on its variable-rate debt. Iroquois uses interest rate
swap agreements to manage the risk of increases in certain variable rate
issues. It records amounts paid and received under those agreements as
adjustments to the interest expense of the specific debt issues. Iroquois
believes that there is no material market risk associated with these
agreements. As of June 30, 2003, Iroquois had $91.1 million of variable-rate
debt outstanding, of which approximately $33.3 million is fixed out under the
interest rate swap agreements. Holding other variables constant, including
levels of indebtedness, a one-percentage point increase in interest rates
would negatively impact pre-tax earnings by approximately $0.6 million.
Iroquois' pension plan assets are made up of equity and fixed income
investments. Fluctuations in those markets could cause Iroquois to recognize
increased or decreased pension income or expense.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried
out, under the supervision and with the participation of the Company's
management, including the Company's principle executive officer and chief
financial officer, of the effectiveness of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 15d-15(b). Based upon that
evaluation, the Company's principle executive officer and chief financial
officer, concluded that the Company's disclosure controls and procedures are
effective.
There have been no changes in the Company's internal controls over financial
reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
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, 2002.
Eastchester Certificate Application (FERC Docket No. CP00-232)
On April 28, 2000, Iroquois filed an application with the FERC to construct
and operate its 'Eastchester Extension Project'. Under this proposal, as
subsequently modified, Iroquois would construct and operate certain
facilities, including additional compression facilities and approximately 36
miles of pipeline and associated facilities from Northport, Long Island to
the Bronx, New York. Those proposed facilities would provide 230 MDth/d of
natural gas per day to the New York City area. The Company would provide
firm transportation service to the shippers with whom it has executed
precedent agreements. On December 26, 2001, the FERC issued a certificate
authorizing Iroquois to construct and operate the Eastchester facilities
('December 26 Order'). On January 25, 2002, Iroquois accepted the
certificate.
On April 19, 2002, the Company began constructing its Eastchester Expansion
Project, and a portion of the upstream facilities have been placed into
service. Construction of the Long Island Sound portion of the project
commenced in October, 2002. As a result of delays in obtaining certain
construction authorizations and permits and delays related to construction
incidents, management believes the projected in-service date of the entire
Eastchester Extension Project will be late summer or early fall of 2003.
Final project construction costs have increased and will likely exceed $290.0
million, rather than the $210.0 million estimated during the FERC's
certificate process, and will likely reduce the Company's initial margins
that were anticipated when the project application was initially filed with
the FERC.
Athens Project (FERC Docket No. CP02-20-000)
On June 3, 2002, the FERC issued a certificate authorizing Iroquois to
construct the Athens Project facilities. In light of various uncertainties
associated with the Athens Project, Iroquois has investigated alternative
means to provide the firm transportation service requested by the shipper.
As a result of that investigation, Iroquois intends to defer the commencement
of construction of the second Athens compressor unit. By letter dated April
22, 2003, Iroquois requested a 1-year extension from the FERC of the deadline
for completion of construction of the Athens Project, or until December 3,
2004. On May 14, 2003, the Commission granted Iroquois' request for a 1-year
extension. On June 13, 2003, Athens Generating Company filed a request for
rehearing in opposition to Iroquois' 1 year extension. On July 14, 2003, the
FERC accepted Athens' request. The FERC stated that it anticipates issuing a
decision on the merits of said request by September 15, 2003.
Brookfield Project (FERC Docket No. CP02-31-000)
On October 31, 2002 the FERC issued a certificate authorizing Iroquois to
construct the Brookfield facilities.
Based on communications with its prospective customers regarding the timing
of their needs of new firm transportation service, Iroquois has determined
that a temporary deferral of the construction of the Brookfield Project is
necessary. Specifically, Astoria Energy LLC, or Astoria, the largest shipper
for the Brookfield Project, has requested that its service be deferred until
November 1, 2005. On February 28, 2003, Iroquois and Astoria executed an
amendment to its precedent agreements reflecting such a deferral. The other
original Brookfield Project shipper, PPL Energy Plus, LLC, or PPL, has
elected to terminate its precedent agreement, and Iroquois is currently
marketing the Brookfield Project capacity entitlement relinquished by PPL to
other potential shippers. As a result of these developments, on April 22,
2003 Iroquois requested an eighteen month extension from the FERC to extend
the construction completion time of the Brookfield Project to October 31,
2005. On May 14, 2003, the FERC granted Iroquois' request and extended the
construction completion date to November 1, 2005.
On June 27, 2003, Iroquois purchased real property at 60 High Meadow Road,
Brookfield, CT, which was previously approved by the FERC as suitable for
construction of the Brookfield compressor station. Per FERC approval, the
site must be remediated before construction takes place. Site remediation is
not expected to have a material impact on Iroquois' operating results or
financial condition.
Eastchester Extension Project Incidents
On November 16, 2002, certain undersea electric transmission cables owned by
Long Island Lighting Company d/b/a The Long Island Power Authority, or LIPA;
and Connecticut Light and Power Company, or CL&P, were allegedly damaged
and/or severed when an anchor deployed by the DSV MR. SONNY, a work vessel
taking part in the construction of the Eastchester Extension, allegedly
allided with the cables. The MR. SONNY was owned by Cal Dive International,
Inc., a subcontractor of Iroquois' general contractor, Horizon Offshore
Contractors, Inc.
On December 6, 2002, Cal Dive commenced a maritime limitation of liability
action in the United States District Court for the Eastern District of New
York, Complaint of Cal Dive Int'l, Inc. as owner of DSV MR. SONNY, 02 Civ.
6397 (LDW)(ETB), seeking exoneration from or limitation of liability in
respect of this incident. LIPA, CL&P, Iroquois, Horizon, and Thales
GeoSolutions Group, Ltd. (another of Horizon's subcontractors), have all
filed claims in the limitation action. In addition, LIPA and CL&P filed
third-party claims against Iroquois and its operating subsidiary, IPOC, as
well as Horizon and Thales seeking recovery for its alleged losses. Iroquois
filed cross claims against Horizon and Thales for indemnification in respect
of LIPA's and CL&P's claims, and Horizon filed a third-party claim against
Thales. LIPA and CL&P subsequently agreed to dismiss its claim against IPOC,
but without prejudice to their right to re-file that claim if they deem
necessary.
LIPA and CL&P estimate that the costs of repair will exceed $17.0 million.
They also allege that they have suffered other, as yet unspecified
consequential damages. No breakdown of these claims has been provided;
however, LIPA and CL&P have informally advised that they anticipate these
claims will exceed $10.0 million.
In addition to the foregoing, Iroquois has been advised that the Town of
Huntington, New York, may assert a claim against the Company, alleging
violations of certain municipal ordinances on the basis of a claim that
dielectric fluid was released from the cable as a result of the incident.
Under the terms of the construction contract between Horizon and Iroquois,
Horizon is obligated to indemnify Iroquois for Horizon's negligence
associated with the construction of the Eastchester Extension. Horizon is
also contractually responsible for its subcontractors' negligence. As
required by the contract, Horizon named Iroquois as an additional named
insured under Horizon's policies of insurance. Iroquois understands that it
is covered under Horizon's policies to the extent that Horizon has assumed
liability to Iroquois under the contract. Based on Horizon's subcontracts
with Thales and Cal Dive, Iroquois may also be entitled to coverage as an
additional insured party under those parties' policies of insurance. In any
event, Iroquois believes it is adequately insured by its own insurers.
Therefore, based on its initial investigation, Iroquois' management believes
that this matter will not have a material adverse affect on the Company's
financial condition or results of operation.
On February 27, 2003, the New York Power Authority, or NYPA, informed
Iroquois that one of four cables that comprised its Y-49 facility, which is a
600 megawatt undersea electrical power interconnection between Westchester
County and LIPA's transmission system at Sands Point, New York, allegedly
sustained damage causing a disruption of power transmission over the line and
leakage of dielectric fluid. NYPA alleges that the damage was caused by an
anchor of Horizon's pipeline lay barge, the GULF HORIZON, which was in the
vicinity of NYPA's cable and was involved in work in the Eastchester
Extension at the time of the casualty.
No litigation has been commenced as of yet; however, by letter dated March
25, 2003, counsel representing NYPA and LIPA informed Iroquois that they
intend to hold Iroquois, Horizon and Horizon's subcontractor, Thales, jointly
and severally liable for the full extent of their damages, which they allege
includes emergency response costs, repair of the damaged electrical cable,
loss of use and disruption of service, and certain other as yet unspecified
damages arising out of or relating to the incident. To date, NYPA has not
placed a specific dollar value on its claim.
Iroquois is a party to an agreement with NYPA which provides, among other
things, that Iroquois will indemnify NYPA for damage to the Y-49 cables which
results from Iroquois' or its contractors' negligent acts or omissions or
willful misconduct. Under the terms of the construction contract between
Horizon and Iroquois, Horizon is required to indemnify Iroquois for Horizon's
negligence associated with the construction of the Eastchester Extension.
Horizon is also contractually responsible for its sub-contractor's
negligence. Pursuant to the contract, Horizon named Iroquois as an
additional named insured under Horizon's policies of insurance. Iroquois is
still investigating whether Horizon's insurance is adequate to cover Iroquois
for its potential losses in this matter. Iroquois may also be entitled to
indemnity as an additional insured under Thales' policies of insurance,
although this matter is also still subject to further investigation.
Iroquois has placed Horizon and its underwriters on notice that it intends to
hold Horizon responsible. Iroquois has further requested that Horizon assume
its defense and hold it harmless in respect of this claim; however, to date,
Horizon has rejected this request. Iroquois has also placed its own
insurance underwriters on notice and is currently investigating the
applicability of all available insurance coverage.
Iroquois is still in the process of investigating this incident and
evaluating its rights, obligations and responsibilities with regard to this
incident. Given the preliminary stage of this matter, Iroquois is unable to
assess the likelihood of an unfavorable outcome and/or the amount or range of
loss, if any, in the event of an unfavorable outcome.
PG&E National Energy Group, Inc. (NEG) and its subsidiaries' bankruptcy
filing
On July 8, 2003, PG&E Corporation reported that PG&E NEG and a number of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. In addition to PG&E NEG, the following subsidiaries
also filed for bankruptcy protection: PG&E Energy Trading Holdings
Corporation, PG&E Energy Trading-Gas Corporation, PG&E Energy Trading-Power
Corporation (PG&E Power Corp), PG&E ET Investments Corporation, and US Gen
New England, Inc. Iroquois has contracts in place with US Gen New England,
Inc. (US Gen NE) and PG&E Energy Trading-Gas Corporation (PG&E Gas Corp).
US Gen NE has two firm transportation service agreements with Iroquois, one
for 40,702 Dth/d which expires on 11/1/2013 and one for 12,000 Dth/d which
expires on 4/1/2018. The total monthly demand charges for both contracts are
$0.5 million. In the past, PG&E Gas Corp has utilized US Gen NE's capacity as
a replacement shipper. As of this date, US Gen NE and PG&E Gas Corp, as its
replacement shipper, have not fulfilled their payment obligations for the
month of June under US Gen NE's firm service agreement totaling $0.5 million.
As security for firm services provided by Iroquois to US Gen NE, PG&E Gas
Corp and PG&E Power Corp, Iroquois received a $1.7 million letter of credit
issued by JPMorgan Chase Bank which expires on August 15, 2003. In light of
US Gen NE and PG&E Gas Corp's failure to pay the June invoice, a request for
demand on the letter of credit was made on July 24, 2003. On July 30, 2003,
Iroquois received a wire transfer of $1.7 million from JPMorgan Chase Bank.
Additionally, PG&E Gas Corp has an interruptible service contract for 50,000
Dth/d and a park and loan service contract for 50,000 Dth/d. In addition to
the letter of credit described above, PG&E Gas Corp has a $0.1 million cash
deposit with Iroquois as prepayment security which can be drawn upon in the
event that PG&E Gas Corp fails to provide payment in the future on its
interruptible and park and loan services contracts.
No further material legal proceedings or material developments have occurred
since December 31, 2002.
ITEMS 2-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Index to Exhibits
Exhibit
Number
31.1 Certification of the Chief Executive Officer to Rule 15d-14(a) under
the Securities Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934.
32.1 Certification pursuant to Rule 15d-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350.
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: August 11, 2003 By: Iroquois Pipeline Operating Company,
as its Agent
/S/ E.J. Holm
_________________
E.J. Holm
President
/S/ Paul Bailey
_________________
Paul Bailey
Vice President & Chief Financial Officer