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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number 333-51713
MARKET HUB PARTNERS STORAGE, L.P.
(Exact name of Registrant as Specified in its Charter)
Delaware 76-0558052
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
5400 Westheimer Court
P.O. Box 1642
Houston, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
713-627-5400
(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 [ ]
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part II, Item 4 has been
omitted in accordance with such Instruction H.
All of the Registrant's interests are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
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MARKET HUB PARTNERS STORAGE, L.P.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMEBER 30, 2000
INDEX
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Item Page
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PART I. FINANCIAL INFORMATION
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1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2000 and 1999.......1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.............2
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..............................3
Notes to Consolidated Financial Statements..............................................................4
2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................5
PART II. OTHER INFORMATION
1. Legal Proceedings.......................................................................................7
6. Exhibits and Reports on Form 8-K........................................................................7
Signatures..............................................................................................8
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
From time to time, the Company's reports, filings and other public announcements
may include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. The Company cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state and federal legislative and regulatory initiatives that
affect cost and investment recovery, have an impact on rate structures and
affect the speed and degree to which competition enters the natural gas
industry; the weather and other natural phenomena; the timing and extent of
changes in commodity prices and interest rates; changes in environmental and
other laws and regulations to which the Company is subject or other external
factors over which the Company has no control; the results of financing efforts,
including the Company's ability to obtain financing on favorable terms, which
can be affected by the Company's credit rating and general economic conditions;
growth in opportunities for the Company; and the effect of accounting policies
issued periodically by accounting standard-setting bodies.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
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Operating Revenues
Salt cavern storage revenues $ 7,108 $ 8,008 $ 22,620 $ 24,353
Hub service revenues 801 242 1,239 597
----------------- ----------------- ----------------- -----------------
Total operating revenues 7,909 8,250 23,859 24,950
----------------- ----------------- ----------------- -----------------
Operating Expenses
Operation and maintenance 1,326 1,711 4,649 5,093
Depreciation and amortization 1,602 1,690 4,494 5,055
Property and other taxes 315 258 945 777
----------------- ----------------- ----------------- -----------------
Total operating expenses 3,243 3,659 10,088 10,925
----------------- ----------------- ----------------- -----------------
Operating Income 4,666 4,591 13,771 14,025
Other Income and Expenses 284 334 827 907
----------------- ----------------- ----------------- -----------------
Earnings Before Interest 4,950 4,925 14,598 14,932
Interest Expense 2,442 2,279 7,355 6,875
----------------- ----------------- ----------------- -----------------
Net Income $ 2,508 $ 2,646 $ 7,243 $ 8,057
================= ================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
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MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Nine Months Ended
September 30,
---------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,243 $ 8,057
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,494 5,055
Net change in current assets and liabilities (3,339) (4,498)
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Net cash provided by operating activities 8,398 8,614
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,347) (8,510)
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Net cash used in investing activities (2,347) (8,510)
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CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners (9,500) (3,000)
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Net cash used in financing activities (9,500) (3,000)
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Net change in cash and cash equivalents (3,449) (2,896)
Cash and cash equivalents at beginning of period 14,029 19,592
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Cash and cash equivalents at end of period $ 10,580 $ 16,696
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Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 9,728 $ 9,247
</TABLE>
See Notes to Consolidated Financial Statements.
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MARKET HUB PARTNERS STORAGE, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
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<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
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ASSETS
Current Assets
Cash and cash equivalents $ 10,580 $ 14,029
Accounts receivable 2,955 8,802
Accounts receivable, affiliates 4,442 -
Note receivable, affiliate 5,000 5,000
Other 268 172
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Total current assets 23,245 28,003
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Property, Plant and Equipment
Cost 346,668 195,550
Less accumulated depreciation and amortization 26,882 22,584
-------- --------
Net property, plant and equipment 319,786 172,966
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Other Assets and Deferred Debits 3,438 3,868
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Total Assets $346,469 $204,837
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LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 2,097 $ 166
Accrued interest 791 3,151
Accrued property tax 837 1,093
Other accrued liabilities 1,073 512
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Total current liabilities 4,798 4,922
Long-term Debt 115,000 115,000
Partners' Capital 226,671 84,915
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Total Liabilities and Partners' Capital $346,469 $204,837
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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MARKET HUB PARTNERS STORAGE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Market Hub Partners Storage, L.P. (the Company) was formed on December 31, 1997
as a Delaware limited partnership. The Company is wholly owned by indirect
subsidiaries of Duke Energy Corporation (Duke Energy). The Company owns and
operates two natural gas market hubs, Moss Bluff and Egan, located near Houston,
Texas and Acadia Parish, Louisiana, respectively. These hubs provide producers,
end-users, local distribution companies, pipelines and natural gas marketers
with high deliverability storage services, real time title tracking and other
hub services.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries and reflect all normal recurring adjustments
that are, in the opinion of management, necessary to present fairly the
financial position and results of operations for the respective periods.
Note 2. Summary of Significant Accounting Policies
Property, Plant and Equipment. Depreciation of storage facilities and equipment
is provided using the straight-line method over estimated useful lives of the
assets ranging from 15 to 40 years. Effective January 1, 2000, the Company
changed the estimated lives of the storage caverns from 30 to 40 years. The
effect of this change for the three and nine months ended September 30, 2000 was
a reduction of depreciation expense of approximately $247 thousand and $720
thousand, respectively.
New Accounting Standards. In December 1999, the Securities and Exchange
Commission (SEC) released Staff Accounting Bulletin No. 101 (SAB 101) which
provides the SEC staff's views on revenue recognition policies. The Company has
adopted the provisions of SAB 101 as of September 18, 2000, the date of its
acquisition by Duke Energy Gas Transmission (DEGT). See Note 3 for further
information. The impact of adopting SAB 101 did not affect the Company's
consolidated results of operations or financial position.
In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. The
Company is required to adopt this standard by January 1, 2001. SFAS No. 133
requires that all derivatives be recognized as either assets or liabilities and
measured at fair value, and changes in the fair value of derivatives are
reported in current earnings, unless the derivative is designated and effective
as a hedge. If the intended use of the derivative is to hedge the exposure to
changes in the fair value of an asset, a liability or a firm commitment, then
changes in the fair value of the derivative instrument will generally be offset
in the income statement by changes in the hedged item's fair value. However, if
the intended use of the derivative is to hedge the exposure to variability in
expected future cash flows then changes in the fair value of the derivative
instrument will generally be reported in Other Comprehensive Income (OCI). The
gains and losses on the derivative instrument that are reported in OCI will be
reclassified to earnings in the periods in which earnings are impacted by the
hedged item.
The Company is conducting a review of its various contracts to identify
derivative instruments and document hedging activities, if applicable. As the
Company is in the preliminary stages of its contract review, management is not
able to quantify the impact that the adoption of SFAS No. 133 will have on the
Company's operations or financial position.
Reclassifications. Certain prior period amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
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Note 3. Acquisition
On September 18, 2000, DEGT, an indirect wholly owned subsidiary of Duke Energy,
acquired from subsidiaries of NiSource, Inc. (NiSource) all of the outstanding
stock and limited partnership interests in Market Hub Partners, L.P. (MHP) for
approximately $250 million in cash and the assumption of $150 million in debt.
MHP indirectly owns all partnership interests in the Company. This acquisition
was accounted for by DEGT utilizing the purchase method of accounting for
acquisitions. As a result, the Company's assets and liabilities have been
adjusted to reflect preliminary estimated fair values and partnership capital
has increased by approximately $146 million primarily as a result of increases
to property, plant and equipment. No goodwill was recorded in the transaction.
Note 4. Related Party Transactions
The note receivable balance of $5 million is due from a wholly-owned indirect
subsidiary of Duke Energy and is payable on demand, bearing interest at prime
plus 2%. The note was used to fund a portion of the pre-construction
expenditures associated with a development project in Tioga County,
Pennsylvania. The Company expects that the note will be repaid when financing is
secured for the Tioga project. For the quarter and nine months ended September
30, 2000 and 1999, interest income included $131 thousand and $394 thousand,
respectively, associated with this note receivable.
Note 5. Debt and Restrictions on Distributions
As defined in the indenture governing the Company's long-term 8.25% notes
payable (the Indenture), the acquisition described in Note 3 above resulted
in a "Change of Control" of the Company. Pursuant to the Indenture, holders of
the notes have the right to require the Company to repurchase the notes
following the Change of Control, at a price equal to 101% of their outstanding
principal amount plus accrued and previously unpaid interest. The outstanding
principal balance of these notes at September 30, 2000 was $115 million. Holders
of the notes are required to notify the Company of repayment elections by
November 17, 2000.
As permitted by the Indenture, the Company may make permitted distributions not
to exceed, in the aggregate: 1) 35% of net income before extraordinary item for
any period, as well as; 2) 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 before the date the permitted distributions are made
for that same period. In the nine months ended September 30, 2000 and 1999, the
Company paid distributions of $9.5 million and $3 million, respectively.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Introduction
The Company markets natural gas storage services to pipelines, local
distribution companies, producers, end-users 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. The Company offers short-term firm and interruptible hub services
to its customers. These services include balancing, wheeling, title transfer,
imbalance trading and loaning natural gas.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
5
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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.
---------------------------------- --------------------- -------------------
September 30, September 30,
(Billion cubic feet (Bcf)) 2000 1999
---------------------------------- --------------------- -------------------
Consolidated Facility Totals
Working gas capacity (1) 22.7 22.4
Average working gas capacity (2) 22.7 21.2
Average leased capacity (2) 19.2 20.9
---------------------------------- --------------------- -------------------
(1) As of the date indicated.
(2) For the nine month period ended as of the date indicated.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 was $7.2 million
compared to $8.1 million for the comparable period of 1999. The decrease was
primarily due to a $1.1 million decline in revenues as a result of lower leased
capacity. Other variances included higher interest expense due to lower
capitalized interest offset by lower depreciation expense as a result of a
change in the useful lives of the storage assets.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the acquisition described in Note 3 to the Consolidated Financial
Statements, the carrying value of the Company's net assets increased by
approximately $146 million to reflect the fair value adjustments.
Capital and investment expenditures for the nine months ended September 30, 2000
and 1999 were $2.3 million and $8.5 million, respectively, and primarily
represent the capital expenditure program that commenced in 1997 to expand
working gas capacity to a combined 24 Bcf. The Company believes that funds
generated from operations will be sufficient to meet its liquidity requirements
for the foreseeable future. The Company anticipates expanding both Moss Bluff
and Egan to 16 Bcf each during 2001 through 2004. Capital expenditures
associated with this expansion are estimated to be $19 million.
The Company has 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, 2000. Management does not anticipate renewing this agreement.
As described in Note 5 to the Consolidated Financial Statements, the Change of
Control of the Company during the third quarter of 2000 gives holders of the
Company's $115 million of outstanding long-term notes payable the right to
require the Company to repurchase the notes at a price equal to 101% of their
outstanding principal amount plus accrued and previously unpaid interest. The
Company believes that funds generated from operations, borrowings from
affiliates or other re-financing alternatives will be sufficient to meet any
repayment requirements that might result from these actions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Five former officers and employees of the Company have filed a lawsuit, which
has been consolidated in the District Court of Harris County, Texas, 157th
Judicial District, which seeks payment of amounts allegedly owed to these former
officers or employees under their employment agreements with the Company in
connection with a change of control of the Company. As part of the sale of the
Company to Duke Energy Corporation on September 18, 2000, NiSource, Inc. agreed
to fully indemnify the Company for any obligations that ultimately arise from
this issue. While the ultimate outcome cannot currently be estimated, management
believes that the final disposition will not have a material adverse effect on
the Company's consolidated results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly 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
November 13, 2000 /s/ Dorothy M. Ables
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Dorothy M. Ables
Senior Vice President, Finance and Administration and
Chief Financial Officer
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