<PAGE>
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 [ ]
<PAGE>
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, 2000 and 1999
and Nine Months Ended September 30, 2000 and 1999 3
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statement of Changes in Partners'
Equity - Nine Months Ended September 30, 2000 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
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on Form 8-K 10
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES, NET $29,426 $29,811 $ 93,919 $ 92,635
OPERATING EXPENSES
Operations 4,905 5,992 15,160 16,038
Depreciation and amortization 5,811 5,690 17,744 16,260
Taxes other than income 2,722 2,831 8,242 8,154
Operating expenses 13,438 14,513 41,146 40,452
OPERATING INCOME 15,988 15,298 52,773 52,183
OTHER INCOME AND EXPENSES 338 439 1,277 1,180
INTEREST EXPENSE, NET 8,339 7,693 23,067 23,086
INCOME BEFORE TAXES 7,987 8,044 30,983 30,277
PROVISION FOR TAXES 3,711 3,162 12,488 11,834
NET INCOME 4,276 4,882 18,495 18,443
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
ITEM 1. FINANCIAL STATEMENTS (Continued)
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments $ 27,619 $ 27,375
Accounts receivable - trade 4,689 6,938
Accounts receivable - affiliates 5,657 5,440
Other current assets 4,044 3,422
Total Current Assets 42,009 43,175
NATURAL GAS TRANSMISSION PLANT
Natural gas plant in service 775,366 773,588
Construction work in progress 6,448 3,292
781,814 776,880
Accumulated depreciation and amortization (259,252) (242,074)
Net Natural Gas Transmission Plant 522,562 534,806
OTHER ASSETS AND DEFERRED CHARGES
Regulatory assets - income tax related 13,666 12,767
Regulatory assets - other 2,085 2,226
Other assets and deferred charges 7,298 1,877
Total Other Assets and Deferred Charges 23,049 16,870
TOTAL ASSETS $ 587,620 $ 594,851
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,228 $ 3,645
Accrued interest 5,902 4,781
Short-term borrowings -- 3,500
Current portion of long-term debt 22,222 28,789
Other current liabilities 3,387 5,290
Total Current Liabilities 32,739 46,005
LONG-TERM DEBT 372,223 307,875
OTHER NON-CURRENT LIABILITIES 621 816
AMOUNTS EQUIVALENT TO DEFERRED INCOME TAXES
Generated by Partnership 78,021 70,037
Payable by Partners (64,355) (57,270)
Total Amounts Equivalent to Deferred
Income Taxes 13,666 12,767
Commitments and Contingencies (Note 6)
Total Liabilities 419,249 367,463
Partners' Equity 168,371 227,388
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 587,620 $ 594,851
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
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)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 18,495 $ 18,443
Adjusted for the following:
Depreciation and amortization 17,744 16,260
Allowance for equity funds used during construction (77) --
Deferred regulatory asset-income tax related (899) 507
Amounts equivalent to deferred income taxes 899 (507)
Income and other taxes payable by partners 12,488 11,834
Other assets and deferred charges (5,796) (160)
CHANGES IN WORKING CAPITAL:
Accounts receivable 2,032 869
Other current assets (622) (1,779)
Accounts payable (2,417) (2,927)
Accrued interest 1,121 (360)
Other liabilities (2,098) (1,834)
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,870 40,346
INVESTING ACTIVITIES:
Capital expenditures (4,906) (4,344)
NET CASH USED IN INVESTING ACTIVITIES (4,906) (4,344)
FINANCING ACTIVITIES:
Long-term borrowing 400,000 --
Partner distributions (90,000) (10,000)
Repayments of long-term debt (313,431) (14,345)
Repayment of short-term borrowings (32,289) --
NET CASH USED FOR FINANCING ACTIVITIES (35,720) (24,345)
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS 244 11,657
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR 27,375 27,356
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 27,619 $ 39,013
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 21,693 $ 23,465
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
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, 2000
(In Thousands)
(Unaudited)
<S> <C>
PARTNERS' EQUITY
BALANCE AT DECEMBER 31, 1999 $227,388
Year-to-date net income 18,495
Taxes payable by Partners:
Federal income taxes 10,476
State income taxes 2,012
12,488
Equity distributions to Partners (90,000)
PARTNERS' EQUITY
BALANCE AT SEPTEMBER 30, 2000 $168,371
<FN>
The accompanying notes are an integral part of this consolidated
financial statement.
</TABLE>
<PAGE>
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. General
Financial Statements
The consolidated financial statements included herein have been prepared by
Iroquois Gas Transmission System, L.P., ("Iroquois" or "Company") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
Description of Partnership
Iroquois Gas Transmission System, L.P., is a Delaware limited partnership
formed for the purpose of constructing, owning and operating a natural gas
transmission pipeline from the Canada-United States border near Waddington,
NY, to South Commack, Long Island, NY. In accordance with the limited
partnership agreement, the Partnership shall continue in existence until
October 31, 2089, and from year to year thereafter, until the Partners elect
to dissolve the Partnership and terminate the limited partnership agreement.
Effective December 31, 1998, Alenco Iroquois Pipeline, Inc. sold its
interest in the Company to TCPL Northeast Ltd. The partners consist of
TransCanada Iroquois Ltd. (29.0%), North East Transmission Co. (19.4%),
Dominion Iroquois, Inc. (16.0%), ANR Iroquois, Inc. (9.4%), ANR New England
Pipeline Co. (6.6%), TCPL Northeast Ltd. (6.0%), JMC-Iroquois, Inc. (4.93%),
TEN Transmission Company (4.87%), NJNR Pipeline Company (2.8%), and LILCO
Energy Systems, Inc. (1.0%). The Iroquois Pipeline Operating Company (IPOC),
a wholly-owned subsidiary, is the administrative operator of the pipeline.
Income and expenses are allocated to the Partners and credited to their
respective equity accounts in accordance with the partnership agreements and
their respective percentage interests.
Distributions to Partners are made concurrently to all Partners in proportion
to their respective partnership interests. Total cash distributions of $90.0
million and $10.0 million were made during the first nine months of 2000 and
1999, respectively.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles and with accounting
for regulated public utilities prescribed by the Federal Energy Regulatory
Commission ("FERC"). Generally accepted accounting principles for regulated
entities allow the Company to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") 71, "Accounting for the Effects of
Certain Types of Regulation". In accordance with SFAS 71, the Company has
deferred recognition of costs (a regulatory asset) or has recognized
obligations (a regulatory liability) if it is probable that such costs will
be recovered or obligations relieved in the future through the rate-making
process.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
Iroquois Pipeline Operating Company, a wholly-owned subsidiary. Intercompany
transactions have been eliminated in consolidation.
Cash and Temporary Cash Investments
Iroquois considers all highly liquid temporary cash investments purchased
with an original maturity date of three months or less to be cash
equivalents. Cash and temporary cash investments of $27.6 million at
September 30, 2000 consisted primarily of discounted commercial paper. Cash
and temporary cash investments of $27.4 million in 1999, consisted primarily
of low-risk mutual funds, carried at cost, which approximated market. At
December 31, 1999, $9.7 million of cash and temporary cash investments was
held to satisfy the terms of the Loan Agreement (refer to Note 3).
Natural Gas Plant In Service
Natural gas plant in service is carried at original cost. The majority of
the natural gas plant in service is categorized as natural gas transmission
plant which was depreciated over 20 years on a straight line basis from the
in-service date through January 31, 1995. Commencing February 1, 1995,
transmission plant was depreciated over 25 years on a straight-line basis as
a result of a rate case settlement. Effective August 31, 1998 the
depreciation rate was changed to 2.77% (36 years average life) in accordance
with the FERC rate order issued July 29, 1998. General plant is depreciated
on a straight-line basis over five years.
Construction Work In Progress
At September 30, 2000, construction work in progress included preliminary
construction costs relating to the proposed Eastchester expansion project and
other on-going minor capital projects.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") represents the
cost of funds used to finance natural gas transmission plant under
construction. The AFUDC rate includes a component for borrowed funds as well
as equity. The AFUDC is capitalized as an element of natural gas plant in
service.
Provision for Taxes
The payment of income taxes is the responsibility of the Partners and such
taxes are not normally reflected in the financial statements of partnerships.
Iroquois' approved rates, however, include an allowance for taxes (calculated
as if it were a corporation) and the FERC requires Iroquois to record such
taxes in the Partnership records to reflect the taxes payable by the Partners
as a result of Iroquois' operations. These taxes are recorded without regard
as to whether each Partner can utilize its share of the Iroquois tax
deductions. Iroquois' rate base, for rate-making purposes, is reduced by the
amount equivalent to accumulated deferred income taxes in calculating the
required return.
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes". Under SFAS 109,
deferred taxes are provided based upon, among other factors, enacted tax
rates which would apply in the period that the taxes become payable, and by
adjusting deferred tax assets or liabilities for known changes in future tax
rates. SFAS 109 requires recognition of a deferred income tax liability for
the equity component of AFUDC.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year classifications.
New Account Standard
In June of 1998, The Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes accounting and reporting standards
for derivative instruments and for hedging activities. The statement
requires recognition of derivatives in the statement of financial position,
to be measured at fair value. Gains or losses resulting from changes in the
value of derivatives would be accounted for depending on the intended use of
the derivative and whether it qualifies for hedge accounting. In June 1999,
the FASB issued SFAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement 133," which
deferred SFAS 133's effective date for all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amended SFAS 133. The Company is currently studying the
future effects of adopting this statement. However, due to the Company's
limited use of derivative financial instruments, adoption of SFAS 133 is not
expected to have a significant effect on the Company's consolidated results
of operations, financial position, or cash flows.
3. Financing
On June 11, 1991, Iroquois entered into a loan agreement which provided a
loan facility totaling $522.6 million to be amortized over a 14-year period
commencing November 1, 1992. During 1993, Iroquois entered into Expansion
Loan Agreement No. 1 in the amount of $17.6 million to construct the Wright
Compressor Station. This loan had a maturity date of November 2007. During
1995, Iroquois entered into Expansion Loan Agreement No. 2 in the amount of
$13.4 million to finance the Croghan Compressor Station. This loan had a
maturity date of November 2008. On May 30, 2000, Iroquois exercised its
option to prepay these three loans in full with the proceeds of the Term Loan
Facility and Senior Notes which are described below.
As of December 31, 1999, Iroquois was party to interest rate swap
transactions for aggregate notional principal amounts of $537.6 million
relating to the original loan and Expansion Loan No. 1. These interest rate
swaps were being amortized over 14 years in accordance with the principal
repayment schedule provided in the Loan Agreement. The interest rate and
margin over the term of the swaps averaged 7.615% and 1.159%, respectively.
The interest rate swap for Expansion Loan No. 2 expired November 2, 1998 at
which time the interest rate became based upon daily LIBOR plus an average
margin of 1.153% over the term of the loan. The Original Loan Agreement
required that at least 50% of the original debt be hedged by interest rate
swaps. The fair value of the interest rate swaps is the estimated amount
that Iroquois would receive or pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and current
creditworthiness of the swap counterparties. The fair value of the interest
rate swaps were ($8.6) million, ($39.2) and ($29.1) million at December 31,
1999, 1998 and 1997 respectively. These interest rate swap agreements were
terminated during the first six months of 2000.
On May 30, 2000, Iroquois completed a private offering of $200 million of
8.68% senior notes due 2010, which were exchanged in a registered offering
for notes with substantially identical terms on September 25, 2000 ("Senior
Notes"). Also on May 30, 2000, Iroquois entered into a credit agreement with
certain financial institutions providing for a term loan facility of $200
million ("Term Loan Facility") and a $10 million, 364-day revolving credit
facility. The credit agreement permits Iroquois to choose among various
interest rate options, to specify the portion of the borrowings to be covered
by specific interest rate options and to specify the interest rate period,
subject to certain parameters. The Term Loan Facility will amortize over
nine years. As of September 30, 2000 there are no amounts outstanding under
the revolving credit facility. The proceeds from the Senior Notes and Term
Loan Facility were used to repay borrowings under the above mentioned three
loan agreements, terminate related interest rate swap agreements, make a cash
distribution to Iroquois' partners of $40 million, pay certain financing fees
and expenses and for general corporate purposes.
During the first six months of 2000, Iroquois paid approximately $0.9 million
for the termination of its entire portfolio of interest rate swap agreements,
which had aggregate notional principal amount of $437.6 million. Under the
provisions of SFAS 71, Iroquois intends to recover these costs and therefore
will defer and amortize these amounts over the life of the original loan
agreements.
Although the new credit facilities do not require Iroquois to enter into an
interest rate swap agreement, on August 9, 2000, the Company entered into an
interest rate swap agreement with The Chase Manhattan Bank to hedge a portion
of the interest rate risk on the new credit facilities. This interest rate
swap agreement was effective on August 30, 2000 and will terminate on the
last business day in May 2009. Pursuant to the terms of this interest rate
swap agreement, Iroquois has agreed to pay to The Chase Manhattan Bank a
fixed rate of 6.82% on an initial notional amount of $25.0 million, which
will be amortized during the term of the interest rate swap agreement, in
return for a payment from The Chase Manhattan Bank of a floating rate of 3-
month LIBOR on the amortizing notional amount. On August 9, 2000, the
Company also entered into an option with The Chase Manhattan Bank pursuant to
which The Chase Manhattan Bank has the option to enter into an additional
interest rate swap agreement effective on December 26, 2000 and terminating
on the last business day in May 2009. This additional interest swap
agreement will have the same fixed and floating rate terms as the initial
interest rate swap agreement but will be for an initial notional amount of
$24.3 million, which will be amortized during the term of the additional
interest rate swap agreement.
At September 30, 2000, the outstanding principal balance was $200 million on
the Senior Notes and $194.5 million on the Term Loan Facility. The combined
schedule of repayments at September 30, 2000 is as follows (in millions):
<TABLE>
<CAPTION>
Year Scheduled Repayment
<S> <C>
2000 $ 5.6
2001 $ 22.2
2002 $ 22.2
2003 $ 22.2
2004 $ 22.2
Thereafter $ 300.1
</TABLE>
At December 31, 1999, the short-term borrowings consisted of an unsecured
line of credit which permitted borrowings up to a maximum of $10 million at a
rate equal to the lower of the lenders' alternate base rate or one, two or
three month LIBOR plus 3/8% per annum. This facility was reviewed on an
annual basis and expired in May 2000. As of December 31, 1999, $3.5 million
was outstanding under this agreement at an annual interest rate of 6.8363%.
The line of credit contained a subjective acceleration clause as its most
restrictive covenant.
4. Concentrations of Credit Risk:
Iroquois' cash and temporary cash investments and trade accounts receivable
represent concentrations of credit risk. Management believes that the credit
risk associated with cash and temporary cash investments is mitigated by its
practice of limiting its investments primarily to commercial paper rated P-1
or higher by Moody's Investors Services and A-1 or higher by Standard and
Poor's, and its cash deposits to large, highly-rated financial institutions.
Management also believes that the credit risk associated with trade accounts
receivable is mitigated by the restrictive terms of the FERC gas tariff which
requires customers to pay for service within 20 days after the end of the
month of service delivery.
5. Gas Transportation Contracts
As of September 30, 2000, Iroquois was providing multi-year firm reserved
transportation service to 33 shippers of 987.5 MDth/d of natural gas as shown
below:
<TABLE>
<CAPTION>
Remaining Term in Years Quantity in MDth/d
<S> <C>
3-10 109.2
11-15 758.8
16-20 119.5
Total 987.5
<FN>
The majority of the long-term firm service gas transportation contracts
expire between October 31, 2011 and August 1, 2018.
</TABLE>
6. Commitments and Contingencies:
Regulatory Proceedings
FERC Docket No. RP97-126
On November 29, 1996, Iroquois submitted a general rate change application to
the Federal Energy Regulatory Commission ("FERC" or "Commission") in Docket
No. RP97-126-000. In an order issued on December 31, 1996 ("Suspension
Order"), the Commission accepted and suspended the rates, permitted them to
become effective (with one exception noted below) on January 1, 1997, and
established a hearing. Pursuant to that Suspension Order, the Presiding
Administrative Law Judge conducted a hearing on all issues raised by
Iroquois' filing, which was concluded on August 28, 1997.
Following the December 31, 1997 issuance of an Initial Decision ("1997
Initial Decision") by the Presiding Administrative Law Judge, on January 30,
1998 Iroquois filed its brief on exceptions vigorously opposing certain
aspects of the 1997 Initial Decision. On July 29, 1998 the Commission issued
its "Order Affirming in Part and Reversing in Part Initial Decision" ("July
29 Order") which modified significant portions of the 1997 Initial Decision.
Iroquois' filing in compliance with the July 29 Order was accepted and the
lower rates became effective on August 31, 1998. In addition, on August 28,
1998 Iroquois filed a request for rehearing of the July 29 Order. By order
issued March 11, 1999 ("March 11 Order") the Commission granted rehearing on
one aspect of the July 29 Order. The March 11 Order reversed the earlier
decision on Iroquois' capital structure and permitted Iroquois to utilize an
equity structure of 35.21% (in place of the 31.85% required by the July 29
Order) in designing its rates. This resulted in an increase of approximately
1 cent per dekatherm in Iroquois' 100% load factor interzone rate. All other
requests for rehearing of the July 29 Order were denied. Iroquois filed a
petition for review of these orders in the United States Court of Appeals for
the District of Columbia Circuit docketed as DC Cir. No. 99-1175. This case
was consolidated with DC Cir. No. 99-1177, which involved a petition for
review of these same orders that was filed by Selkirk Cogen Partners, L.P.
and MassPower (customers of Iroquois). As a result of the Commission's
February 10, 2000 approval of the rate settlement discussed below, these
petitions for review were withdrawn.
The Suspension Order granted summary disposition on one issue: as a result of
the Commission's December 20 Opinion in Docket No. RP94-72 (discussed below),
Iroquois was ordered to remove approximately $11.7 million in plant and
associated costs from its proposed rate base. This resulted in an additional
reduction in Iroquois' test-period revenues of approximately $2.0 million
from those set forth in the filing. Iroquois sought rehearing (on January 30,
1997) of the Suspension Order. This was denied by the Commission by an order
issued August 5, 1997 ("August 5 Order"). On September 3, 1997, Iroquois
filed a Petition for Review of the Commission's Suspension and August 5
Orders in the United States Court of Appeals for the District of Columbia
Circuit, docketed as D.C. Cir. No. 97-1533, which was consolidated with D.C.
Cir. No. 97-1276 (discussed below).
FERC Docket No. RP94-72
The Commission, on June 19, 1995, approved a Stipulation and Consent
Agreement in Iroquois' prior rate proceeding in Docket No. RP94-72, which
resolved all issues except for the accounting and recovery of legal defense
costs incurred in connection with certain criminal and civil investigations
into the initial construction of the Iroquois facility. A hearing was held
on this reserved issue on April 5, 1995. On July 19, 1995 the Presiding
Administrative Law Judge issued an Initial Decision ("1995 Initial Decision")
that would have permitted Iroquois to capitalize those legal defense costs
and recover $4.1 million (the dollar amount of such costs which Iroquois
filed to recover in Docket No. RP94-72) from its customers. Various
participants, including the Commission Staff, filed exceptions to the 1995
Initial Decision with the Commission (which were opposed by Iroquois on
September 7, 1995). On December 20, 1996 the Commission issued an order
reversing the 1995 Initial Decision and disallowing recovery of the legal
defense costs at issue. Iroquois filed a request for rehearing of the
Commission's December 20 Order on January 21, 1997. By Order issued March 3,
1997, the Commission denied rehearing.
Consolidated Proceedings
Iroquois filed a petition for review of the December 20 and March 3 Orders in
the United States Court of Appeals for the District of Columbia Circuit on
April 18, 1997 in D.C. Cir. No. 97-1276. Following oral argument on May 14,
1998, the court on July 21, 1998 issued a decision reversing the Commission's
December 20 and March 3 Orders as well as the Suspension and August 5 Orders
and remanded the matter to the agency for further proceedings. The court
subsequently denied rehearing of its opinion on November 13, 1998 and issued
its mandate. On June 16, 1999 the Commission issued an "Order on Remand and
Establishing Rehearing" ("June 16 Order"). The June 16 Order concluded that
a hearing was necessary to determine whether Iroquois' incurrence of the
legal expenditures was prudent and set forth the procedures and burdens which
were to govern that hearing. A preliminary conference to establish a
procedural schedule and to clarify the positions of the participants was
convened on July 12, 1999. As a result of the Commission's February 10, 2000
approval of the rate settlement described below, these issues have been
resolved.
Settlement (FERC Docket Nos. RP97-126 and RP94-72 et al.)
After extensive negotiations, on December 17, 1999 Iroquois, with the support
of all active participants, filed with the Commission a settlement of all of
the above outstanding rate matters. Pursuant to the settlement the parties
agreed to a rate moratorium whereby, with limited exceptions, no new rates
could be placed in effect on Iroquois' system until January 1, 2004. During
the period of the moratorium, Iroquois would reduce its 100% load factor
interzone rate by approximately 4.8 cents per dekatherm (approximately 1 cent
in 2001, an additional 2.4 cents in 2002 and an additional 1.4 cents in
2003). Based on 1999 long-term firm service contracts the settlement will
result in the following reductions in revenues: $2.3 million in 2001, $5.7
million in 2002, and $3.4 million in 2003. In addition, Iroquois would not
seek in any future rate proceedings to recover defense costs associated with
the criminal and civil investigations into the initial construction of the
Iroquois facility. These costs were removed from the proposed rate base and
reflected in the Company's results from operations in previous years.
Finally, Iroquois, Selkirk Cogen Partners, L.P. and MassPower would withdraw
their petitions for review in DC Cir. Nos. 99-1175 and 99-1177. By letter
order issued February 10, 2000, the Commission approved the rate settlement
without modification. The period for filing rehearing requests of such order
has expired. No such requests were filed. The settlement became effective on
March 10, 2000.
FERC Order No. 637
On February 9, 2000, the Commission issued Order No. 637 in Docket Nos. RM98-
10 and RM98-12. According to the Commission, the order was to reflect "steps
to guarantee effective competition, remove constraints on market power, and
eliminate regulatory bias". Among other things, the order required pipelines
to submit Commission filings to 1) remove the price cap applicable to
pipeline capacity released by firm shippers to new shippers, 2) revise
pipeline scheduling procedures applicable to such released capacity, 3)
permit firm shippers to segment their capacity for their own use or release,
4) revise pipeline penalty provisions, and 5) expand, modify and consolidate
certain pipeline reporting requirements. On July 17, 2000 and September 1,
2000, Iroquois submitted filings in (respectively) Docket Nos. RP00-411 and
RP00-529 to implement the provisions of Order No. 637. Certain parties,
including a number of Iroquois shippers, opposed certain aspects of the
filings. The Commission has not yet acted on the filings. Management
believes that the outcome of these proceedings will not have a material
adverse effect on Iroquois' financial condition or results of operations.
Eastchester Certificate Application (FERC Docket No. CP00-232)
On April 28, 2000, Iroquois filed an application with the Commission to
construct and operate its "Eastchester Extension Project". Under this
proposal, Iroquois would construct and operate certain facilities, including
additional compression facilities and approximately 30.3 miles of 24"
pipeline and associated facilities from Northport, Long Island to the Bronx,
New York. Those proposed facilities would serve 220,000 - 230,000 dekatherms
of natural gas per day on a long-haul basis to the New York City area.
Iroquois would provide firm transportation service to the shippers with whom
it has executed precedent agreements; Iroquois proposed to place the
facilities into service on a staggered basis, with certain facilities placed
into service on April 1, 2002 and the remainder on November 1, 2002. In
order to meet the proposed in-service dates, Iroquois requested action by the
Commission by June 1, 2001. Certain parties have intervened in opposition to
certain aspects of the Eastchester proposal, including the location of the
pipeline through the Bronx and the treatment of the costs associated with the
project in future rate cases. Subsequent to the filing of those
interventions, the Commission submitted several data requests to Iroquois, to
which Iroquois has responded. In addition, on August 9, 2000 the Commission
issued a "Notice of Intent to Prepare an Environmental Impact Statement"
regarding the project, and conducted scoping sessions in various locations in
New York state.
Legal Proceedings-Other
Iroquois is party to various other legal actions incident to its business.
However, management believes that the outcome of these proceedings will not
have a material adverse effect on Iroquois' financial condition, results of
operations or cash flows.
Leases
Iroquois leases its office space under operating lease arrangements. The
leases expire at various dates through 2003 and are renewable at Iroquois'
option. Iroquois also leases a right-of-way easement on Long Island, New
York, from the Long Island Lighting Company ("LILCO"), a general partner,
which requires annual payments escalating 5% a year over the 39-year term of
the lease. In addition, Iroquois leases various equipment under non-
cancelable operating leases. During each of the nine months ended September
30, 2000 and 1999, Iroquois made payments of $0.8 million under operating
leases which were recorded as rental expense.
<TABLE>
<CAPTION>
Future minimum rental payments under operating lease arrangements as of
September 30, 2000 are as follows (millions of dollars):
Year Amount
<S> <C>
2000 $ 0.2
2001 $ 0.8
2002 $ 0.8
2003 $ 0.4
2004 $ 0.1
Thereafter $ 4.6
</TABLE>
7. Income Taxes:
Deferred income taxes which are the result of operations will become the
obligation of the Partners when the temporary differences related to those
items reverse. The Company recognizes a decrease in the Amounts Equivalent
to Deferred Income Taxes account for these amounts and records a
corresponding increase to Partners' equity. Deferred income taxes with
respect to the equity component of AFUDC remain on the accounts of the
Partnership until the related deferred regulatory asset is recognized.
<TABLE>
Total income tax expense includes the following components (thousands of
dollars):
<CAPTION>
U.S. State-
Federal State Other Total
Nine Months Ended September 30, 2000
<S> <C> <C> <C> <C>
Current $ 4,266 $ 1,136 $ - $ 5,402
Deferred 6,210 876 - 7,086
Total $ 10,476 $ 2,012 $ - $ 12,488
Nine Months Ended September 30, 1999
<S> <C> <C> <C> <C>
Current $ 3,884 $ 416 $ 835 $ 5,135
Deferred 6,296 403 - 6,699
Total $ 10,180 $ 819 $ 835 $ 11,834
For the nine months ended September 30, 2000 and the year ended December 31,
1999, the effective tax rate differs from the Federal statutory rate due
principally to the impact of state taxes.
</TABLE>
<TABLE>
Deferred income taxes included in the income statement relate to the
following (thousands of dollars):
<CAPTION>
Nine Months Ended:
September 30
2000 1999
<S> <C> <C>
Depreciation $ 6,418 $ 6,618
Deferred regulatory asset (57) (52)
Legal costs 163 (13)
Accrued expenses (163) 13
Alternative minimum tax credit 362 74
Other 363 59
Total deferred taxes $ 7,086 $ 6,699
The components of the net deferred tax liability are as follows (thousands of
dollars):
At September 30 At December 31
2000 1999
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit $ 2,410 $ 2,773
Accrued expenses 5,639 5,474
Total deferred tax assets 8,049 8,247
Deferred tax liabilities:
Depreciation and related items (65,471) (59,072)
Deferred regulatory asset (826) (883)
Property taxes (879) (879)
Legal costs (4,826) (4,662)
Other (1,069) (707)
Total deferred tax liabilities (73,071) (66,203)
Net deferred tax liabilities (65,022) (57,956)
Less deferral of tax rate change 667 686
Deferred taxes-operations (64,355) (57,270)
Def. tax related to equity AFUDC (12,999) (12,081)
Def. tax related to change in rate (667) (686)
Total deferred taxes $(78,021) $(70,037)
</TABLE>
8. RELATED PARTY TRANSACTIONS:
Operating revenues and amounts due from related parties are primarily for gas
transportation services. Amounts due from related parties are shown net of
payables, if any.
<TABLE>
The following table summarizes Iroquois' related party transactions (millions
of dollars):
<CAPTION>
Nine Months Ended September 30, 2000:
Payments Due from Revenue
To Related Related from Related
Parties Parties Parties
<S> <C> <C> <C>
TransCanada Iroquois Ltd. $ 0.2 $ 0.4 $ 5.7
North East Transmission Company - 1.1 6.1
ANR Iroquois, Inc. - 0.3 2.5
JMC-Iroquois, Inc. - 1.6 13.2
TEN Transmission Company - 0.6 5.5
NJNR Pipeline Company - 0.6 5.2
LILCO Energy Systems, Inc. - 1.0 8.5
Totals $ 0.2 $ 5.6 $46.7
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1999:
Payments Due from Revenue
To Related Related from Related
Parties Parties Parties
<S> <C> <C> <C>
TransCanada Iroquois Ltd. $ 0.5 $ 1.3 $ 7.7
ANR Iroquois, Inc. - 0.3 3.7
JMC-Iroquois, Inc. - 1.4 16.4
TEN Transmission Company - 0.6 9.0
NJNR Pipeline Company - 0.7 7.1
LILCO Energy Systems, Inc. 0.1 1.0 11.4
Totals $ 0.6 $ 5.3 $55.3
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We own an interstate natural gas pipeline system extending from the United
States-Canada border near Waddington, New York through Connecticut to South
Commack, Long Island, New York. We commenced full operations on January 25,
1992, and are operated by our wholly owned subsidiary, IPOC.
In accordance with our FERC certificate, we were required to submit two rate
cases. Our first rate case filing was approved by the FERC on June 19, 1995,
except for one item which involved the recovery of certain legal costs
incurred by us in defense of an investigation discussed in Note 6 to Item 1,
Financial Statements. Our second rate case was filed on December 31, 1996.
During the latter part of 1999, we held negotiations with our shippers, which
led to the settlement of the second rate case as well as remaining issues
from our first rate case. This settlement was filed with the FERC on
December 17, 1999, and subsequently received FERC approval on February 10,
2000. The settlement provides for a schedule of rate reductions through the
year 2003, generally precludes additional rate cases during this period
initiated by us or any settling party and resolves all rate matters
outstanding from our previous two rate cases.
Results of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
Revenues and Volumes Delivered September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues (dollars in millions)
Long-term firm reserved service $ 27.9 $ 28.0 $ 86.5 $ 87.2
Short-term firm/ interruptible/other(1) 1.5 1.8 7.4 5.4
Total revenues $ 29.4 $ 29.8 $ 93.9 $ 92.6
Volumes delivered (million dekatherms)
Long-term firm reserved service 71.0 73.4 219.6 219.4
Short-term firm/ interruptible/other(1) 14.1 15.3 40.1 39.8
Total volumes delivered 85.1 88.7 259.7 259.2
____________________
(1)Other revenue includes deferred asset surcharges, park and loan service
revenue and marketing fees.
</TABLE>
We receive revenues under long-term firm reserved transportation service
contracts with shippers in accordance with service rates approved by the
FERC. We also have interruptible transportation service revenues which,
although small relative to overall revenues, are at the margin and thus can
have a significant impact on our net income. Such revenues include short-
term firm reserved transportation service contracts of less than one-year
term as well as standard interruptible transportation service contracts.
While it is common for pipelines to have some form of required revenue
sharing of their interruptible transportation service revenues with long-term
firm reserved service shippers, we do not. However, we cannot assure you
this will be the case in the future.
Three months ended September 30, 2000 compared to the three months ended
September 30, 1999
Revenues. Total revenues for the three months ended September 30, 2000
decreased $0.4 million or 1.3% compared to the three months ended
September 30, 1999. The decrease can be attributed to a slightly lower
demand for interruptible and short-term firm services.
Operating Expenses. Operating expenses decreased $1.1 million for the three
months ended September 30, 2000 compared to the three months ended
September 30, 1999 primarily due to staffing levels and timing of work
activities.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $0.1 million for the three months ended September 30, 2000 compared
to the three months ended September 30, 1999. The increase is due to normal
additions of general and transmission plant assets.
Taxes Other than Income Taxes. Taxes other than income taxes encompass
property and school taxes paid to various jurisdictions for mainline,
metering and compression facilities along the pipeline system of Iroquois.
These taxes have remained relatively stable for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999.
Interest Expense. Interest expense increased $0.6 million for the three
months ended September 30, 2000 compared to the three months ended
September 30, 1999. The increase is the result of increased debt expense
resulting from the refinancing of $322 million of debt with $400 million. See
Note 3 to Item 1, Financial Statements for details.
Provision for taxes. Income tax expense has increased approximately $0.5
million for the three months ended September 30, 2000 as compared to the same
period in 1999. This increase is due primarily to an increase in taxable
income.
Nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999
Revenues. Total revenues for the nine months ended September 30, 2000
increased $1.3 million or 1.4% compared to the nine months ended
September 30, 1999 due to a $0.9 million marketing fee earned and higher
demand for interruptible and short-term firm services.
Operating Expenses. Operating expenses decreased $0.9 million for the nine
months ended September 30, 2000 compared to the nine months ended
September 30, 1999 primarily due to a $0.3 million increase in capitalized
labor, which reduced operating expenses and a $0.3 million decrease in
outside services employed.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $1.5 million for the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999. The increase was primarily due
to normal additions to general and transmission plant assets during the year.
Taxes Other than Income Taxes. Taxes other than income taxes encompass
property and school taxes paid to various jurisdictions for mainline,
metering and compression facilities along the pipeline system of Iroquois.
The increase of $0.1 million for the nine months ended September 30, 2000
over the nine months ended September 30, 1999 can be attributed to general
increases in assessed property values.
Other income and expenses for the nine months ended September 30, 2000
increased $0.1 million over the nine months ended September 30, 1999,
primarily due to additional interest income derived from the investment of
proceeds from the refinancing activities.
Interest Expense. Interest expenses for the first nine months ended
September 30, 2000 decreased slightly over the nine months ended September
30, 1999. The net decrease can be attributed to a decrease in interest on
long-term debt for the first five months of 2000 totaling $1.1 million due to
scheduled debt repayments, as well as $0.1 million in AFUDC recorded in 2000,
partially offset by an increase in interest on long-term debt for the last
four months of 2000 of $0.8 million. The increase in interest expense for
the last four months of 2000 is the result of refinancing $322 million of
debt with $400 million. Additionally there was an increase of $0.3 million
due to the amortization of swap terminations and refinancing costs.(See Note
3 to Item 1, Financial Statements)
Provision for taxes. Income tax expense for the nine months ended September
30, 2000, has increased approximately $0.7 million as compared to the same
period in 1999. This increase is due primarily to an increase in taxable
income.
Liquidity and capital resources
Capital expenditures for the first nine months of 2000 were $4.9 million
compared to $4.3 million in 1999 reflecting the increased level of
construction activity over the period. 2000 capital expenditures related
primarily to the Eastchester/New York City extension, various general plant
purchases and other minor projects. In 1999 capital activity was restricted
to some post-completion costs for the Athens compressor station, preliminary
engineering work for the Eastchester extension and various general plant
purchases. Iroquois expects that if it decides to pursue any of the proposed
expansion projects currently under consideration it may be necessary to fund
such projects through the issuance of additional indebtedness and capital
contributions by our partners in accordance with the partnership agreement.
Cash flow (defined as net income adjusted for non-cash items such as
depreciation and deferred income taxes) represents the cash generated from
operations available for capital expenditures, partner distributions and
other operational needs. Net cash provided by operating activities remained
relatively constant in 2000 compared to 1999.
Total capital expenditures for 2000 are estimated to be approximately $8.6
million, including approximately $3.5 million for Eastchester. The remaining
capital expenditures planned for 2000 are for the purchase of land for a
compressor site, a meter station and tap, and various general plant
purchases. Iroquois currently anticipates funding its 2000 capital
expenditures by using internal sources and if necessary, borrowing on the
revolving credit facility. As of September 30, 2000 there were no borrowings
outstanding on this $10 million facility.
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. Iroquois
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; competitive
conditions in the marketplace; changes in the receptivity of the financial
markets to Iroquois or other oil and gas credits 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 our Registration Statement on Form S-4,
which is on file with the United States Securities and Exchange Commission.
<PAGE>
PART I. FINANCIAL INFORMATION - (Concluded)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
The Partnership's interest rate exposure results from the
portion of its consolidated debt portfolio subject to variable
rates. To mitigate potential fluctuations in interest rates, the
Partnership maintains a significant portion of its consolidated
debt portfolio in fixed rate debt. The Partnership also uses
interest rate swap agreements to manage its level of exposure to
interest rate changes.
<PAGE>
PART II. OTHER INFORMATION
IROQUOIS GAS TRANSMISSION SYSTEM, L.P. AND SUBSIDIARY
ITEM 1. Legal Proceedings
A description of the Company's legal proceedings is contained in the notes to
the Consolidated Financial Statements contained on page 7.
ITEMS 2-5 are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
3.1 Amended and Restated Limited Partnership Agreement of the
Registrant dated as of February 28, 1997 among the partners of
the Registrant.*
3.2 First Amendment to Amended and Restated Limited Partnership
Agreement of the Registrant dated as of January 27, 1999 among
the partners of the Registrant.*
4.1 Indenture dated as of May 30, 2000 between the Registrant and
the Chase Manhattan Bank, as trustee (the "Trustee") for
$200,000,000 aggregate principal amount of 8.68% senior note
due 2010.*
4.2 First Supplemental Indenture, dated as of May 30, 2000 between
the Registrant and the Trustee for $200,000,000 aggregate
principal amount of 8.68% senior note due 2010.*
4.3 Form of Exchange Note.*
4.4 Exchange and Registration Rights Agreement dated as of
May 30, 2000 among the Registrant and Initial Purchasers for
$200,000,000 aggregate principal amount of 8.68% Senior notes
due 2010.*
10.1 Credit Agreement among the Registrant, The Chase Manhattan
Bank, as administrative agent, Bank of Montreal, as syndication
agent and Fleet National Bank, as documentation agent, and
other financial institutions, dated May 30, 2000.*
10.2 Amended and Restated Operating Agreement dated as of
February 28, 1997 between Iroquois Pipeline Operating Company
and the Registrant.*
10.3 Agreement Between Iroquois Pipeline Operating Company and
Tennessee Gas Pipeline Company with respect to operating
pipelines of the Registrant dated as of March 15, 1991.*
10.4 FERC Gas Tariff, First Revised Volume No. 1 of the Registrant
filed with the Federal Energy Regulatory Commission.*
10.5 Stipulation and Agreement dated as of December 17, 1999 between
the Registrant, the Federal Energy Regulatory Commission Staff
and all active participants in Docket Nos. RP94-72-009,
FA92-59-007, RP97-126-015, and RP97-126-000 as approved by the
Federal Energy Regulatory Commission on February 10, 2000.*
10.6 Supplemental Executive Retirement Agreement dated as of
July 1, 1997 between the Registrant and Craig R. Frew.*
10.7 Supplemental Executive Retirement Agreement dated as of
July 1, 1997 between the Registrant and Paul Bailey.*
10.8 Supplementary Pension Plan of Iroquois Pipeline Operating
Company adopted on December 31, 1998.*
10.9 Performance Share Unit Plan of Iroquois Pipeline Operating
Company effective as of January 1, 1999.*
27.1 Financial Data Schedule.
* Filed as an exhibit to the Registrant's Registration Statement
on Form S-4, File No. 333-42578.
(b) Reports on Form 8-K.
None.
<PAGE>
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 6, 2000) By: Iroquois Pipeline Operating Company,
as its Agent
/S/ Paul Bailey
_________________
Paul Bailey
Vice President & Chief Financial Officer
