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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-51713
MARKET HUB PARTNERS STORAGE, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0558052
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
16420 Park Ten Place, Suite 420
Houston, Texas
77084
(Address of principal executive offices)
(Zip code)
(281) 597-6777
(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. Market Hub Partners Storage, L.P. is no
longer obligated by Section 13 or 15(d) of the Securities Exchange Act of 1934
to file periodic reports. This filing is being submitted to satisfy contractual
obligations of the filer.
YES [ ] NO [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARKET HUB PARTNERS STORAGE, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 16,696 $ 19,592
Accounts and notes receivable ............... 13,456 12,453
Other current assets ........................ 200 74
--------- ---------
Total current assets .................. 30,352 32,119
--------- ---------
Property and Equipment:
Natural gas storage facilities .............. 184,454 173,692
Construction in progress .................... 10,038 12,290
Less accumulated depreciation ............... (20,935) (16,148)
--------- ---------
173,557 169,834
Other Assets ...................................... 4,043 4,287
--------- ---------
$ 207,952 $ 206,240
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable, trade and other ............. 35 1,483
Accrued liabilities ........................... 6,747 8,644
--------- ---------
Total current liabilities ............... 6,782 10,127
Long-Term Debt ..................................... 115,000 115,000
Partners' capital .................................. 86,170 81,113
--------- ---------
$ 207,952 $ 206,240
========= =========
See Notes to Consolidated Financial Statements.
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<PAGE>
MARKET HUB PARTNERS STORAGE, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Salt cavern storage revenues ... $ 8,008 $ 7,609 24,353 $ 20,778
Hub services revenues .......... 242 316 597 1,657
-------- -------- -------- --------
Total revenues ................. 8,250 7,925 24,950 22,435
-------- -------- -------- --------
Operating Expense:
Operations and maintenance ..... 565 556 2,029 1,667
Plant administrative ........... 89 62 204 298
Property taxes ................. 258 247 777 734
Royalty payments ............... -- -- -- 136
General and administrative ..... 1,057 842 2,860 2,319
Depreciation and amortization .. 1,690 1,443 5,055 4,382
-------- -------- -------- --------
Total operating expenses ....... 3,659 3,150 10,925 9,536
-------- -------- -------- --------
Operating income .................... 4,591 4,775 14,025 12,899
Interest expense .................... 2,279 2,174 6,875 5,307
Interest income ..................... 334 498 907 1,264
-------- -------- -------- --------
Net Income Before Extraordinary Item 2,646 3,099 8,057 8,856
Extraordinary loss on early
extinguishment of debt....... -- -- -- (6,702)
-------- -------- -------- --------
Net Income .......................... $ 2,646 $ 3,099 $ 8,057 $ 2,154
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
MARKET HUB PARTNERS STORAGE, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income .............................................. $ 8,057 $ 2,154
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization ....................... 5,055 4,382
Extraordinary loss on early extinguishment of debt... -- 6,702
Changes in assets and liabilities:
Increase in accounts receivable ..................... (1,003) (2,158)
Increase in other current assets .................... (126) (807)
Decrease (increase) in other assets ................. (24) 111
(Decrease) increase in trade payables and
accrued liabilities .............................. (3,345) 1,451
Decrease in payable to partners, affiliates and
other ............................................ -- (943)
--------- ---------
Net cash provided by operating activities ........... 8,614 10,892
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ................................... (8,510) (20,282)
Issuance of note to Tioga project ...................... -- (5,000)
--------- ---------
Net cash used in investing activities .................. (8,510) (25,282)
--------- ---------
Cash Flows from Financing Activities:
Issuance of long-term debt (net of expenses of $8,753) . 105,885
Repayments of long-term debt ........................... (53,492)
Receipt of restricted cash ............................. 2,084
Capital distributions to partners ...................... (3,000) (19,617)
--------- ---------
Net cash (used in) provided by financing activities (3,000) 34,860
--------- ---------
Net increase (decrease) in cash and cash
equivalents .................................... (2,896) 20,470
Cash and cash equivalents at beginning of period ...... 19,592 2,153
--------- ---------
Cash and cash equivalents at end of period ............ $ 16,696 $ 22,623
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest (net of amounts capitalized) .. $ 9,247 $ 4,264
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
MARKET HUB PARTNERS STORAGE, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999
-----------------
(IN THOUSANDS)
Partner Distributions ................................. $ (3,000)
Net Income ............................................ 8,057
--------
Net Increase in Capital ............................... 5,057
Partners' Capital Balance, Beginning of Period ........ 81,113
--------
Partners' Capital Balance, End of Period .............. $ 86,170
========
See Notes to Consolidated Financial Statements
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<PAGE>
MARKET HUB PARTNERS STORAGE, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED)
NOTE 1. BASIS OF PRESENTATION
Market Hub Partners Storage, L.P. (the "Company") owns and operates two
natural gas market hubs, "Moss Bluff" and "Egan," located near Houston, Texas
and in Acadia Parish, Louisiana, respectively, which provide producers,
end-users, local distribution companies, pipelines and natural gas marketers
with "unbundled" high deliverability storage services, cash market trading, real
time title tracking and other hub services. The Company was formed on December
31, 1997 as a Delaware limited partnership. The Company is wholly-owned by
Market Hub Partners, L.P. ("MHP") through its direct 99.99% limited partner
interest and its subsidiary's, Market Hub Partners Storage, L.L.C., .01% general
partner interest. Prior to April 1, 1999, MHP was owned by TPC Corporation, a
wholly-owned subsidiary of PacifiCorp, and subsidiaries of NiSource (formerly
NIPSCO Industries, Inc.), DPL Inc., and Public Service Enterprise Group, Inc.
On April 1, 1999, NiSource completed its acquisition of TPC Corporation,
including its 66% interest in Market Hub Partners, L.P. As a result of the TPC
acquisition, NiSource increased its ownership of MHP to approximately 77.3%.
The sale may trigger an obligation of the Company to make certain change of
control incentive payments under the Company's employment agreements with its
executive officers and certain other key employees. Upon a change of control
under the Executive Employment Agreements, Messrs. Hooker, Clark, Cook, Lorio,
Gatewood and Allemandou shall receive an amount equal to 2.0%, 1.25%, 1.25%,
1.0%, 1.0% and 1.0%, respectively, of the increase in value of the Company from
January 1, 1998 to the date the change of control occurs, calculated pursuant to
the Executive Employment Agreements. The amount of any such payment that may be
required has not yet been quantified, but may be material (see Note 3).
The accompanying consolidated financial statements and notes for the
Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. In connection with the preparation of these financial statements,
management was required to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenues, expenses and disclosure of
contingent liabilities. Actual results could differ from such estimates.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments (all of which are normal and recurring)
which, in the opinion of management, are necessary to fairly state the
consolidated financial position of the Company as of September 30, 1999 and the
results of its operations for the three and nine months ended September 30, 1999
and 1998, and its cash flows for the nine months ended September 30, 1999 and
1998.
NOTE 2. LONG-TERM DEBT
SENIOR UNSECURED NOTES - In March 1998, the Company completed the sale of
$115 million in 8.25% senior unsecured notes due 2008 (the "Senior Unsecured
Notes"). The net proceeds from the sale were approximately $110.9 million.
Proceeds of the placement have been used by the Company to repay the outstanding
principal amount, $53.5 million, of 8.10% secured indebtedness (the "Secured
Notes"), with accrued interest of $758,000 and prepayment penalties of $5.1
million, and to pay a distribution to MHP in the amount of $17.6 million, which
was subsequently used by MHP to repay debt owed by MHP to its partners. In
addition, the Company loaned approximately $5.0 million of the net proceeds, at
a rate of prime plus 2%, to a subsidiary of MHP to develop another project.
As a result of the repayment of the Secured Notes, the Company recorded a
$6.7 million extraordinary loss. Approximately $5.1 million of the extraordinary
loss was a prepayment penalty made to holders of the Secured Notes and $1.6
million was a write-off on unamortized deferred financing costs associated with
the Secured Notes. In addition, $2.1 million of restricted cash was made
available to the Company. Subsequent to the Senior Unsecured Notes issuance, the
Company completed an offering to exchange all of the outstanding Senior
Unsecured Notes for newly issued notes. The new notes have been registered with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, but are otherwise substantially the same in all material respects to
the Senior Unsecured Notes surrendered for exchange.
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<PAGE>
If various conditions are met under the indenture governing the Senior
Unsecured Notes (the "Indenture"), the Company may make certain distributions.
As permitted by the Indenture, the Company distributed $2.5 million to MHP in
1998. In addition, the Indenture allows the Company to make permitted
distributions not to exceed, in the aggregate, 35% of net income before
extraordinary item for any period, as well as restricted payments not to exceed,
in the aggregate, 50% of the difference between net income for the period
beginning on January 1, 1998 and ending on the last day of the Company's last
fiscal quarter for which quarterly or annual consolidated financial statements
are available preceding the date the restricted payment is made and the
permitted distribution amount for that same period. In December 1998, the
Company paid a $2.9 million permitted distribution and a restricted payment of
$2.1 million to MHP. On May 21, 1999, the Company made a restricted payment of
$2 million and a permitted distribution of $1 million to MHP.
REVOLVING CREDIT FACILITY. Pursuant to the indenture for the Senior
Unsecured Notes, the Company is allowed to execute a revolving credit facility.
In April 1998, the Company executed a credit facility (the "Credit Facility")
with Bank One, Texas, N.A. that expires December 2000. The Credit Facility
provides for revolving credit borrowings up to $20.0 million in the aggregate at
any time. Borrowings under the Credit Facility will bear interest at a rate per
annum, at the Company's option, equal to: (i) the bank's prime rate or (ii) the
London Interbank Offered Rate plus 2%. The Credit Facility is secured by
substantially all the assets of the Company and includes certain covenants
applicable to the Company, including requirements that the Company comply with
certain financial ratios. The Company has not made any borrowings under the
Credit Facility as of September 30, 1999.
NOTE 3. LITIGATION
Mr. Hooker, former Executive Vice President and Chief Operating Officer,
filed a lawsuit against the Company and certain of its affiliates (Market Hub
Partners, L.P., Market Hub Partners, Inc. and Market Hub Partners Storage,
L.L.C.) in the District Court of Harris County, Texas, 269th Judicial District,
on May 17, 1999. Messrs. Clark, Lorio, Gatewood, Allemandou and Cook (each of
whom was at that time an officer or key employee of the Company) filed a lawsuit
against the Company and certain of its affiliates (Market Hub Partners, L.P.,
Market Hub Partners, Inc. and Market Hub Partners Storage, L.L.C.) in the
District Court of Harris County, Texas, 157th Judicial District, on May 13,
1999. The lawsuits, now consolidated before the 157th Judicial District, seek
payment of amounts allegedly owed to the former officers or key employees under
their employment agreements with the Company in connection with the NiSource
acquisition of the stock of TPC.
In November 1998, the Company's Board of Directors elected not to renew
the employment contract of Donald B. Russell, President and Chief Executive
Officer of the MHP, which expired December 31, 1998. On December 22, 1998, Mr.
Russell filed a lawsuit against the Company, and certain of its current and
former affiliates including MHP and NE Hub Partners L.P. (a subsidiary of MHP),
in the 165th Judicial District Court, Harris County, Texas. Mr. Russell alleges
he is due additional compensation under the terms of his one-year 1998
Employment Agreement with the Company and MHP and certain other compensation
agreements with MHP and NE Hub Partners, L.P. The lawsuit seeks damages and
punitive damages for alleged fraud, negligent misrepresentation, and breach of
contract with respect to the agreements, including claims for incentive
compensation that allegedly became payable upon the NiSource acquisition of the
stock of TPC.
The amount of any such payments that may be required regarding the above
lawsuits has not been quantified, but may be material. The Company intends to
vigorously defend all such claims of additional compensation. Each of the
individual plaintiffs cited in the lawsuits described above is no longer
employed by the Company.
NOTE 4. SUBSEQUENT EVENTS
On November 8, 1999, TPC Corporation, through its wholly-owned subsidiary
TPC Gas Storage Service, L.P., acquired from PSEG Resources, Inc. the stock of
PSRC I, Inc., including its 5.67% interest in MHP. As a result, NiSource
currently indirectly owns approximately 83% of MHP.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's annual report on Form 10-K for the year
ended December 31, 1998, and the Company's Consolidated Financial Statements,
and the notes thereto, included in Item 1 of this Report.
GENERAL
The Company markets its natural gas storage services to utilities,
pipeline companies, local distribution companies, producers and natural gas
marketers. The Company receives fees for use of its salt cavern storage
facilities, which generally include a contractual demand charge for the
reservation of storage space and, in some instances, injection and withdrawal
fees for the actual use of the space. A relatively stable source of revenues
exists from several long-term, demand charge contracts with customers at the
Company's two operating facilities. These contracts provide a minimum level of
revenue regardless of usage by the customer.
The Company also offers short-term firm and interruptible hub services to
its customers. These services include balancing, wheeling, title transfer,
imbalance trading and loaning natural gas. The Company is currently using hub
services to generate incremental revenue and to provide existing and potential
long-term customers with an inexpensive way to incorporate these services in
their natural gas portfolios. The Company believes that hub service transactions
may lead to additional long-term storage contracts over time.
CAPACITY EXPANSIONS
The Company's financial condition and results of operations are directly
related to the working storage capacity of the Company's storage facilities. As
of September 30, 1999, working storage capacity was approximately 11.3 billion
cubic feet ("Bcf") at Moss Bluff and approximately 11.1 Bcf at Egan, for a total
of 22.4 Bcf. At December 31, 1998, working storage capacity was approximately
10.3 Bcf at Moss Bluff and approximately 9.4 Bcf at Egan, for a total storage
capacity of 19.7 Bcf. At September 30, 1998, working storage capacity was
approximately 10.3 Bcf at Moss Bluff and approximately 9.3 Bcf at Egan, for a
total storage capacity of 19.6 Bcf.
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<PAGE>
Below is a chart depicting the growth in both working and leased gas
capacity at each of the facilities for the period ending September 30, 1999 and
1998 (in Bcf's, except for percentages):
SEPTEMBER SEPTEMBER
1999 1998
--------- ---------
MOSS BLUFF
Working gas capacity (1) .................... 11.3 10.3
Average working gas capacity (2) ............ 10.9 9.9
Leased gas capacity (includes secondary
firm *) (1) ............................... 11.4 10.8
Percentage of working gas capacity leased (1) 101% 105%
Average leased gas capacity (2) ............. 11.2 10.3
EGAN
Working gas capacity (1) .................... 11.1 9.3
Average working gas capacity (2) ............ 10.3 8.0
Leased gas capacity (includes secondary
firm *) (1) ............................... 9.5 8.7
Percentage of working gas capacity leased (1) 86% 94%
Average leased gas capacity (2) ............. 9.7 7.3
CONSOLIDATED FACILITY TOTALS
Working gas capacity (1) .................... 22.4 19.6
Average working gas capacity (2) ............ 21.2 17.9
Leased gas capacity (includes secondary
firm *) (1) ............................... 20.9 19.5
Percentage of working gas capacity leased (1) 93% 99%
Average leased gas capacity (2) ............. 20.9 17.6
(1) As of September 30 of the years indicated.
(2) From January 1 to September 30 of the years indicated.
* Secondary firm customers typically pay a lower demand fee than a firm
contract because the facility has the right to make the storage capacity or
injection and withdrawal facilities unavailable to the secondary firm
customer if a customer with a firm contract requires the space or facilities.
RESULTS OF OPERATIONS
The Company was formed by MHP on December 31, 1997 to hold the equity
interests of Moss Bluff, Egan and their respective general partners.
COMPARISON OF THIRD QUARTER 1999 AND THIRD QUARTER 1998
REVENUES. Revenues for the third quarter of 1999 were $8.3 million
compared to $7.9 million for the third quarter of 1998, an increase of $0.4
million, or 5%. This $0.4 million increase is attributable to an increase in
salt cavern storage revenues. The increase in salt cavern storage revenues is
principally due to an increase in total working storage capacity to 22.4 Bcf at
September 30, 1999 from 19.6 Bcf at September 30, 1998.
OPERATING EXPENSES. Operating expenses were $3.7 million for the third
quarter of 1999 compared to $3.2 million for the third quarter of 1998, an
increase of $0.5 million, or 16%. The increase is a result of accruing for a
severance payment to a former officer and increased depreciation related to the
Moss Bluff and Egan capacity expansions.
OPERATING INCOME. As a result of the factors described above, operating
income for the third quarter of 1999 decreased to $4.6 million from $4.8 million
in the third quarter 1998, a decrease of $0.2 million, or 4%.
NET INTEREST EXPENSE. Net interest expense was $2.0 million for the third
quarter of 1999 compared to $1.7 million for the third quarter of 1998, an
increase of $0.3 million, or 18%. This increase is the result of a decrease in
interest income due to a lower cash balance.
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<PAGE>
COMPARISON OF FIRST NINE MONTHS OF 1999 AND FIRST NINE MONTHS OF 1998
REVENUES. Revenues for the first nine months of 1999 were $25.0 million
compared to $22.4 million for the first nine months of 1998, an increase of $2.6
million, or 12%. This $2.6 million increase is attributable to a $3.6 million
increase in salt cavern storage revenues and to a $1.0 million decrease in hub
services revenue. The increase in salt cavern storage revenues is principally
due to an increase in working storage capacity from 19.6 Bcf at September 30,
1998 to 22.4 Bcf at September 30, 1999. The decrease in hub service revenues is
a result of a mild winter and lack of price volatility.
OPERATING EXPENSES. Operating expenses were $10.9 million for the first
nine months of 1999 compared to $9.5 million for the first nine months of 1998,
an increase of $1.4 million, or 15%. The increase is a result of increased
activities at the operating facilities resulting from the storage capacity
expansion program.
OPERATING INCOME. As a result of the factors described above, operating
income for the first nine months of 1999 increased to $14.0 million from $12.9
million in the first nine months 1998, an increase of $1.1 million, or 9%.
NET INTEREST EXPENSE. Net interest expense was $6.0 million for the first
nine months of 1999 compared to $4.0 million for the first nine months of 1998,
an increase of $2.0 million, or 50%. This increase is the result of issuance of
$115 million in aggregate principal amount of the Unsecured Notes in March 1998.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. In April 1998, the Company executed a credit facility (the
"Credit Facility") with Bank One, Texas, N.A. that expires December 2000. The
Credit Facility provides for revolving credit borrowings up to $20.0 million in
the aggregate outstanding at any time. Borrowings under the Credit Facility will
bear interest at a rate per annum, at the Company's option, equal to: (i) the
bank's prime rate or (ii) the London Interbank Offered Rate plus 2%. The Credit
Facility is secured by substantially all the assets of the Company and includes
certain covenants applicable to the Company, including requirements that the
Company comply with certain financial ratios. The Company has not made any
borrowings under the Credit Facility as of September 30, 1999.
CASH FLOWS. Net cash provided by operating activities was $8.6 million for
the first nine months of 1999 and $10.9 million for the first nine months of
1998. The reduction in cash flows from operating activities is primarily due to
a decrease in current liabilities during the first nine months of 1999.
Net cash used in investing activities during the first nine months of 1999
and 1998 consisted of capital expenditures to increase working gas storage
capacity. The Company spent $8.5 million and $20.3 million during the first nine
months of 1999 and 1998, respectively, relating to the storage capacity
expansion program. During the first nine months of 1999, working gas storage
capacity increased 2.7 Bcf, to 22.4 Bcf from 19.7 Bcf at December 31, 1998.
Additionally, in the first nine months of 1998, the Company issued a $5.0
million note to an MHP subsidiary for the Tioga project.
Net cash (used in) provided by financing activities was $(3.0) million
during the first nine months of 1999 and $34.9 million during the first nine
months of 1998. During the first quarter of 1998, the Company issued $115
million in aggregate principal amount of Unsecured Notes and used approximately
$59.3 million of the proceeds thereof to repay the Secured Notes including
accrued interest and prepayment penalties. As discussed in Note 2 to the
Consolidated Financial Statements, the Company distributed $17.6 million to MHP
for repayment of certain indebtedness owed to certain limited partners of MHP,
including $0.6 million of accrued interest. The Company also received $2,084 of
cash that had been restricted under terms of the Old Notes.
CAPITAL EXPENDITURES. As part of its capital expenditure program that
commenced in 1997 to expand working gas capacity to a combined 24.0 Bcf, the
Company has budgeted for fiscal year 1999 capital expenditures of approximately
$4.6 million and $2.6 million for Moss Bluff and Egan, respectively, to increase
working gas capacity by a total of 4.3 Bcf, of which 2.7 Bcf has been created in
the first nine months of 1999. After this additional capacity has been added,
management expects that capital expenditures needed to maintain these facilities
will be relatively low. The Company projects that its maintenance capital
expenditures for 1999 will be less than $1.5 million of which $920 has been
spent in the first nine months of 1999. The Company believes that funds
generated from operations will be sufficient to meet its liquidity requirements
for the foreseeable future.
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<PAGE>
YEAR 2000 COMPLIANCE
The Company, like other businesses, is facing the Year 2000 ("Y2K") issue. Many
computer systems and equipment with embedded chips or processors use only two
digits to represent the calendar year. This could result in computational or
operational errors as dates are compared across the century boundary causing
possible disruptions in business operations. The Y2K issue can arise at any
point in the Company's natural gas supply, gas measurement and financial chain.
STATE OF READINESS. The Company began addressing the Y2K issue in 1998 by
retaining an engineering firm to perform a study on both the Moss Bluff and Egan
facilities' operating equipment and developed a standardized Y2K Plan format
that included the following components:
1) Inventory of all facility equipment and systems (including hardware,
software and equipment with embedded chips or processors);
2) Assessment of all equipment and systems for Y2K compliance;
3) Development of a project matrix and schedule for replacement or
remediation of non-compliant systems;
4) Development of a project schedule for testing compliant systems; and
5) Development of a list of significant vendors/suppliers for surveying
their Y2K readiness efforts.
The Y2K issue as it relates to the Company's corporate office management
information systems (MIS) has been addressed internally. Progress as to the Y2K
issues at both the facility and corporate office are reported periodically to
management. The Company has committed resources to conduct risk assessment and
to take corrective action, where required, with a target date of becoming Y2K
ready early in the fourth quarter of 1999. The Company has completed all of its
Y2K readiness work on its critical systems.
With respect to external parties, including vendors and customers, the
Company has surveyed the Y2K readiness efforts of critical external parties.
Monitoring risk in this area will continue throughout 1999, as many external
parties will not have completed their Y2K readiness efforts.
In addition, the Company has developed contingency plans to mitigate
possible disruption in business operations that may result from the Y2K issue.
The contingency plans include manual operations of the operating facilities. The
contingency plans may be refined as additional information becomes available.
COST. The Y2K activities and associated costs are being managed within the
Company and its total cost relating to Y2K activities is not expected to exceed
$200,000 (of which the Company has spent $135,236 as of September 30, 1999).
RISKS. The major systems which pose the greatest Y2K risk for the Company
if its Y2K plan is not implemented in a timely manner are the flow computers,
programmable logic controllers (PLC's) and other control devices that assist in
the measurement and compression of natural gas that flows through the pipelines
in and out of the Company's caverns. The Company relies on third party suppliers
for equipment, natural gas, water, utilities and other key services.
Interruption of supplier operations due to Y2K issues could affect the Company's
operations. While the Company has evaluated the status of its major suppliers'
Y2K readiness efforts and develop contingency plans to manage the risk, it
cannot eliminate the potential for disruption due to third party failures.
The Company is also dependent upon its customers for sales and cash flows.
Y2K interruptions in the operations of its customers could result in reduced
sales, increased receivable levels and cash flow reductions. The Company has
surveyed its customer's Y2K readiness efforts to assess risk and develop plans
with an intent to minimize the impact on its operations.
The Company's ability to meet the projected goals, including the costs of
addressing the Y2K issue and the dates upon which compliance will be attained,
depends on the Y2K readiness of its key suppliers and customers, the completion
of its final remediation and testing efforts. Although these and other
unanticipated Y2K issues could have an adverse effect on the results of
operations or financial condition of the Company, it is not possible to estimate
the extent of impact at this time, since the contingency plans are still under
development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS REPORT ARE
"YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR 2000
INFORMATION AND READINESS DISCLOSURE ACT.
- 11 -
<PAGE>
The statements included in this Report on Form 10-Q regarding future
financial performance and results and the other statements that are not
historical fact are forward-looking statements regarding the intent, belief and
current expectations of the Company's management. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurances that such expectations will prove to be
correct. Generally, these statements relate to business plans or strategies,
projected or anticipated benefits or other consequences of such plans or
strategies, or projections involving anticipated revenues, expenses, earnings,
levels of capital expenditures or other aspects of operating results. As further
discussed in the Company's annual report on Form 10-K for the year ended
December 31, 1998, the operations of the Company are subject to a number of
uncertainties, risks and other influences, many of which are outside the control
of the Company, any one of which, or a combination of which, could materially
affect the results of the Company's operations and whether the forward-looking
statements made by the Company ultimately prove to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material risk exposure to market changes
that affect market risk sensitive instruments, as interest on all of the
Company's material long-term debt accrues at a fixed rate.
- 12 -
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Mr. Hooker, former Executive Vice President and Chief Operating Officer,
filed a lawsuit against the Company and certain of its affiliates (Market Hub
Partners, L.P., Market Hub Partners, Inc. and Market Hub Partners Storage,
L.L.C.) in the District Court of Harris County, Texas, 269th Judicial District,
on May 17, 1999. Messrs. Clark, Lorio, Gatewood, Allemandou and Cook (each of
whom was at that time an officer or key employee of the Company) filed a lawsuit
against the Company and certain of its affiliates (Market Hub Partners, L.P.,
Market Hub Partners, Inc. and Market Hub Partners Storage, L.L.C.) in the
District Court of Harris County, Texas, 157th Judicial District, on May 13,
1999. The lawsuits, now consolidated before the 157th Judicial District, seek
payment of amounts allegedly owed to the former officers or key employees under
their employment agreements with the Company in connection with the NiSource
acquisition of the stock of TPC.
In November 1998, the Company's Board of Directors elected not to renew
the employment contract of Donald B. Russell, President and Chief Executive
Officer of the MHP, which expired December 31, 1998. On December 22, 1998, Mr.
Russell filed a lawsuit against the Company, and certain of its current and
former affiliates including MHP and NE Hub Partners L.P. (a subsidiary of MHP),
in the 165th Judicial District Court, Harris County, Texas. Mr. Russell alleges
he is due additional compensation under the terms of his one-year 1998
Employment Agreement with the Company and MHP and certain other compensation
agreements with MHP and NE Hub Partners, L.P. The lawsuit seeks damages and
punitive damages for alleged fraud, negligent misrepresentation, and breach of
contract with respect to the agreements, including claims for incentive
compensation that allegedly became payable upon the NiSource acquisition of the
stock of TPC.
The amount of any such payments that may be required regarding the above
lawsuits has not been quantified, but may be material. The Company intends to
vigorously defend all such claims of additional compensation. Each of the
individual plaintiffs cited in the lawsuits described above is no longer
employed by the Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
- 13 -
<PAGE>
Item 5. Other Information
This Report contains certain forward-looking statements regarding the
intent, belief and current expectations of the Company's management. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, or projections involving anticipated revenues, expenses,
earnings, levels of capital expenditures or other aspects of operating results.
As further discussed in the Company's annual report on Form 10-K for the year
ended December 31, 1998, the operations of the Company are subject to a number
of uncertainties, risks and other influences, many of which are outside the
control of the Company and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether the
forward-looking statements made by the Company ultimately prove to be accurate.
Item 6. Index to Exhibits
27.1 Financial Data Schedule
- 14 -
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARKET HUB PARTNERS STORAGE, L.P.
By: MARKET HUB PARTNERS STORAGE, LLC.,
its general partner
Date: November 12, 1999
By: /s/DONALD K. ELDERT
Manager
- 15 -
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