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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 September 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 September 30, 2004 and 2003 and
Nine Months Ended September 30, 2004 and 2003 3
Consolidated Balance Sheets - September 30, 2004
and December 31, 2003 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
Consolidated Statement of Changes in Partners'
Equity - Nine Months Ended September 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 Nine Months Ended
September 30 September 30
2004 2003 2004 2003
OPERATING REVENUES, NET $36,072 $29,628 $111,679 $98,156
OPERATING EXPENSES
Operation and maintenance 7,250 6,232 19,966 18,301
Depreciation and amortization 8,067 6,024 23,548 18,045
Taxes other than income taxes 4,058 3,281 10,499 9,295
Operating expenses 19,375 15,537 54,013 45,641
OPERATING INCOME 16,697 14,091 57,666 52,515
OTHER INCOME/(EXPENSES)
Interest Income 132 56 259 176
Allowance for equity funds
used during construction -- 2,466 1,123 5,926
Other, net (100) -- (146) (36)
Other income/(expenses) 32 2,522 1,236 6,066
INTEREST EXPENSE
Interest Expense 8,384 8,463 25,047 24,995
Allowance for borrowed funds
used during construction -- (2,350) (1,070) (5,951)
Interest Expense, Net 8,384 6,113 23,977 19,044
INCOME BEFORE TAXES 8,345 10,500 34,925 39,537
PROVISION FOR TAXES 3,113 4,064 13,935 15,619
NET INCOME 5,232 6,436 20,990 23,918
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)
September 30, December 31,
ASSETS 2004 2003
CURRENT ASSETS
Cash and temporary cash investments $ 42,953 $ 36,344
Accounts receivable - trade, net 5,811 7,080
Accounts receivable - affiliates 5,643 5,495
Other current assets 12,545 6,413
Total Current Assets 66,952 55,332
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 1,097,304 802,220
Construction work in progress 8,988 280,528
1,106,292 1,082,748
Accumulated depreciation and amortization (346,552) (323,405)
Natural Gas Transmission Plant, Net 759,740 759,343
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 19,965 19,174
Regulatory assets - other 1,332 1,473
Other assets and deferred charges 12,284 13,383
Total Other Assets and Deferred Charges 33,581 34,030
TOTAL ASSETS $ 860,273 $ 848,705
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,375 $ 21,424
Accrued interest 11,561 4,626
Current portion of long-term debt 32,222 32,222
Other current liabilities 5,996 7,425
Total Current Liabilities 58,154 65,697
LONG-TERM DEBT 431,111 447,778
OTHER NON-CURRENT LIABILITIES
Unrealized loss-interest rate hedge, net of tax 2,197 3,263
Other 1,883 1,821
Total Other Non-Current Liabilities 4,080 5,084
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 149,633 122,220
Payable by Partners (129,668) (103,046)
Related to Other Comprehensive Income (1,246) (1,671)
Total Amounts Equivalent to Deferred
Income Taxes 18,719 17,503
Commitments and Contingencies - -
Total Liabilities 512,064 536,062
Partners' Equity 348,209 312,643
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 860,273 $ 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)
Nine Months Ended
September 30,
2004 2003
OPERATING ACTIVITIES:
Net Income $ 20,990 $ 23,918
Adjusted for the following:
Depreciation and amortization 23,548 18,045
Allowance for equity funds used during construction (1,123) (5,926)
Deferred regulatory asset-income tax related (791) (3,701)
Amounts equivalent to deferred income taxes 791 3,701
Income and other taxes payable by partners 13,935 15,619
Other assets and deferred charges 1,027 964
Other non-current liabilities 62 (324)
CHANGES IN WORKING CAPITAL:
Accounts receivable 1,121 1,222
Other current assets (6,132) (2,653)
Accounts payable (13,049) (7,285)
Accrued interest 6,935 4,718
Other current liabilities (1,429) 226
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,885 48,524
INVESTING ACTIVITIES:
Capital expenditures (22,609) (118,323)
NET CASH USED IN INVESTING ACTIVITIES (22,609) (118,323)
FINANCING ACTIVITIES:
Partner contributions -- 10,000
Long-term debt borrowings -- 85,000
Repayments of long-term debt (16,667) (16,667)
NET CASH (USED FOR)/PROVIDED BY
FINANCING ACTIVITIES (16,667) 78,333
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS 6,609 8,534
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 36,344 21,620
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 42,953 $ 30,154
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 16,890 $ 19,055
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 Nine Months Ended September 30, 2004
(In Thousands)
(Unaudited)
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 2003 $312,643
Year-to-date net income 20,990
Taxes payable by Partners 13,935
Other comprehensive income, net of tax 641
PARTNERS' EQUITY
BALANCE AT SEPTEMBER 30, 2004 $348,209
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 Nine months ended
September 30, September 30,
2004 2003 2004 2003
Net income $5,232 $6,436 $20,990 $23,918
Other comprehensive income
Unrealized income on interest
rate hedge, net of tax 21 418 641 467
Comprehensive income $5,253 $6,854 $21,632 $24,385
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 Nine months ended
September 30, September 30,
2004 2003 2004 2003
Service Cost $ 210 $ 203 $ 630 $ 609
Interest Cost 77 62 231 186
Expected return on plan assets (88) (62) (264) (184)
Amortization of prior service cost 3 3 9 9
Recognition of net actuarial loss 15 14 45 42
Net periodic pension cost $ 217 $ 220 $ 651 $ 662
Note 10 of the Notes to Consolidated Financial Statements in Iroquois'
December 31, 2003 Form 10-K discusses the Partnership's expected contribution
to its pension plans. For the nine months ended September 30, 2004, $1.4
million of contributions have been made to its pension plans. The
Partnership does not plan to make further contributions in 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.
On September 10, 2004, Cal Dive filed a complaint against the Partnership in
the United States District Court for the Eastern District of New York. The
complaint alleges that Cal Dive has not been paid $3.3 million for work that
it performed on the Eastchester project. Iroquois filed an answer to the Cal-
Dive action on October 15, 2004 and commenced a third party action against
Horizon on October 25, 2004. 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 Cal Dive's claims.
Tom Allen Construction Partnership
On June 14, 2004, Tom Allen Construction Partnership ('Tom Allen'), one 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. 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 Tom
Allen's claims.
Weeks Marine, Inc.
On July 21, 2004 Weeks Marine Inc. ('Weeks'), one 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 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 filed an answer
to the complaint on August 16, 2004. 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 Week's claims.
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 million. The Partnership has notified its insurance carriers and an
answer has been filed to the complaint. Hallen's insurer has agreed to
indemnify and defend Iroquois in this action up to the $1 million limit of
its general liability insurance policy. Additionally, Hallen has coverage
under an excess liability policy up to $20 million. 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.
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, 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 originally claimed 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 September 2004, the Cable Interests
amended their claim to $23.5 million, consisting of approximately $12.9
million for repairs and repair related costs and $10.6 million in
consequential damages.
The matter is presently in the latter stages of discovery, with a trial date
currently set for February 22, 2005.
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 filed motions to transfer the Texas action to the United States District
Court for the Eastern District of New York. Thales 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 filed cross claims against the Partnership
alleging claims under the Crossing Agreement and in common law tort.
The Y-49 Cable Interests filed a motion for partial summary judgment against
the Partnership on October 13, 2004. The motion asks the court to find the
Partnership liable for indemnity under the Crossing Agreement for all costs
and expenses incurred by the Y-49 Cable Interests directly related to the
emergency response to the incident and for the costs and expenses of the
temporary and permanent repairs. The Partnership believes the motion is
premature.
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. 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.
Pursuant to its agreements with the owners of the electric transmission
cables that the Eastchester facilities cross in the Long Island Sound,
Iroquois performed certain post construction surveys to verify the condition
of the cable crossings and confirm the location of the pipeline.
Specifically, Iroquois had constructed a 'structure' over the Y-50 cable
system consisting of lightweight flexible concrete mattresses under the
pipeline, specially fabricated concrete blocks adjacent to the pipeline and
crushed rock. The surveys and additional follow-up studies indicate that the
'structure' may have settled to a greater extent than originally anticipated
and that its location is believed to be 65 feet north of the location where
the pipeline crosses the Y-50 cable. Iroquois has been discussing this
matter with the owner of the Y-50 cable system as to whether and how these
issues should be modified and has notified the FERC by letter dated September
3, 2004. Given the preliminary stage of this matter, Iroquois is unable to
assess the likelihood of an unfavorable outcome and/or the amount or range of
costs, if any, in the event of an unfavorable outcome.
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 served as the initial rate per the
certificate order). The increased rate reflected, 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 was 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 provides 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, will
also be in effect through December 31, 2011. The settlement agreement was
approved by the FERC on October 13, 2004.
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.
The recourse rates and negotiated individual Eastchester shipper rates,
coupled with cost overruns experienced on the Eastchester Project, will
reduce the Partnership's initial margins that were anticipated when the
project application was filed with FERC.
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. At this time the Partnership does not know what the
disposition of this claim will be nor its ultimate impact on the Partnership.
On September 15, 2004, NEGT announced that it had entered into an agreement
with GS Power Holdings II LLC (a subsidiary of Goldman Sachs) to purchase
NEGT's indirect equity interest in the Partnership. 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 acquisition is expected to close in the first quarter of 2005.
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, as
required by the order, on September 22, 2004, the Partnership developed and
posted on its website, a written procedure implementing its standards of
conduct and trained all its 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 September 30, 2004, the Partnership had incurred
approximately $2.3 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. In the event that the Partnership is unable to secure customers
prior to the December 3, 2004 construction extension deadline, the project
will be cancelled and the $2.3 million in capital expenditures will be
written off and charged to expense.
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 September 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.
On November 3, 2004, the Connecticut Department of Environmental Protection
approved the project's site remediation plan and scope of work schedule. Work
is anticipated to begin in late November. Site remediation is not expected to
have a material adverse impact on the Partnership's operating results or
financial condition.
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.
On November 9, 2004 TransCanada Corporation and Shell US Gas & Power LLC
announced plans to develop an offshore liquefied natural gas (LNG)
regasification terminal, named Broadwater Energy, in the New York State
waters of Long Island Sound. The expected in-service date of the facility is
late 2010. Iroquois has been in discussions with the proponents of this
project as to potential interconnection of the LNG terminal with Iroquois'
existing facilities; those discussions are continuing. Given the preliminary
stage of this matter, Iroquois is unable to assess the possible effects, if
any, of the LNG project, if ultimately constructed, on its system.
Results of Operations
The components of Operating Revenues and Volumes Transported are provided in
the following table:
Three months ended Nine months ended
Revenues and Volumes Delivered September 30, September 30,
2004 2003 2004 2003
Revenues (dollars in millions)
Long-term firm reserved service $ 32.6 $ 27.2 $ 99.5 $ 86.3
Short-term firm/interruptible/other 3.5 2.4 12.2 11.9
Total revenues $ 36.1 $ 29.6 $111.7 $ 98.2
Volumes delivered (million dekatherms)
Long-term firm reserved service 70.4 71.5 217.4 212.8
Short-term firm/interruptible/other 19.8 9.9 54.0 41.5
Total volumes delivered 90.2 81.4 271.4 254.3
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 which expires December 31, 2007. However, there can be no
assurance that this will be the case in the future.
Three-month period ended September 30, 2004 compared to the three-month
period ended September 30, 2003.
Revenues. Total revenues increased $6.5 million, or 22.0%, to $36.1 million
for the three-month period ended September 30, 2004 from $29.6 million for
the three-month period ended September 30, 2003.
Long-term firm reserved service revenues increased $5.4 million, or 19.9%, to
$32.6 million for the three months ended September 30, 2004 from $27.2
million for the same period in 2003. This increase was primarily due to
additional revenues from the Eastchester Extension of approximately $7.3
million due to the February 5, 2004 in-service date of the Eastchester
Extension, and approximately $0.8 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 revenues
primarily due to a rate decrease effective July 1, 2004 of approximately
$0.03 per dekatherm as well as 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 $1.1 million, or
45.8%, to $3.5 million for the three-month period ended September 30, 2004
from $2.4 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 September 30, 2004 as compared to the same period in
2003.
Operation and Maintenance Expense. 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 $1.1 million, or 17.7%, to $7.3 million for the three-month
period ended September 30, 2004 from $6.2 million for the three-month period
ended September 30, 2004, primarily due to an increase in regulatory
expenses, employee benefit costs and field operation and maintenance costs,
as well as a decrease in capitalized payroll.
Depreciation and Amortization. Depreciation and amortization increased $2.1
million, or 35.0%, to $8.1 million for the three-month period ended September
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.
Taxes other than income taxes. Taxes other than income taxes encompass
property and school taxes paid to various state jurisdictions for mainline,
metering and compression facilities along the pipeline system of Iroquois.
Taxes other than income taxes increased $0.8 million or 24.2% to $4.1 million
for the three-month period ended September 30, 2004 from $3.3 million for the
three-month period ended September 30, 2003 primarily due to assessments on
facilities related to 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 $2.5 million, for the three-
month period ended September 30, 2004 as compared to the three-month period
ended September 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 $2.3 million, or
37.7%, to $8.4 million for the three-month period ended September 30, 2004
from $6.1 million for the three-month period ended September 30, 2003
primarily due to a decrease in interest capitalized, related to the February
5, 2004 in-service date of the Partnership's Eastchester Extension.
Nine-month period ended September 30, 2004 compared to the Nine-month period
ended September 30, 2003.
Revenues. Total revenues increased $13.5 million, or 13.7%, to $111.7
million for the nine-month period ended September 30, 2004 from $98.2 million
for the nine-month period ended September 30, 2003.
Long-term firm reserved service revenues increased $13.2 million, or 15.3%,
to $99.5 million for the nine months ended September 30, 2004 from $86.3
million for the same period in 2003. This increase was primarily due to
additional revenues from the Eastchester Extension of approximately $15.0
million due to the February 5, 2004 in-service date of the Eastchester
Extension, and approximately $3.6 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 revenues
primarily due to a rate decrease effective July 1, 2004 of approximately
$0.03 per dekatherm as well as 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 $0.3 million, or 2.5%,
to $12.2 million for the nine-month period ended September 30, 2004 from
$11.9 million for the same period in 2003, primarily due to increased market
demand for natural gas in the second and third quarters of 2004, partially
offset by 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.
Operation and Maintenance Expense. 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 $1.7 million or 9.3% to $20.0 million for the nine-month
period ended September 30, 2004 from $18.3 million for the nine-month period
ended September 30, 2003, primarily due to an increase in regulatory
expenses, employee benefit costs and field operation and maintenance costs,
as well as a decrease in capitalized payroll.
Depreciation and Amortization. Depreciation and amortization increased $5.5
million, or 30.6%, to $23.5 million for the nine-month period ended September
30, 2004 from $18.0 million for the same period in 2003, primarily due to the
February 5, 2004 in-service date of the Eastchester Extension.
Taxes other than income taxes. Taxes other than income taxes encompass
property and school taxes paid to various state jurisdictions for mainline,
metering and compression facilities along the pipeline system of Iroquois.
Taxes other than income taxes increased $1.2 million or 12.9% to $10.5
million for the nine-month period ended September 30, 2004 from $9.3 million
for the nine-month period ended September 30, 2003, primarily due to
assessments on facilities related to 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 $4.9 million, or 80.3%, to $1.2
million for the nine-month period ended September 30, 2004 from $6.1 million
for the nine-month period ended September 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 $5.0 million, or
26.3%, to $24.0 million for the nine-month period ended September 30, 2004
from $19.0 million for the nine-month period ended September 30, 2003
primarily due to a decrease in interest capitalized, related to the February
5, 2004 in-service date of the Partnership's Eastchester Extension.
Liquidity and Capital Resources
For the first nine months of 2004, the Partnership's 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 $45.9 million in the
first nine months of 2004 compared to $48.5 million in the first nine months
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 $16.7 million for the first nine
months of 2004, consisting of the repayment of long-term debt. Net cash
provided by financing activities was $78.3 million during the same period in
2003, primarily due to bank borrowings under the Partnership's amended credit
agreement.
The Partnership has a $10.0 million, 364-day, variable rate revolving line of
credit to support working capital requirements. As of September 30, 2004 and
December 31, 2003, the outstanding principal balance on the revolving credit
facility was $10.0 million.
Capital expenditures in the first nine months of 2004 were $22.6 million,
compared to $118.3 million in the first nine 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 $31 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
nine months of 2004 or during the same period in 2003.
Off-Balance Sheet Transactions
At September 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 September 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.
On September 10, 2004, Cal Dive filed a complaint against the Partnership in
the United States District Court for the Eastern District of New York. The
complaint alleges that Cal Dive has not been paid $3.3 million for work that
it performed on the Eastchester project. Iroquois filed an answer to the Cal-
Dive action on October 15, 2004 and commenced a third party action against
Horizon on October 25, 2004. Horizon's time to answer or move expires on
December 15, 2004. 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 Cal Dive's claims.
Tom Allen Construction Company
On June 14, 2004, Tom Allen Construction Company ('Tom Allen'), one 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. 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 Tom
Allen's claims.
Weeks Marine, Inc.
On July 21, 2004 Weeks Marine Inc. ('Weeks'), one 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 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 filed an answer
to the complaint on August 16, 2004. 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 Week's claims.
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. Hallen's insurer has agreed to
indemnify and defend Iroquois in this action up to its $1 million limit of
its general liability insurance policy. Additionally, Hallen has coverage
under an excess liability policy up to $20 million. 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.
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. (one 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 originally claimed 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 September 2004, the Cable Interests
amended their claim to $23.5 million, consisting of approximately $12.9
million for repairs and repair related costs and $10.6 million in
consequential damages.
The matter is presently in the latter stages of discovery, with a trial date
currently set for February 22, 2005.
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 filed motions to transfer the Texas action to the United States District
Court for the Eastern District of New York. Thales 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 filed cross claims against the Partnership
alleging claims under the Crossing Agreement and in common law tort.
The Y-49 Cable Interests filed a motion for partial summary judgment against
the Partnership on October 13, 2004. The motion asks the court to find the
Partnership liable for indemnity under the Crossing Agreement for all costs
and expenses incurred by the Y-49 Cable Interests directly related to the
emergency response to the incident and for the costs and expenses of the
temporary and permanent repairs. The Partnership believes the motion is
premature.
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. 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.
Pursuant to its agreements with the owners of the electric transmission
cables that the Eastchester facilities cross in the Long Island Sound,
Iroquois performed certain post construction surveys to verify the condition
of the cable crossings and confirm the location of the pipeline.
Specifically, Iroquois had constructed a 'structure' over the Y-50 cable
system consisting of lightweight flexible concrete mattresses under the
pipeline, specially fabricated concrete blocks adjacent to the pipeline and
crushed rock. The surveys and additional follow-up studies indicate that the
'structure' may have settled to a greater extent than originally anticipated
and that its location is believed to be 65 feet north of the location where
the pipeline crosses the Y-50 cable. Iroquois has been discussing this
matter with the owner of the Y-50 cable system as to whether and how these
issues should be modified and has notified the FERC by letter dated September
3, 2004. Given the preliminary stage of this matter, Iroquois is unable to
assess the likelihood of an unfavorable outcome and/or the amount or range of
costs, if any, in the event of an unfavorable outcome.
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 served as the initial rate per the
certificate order). The increased rate reflected, 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 was 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 provides 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, will
also be in effect through December 31, 2011. The settlement agreement was
approved by the FERC on October 13, 2004.
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.
The recourse rates and negotiated individual Eastchester shipper rates,
coupled with cost overruns experienced on the Eastchester Project, will
reduce the Partnership's initial margins that were anticipated when the
project application was filed with FERC.
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. At this time, the Partnership does not know what the
disposition of this claim will be nor its ultimate impact on the Partnership.
On September 15, 2004, NEGT announced that it had entered into an agreement
with GS Power Holdings II LLC (a subsidiary of Goldman Sachs) to purchase
NEGT's indirect equity interest in the Partnership. 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 acquisition is expected to close in the first quarter of 2005.
ITEMS 2-5 are not applicable.
ITEM 6. EXHIBITs:
(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.
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: November 12, 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