Back to GetFilings.com
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 June 30, 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 June 30, 2004 and 2003 and
Six Months Ended June 30, 2004 and 2003 3
Consolidated Balance Sheets - June 30, 2004
and December 31, 2003 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 and 2003 5
Consolidated Statement of Changes in Partners'
Equity - Six Months Ended June 30, 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 Six Months Ended
June 30 June 30
2004 2003 2004 2003
OPERATING REVENUES, NET $36,288 $30,913 $75,607 $68,528
OPERATING EXPENSES
Operation and maintenance 6,829 6,348 12,716 12,069
Depreciation and amortization 8,098 6,007 15,481 12,021
Taxes other than income taxes 3,150 2,858 6,441 6,014
Operating expenses 18,077 15,213 34,638 30,104
OPERATING INCOME 18,211 15,700 40,969 38,424
OTHER INCOME/(EXPENSES)
Interest Income 59 69 127 120
Allowance for equity funds
used during construction -- 2,045 1,123 3,460
Other, net (42) (31) (46) (36)
Other income/(expenses) 17 2,083 1,204 3,544
INTEREST EXPENSE
Interest Expense 8,319 8,286 16,663 16,532
Allowance for borrowed funds
used during construction -- (1,949) (1,070) (3,601)
Interest Expense, Net 8,319 6,337 15,593 12,931
INCOME BEFORE TAXES 9,909 11,446 26,580 29,037
PROVISION FOR TAXES 3,986 4,553 10,821 11,555
NET INCOME 5,923 6,893 15,759 17,482
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)
June 30, December 31,
ASSETS 2004 2003
CURRENT ASSETS
Cash and temporary cash investments $ 35,612 $ 36,344
Accounts receivable - trade, net 5,506 7,080
Accounts receivable - affiliates 5,863 5,495
Other current assets 5,830 6,413
Total Current Assets 52,811 55,332
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 1,096,564 802,220
Construction work in progress 5,695 280,528
1,102,259 1,082,748
Accumulated depreciation and amortization (338,631) (323,405)
Natural Gas Transmission Plant, Net 763,628 759,343
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 19,932 19,174
Regulatory assets - other 1,379 1,473
Other assets and deferred charges 12,122 13,383
Total Other Assets and Deferred Charges 33,433 34,030
TOTAL ASSETS $ 849,872 $ 848,705
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,013 $ 21,424
Accrued interest 4,613 4,626
Current portion of long-term debt 32,222 32,222
Other current liabilities 5,686 7,425
Total Current Liabilities 50,534 65,697
LONG-TERM DEBT 436,667 447,778
OTHER NON-CURRENT LIABILITIES
Unrealized loss-interest rate hedge, net of tax 2,230 3,263
Other 1,925 1,821
Total Other Non-Current Liabilities 4,155 5,084
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 141,639 122,220
Payable by Partners (121,707) (103,046)
Related to Other Comprehensive Income (1,259) (1,671)
Total Amounts Equivalent to Deferred
Income Taxes 18,673 17,503
Commitments and Contingencies - -
Total Liabilities 510,029 536,062
Partners' Equity 339,843 312,643
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 849,872 $ 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)
Six Months Ended
June 30,
2004 2003
OPERATING ACTIVITIES:
Net Income $ 15,759 $ 17,482
Adjusted for the following:
Depreciation and amortization 15,481 12,021
Allowance for equity funds used during construction (1,123) (3,460)
Deferred regulatory asset-income tax related (758) (1,788)
Amounts equivalent to deferred income taxes 758 1,788
Income and other taxes payable by partners 10,821 11,555
Other assets and deferred charges 1,213 1,091
Other non-current liabilities 104 (142)
CHANGES IN WORKING CAPITAL:
Accounts receivable 1,206 1,613
Other current assets 583 1,159
Accounts payable (13,411) (6,834)
Accrued interest (13) (2,033)
Other current liabilities (1,739) (1,379)
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,881 31,073
INVESTING ACTIVITIES:
Capital expenditures (18,502) (83,550)
NET CASH USED IN INVESTING ACTIVITIES (18,502) (83,550)
FINANCING ACTIVITIES:
Long-term debt borrowings -- 65,000
Repayments of long-term debt (11,111) (11,111)
NET CASH (USED FOR)/PROVIDED BY
FINANCING ACTIVITIES (11,111) 53,889
NET (DECREASE)/INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS (732) 1,412
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 36,344 21,620
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 35,612 $ 23,032
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 15,862 $ 17,750
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, 2004
(In Thousands)
(Unaudited)
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 2003 $312,643
Year-to-date net income 15,759
Taxes payable by Partners 10,821
Other comprehensive income, net of tax 620
PARTNERS' EQUITY
BALANCE AT JUNE 30, 2004 $339,843
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 Partnership, 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 Partnership
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 Six months ended
June 30, June 30,
2004 2003 2004 2003
Net income $5,923 $6,893 $15,759 $17,482
Other comprehensive income/(loss)
Unrealized income/(loss)on interest
rate hedge, net of tax 668 (75) 620 50
Comprehensive income $6,591 $6,818 $16,379 $17,532
3. Retirement Benefit Plans:
The components of net pension benefit costs included in the Partnership's
consolidated statements of income were as follows:
(in thousands)
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
Service Cost $ 200 $ 203 $ 420 $ 406
Interest Cost 77 62 154 124
Expected return on plan assets (88) (61) (176) (122)
Amortization of prior service cost 3 3 6 6
Recognition of net actuarial loss 15 14 30 28
Net periodic pension cost $ 207 $ 221 $ 434 $ 442
Note 10 of the Notes to Consolidated Financial Statements in Iroquois'
December 31, 2004 Form 10-K discusses the Partnership's expected contribution
to its pension plans. For the six months ended June 30, 2004, $1.4 million
of contributions have been made to its pension plans including $1.2 million
for the three months ended June 30, 2004.
4. Commitments and Contingencies:
Eastchester-Horizon Suit
On January 20, 2004, Horizon Offshore Contractors, Inc. ("Horizon") filed a
complaint against the Partnership and its operating company, Iroquois
Pipeline Operating Company ("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
million. On April 7, 2004, the Partnership filed in such court proceeding an
amended answer and counterclaims against Horizon totaling in excess of $66
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.
Tom Allen Construction Partnership
On June 14, 2004, Tom Allen Construction Partnership ("Tom Allen"), another
of Horizon's subcontractors for the Eastchester project, filed a complaint
against Horizon and Iroquois in the Supreme Court of the State of New York,
New York County. Tom Allen was responsible for performing the directional
drills at Northport and Hunts Point. Tom Allen is claiming that it has not
been paid for work associated with a failed directional drill at Hunt's Point
and is seeking $5.6 million in damages from Horizon and Iroquois. Iroquois
served an Answer to the complaint and various discovery demands on July 30,
2004.
Weeks Marine, Inc.
On July 21, 2004 Weeks Marine Inc. ("Weeks"), another of Horizon's
subcontractors for the Eastchester project, filed a complaint against Horizon
and Iroquois in the Supreme Court of the State of New York, New York County.
Weeks was responsible for certain marine construction operations including
dredging, rock placement, fabric placement and associated activities along
the Eastchester project. Weeks Marine is claiming that it has not been paid
for work associated with the marine portion of the Eastchester project and is
seeking $18.5 million in damages from Horizon and Iroquois. Iroquois is in
the process of preparing an Answer to the complaint.
Capobianco, A. vs. Iroquois Gas & Consolidated Edison Partnership of New York
On January 28, 2004, Anthony Capobianco filed a complaint against Iroquois
Gas Transmission System, L.P., Iroquois Pipeline Operating Partnership and
Consolidated Edison Partnership 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 Partnership, 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. However, Hallen's insurer has agreed to
indemnify and defend Iroquois in this action up to the $2 million limit of
its insurance policy. The parties are in the process of documenting this
agreement.
Eastchester Construction Incidents
On November 16, 2002, certain undersea electric transmission cables owned by
Long Island Lighting Partnership d/b/a The Long Island Power Authority, or
LIPA, and Connecticut Light and Power Partnership, 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 their 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 $34.3 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 agreed to
indemnify the Partnership in accordance with the indemnity provision in the
Horizon/Thales contract, including indemnity for the Partnership's attorneys'
fees incurred to date and going forward. This indemnity is subject to the
policies' terms and limit of $10 million. The Partnership further 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 coverages.
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. Horizon's suit contends that if
it is not entitled to exoneration, its liability should be limited to $19.3
million, representing the value of the GULF HORIZON and her pending freight,
and Horizon's insurers have provided an undertaking (subject to policy
defenses) to pay any judgment that may be rendered in the suit up to $19.3
million. NYPA, LIPA and the insurers of the Y-49 cable (collectively, the
"Y-49 Cable Interests") also have filed claims in the limitation action
asserting total damages of approximately $18.2 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 and that Horizon had no right to limit its liability as to
the Partnership's contract claims. The Y-49 Cable Interests recently have
filed cross claims against the Partnership alleging claims under the Crossing
Agreement and in common law tort.
The parties presently are engaging in document discovery, and 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.
No liabilities have been recorded by Iroquois in conjunction with any of the
preceding legal matters.
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 proposed 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 million to a
level of approximately $334 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 customers 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.
On June 15 and July 8, 2004, settlement conferences were convened at the
FERC's offices to attempt to negotiate a settlement of the issues in the rate
case. As a result of those conferences, the parties reached a settlement in
principle of all issues that the Partnership believes is either supported or
not opposed by all participants to the proceeding. On July 15, 2004 Iroquois
submitted a motion to the Presiding Administrative Law Judge to suspend the
procedural schedule to allow the parties to formalize the settlement
agreement; such motion was granted by the judge on July 16. Following
additional discussions and negotiations with the parties, Iroquois submitted
a comprehensive settlement agreement on August 12, 2004. The settlement
agreement, if approved, would provide for recourse rates of $0.66 per dth for
the period July 1, 2004 through December 31, 2007 and $0.635 per dth for the
period January 1, 2008 through December 31, 2011. In addition, Iroquois will
not include in future rates any future legal fees (incurred after June 30,
2004) incurred in litigation regarding construction incidents associated with
the original Eastchester Project. A moratorium on rate changes, as spelled
out more fully in the settlement agreement, would also be in effect through
December 31, 2011. That settlement agreement is pending before the FERC, and
Iroquois anticipates that it will be supported or not opposed by all
participants to the proceeding.
In addition to settling the Eastchester recourse rates as set forth above,
Iroquois has also entered into negotiated rate agreements with all of the
initial shippers on the Eastchester Extension Project. The negotiated rates
on a 100% load-factor equivalent basis range between $0.47 and $0.59 per dth
depending on whether the agreement was signed pre or post construction and
the length of the negotiated contract.
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.
On July 27, 2004, NEGT issued a press release announcing a proposed sale of
its indirect equity interest in the IGTS Partnership to Denali Power, LLC, as
part of a sale of a portfolio of assets. NEGT's indirect interest is held
through JMC-Iroquois, Inc. and Iroquois Pipeline Investment, LLC, both of
which represent a 5.77% interest in the Partnership. According to NEGT, the
transaction is expected to close in the first quarter of 2005 and is subject
to a further auction process as well as bankruptcy court, regulatory and
third party approvals.
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. As required
by said schedule, on June 1, 2004 the Partnership posted its revised
standards of conduct on its internet website, identifying the procedures
established for implementing the FERC's requirements. Additionally, by
September 22, 2004, the Partnership is required to develop a written
procedure implementing its standards of conduct and train all employees
subject to the standard. Management does not believe that the requirements of
Order No. 2004 will have a material impact on the Partnership.
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. As of June 30, 2004, the Partnership had incurred approximately
$1.9 million in construction expenditures related to the Athens Project which
is reflected on the balance sheet of the Partnership as Construction work in
progress. The Partnership continues to market this project to potential
customers and also continues to evaluate its feasibility.
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 Partnership 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. As of June 30, 2004, the Partnership had
incurred approximately $2.5 million in construction expenditures related to
the Brookfield Project, primarily related to the purchase of the Brookfield
site.
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 Six months ended
Revenues and Volumes Delivered June 30, June 30,
2004 2003 2004 2003
Revenues (dollars in millions)
Long-term firm reserved service $ 33.1 $ 28.1 $ 66.9 $ 59.0
Short-term firm/interruptible/other 3.2 2.8 8.7 9.5
Total revenues $ 36.3 $ 30.9 $ 75.6 $ 68.5
Volumes delivered (million dekatherms)
Long-term firm reserved service 70.0 69.0 147.0 141.3
Short-term firm/interruptible/other 17.4 9.9 34.2 31.6
Total volumes delivered 87.4 78.9 181.2 172.9
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 June 30, 2004 compared to the three-month period
ended June 30, 2003.
Revenues. Total revenues increased $5.4 million, or 17.5%, to $36.3 million
for the three-month period ended June 30, 2004 from $30.9 million for the
three-month period ended June 30, 2003.
Long term firm reserved service revenues increased $5.0 million, or 17.8%, to
$33.1 million for the three months ended June 30, 2004 from $28.1 million for
the same period in 2003. This increase was primarily due to additional
Eastchester revenues of $5.4 million due to the February 5, 2004 in-service
date 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 $1.4 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 increased $0.4 million, or
14.3%, to $3.2 million for the three-month period ended June 30, 2004 from
$2.8 million for the same period in 2003, primarily due to higher volumes
associated with increased market demand for natural gas during the three-
month period ended June 30, 2004 as compared to the same period in 2003.
Operation and maintenance expense includes operating, maintenance and
administrative expenses for the Partnership's corporate office in Shelton,
Connecticut and field support for the mainline, metering and compression
facilities. Operation and maintenance expense increased $0.5 million, or
7.9%, to $6.8 million for the three-month period ended June 30, 2004 from
$6.3 million for the three-month period ended June 30, 2004, primarily due to
an increase in regulatory expenses and employee benefit costs.
Depreciation and Amortization. Depreciation and amortization increased $2.1
million, or 35.0%, to $8.1 million for the three-month period ended June
30, 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 $2.1 million, or 100%, for the
three-month period ended June 30, 2004 as compared to the three-month period
ended June 30, 2003 primarily due to a 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 $2.0 million, or
31.8%, to $8.3 million for the three-month period ended June 30, 2004 from
$6.3 million for the three-month period ended June 30, 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.
Six-month period ended June 30, 2004 compared to the six-month period ended
June 30, 2003.
Revenues. Total revenues increased $7.1 million, or 10.4%, to $75.6 million
for the six-month period ended June 30, 2004 from $68.5 million for the six-
month period ended June 30, 2003.
Long term firm reserved service revenues increased $7.9 million, or 13.4%, to
$66.9 million for the six months ended June 30, 2004 from $59.0 million for
the same period in 2003. This increase was primarily due to additional
Eastchester revenues of $7.6 million due to the February 5, 2004 in-service
date of the Eastchester Extension, and $2.8 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 $1.8 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 $0.8 million, or 8.4%,
to $8.7 million for the six-month period ended June 30, 2004 from $9.5
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 and more competitive oil prices during the first quarter of 2004 as
compared to the same period in 2003, partially offset by increased market
demand for natural gas in the second quarter of 2004.
Operation and maintenance expense includes operating, maintenance and
administrative expenses for the Partnership's corporate office in Shelton,
Connecticut and field support for the mainline, metering and compression
facilities. Operation and maintenance expense increased $0.6 million or 5.0%
to $12.7 million for the six-month period ended June 30, 2004 from $12.1
million for the six-month period ended June 30, 2004, primarily due to an
increase in regulatory expenses and employee benefit costs.
Depreciation and Amortization. Depreciation and amortization increased $3.5
million, or 29.2%, to $15.5 million for the six-month period ended June
30, 2004 from $12.0 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 $2.3 million, or 65.7%, to $1.2
million for the six-month period ended June 30, 2004 from $3.5 million for
the six-month period ended June 30, 2003 primarily due to a decrease in
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 $2.7 million, or
20.9%, to $15.6 million for the six-month period ended June 30, 2004 from
$12.9 million for the six-month period ended June 30, 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 six months 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.
Net cash provided by operating activities decreased to $28.9 million in the
first half of 2004 compared to $31.1 million in the first half of 2003,
primarily due to a decrease in accounts payable balances resulting from
higher December 31, 2003 accruals related to the Eastchester Extension. Net
cash used for financing activities was $11.1 million for the first six months
of 2004, as compared to net cash provided by financing activities of $53.9
million during the same period in 2003, primarily 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 June
30, 2004 and December 31, 2003, the outstanding principal balance on the
revolving credit facility was $10.0 million.
Capital expenditures in the first six months of 2004 were $18.5 million,
compared to $83.6 million in the first six months 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 $36
million, including approximately $32 million related to 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 six
months of 2004 or during the same period in 2003.
Off-Balance Sheet Transactions
At June 30, 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 June 30, 2004, the
Partnership had $98.9 million of variable-rate debt outstanding, of which
approximately $27.8 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 $0.7 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 Offshore Contractors, Inc. ("Horizon") filed a
complaint against the Partnership and its operating company, Iroquois
Pipeline Operating Company ("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
million. On April 7, 2004, the Partnership filed in such court proceeding an
amended answer and counterclaims against Horizon totaling in excess of $66
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.
Tom Allen Construction Company
On June 14, 2004, Tom Allen Construction Company, another of Horizon's
subcontractors for the Eastchester project, filed a complaint against Horizon
and Iroquois in the Supreme Court of the State of New York, New York County.
Tom Allen was responsible for performing the directional drills at Northport
and Hunts Point. Tom Allen is claiming that it has not been paid for work
associated with a failed directional drill at Hunt's Point and is seeking
$5.6 million in damages from Horizon and Iroquois. Iroquois served an Answer
to the complaint and various discovery demands on July 30, 2004.
Weeks Marine, Inc.
On July 21, 2004 Weeks Marine Inc. ("Weeks"), another of Horizon's
subcontractors for the Eastchester project, filed a complaint against Horizon
and Iroquois in the Supreme Court of the State of New York, New York County.
Weeks was responsible for certain marine construction operations including
dredging, rock placement, fabric placement and associated activities along
the Eastchester project. Weeks Marine is claiming that it has not been paid
for work associated with the marine portion of the Eastchester project and is
seeking $18.5 million in damages from Horizon and Iroquois. Iroquois is in
the process of preparing an answer to the complaint.
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 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. However, Hallen's insurer has agreed to
indemnify and defend Iroquois in this action up to its $2 million limit of
its insurance policy. The parties are in the process of documenting this
agreement.
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, 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 their 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 $34.3 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 agreed to
indemnify the Partnership in accordance with the indemnity provision in the
Horizon/Thales contract, including indemnity for the Partnership's attorneys'
fees incurred to date and going forward. This indemnity is subject to the
policies' terms and limit of $10 million. The Partnership further 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 coverages.
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. Horizon's suit contends that if
it is not entitled to exoneration, its liability should be limited to $19.3
million, representing the value of the GULF HORIZON and her pending freight,
and Horizon's insurers have provided an undertaking (subject to policy
defenses) to pay any judgment that may be rendered in the suit up to $19.3
million. NYPA, LIPA and the insurers of the Y-49 cable (collectively, the
"Y-49 Cable Interests") also have filed claims in the limitation action
asserting total damages of approximately $18.2 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 and that Horizon had no right to limit its liability as to
the Partnership's contract claims. The Y-49 Cable Interests recently have
filed cross claims against the Partnership alleging claims under the Crossing
Agreement and in common law tort.
The parties presently are engaging in document discovery and 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.
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 proposed 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 million to a
level of approximately $334 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 customers 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.
On June 15 and July 8, 2004, settlement conferences were convened at the
FERC's offices to attempt to negotiate a settlement of the issues in the rate
case. As a result of those conferences, the parties reached a settlement in
principle of all issues that the Partnership believes is either supported or
not opposed by all participants to the proceeding. On July 15, 2004 Iroquois
submitted a motion to the Presiding Administrative Law Judge to suspend the
procedural schedule to allow the parties to formalize the settlement
agreement; such motion was granted by the judge on July 16. Following
additional discussions and negotiations with the parties, Iroquois submitted
a comprehensive settlement agreement on August 12, 2004. The settlement
agreement, if approved, would provide for recourse rates of $0.66 per dth for
the period July 1, 2004 through December 31, 2007 and $0.635 per dth for the
period January 1, 2008 through December 31, 2011. In addition, Iroquois will
not include in future rates any future legal fees (incurred after June 30,
2004) incurred in litigation regarding construction incidents associated with
the original Eastchester Project. A moratorium on rate changes, as spelled
out more fully in the settlement agreement, would also be in effect through
December 31, 2011. That settlement agreement is pending before the FERC, and
Iroquois anticipates that it will be supported or not opposed by all
participants to the proceeding.
In addition to settling the Eastchester recourse rates as set forth above,
Iroquois has also entered into negotiated rate agreements with all of the
initial shippers on the Eastchester Extension Project. The negotiated rates
on a 100% load-factor equivalent basis range between $0.47 and $0.59 per dth
depending on whether the agreement was signed pre or post construction and
the length of the negotiated contract.
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.
On July 27, 2004, NEGT issued a press release announcing a proposed sale of
its indirect equity interest in the IGTS Partnership to Denali Power, LLC, as
part of a sale of a portfolio of assets. NEGT's indirect interest is held
through JMC-Iroquois, Inc. and Iroquois Pipeline Investment, LLC, both of
which represent a 5.77% interest in the Partnership. According to NEGT, the
transaction is expected to close in the first quarter of 2005 and is subject
to a further auction process as well as bankruptcy court, regulatory and
third party approvals.
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: August 13, 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