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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 333-42578
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 March 31, 2004 and 2003 3
Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003 5
Consolidated Statement of Changes in Partners'
Equity - Three Months Ended March 31, 2004 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 8-K 11
Signatures 12
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
March 31
2004 2003
OPERATING REVENUES $39,320 $37,615
OPERATING EXPENSES
Operation and maintenance 5,887 5,722
Depreciation and amortization 7,383 6,014
Taxes other than income taxes 3,291 3,156
Operating expenses 16,561 14,892
OPERATING INCOME 22,759 22,723
OTHER INCOME/(EXPENSES)
Interest Income 67 51
Allowance for equity funds
used during construction 1,123 1,415
Other, net (4) (5)
Other income/(expenses) 1,186 1,461
INTEREST EXPENSE
Interest Expense 8,344 8,246
Allowance for borrowed funds
used during construction (1,070) (1,653)
Interest Expense, Net 7,274 6,593
INCOME BEFORE TAXES 16,671 17,591
PROVISION FOR TAXES 6,835 7,002
NET INCOME 9,836 10,589
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)
(Unaudited)
March 31, December 31,
ASSETS 2004 2003
CURRENT ASSETS
Cash and temporary cash investments $ 35,852 $ 36,344
Accounts receivable - trade, net 6,843 7,080
Accounts receivable - affiliates 6,031 5,495
Other current assets 7,462 6,413
Total Current Assets 56,188 55,332
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 1,090,479 802,220
Construction work in progress 5,637 280,528
1,096,116 1,082,748
Accumulated depreciation and amortization (330,698) (323,405)
Natural Gas Transmission Plant, Net 765,418 759,343
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 19,849 19,174
Regulatory assets - other 1,426 1,473
Other assets and deferred charges 12,675 13,383
Total Other Assets and Deferred Charges 33,950 34,030
TOTAL ASSETS $ 855,556 $ 848,705
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,362 $ 21,424
Accrued interest 11,529 4,626
Current portion of long-term debt 32,222 32,222
Other current liabilities 7,657 7,425
Total Current Liabilities 60,770 65,697
LONG-TERM DEBT 442,222 447,778
OTHER NON-CURRENT LIABILITIES
Unrealized loss-interest rate hedge, net of tax 3,342 3,263
Other 1,810 1,821
Total Other Non-Current Liabilities 5,152 5,084
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 131,817 122,220
Payable by Partners (111,968) (103,046)
Related to Other Comprehensive Income (1,703) (1,671)
Total Amounts Equivalent to Deferred
Income Taxes 18,146 17,503
Commitments and Contingencies - -
Total Liabilities 526,290 536,062
Partners' Equity 329,266 312,643
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 855,556 $ 848,705
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)
Three Months Ended
March 31,
2004 2003
OPERATING ACTIVITIES:
Net Income $ 9,836 $ 10,589
Adjusted for the following:
Depreciation and amortization 7,383 6,014
Allowance for equity funds used during construction (1,123) (1,415)
Deferred regulatory asset-income tax related (675) (781)
Amounts equivalent to deferred income taxes 675 781
Income and other taxes payable by partners 6,835 7,002
Other assets and deferred charges 684 620
Other non-current liabilities (11) (46)
CHANGES IN WORKING CAPITAL:
Accounts receivable (299) (653)
Other current assets (1,049) 1,240
Accounts payable (12,062) (9,077)
Accrued interest 6,903 7,061
Other current liabilities 232 (4,752)
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,329 16,583
INVESTING ACTIVITIES:
Capital expenditures (12,265) (46,010)
NET CASH USED FOR INVESTING ACTIVITIES (12,265) (46,010)
FINANCING ACTIVITIES:
Long-term debt borrowings -- 32,000
Repayments of long-term debt (5,556) (5,556)
NET CASH (USED FOR)/PROVIDED BY
FINANCING ACTIVITIES (5,556) 26,444
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS (492) (2,983)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 36,344 21,620
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 35,852 $ 18,637
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 1,034 $ 778
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 Three Months Ended March 31, 2004
(In Thousands)
(Unaudited)
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 2003 $312,643
Year-to-date net income 9,836
Taxes payable by Partners 6,835
Other comprehensive loss, net of tax (48)
PARTNERS' EQUITY
BALANCE AT MARCH 31, 2004 $329,266
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, 2003, 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
March 31,
2004 2003
Net income $9,836 $10,589
Other comprehensive income
Unrealized (loss)/gain on interest rate
hedge, net of tax (48) 124
Comprehensive income $ 9,788 $10,713
3. Retirement Benefit Plans:
The components of net pension benefit costs included in the Company's
consolidated statements of income were as follows:
(in thousands) Three months ended
March 31,
2004 2003
Service Cost $ 220 $ 203
Interest Cost 77 62
Expected return on plan assets (88) (61)
Amortization of prior service cost 3 3
Recognition of net actuarial loss 15 14
Net periodic pension cost $ 227 $ 221
4. Commitments And Contingencies:
Eastchester-Horizon Suit
On January 20, 2004, Horizon filed a complaint against the Partnership and
IPOC in the Supreme Court of the State of New York, New York County (Index
No. 04/600140). The complaint alleges that the Partnership wrongfully
terminated its agreement with Horizon to perform the Eastchester construction
work in Long Island Sound and that the Partnership committed other breaches
of such agreement in conjunction with the Eastchester construction work. The
complaint seeks damages in excess of $40.0 million. On April 7, 2004, the
Partnership filed in such court proceeding an amended answer and
counterclaims against Horizon totaling in excess of $66.0 million. Given the
preliminary stage of this matter, the Partnership is unable at this time to
assess the likelihood of a favorable or unfavorable outcome and/or the amount
or range of recovery or loss, if any, resulting from Horizon's claims and the
Partnership's counterclaims.
Cal Dive International, Inc.
On March 1, 2004 and in a duplicate filing on March 9, 2004, Cal Dive
International, Inc. ("Cal Dive") filed a Mechanic's Lien totaling $3.3
million in the offices of the Clerk of Bronx and Suffolk Counties,
respectively. Cal Dive was in privity with Horizon Offshore Contractors,
Inc. ("Horizon") and provided services to Horizon during the Eastchester
construction work. The Partnership instructed Horizon to address the lien
notice pursuant to its contractual obligations. The Partnership also
demanded further information from Cal Dive on the particulars of its lien.
The Partnership does not believe it owes Cal Dive any monies and plans to
vigorously contest the validity of the liens. Furthermore, the Partnership,
on April 1 and April 5, 2004 in compliance with Section 6.2(c)(ii) of its
Second Supplemental Indenture, dated August 13, 2003, posted bonds to
discharge the Mechanic's Liens.
Eastchester Construction 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 allegedly is owned by Cal Dive
International, Inc., a subcontractor of the Partnership's 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, seeking exoneration from or limitation of liability in respect of this
incident. LIPA, CL&P, the Partnership, Horizon, and Thales GeoSolutions
Group, Ltd. (another of Horizon's subcontractors), have all filed claims in
the limitation action. In addition, LIPA, CL&P and their subrogated
underwriters (the "Cable Interests") filed third-party claims against the
Partnership and its operating subsidiary, IPOC, as well as Horizon and
Thales, seeking recovery for its alleged losses. The Partnership filed
cross- claims against Horizon and Thales for indemnification in respect of
the Cable Interests' claims, and Horizon filed a third-party claim against
Thales. The Cable Interests subsequently agreed to dismiss their claim
against IPOC, but without prejudice to their right to re-file that claim if
they deem necessary.
The Cable Interests are claiming a total of $34.2 million in damages,
consisting of $14.4 million for repairs and repair related costs, including
LIPA and CL&P internal costs and overheads of $4.7 million, as well as $19.9
million in consequential damages.
In addition to the foregoing, the Partnership has been advised that the Town
of Huntington, New York may assert a claim against the Partnership 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 the
Partnership, Horizon is obligated to indemnify the Partnership 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 the Partnership as an additional
named insured under Horizon's policies of insurance. The Partnership
understands that it is covered under Horizon's policies to the extent that
Horizon has assumed liability to the Partnership under the contract. Based
on Horizon's subcontracts with Thales and Cal Dive, the Partnership may also
be entitled to coverage as an additional insured party under those parties'
policies of insurance. In addition, Thales's underwriters have sent a letter
to Thales, which was forwarded to the Partnership's counsel on March 12,
2004, agreeing to indemnify the Partnership in accordance with the indemnity
provision in the Horizon/Thales contract. This indemnity is subject to the
policies' terms and limit of $10.0 million. The details of this arrangement
are being negotiated. In any event, the Partnership believes it is
adequately insured by its own insurers. Therefore, based on its initial
investigation, the Partnership's management believes that this matter will
not have a material adverse effect on the Partnership's financial condition
or results of operations.
On February 27, 2003, the New York Power Authority, or NYPA, informed the
Partnership 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.
By letter dated March 25, 2003, counsel representing NYPA and LIPA informed
the Partnership that they intend to hold the Partnership, 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.
The Partnership is a party to an agreement with NYPA, which provides, among
other things, that the Partnership will indemnify NYPA for damage to the Y-49
cables, which results from the Partnership's or its contractors' negligence,
acts, omissions or willful misconduct. Under the terms of the construction
contract between Horizon and the Partnership, Horizon is obligated to
indemnify the Partnership 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 the Partnership as an additional named insured under Horizon's
policies of insurance. The Partnership is still investigating whether
Horizon's insurance is adequate to cover the Partnership for its potential
losses in this matter. The Partnership 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. The Partnership has
placed Horizon and its underwriters on notice that it intends to hold Horizon
responsible. The Partnership 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. The Partnership has also placed its own
insurance underwriters on notice and is currently investigating the
applicability of all available insurance coverage's.
On August 15, 2003, Horizon commenced a maritime limitation of liability
action in the United States District Court for the Southern District of
Texas, Houston Division, captioned In the Matter of Horizon Vessels Inc., as
owner of the GULF HORIZON, seeking exoneration from or limitation of
liability in connection with this incident. NYPA and LIPA (collectively, the
"Y-49 Cable Interests") also have filed claims in the limitation action
asserting total damages of approximately $21.0 million. On November 12, 2003,
the Partnership filed an Answer in Horizon's action, requesting that the
limitation of liability action be dismissed and/or that the limitation
injunction be lifted to permit the Partnership to pursue its claims against
Horizon in the forum of its choice, or, in the alternative, that Horizon be
denied limitation rights under the Limitation Act. The Partnership also
filed a claim in Horizon's limitation action seeking indemnity for any
liability it may be found to have to the Y-49 Cable Interests as a result of
the NYPA cable incident as well as all losses suffered by the Partnership as
a result thereof, and, on a protective basis, seeking full damages for
Horizon's breaches and deficient performance under the Partnership/Horizon
construction contract, which claims are unrelated to the NYPA cable incident.
Thales also has filed a claim in the Horizon limitation action seeking
indemnity for any liability it may be found to have to the Y-49 Cable
Interests or the Partnership. The Y-49 Cable Interests and the Partnership
both have filed motions to transfer the Texas action to the United States
District Court for the Eastern District of New York. Thales has joined in
those motions. By order entered February 27, 2004, the court denied the
motions to transfer. However, in doing so, the court confirmed that the
Partnership could pursue its contract claims against Horizon outside of the
limitation action.
The Partnership is still in the process of investigating this incident and
evaluating its rights, obligations and responsibilities. Given the
preliminary stage of this matter, the Partnership 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.
The Partnership has also learned that as part of the Eastchester construction
there may have been one or more violations by the contractor of the
exclusionary zones established around certain specified areas of possible
cultural resources, namely underwater archeological sites such as shipwrecks,
along the pipeline's marine route and the contractor may have placed anchors
outside the authorized construction corridor. At this time, the Partnership
has no information that any sites were in fact damaged and the Partnership's
investigation in this matter is ongoing. The Partnership has informed the
FERC and the New York State Office of Parks, Recreation and Historic
Preservation of this matter. At this time, the Partnership is unable to
determine if there will be any material adverse effect on the Partnership's
financial condition and results of operations due to this matter.
Capobianco, A. vs. Iroquois Gas & Consolidated Edison Company of New York
On January 28, 2004, Anthony Capobianco filed a complaint against Iroquois
Gas Transmission System, L.P., Iroquois Pipeline Operating Company and
Consolidated Edison Company of New York in the Supreme Court of the State of
New York, New York County (Index No. 101366/04). The complaint alleges that
Mr. Capobianco, an employee of Hallen Construction Company, Inc. ("Hallen"),
sustained personal injuries resulting from an electrical current causing
severe electrical shock while performing his duties as part of the
construction of the Hunts Point segment of the Partnership's Eastchester
project. Hallen was the Partnership's contractor employed to construct that
segment of the project. The claim is asserted for damages in the amount of
$10.0 million. The Partnership has notified its insurance carriers and an
answer has been filed to the complaint. Given the preliminary nature of this
matter, at this time, the Partnership is unable to determine the likelihood
of an unfavorable outcome and/or the amount or range of loss, if any, in the
event of an unfavorable outcome.
National Energy & Gas Transmission Inc. ("NEGT") and its Subsidiaries'
Bankruptcy Filing
On July 8, 2003, PG&E Corporation reported that NEGT and a number of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. These subsidiaries include, PG&E Energy Trading
Holdings Corporation, PG&E Energy Trading-Gas Corporation, PG&E Energy
Trading-Power Corporation, PG&E ET Investments Corporation, and US Gen New
England, Inc. ("US Gen NE").
US Gen NE had two firm transportation service agreements with the
Partnership, one for 40,702 Dth/d, which expires on November 1, 2013, and one
for 12,000 Dth/d, which expires on April 1, 2018. The total monthly demand
charges for both contracts were $0.5 million. On September 5, 2003, the
bankruptcy court authorized the rejection of US Gen NE's two firm
transportation contracts. In February 2004, the Partnership entered into a
ten year contract for the 12,000 Dth/d while the remaining unsubscribed
capacity of 40,720 Dth/d will continue to be remarketed on a short term basis
until longer term market opportunities emerge.
On October 15, 2003, the Partnership filed a proof of claim with the
bankruptcy court for $49.8 million, representing the present value of the two
rejected contracts.
FERC Docket No. RP04-136-000
On January 2, 2004 the Partnership filed a Section 4 rate change proceeding,
consistent with the settlement in Docket No. RP03-589, limited to rates for
service on the Eastchester Extension Project as certificated by FERC in
Docket No. CP00-232. The Eastchester Project was in-service on February 5,
2004. The Partnership proposes a rate of $0.8444 per Dth on a 100% load-
factor basis (as compared with the Partnership's existing 100% load-factor
inter-zone rate of $0.4234 per Dth, which will serve as the initial rate per
the certificate order). The increased rate reflects, among other things, an
increase in plant costs from the certificate estimate of $210.0 million to a
level of approximately $334.0 million. The higher plant costs are the result
of a number of factors, including delays in obtaining construction permits
and authorizations; unanticipated environmental costs; a failed directional
drill; higher than expected labor costs; and construction incidents
associated with constructing the Project in a highly congested marine
corridor. Various Partnership customers have filed motions in response to
the Partnership's requested rate change. On January 30, 2004 the FERC issued
an order accepting the rates and making them effective July 1, 2004, subject
to refund and subject to the outcome of hearings. On February 17, 2004, a
pre-hearing conference before the FERC resulted in a procedural schedule
outlining the various phases of the Partnership's rate filing proceeding with
an anticipated final order due by the end of the second quarter of 2005. The
final rate for service on the Eastchester facilities will not be known until
the conclusion of the regulatory process. Because of the preliminary nature
of this proceeding, it is impossible at this time to determine the outcome or
the effect on the Partnership's financial position.
FERC Order No. 2004
On November 25, 2003 the FERC issued Order No. 2004 in FERC Docket No. RM01-
10. According to the FERC, Order No. 2004 adopts new standards of conduct
that apply uniformly to interstate natural gas pipelines and public utilities
and that replace standards of conduct currently in effect. The standards of
conduct are designed to ensure that transmission providers do not provide
preferential access to service or information to affiliated entities. Under
the schedule adopted by the FERC, on February 9, 2004 the Partnership
submitted its plan and schedule for implementing Order No. 2004. By June 1,
2004 the Partnership will post its revised standards of conduct on its
internet website, identifying the procedures established for implementing the
FERC's requirements. Management does not believe that the requirements of
Order No. 2004 will have a material impact on the Partnership.
Eastchester Certificate Application (FERC Docket No. CP00-232)
On April 28, 2000, the Partnership filed an application with the FERC to
construct and operate its 'Eastchester Extension Project'. On April 19,
2002, the Partnership began constructing its Eastchester Extension Project.
Construction of the Long Island Sound portion of the project commenced in
October 2002. Final project construction costs have increased and are
currently estimated at approximately $334.0 million, rather than the $210.0
million estimated during the FERC's certificate process and will likely
reduce the initial margins that were anticipated when the project application
was initially filed with the FERC. The project was completed and began
service on February 5, 2004.
Athens Project (FERC Docket No. CP02-20-000)
On November 8, 2001, the Partnership filed an application with the FERC to
construct and operate its "Athens Project". Under this proposal, the
Partnership would construct a second compressor unit at its existing Athens,
New York compressor station. The facilities are designed to provide up to 70
MDth/d of firm transportation to Athens Generating Company, L. P. ("Athens
Generating") with whom the Partnership has executed a firm transportation
agreement for this service. On June 3, 2002, the FERC issued a certificate
authorizing the Partnership to construct the Athens Project facilities.
However, the Partnership anticipated having adequate capacity on its system
to serve the initial 70 MDth/d transportation needs of the Athens Generating
facility. As a result of this evaluation, capacity was made available on an
interim basis, allowing the Partnership to defer the commencement of
construction of the Athens Project. By letter dated April 22, 2003, the
Partnership 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 FERC granted the Partnership's' request for the 1-year
extension.
Brookfield Project (FERC Docket No. CP02-31-000)
On October 31, 2002 the FERC issued a certificate authorizing the Partnership
to construct the Brookfield Project facilities.
Based on communications with its prospective customers regarding the timing
of their needs for new firm transportation service, the Partnership 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, had requested that its service be
deferred until November 1, 2005. On February 28, 2003, the Partnership and
Astoria executed an amendment to their precedent agreements reflecting this
deferral. However, on August 1, 2003, Astoria elected to terminate its
precedent agreements with the Partnership.
The Partnership plans, however, to continue to work directly with Astoria
regarding its future natural gas transportation requirements pending
Astoria's financing of its proposed electric generating facility for which it
has a power purchase agreement with Consolidated Edison Company of New York,
Inc.
The other original Brookfield Project shipper, PPL Energy Plus, LLC, or PPL,
has also elected to terminate its precedent agreement, and the Partnership is
currently remarketing the Brookfield Project capacity entitlement
relinquished by PPL to other potential shippers. Additionally, the
Partnership is exploring other services and products that may negate the need
to find a replacement shipper.
In anticipation of these developments, on April 22, 2003, the Partnership
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 the Partnership's request and extended the
construction completion date to November 1, 2005.
On June 27, 2003, the Partnership 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. In accordance with the
FERC approval, the site must be remediated before construction takes place.
Site remediation is not expected to have a material adverse impact on the
Partnership's operating results or financial condition. The Connecticut
Department of Environmental Protection is currently reviewing the project's
site remediation plan and scope of work schedule.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Iroquois Gas Transmission System, L.P., or the Partnership, is a Delaware
limited partnership. It owns and operates a 412-mile interstate natural gas
transmission pipeline from the Canada-United States border near Waddington,
New York to South Commack, Long Island, New York including an approximate 36-
mile mainline extension from Northport, New York through the Long Island
Sound to Hunts Point, New York, also referred to as the Eastchester
Extension. The Eastchester Extension was placed into service on February 5,
2004. The Partnership provides service to local gas distribution companies,
electric utilities and electric power generators, as well as marketers and
other end-users, directly or indirectly, by connecting with pipelines and
interconnects throughout the northeastern United States. The Partnership is
exclusively a transporter of natural gas in interstate commerce and operates
under authority granted by the Federal Energy Regulatory Commission, or the
FERC. The Partnership was organized in 1989 and commenced full operations in
1992, creating a link between markets in the states of Connecticut,
Massachusetts, New Hampshire, New Jersey, New York and Rhode Island, and
western Canada natural gas supplies.
Results of Operations
The components of Operating Revenues and Volumes Transported are provided in
the following table:
Three months ended
Revenues and Volumes Delivered March 31,
2004 2003
Revenues (dollars in millions)
Long-term firm reserved service $ 34.1 $ 30.9
Short-term firm/interruptible/other 5.2 6.7
Total revenues $ 39.3 $ 37.6
Volumes delivered (million dekatherms)
Long-term firm reserved service 77.0 72.4
Short-term firm/interruptible/other 16.8 21.7
Total volumes delivered 93.8 94.1
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 Partnership receives revenues under long-term firm reserved
transportation service contracts with shippers in accordance with service
rates approved by the FERC. The Partnership 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. However, there can be no assurance that this will be the case in
the future.
Three-month period ended March 31, 2004 compared to the three-month period
ended March 31, 2003.
Revenues. Total revenues increased $1.7 million, or 4.5%, to $39.3 million
for the three-month period ended March 31, 2004 from $37.6 million for the
three-month period ended March 31, 2003.
Long term firm reserved service revenues increased $3.2 million, or 10.4%, to
$34.1 million for the three months ended March 31, 2004 from $30.9 million
for the same period in 2003. This increase was primarily due to additional
Eastchester revenues of $2.2 million due to the February 5, 2004 in-service
of the Eastchester Extension, and $1.4 million of revenues attributable to
the commencement of the Athens contract in September of 2003. These
increases were partially offset by decreased long term firm reserved service
of $0.4 million primarily due to the loss of the firm revenue stream
associated with US Gen New England, which filed for bankruptcy in 2003.
Portions of the US Gen New England volumes were re-contracted under short-
term contracts.
Short-term firm/interruptible/other revenues decreased $1.5 million, or
22.4%, to $5.2 million for the three-month period ended March 31, 2004 from
$6.7 million for the same period in 2003, primarily due to lower volumes
associated with softer market demand for natural gas as a result of warmer
weather during the three-month period ended March 31, 2004 as compared to the
same period in 2003, and more competitive oil prices.
Depreciation and Amortization. Depreciation and amortization increased $1.4
million, or 23.3%, to $7.4 million for the three-month period ended
March 31, 2004 from $6.0 million for the same period in 2003, primarily due
to the February 5, 2004 in-service date of the Eastchester Extension.
Other Income/(Expenses). Other income/(expenses) include certain investment
income and the net of income and expense adjustments not recognized
elsewhere. Other income/(expenses) decreased $0.3, or, 20.0%, to $1.2
million for the three-month period ended March 31, 2004 from $1.5 million for
the three-month period ended March 31, 2003 primarily due to an decrease in
the allowance for equity funds used during construction ("equity AFUDC").
The decrease in the equity AFUDC related primarily to the February 5, 2004
in-service date of the Eastchester Extension.
Interest Expense, Net. Interest expense, net increased $0.7 million, or
10.6%, to $7.3 million for the three-month period ended March 31, 2004 from
$6.6 million for the three-month period ended March 31, 2003 primarily due to
a decrease in interest expense capitalized, related to the February 5, 2004
in-service date of the Partnership's Eastchester Extension.
Liquidity and Capital Resources
For the first quarter of 2004, the Partnership's primary source of financing
has been cash flow from operations. The Partnership's ongoing operations will
require the availability of funds to service debt, fund working capital, and
make capital expenditures on the Partnership's existing facilities and
expansion projects. The Partnership expects to fund its 2004 capital
expenditures through internal sources, including cash from operations and
increased equity (by limiting distributions to partners) in accordance with
the partnership agreement.
Net cash provided by operating activities increased to $17.3 million in the
first quarter of 2004 compared to $16.6 million in the first quarter of 2003,
primarily due to an increase in net income adjusted for depreciation and
amortization, partially offset by a decrease in working capital. Net cash
used for related to financing activities was $5.6 million for the first three
months of 2004, as compared to net cash provided by financing activities of
$26.4 million during the same period in 2003, due to bank borrowings, in
2003, under the Partnership's amended credit agreement.
The Partnership also is party to a $10.0 million, 364-day, variable rate
revolving line of credit to support working capital requirements. As of
March 31, 2004 and December 31, 2003, the outstanding principal balance on the
revolving credit facility was $10.0 million.
Capital expenditures in the first quarter of 2004 were $12.3 million,
compared to $46.0 million in the first quarter of 2003, reflecting primarily
the February 5, 2004 in-service date of the Partnership's Eastchester
Extension.
Total capital expenditures for 2004 are estimated to be approximately $30.9
million, including approximately $27.7 million for the completion of the
Eastchester Extension. The remaining capital expenditures planned for 2004
are primarily for various general plant purchases.
The Partnership's 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 first
three months of 2004 or during the same period in 2003.
Off-Balance Sheet Transactions
At March 31, 2004, the Partnership 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. The
Partnership 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
cost of the Partnership's expansion projects, including the Eastchester
Extension; competitive conditions in the marketplace; changes in the
receptivity of the financial markets to the Partnership or other oil and gas
credit 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 the
Partnership's 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
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 the Partnership's 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. The Partnership handles
market risks in accordance with established policies, which may include
various derivative transactions.
The financial instruments held or issued by the Partnership are for purposes
other than trading or speculation. The Partnership is exposed to risk
resulting from interest rate changes on its variable-rate debt. The
Partnership 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. The Partnership believes that there is no material
market risk associated with these agreements. As of March 31, 2004, the
Partnership had $104.4 million of variable-rate debt outstanding, of which
approximately $29.2 million is fixed out under the interest rate swap
agreements. Holding other variables constant, including levels of
indebtedness, a one-percentage point change in interest rates would impact
pre-tax earnings by approximately $0.8 million.
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 I. FINANCIAL INFORMATION - (Concluded)
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 Partnership's
management, including the Partnership's principle executive officer and chief
financial officer, of the effectiveness of the Partnership's disclosure
controls and procedures pursuant to Exchange Act Rule 15d-15(b). Based upon
that evaluation, the Partnership's principle executive officer and chief
financial officer concluded that the Partnership's disclosure controls and
procedures are effective.
There have been no changes in the Partnership's internal control over
financial reporting that have materially affected, or are reasonably likely
to materially affect, the Partnership's internal control over financial
reporting.
PART II. OTHER INFORMATION
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
ITEM 1. Legal Proceedings
A description of the Partnership's legal proceedings is contained in the
Partnership's Annual Report on Form 10-K for the year ended December 31,
2003. Those descriptions remain accurate except as updated below.
Eastchester-Horizon Suit
On January 20, 2004, Horizon filed a complaint against the Partnership and
IPOC in the Supreme Court of the State of New York, New York County (Index
No. 04/600140). The complaint alleges that the Partnership wrongfully
terminated its agreement with Horizon to perform the Eastchester construction
work in Long Island Sound and that the Partnership committed other breaches
of such agreement in conjunction with the Eastchester construction work. The
complaint seeks damages in excess of $40.0 million. On April 7, 2004, the
Partnership filed in such court proceeding an amended answer and
counterclaims against Horizon totaling in excess of $66.0 million. Given the
preliminary stage of this matter, the Partnership is unable at this time to
assess the likelihood of a favorable or unfavorable outcome and/or the amount
or range of recovery or loss, if any, resulting from Horizon's claims and the
Partnership's counterclaims.
Cal Dive International, Inc.
On March 1, 2004 and in a duplicate filing on March 9, 2004, Cal Dive
International, Inc. ("Cal Dive") filed a Mechanic's Lien totaling
$3.2 million in the offices of the Clerk of Bronx and Suffolk Counties,
respectively. Cal Dive was in privity with Horizon Offshore Contractors,
Inc. ("Horizon") and provided services to Horizon during the Eastchester
construction work. The Partnership instructed Horizon to address the lien
notice pursuant to its contractual obligations. The Partnership also
demanded further information from Cal Dive on the particulars of its lien.
The Partnership does not believe it owes Cal Dive any monies and plans to
vigorously contest the validity of the liens. Furthermore, the Partnership,
on April 1 and April 5, 2004 in compliance with Section 6.2(c)(ii) of its
Second Supplemental Indenture, dated August 13, 2003, posted bonds to
discharge the Mechanic's Liens.
ITEMS 2-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Index to Exhibits
Exhibit
Number
31.1 Rule 15d-14(a) Certification of Principal Executive Officer.
31.2 Rule 15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certifications.
(b) Reports on Form 8-K.
The Partnership filed no reports on Form 8-K during the quarter for
which this report is being filed.
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: May 14, 2004 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