epng200810k.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
Form
10-K
(Mark
One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period
from to .
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Commission
File Number 1-2700
El
Paso Natural Gas Company
(Exact Name of
Registrant as Specified in Its Charter)
Delaware
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74-0608280
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(State or
Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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El
Paso Building
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1001
Louisiana Street
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Houston,
Texas
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77002
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(Address of
Principal Executive Offices)
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(Zip
Code)
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Telephone
Number: (713) 420-2600
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ
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Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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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 þ No o
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Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. þ
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Indicate by
check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check
one):
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Large accelerated filer
£
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Accelerated filer £
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Non-accelerated filer
R
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Smaller reporting
company £
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
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State
the aggregate market value of the voting stock held by non-affiliates
of
the registrant: None
Indicate
the number of shares outstanding of each of the registrant’s classes
of
common stock, as of the latest practicable
date.
Common Stock, par
value $1 per share. Shares outstanding on March 2, 2009: 1,000
EL
PASO NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
I(1)(a)
AND (b) TO FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE
FORMAT AS PERMITTED BY SUCH INSTRUCTION.
Documents
Incorporated by Reference: None
EL
PASO NATURAL GAS COMPANY
TABLE
OF CONTENTS
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Caption |
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Page
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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5
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Item
1B.
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Unresolved
Staff Comments
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12
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Item
2.
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Properties
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12
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Item
3.
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Legal
Proceedings
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12
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Item
4.
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Submission of
Matters to a Vote of Security Holders
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*
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PART
II
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Item
5.
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Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13
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Item
6.
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Selected
Financial Data
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*
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item
8.
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Financial
Statements and Supplementary Data
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20
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Item
9.
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Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
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43
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Item
9A.
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Controls and
Procedures
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43
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Item
9A(T).
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Controls and
Procedures
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43
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Item
9B.
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Other
Information
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43
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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*
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Item
11.
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Executive
Compensation
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*
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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*
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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*
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Item
14.
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Principal
Accountant Fees and Services
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44
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PART
IV
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Item
15.
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Exhibits and
Financial Statement Schedules
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45
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Signatures
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46
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____________
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We have not
included a response to this item in this document since no response is
required pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
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Below is a list of
terms that are common to our industry and used throughout this
document:
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/d
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=
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per
day
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LNG
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=
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liquefied
natural gas
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BBtu
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=
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billion
British thermal units
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MMcf
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=
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million cubic
feet
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Bcf
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=
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billion cubic
feet
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When we refer to
cubic feet measurements, all measurements are at a pressure of 14.73 pounds per
square inch.
When we refer to
“us”, “we”, “our”, “ours”, or “EPNG”, we are describing El Paso Natural Gas
Company and/or our subsidiaries.
PART I
Overview
and Strategy
We are a Delaware
corporation incorporated in 1928, and an indirect wholly owned subsidiary of El
Paso Corporation (El Paso). Our primary business consists of the interstate
transportation and storage of natural gas. We conduct our business activities
through our natural gas pipeline systems and a storage facility as discussed
below.
Each of our
pipeline systems and our storage facility operates under tariffs approved by the
Federal Energy Regulatory Commission (FERC) that establish rates, cost recovery
mechanisms and other terms and conditions of services to our customers. The fees
or rates established under our tariffs are a function of our costs of providing
services to our customers, including a reasonable return on our invested
capital.
Our strategy is to
enhance the value of our transportation and storage business by:
•
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Developing
new growth projects in our market and supply
areas;
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•
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Successfully
recontracting expiring transportation
capacity;
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•
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Focusing on
efficiency and synergies across our
system;
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•
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Ensuring the
safety of our pipeline systems and assets;
and
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•
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Providing
outstanding customer service.
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The
EPNG System. The EPNG system consists of approximately 10,200 miles of
pipeline with a winter sustainable west-flow capacity of 4,850 MMcf/d and
east-end deliverability of 800 MMcf/d. During 2008, 2007 and 2006, average
throughput was 4,379 BBtu/d, 4,189 BBtu/d and 4,179 BBtu/d. This system delivers
natural gas from the San Juan, Permian, Anadarko basins and the Rocky Mountains
via interconnects to markets in California, Arizona, Nevada, New Mexico,
Oklahoma, Texas and northern Mexico.
The
Mojave Pipeline Company (Mojave) System. The Mojave system consists of
approximately 400 miles of pipeline with an east to west flow design capacity of
approximately 400 MMcf/d. During 2008, 2007 and 2006, average throughput was 349
BBtu/d, 458 BBtu/d and 461 BBtu/d. Mojave’s 2008, 2007 and 2006 throughput
includes 306 BBtu/d, 431 BBtu/d and 385 BBtu/d transported volume for the EPNG
system. The Mojave system connects with the EPNG system near Cadiz, California,
the EPNG and Transwestern systems at Topock, Arizona and the Kern River Gas
Transmission Company system in California. This system also extends to customers
in the vicinity of Bakersfield, California.
Storage
Facility. We utilize our Washington Ranch underground storage facility
located in New Mexico, which has up to approximately 44 Bcf of underground
working natural gas storage capacity, to manage our transportation needs and to
offer interruptible storage services.
Markets
and Competition
Our customers
consist of natural gas distribution and industrial companies, electric
generation companies, natural gas producers, other natural gas pipelines, and
natural gas marketing and trading companies. We provide transportation and
storage services in both our natural gas supply and market areas and provide
storage services in our supply areas. Our pipeline systems connect with multiple
pipelines that provide our customers with access to diverse sources of supply
and various natural gas markets.
Imported LNG has
been a growing supply sector of the natural gas market. LNG terminals and other
regasification facilities can serve as alternate sources of supply for
pipelines, enhancing their delivery capabilities and operational flexibility and
complementing traditional supply transported into market areas. However, these
LNG delivery systems also may compete with us for transportation of gas into
market areas we serve.
Electric power
generation has been a growing demand sector of the natural gas market. The
growth of natural gas fired electric power benefits the natural gas industry by
creating more demand for natural gas. This potential benefit is offset, in
varying degrees, by increased generation efficiency, the more effective use of
surplus electric capacity and the use and availability of other fuel sources for
power generation. In addition, in several regions of the country, new additions
in electric generating capacity have exceeded load growth and electric
transmission capabilities out of those regions. These developments may inhibit
owners of new power generation facilities from signing firm transportation
contracts with natural gas pipelines.
We provide
transportation services to the southwestern U.S. and to the Mexican border
through connections to other pipelines. The market demand for natural gas
distribution as well as gas-fired electric generation capacity has experienced
considerable growth in these areas in recent years. Historically, California
customers have been the largest holders of capacity on our EPNG system.
Currently, California and Arizona customers account for the majority of
transportation on the EPNG system. Following California and Arizona, Texas
accounts for the next highest load, followed by New Mexico. The EPNG system also
delivers natural gas to the U.S./Mexico Border serving customers in Chihuahua,
Sonora, and Baja California, Mexico.
We expect growth of
the natural gas market will be adversely affected by the current economic
recession in the U. S. and global economies. The decline in economic activity
will reduce industrial demand for natural gas and electricity, which will cause
lower natural gas demand both directly in end-use markets and indirectly through
lower power generation demand for natural gas. The demand for natural gas and
electricity in the residential and commercial segments of the market will likely
be less affected by the economy. The lower demand and the credit restrictions on
investments in the current environment may also slow development of supply
projects. While our pipelines could experience some level of reduced throughput
and revenues, or slower development of expansion projects as a result of these
factors, each generates a significant (greater than 80%) portion of their
revenues through fixed monthly reservation or demand charges on long-term
contracts at rates stipulated under our tariffs.
Our existing
transportation and storage contracts mature at various times and in varying
amounts of throughput capacity. Our ability to extend our existing customer
contracts or remarket expiring contracted capacity is dependent on competitive
alternatives, the regulatory environment at the federal, state and local levels
and market supply and demand factors at the relevant dates these contracts are
extended or expire. The duration of new or renegotiated contracts will be
affected by current prices, competitive conditions and judgments concerning
future market trends and volatility. Subject to regulatory requirements, we
attempt to recontract or remarket our capacity at the maximum rates allowed
under our tariffs, although at times, we enter into firm transportation
contracts at amounts that are less than these maximum allowable rates to remain
competitive.
The EPNG system
faces competition in the west and southwest from other existing and proposed
pipelines, from California storage facilities, and from alternative energy
sources that are used to generate electricity such as hydroelectric power,
nuclear energy, wind, solar, coal and fuel oil. In addition, construction of
facilities to bring LNG into the southwestern U.S. and northern Mexico were
completed in 2008.
The Mojave system
faces competition from other existing and proposed pipelines and alternative
energy sources that are used to generate electricity such as hydroelectric
power, nuclear energy, wind, solar, coal and fuel oil. In addition, construction
of facilities to bring LNG into the southwestern U.S. and northern Mexico were
completed in 2008.
The following table
details our customer and contract information for each of our pipeline systems
as of December 31, 2008. Firm customers reserve capacity on our pipeline systems
and storage facility and are obligated to pay a monthly reservation or demand
charge, regardless of the amount of natural gas they transport or store, for the
term of their contracts. Interruptible customers are customers without reserved
capacity that pay usage charges based on the volume of gas they transport,
store, inject or withdraw.
Pipeline
System
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Customer
Information
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Contract
Information
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EPNG
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Approximately
160 firm and interruptible customers.
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Approximately
190 firm transportation contracts. Weighted average remaining contract
term of approximately three years.
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Major
Customers:
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Sempra Energy
and Subsidiaries, including Southern California Gas Company
(SoCal)
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(130
BBtu/d)
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Expires in
2009.
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(246
BBtu/d)
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Expires in
2010.
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(323
BBtu/d)
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Expires in
2011.
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ConocoPhillips
Company
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(447
BBtu/d)
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Expires in
2009.
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(150
BBtu/d)
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Expires in
2010.
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(392
BBtu/d)
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Expires in
2012.
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Southwest Gas
Corporation
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(412
BBtu/d)
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Expires in
2011.
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(75
BBtu/d)
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Expires in
2015.
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Mojave
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Approximately
10 firm and interruptible customers.
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Approximately
five firm transportation contracts. Weighted average remaining contract
term of approximately seven years.
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Major
Customer:
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EPNG
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(312
BBtu/d)
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Expires in
2015.
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Regulatory
Environment
Our interstate
natural gas transmission systems and storage operations are regulated by the
FERC under the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and
the Energy Policy Act of 2005. We operate under tariffs approved by the FERC
that establish rates, cost recovery mechanisms and other terms and conditions of
service to our customers. Generally, the FERC’s authority extends
to:
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•
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rates and
charges for natural gas transportation and
storage;
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certification
and construction of new facilities;
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extension or
abandonment of services and
facilities;
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maintenance
of accounts and records;
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relationships
between pipelines and certain
affiliates;
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terms and
conditions of service;
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depreciation
and amortization policies;
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acquisition
and disposition of facilities; and
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initiation
and discontinuation of services.
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Our interstate
pipeline systems are also subject to federal, state and local safety and
environmental statutes and regulations of the U.S. Department of Transportation
and the U.S. Department of the Interior. We have ongoing inspection programs
designed to keep our facilities in compliance with pipeline safety and
environmental requirements and we believe that our systems are in material
compliance with the applicable regulations.
Environmental
A description of
our environmental activities is included in Part II, Item 8, Financial
Statements and Supplementary Data, Note 6, and is incorporated herein by
reference.
Employees
As of February 23,
2009, we had approximately 880 full-time employees, none of whom are subject to
a collective bargaining arrangement.
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF
THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on
assumptions or beliefs that we believe to be reasonable; however, assumed facts
almost always vary from actual results, and differences between assumed facts
and actual results can be material, depending upon the circumstances. Where,
based on assumptions, we or our management express an expectation or belief as
to future results, that expectation or belief is expressed in good faith and is
believed to have a reasonable basis. We cannot assure you, however, that the
stated expectation or belief will occur, be achieved or accomplished. The words
“believe,” “expect,” “estimate,” “anticipate,” and similar expressions will
generally identify forward-looking statements. All of our forward-looking
statements, whether written or oral, are expressly qualified by these cautionary
statements and any other cautionary statements that may accompany such
forward-looking statements. In addition, we disclaim any obligation to update
any forward-looking statements to reflect events or circumstances after the date
of this report.
With this in mind,
you should consider the risks discussed elsewhere in this report and other
documents we file with the Securities and Exchange Commission (SEC) from time to
time and the following important factors that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us or on our behalf.
Risks
Related to Our Business
Our
success depends on factors beyond our control.
The financial
results of our transportation and storage operations are impacted by the volumes
of natural gas we transport or store and the prices we are able to charge for
doing so. The volume of natural gas we are able to transport and store depends
on the actions of third parties, including our customers, and is beyond our
control. Further, the following factors, most of which are also beyond our
control, may unfavorably impact our ability to maintain or increase current
throughput, or to remarket unsubscribed capacity on our pipeline
systems:
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•
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service area
competition;
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•
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expiration or
turn back of significant contracts;
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•
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changes in
regulation and action of regulatory
bodies;
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weather
conditions that impact natural gas throughput and storage
levels;
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•
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weather
fluctuations or warming or cooling trends that may impact demand in the
markets in which we do business, including trends potentially attributed
to climate change;
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•
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drilling
activity and decreased availability of conventional gas supply sources and
the availability and timing of other natural gas supply sources, such as
LNG;
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continued
development of additional sources of gas supply that can be
accessed;
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•
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decreased
natural gas demand due to various factors, including economic recession
(as further discussed below) and increases in
prices;
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•
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legislative,
regulatory or judicial actions, such as mandatory greenhouse gas
regulations and/or legislation that could result in (i) changes in the
demand for natural gas and oil, (ii) changes in the availability of or
demand for alternative energy sources such as hydroelectric and nuclear
power, wind and solar and/or (iii) changes in the demand for less carbon
intensive energy sources;
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•
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availability
and cost to fund ongoing maintenance and growth projects, especially in
periods of prolonged economic
decline;
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•
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opposition to
energy infrastructure development, especially in environmentally sensitive
areas;
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•
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adverse
general economic conditions including prolonged recessionary periods that
might negatively impact natural gas demand and the capital
markets;
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•
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expiration or
renewal of existing interests in real property including real property on
Native American lands; and
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•
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unfavorable
movements in natural gas prices in certain supply and demand
areas.
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A
substantial portion of our revenues are generated from firm transportation
contracts that must be renegotiated periodically.
Our revenues are
generated under transportation and storage contracts which expire periodically
and must be renegotiated, extended or replaced. If we are unable to extend or
replace these contracts when they expire or renegotiate contract terms as
favorable as the existing contracts, we could suffer a material reduction in our
revenues, earnings and cash flows. For additional information on the expiration
of our contract portfolio, see Part II, Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations. In particular, our
ability to extend and replace contracts could be adversely affected by factors
we cannot control, including:
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•
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competition
by other pipelines, including the change in rates or upstream supply of
existing pipeline competitors, as well as the proposed construction by
other companies of additional pipeline capacity or LNG terminals in
markets served by our interstate
pipelines;
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•
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changes in
state regulation of local distribution companies, which may cause them to
negotiate short-term contracts or turn back their capacity when their
contracts expire;
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•
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reduced
demand and market conditions in the areas we
serve;
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•
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the
availability of alternative energy sources or natural gas supply points;
and
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•
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legislative
and/or regulatory
actions.
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For additional
information on our revenues from our major customers, see Part II, Item 8,
Financial Statements and Supplementary Data, Note 8. The loss of any one of
these customers or a decline in their creditworthiness could adversely affect
our results of operations, financial position and cash flows.
We
are exposed to the credit risk of our customers and our credit risk management
may not be adequate to protect against such risk.
We are subject to
the risk of delays in payment as well as losses resulting from nonpayment and/or
nonperformance by our customers, including default risk associated with adverse
economic conditions. Our credit procedures and policies may not be adequate to
fully eliminate customer credit risk. If we fail to adequately assess the
creditworthiness of our existing or future customers, and they fail to pay
and/or perform due to an unanticipated deterioration in their creditworthiness
and we are unable to remarket the capacity, our business, the results of our
operations and our financial condition could be adversely affected. We may not
be able to effectively remarket capacity during and after insolvency proceedings
involving a shipper.
Fluctuations
in energy commodity prices could adversely affect our
business.
Revenues generated
by our transportation and storage contracts depend on volumes and rates, both of
which can be affected by the price of natural gas. Increased prices could result
in a reduction of the volumes transported by our customers, including power
companies that may not dispatch natural gas-fired power plants if natural gas
prices increase. Increased prices could also result in industrial plant
shutdowns or load losses to competitive fuels as well as local distribution
companies’ loss of customer base. The success of our transmission and storage
operations is subject to continued development of additional gas supplies to
offset the natural decline from existing wells connected to our systems, which
requires the development of additional oil and natural gas reserves and
obtaining additional supplies from interconnecting pipelines. A decline in
energy prices could cause a decrease in these development activities and could
cause a decrease in the volume of reserves available for transmission and
storage through our systems.
We retain a fixed
percentage of natural gas transported as provided in our tariff. This retained
natural gas is used as fuel and to replace lost and unaccounted for natural gas.
If natural gas prices in the supply basins connected to our pipeline systems are
higher than prices in other natural gas producing regions, our ability to
compete with other transporters may be negatively impacted on a short-term
basis, as well as with respect to our long-term recontracting activities.
Furthermore, fluctuations in pricing between supply sources and market areas
could negatively impact our transportation revenues. As a result, significant
prolonged changes in natural gas prices could have a material adverse effect on
our financial condition, results of operations and liquidity. Fluctuations in
energy prices are caused by a number of factors, including:
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•
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regional,
domestic and international supply and
demand;
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•
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availability
and adequacy of transportation
facilities;
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•
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energy
legislation and regulation;
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•
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federal and
state taxes, if any, on the transportation and storage of natural
gas;
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•
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abundance of
supplies of alternative energy sources;
and
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•
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political
unrest among countries producing oil and
LNG.
|
The
agencies that regulate us and our customers could affect our
profitability.
Our business is
regulated by the FERC, the U.S. Department of Transportation, the U.S.
Department of the Interior and various state and local regulatory agencies whose
actions have the potential to adversely affect our profitability. In particular,
the FERC regulates the rates we are permitted to charge our customers for our
services and sets authorized rates of return. In June 2008, EPNG filed a rate
case with the FERC as required under the settlement of its previous rate case.
The filing proposed an increase in our base tariff rates. In August 2008, the
FERC issued an order accepting the proposed rates to be effective January 1,
2009, subject to refund and the outcome of a hearing and a technical
conference.
In addition, in
April 2008, the FERC adopted a new policy that will allow master limited
partnerships to be included in rate of return proxy groups for determining rates
for services provided by interstate natural gas and oil pipelines. The FERC uses
a discounted cash flow model that incorporates the use of proxy groups to
develop a range of reasonable returns earned on equity interests in companies
with corresponding risks. The FERC then assigns a rate of return on equity
within that range to reflect specific risks of that pipeline when compared to
the proxy group companies. The FERC’s policy statement concludes among other
items that (i) there should be no cap on the level of distributions included in
the current discounted cash flow methodology and (ii) there should be a downward
adjustment to the long-term growth rate used for the equity cost of capital of
natural gas pipeline master limited partnerships. Pursuant to the FERC’s
jurisdiction over rates, existing rates may be challenged by complaint, and
proposed rate increases may be challenged by protest. A successful complaint or
protest against our rates could have an adverse impact on our
revenues.
In a January 15,
2009 decision that discussed an individual pipeline’s rate of return, the FERC
analyzed the operations of each company proposed for inclusion in that
pipeline’s proxy group to determine whether each company to be included had
commensurate risks to the pipeline whose rates were being determined. The FERC
included in that proxy group two primarily gas pipeline master limited
partnerships (with the adjusted gross domestic product) and a diversified
company that had higher risk exploration, production and trading operations in
addition to pipeline operations. Companies whose distribution, electric or
natural gas liquids operations exceeded pipeline operations were excluded. In
light of this, it is expected that pipeline returns on equity will be driven
largely by fact-based proxy group determinations in each case.
Also, increased
regulatory requirements relating to the integrity of our pipelines requires
additional spending in order to maintain compliance with these requirements. Any
additional requirements that are enacted could significantly increase the amount
of these expenditures. Further, state agencies that regulate our local
distribution company customers could impose requirements that could impact
demand for our services.
Environmental
compliance and remediation costs and the costs of environmental liabilities
could exceed our estimates.
Our operations are
subject to various environmental laws and regulations regarding compliance and
remediation obligations. Compliance obligations can result in significant costs
to install and maintain pollution controls, fines and penalties resulting from
any failure to comply and potential limitations on our operations. Remediation
obligations can result in significant costs associated with the investigation or
clean up of contaminated properties (some of which have been designated as
Superfund sites by the U. S. Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation and Liability Act ), as well
as damage claims arising out of the contamination of properties or impact on
natural resources. Although we believe we have established appropriate reserves
for our environmental liabilities, it is not possible for us to estimate the
exact amount and timing of all future expenditures related to environmental
matters and we could be required to set aside additional amounts which could
significantly impact our future consolidated results of operations, financial
position or cash flows. See Part II, Item 8, Financial Statements and
Supplementary Data, Note 6.
In estimating our
environmental liabilities, we face uncertainties that include:
|
•
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estimating
pollution control and clean up costs, including sites where preliminary
site investigation or assessments have been
completed;
|
|
•
|
discovering
new sites or additional information at existing
sites;
|
|
•
|
receiving
regulatory approval for remediation
programs;
|
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•
|
quantifying
liability under environmental laws that impose joint and several liability
on all potentially responsible
parties;
|
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•
|
evaluating
and understanding environmental laws and regulations, including their
interpretation and enforcement;
and.
|
|
•
|
changing
environmental laws and regulations that may increase our
costs.
|
In addition to
potentially increasing the cost of our environmental liabilities, changing
environmental laws and regulations may increase our future compliance costs,
such as the costs of complying with ozone standards and potential mandatory
greenhouse gas reporting and emission reductions. Future environmental
compliance costs relating to greenhouse gases (GHGs) associated with our
operations are not yet clear. Legislative and regulatory measures to address GHG
emissions are in various phases of discussions or implementation at the
international, national, regional and state levels. Various federal
and state legislative proposals have been made over the last several
years and it is possible that legislation may be enacted in the future that
could negatively impact our operations and financial results. The level of such
impact will likely depend upon whether any of our facilities will be directly
responsible for compliance with GHG regulations and legislation; whether federal
legislation will preempt any potentially conflicting state/regional GHG
programs; whether cost containment measures will be available; the ability to
recover compliance costs from our customers; and the manner in which allowances
are provided. At the federal regulatory level, the EPA has requested public
comments on the potential regulation of GHGs under the Clean Air Act. Some of
the regulatory alternatives identified by the EPA in its request for comments,
if eventually promulgated as final rules, would likely impact our operations and
financial results. It is uncertain whether the EPA will proceed with adopting
final rules or whether the regulation of GHGs will be addressed in federal and
state legislation.
Legislation and
regulation are also in various stages of discussion or implementation in many of
the states and regions in which we operate, including the Western Climate
Initiative (WCI) proposal to institute a cap-and-trade program and target
emission reductions. There is uncertainty regarding whether and to what extent
each member state will adopt the WCI recommendations, and the details of the
programs as eventually adopted may differ significantly among the member states.
In addition, California has enacted legislation that imposes GHG emission
reductions. However, California’s governing state regulatory agency must enact
implementing regulations to define the scope of the coverage, the compliance
schedule and other relevant provisions governing GHG emissions. Therefore, it is
not yet possible to determine whether the regulations implementing the WCI
recommendations or the California legislation will be material to our operations
or our financial results.
Finally, several
lawsuits have been filed seeking to force the federal government to regulate GHG
emissions and individual companies to reduce the GHG emissions from their
operations. These and other lawsuits may also result in decisions by federal and
state courts and agencies that impact our operations and ability to obtain
certifications and permits to construct future projects.
Although it is
uncertain what impact these legislative, regulatory, and judicial actions might
have on us until further definition is provided in those forums, there is a risk
that such future measures could result in changes to our operations and to the
consumption and demand for natural gas. Changes to our operations could include
increased costs to (i) operate and maintain our facilities, (ii) install new
emission controls on our facilities, (iii) construct new facilities, (iv)
acquire allowances to authorize our GHG emissions, (v) pay any taxes related to
our GHG emissions and (vi) administer and manage a GHG emissions program. While
we may be able to include some or all of the costs associated with our
environmental liabilities and environmental and GHG compliance in the rates
charged by our pipelines and in the prices at which we sell natural gas, our
ability to recover such costs is uncertain and may depend on events beyond our
control including the outcome of future rate proceedings before the FERC and the
provisions of any final regulations and legislation.
Our
operations are subject to operational hazards and uninsured
risks.
Our operations are
subject to the inherent risks normally associated with pipeline operations,
including pipeline ruptures, explosions, pollution, release of toxic substances,
fires, adverse weather conditions (such as flooding), terrorist activity or acts
of aggression, and other hazards. Each of these risks could result in damage to
or destruction of our facilities or damages or injuries to persons and property
causing us to suffer substantial losses. Analyses performed by various
governmental and private organizations indicate potential physical risks
associated with climate change events (such as flooding, etc). Some of the
studies indicate that potential impacts on energy infrastructure are highly
uncertain and not well understood, including both the timing and potential
magnitude of such impacts. As the science is better understood and analyzed, we
will review the operational and uninsured risks to our facilities attributed to
climate change.
While we maintain
insurance against many of these risks to the extent and in amounts that we
believe are reasonable, our insurance coverages have material deductibles as
well as limits on our maximum recovery, and do not cover all risks. In addition,
there is a risk that our insurers may default on their coverage obligations. As
a result, our results of operations, cash flows or financial condition could be
adversely affected if a significant event occurs that is not fully covered by
insurance.
The
expansion of our business by constructing new facilities subjects us to
construction
and other risks that may adversely affect our financial
results.
We may expand the
capacity of our existing pipelines or our storage facility by constructing
additional facilities. Construction of these facilities is subject to various
regulatory, development and operational risks, including:
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•
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our ability
to obtain necessary approvals and permits by the FERC and other regulatory
agencies on a timely basis and on terms that are acceptable to
us;
|
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•
|
the ability
to access sufficient capital at reasonable rates to fund expansion
projects, especially in periods of prolonged economic decline when we may
be unable to access the capital
markets;
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•
|
the
availability of skilled labor, equipment, and materials to complete
expansion projects;
|
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•
|
potential
changes in federal, state and local statutes, regulations and orders,
including environmental requirements that prevent a project from
proceeding or increase the anticipated cost of the
project;
|
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•
|
impediments
on our ability to acquire rights-of-way or land rights on a timely basis
or on terms that are acceptable to
us;
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•
|
our ability
to construct projects within anticipated costs, including the risk that we
may incur cost overruns resulting from inflation or increased costs of
equipment, materials, labor, contractor productivity or other factors
beyond our control, that we may not be able to recover from our customers
which may be material;
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•
|
the lack of
future growth in natural gas supply and/or demand;
and
|
|
•
|
the lack of
transportation, storage or throughput
commitments.
|
Any of these risks
could prevent a project from proceeding, delay its completion or increase its
anticipated costs. There is also the risk that the downturn in the economy and
its negative impact upon natural gas demand may result in either slower
development in our expansion projects or adjustments in the contractual
commitments supporting such projects. As a result, new facilities may be delayed
or may not achieve our expected investment return, which could adversely affect
our results of operations, cash flows or financial position.
We
are exposed to the decline in value on our long-lived assets.
Our
long-lived assets are subject to the decline in their value. Our fair value
estimates are generally based on market data obtained through the sales process
or an analysis of expected discounted cash flows. The magnitude of any
impairment is impacted by a number of factors, including the nature of the
assets being sold and our established time frame for completing the sale.
Therefore, actual results may differ from these estimates.
Our
business requires the retention and recruitment of a skilled workforce
and the
loss of employees could result in the failure to implement our business
plan.
Our business
requires the retention and recruitment of a skilled workforce. If we are unable
to retain and recruit employees such as engineers and other technical personnel,
our business could be negatively impacted.
Adverse
general domestic economic conditions could negatively affect our
operating results, financial condition or liquidity.
We, El Paso, and
its subsidiaries are subject to the risks arising from adverse changes in
general domestic economic conditions including recession or economic slowdown.
Recently, the U.S. economy has experienced recession and the financial markets
have experienced extreme volatility and instability. In response to the
volatility in the financial markets, El Paso has announced certain actions that
are designed to reduce its need to access such financial markets, including
reductions in the capital programs of certain of its operating subsidiaries and
the sale of several non-core assets.
If we or El Paso
experience prolonged periods of recession or slowed economic growth in the
United States, demand growth from consumers for natural gas transported by us
may continue to decrease, which could impact the development of our future
expansion projects. Additionally, our or El Paso’s access to capital could
continue to be impeded and the cost of capital we obtain could be higher.
Finally, we are subject to the risks arising from changes in legislation and
regulation associated with any such recession or prolonged economic slowdown,
including creating preference for renewables, as part of a legislative package
to stimulate the economy. Any of these events, which are beyond our
control, could negatively impact our business, results of operations, financial
condition, and liquidity.
We
are subject to financing and interest rate risk.
Our future success,
financial condition and liquidity could be adversely affected based on our
ability to access capital markets and obtain financing at cost effective rates.
This is dependent on a number of factors in addition to general economic
conditions discussed above, many of which we cannot control, including changes
in:
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the
structured and commercial financial
markets;
|
|
•
|
market
perceptions of us or the natural gas and energy
industry;
|
|
•
|
tax
rates due to new tax laws; and
|
|
•
|
market prices
for hydrocarbon products.
|
Risks
Related to Our Affiliation with El Paso
El Paso files
reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934, as amended. Each prospective investor should
consider this information and the matters disclosed therein in addition to the
matters described in this report. Such information is not included herein or
incorporated by reference into this report.
Our
relationship with El Paso and its financial condition subjects us to
potential
risks that are beyond our control.
Due to our
relationship with El Paso, adverse developments or announcements concerning El
Paso or its other subsidiaries could adversely affect our financial condition,
even if we have not suffered any similar development. The ratings assigned to El
Paso’s senior unsecured indebtedness are below investment grade, currently rated
Ba3 by Moody’s Investor Service, BB- by Standard & Poor’s and BB+ by Fitch
Ratings. The ratings assigned to our senior unsecured indebtedness are currently
investment grade, with a Baa3 rating by Moody’s Investor Service and a BBB-
rating by Fitch Ratings. Standard & Poor’s has assigned a below investment
grade rating of BB to our senior unsecured indebtedness. El Paso and its
subsidiaries, including us, are (i) on a stable outlook with Moody’s Investor
Service and Fitch Ratings and (ii) on a negative outlook with Standard &
Poor’s. There is a risk that these credit ratings may be adversely affected in
the future as credit rating agencies continue to review our and El Paso’s
leverage, liquidity and credit profile. Any reduction in our or El Paso’s credit
ratings could impact our ability to access the capital markets, as well as our
cost of capital and collateral requirements.
El Paso provides
cash management and other corporate services for us. Pursuant to El Paso’s cash
management program, we transfer surplus cash to El Paso in exchange for an
affiliated note receivable. In addition, we conduct commercial transactions with
some of our affiliates. If El Paso or such affiliates are unable to meet their
respective liquidity needs, we may not be able to access cash under the cash
management program, or our affiliates may not be able to pay their obligations
to us. However, we might still be required to satisfy affiliated payables we
have established. Our inability to recover any affiliated receivables owed to us
could adversely affect our financial position. For a further discussion of these
matters, see Part II, Item 8, Financial Statements and Supplementary Data, Note
10.
We
may be subject to a change of control if an event of default occurs under
El Paso’s
credit agreement.
Under El Paso’s
$1.5 billion credit agreement, our common stock and the common stock of one of
El Paso’s other subsidiaries are pledged as collateral. As a result, our
ownership is subject to change if there is a default under the credit agreement
and El Paso’s lenders exercise rights over their collateral, even if we do not
have any borrowings outstanding under the credit agreement. For additional
information concerning El Paso’s credit facility, see Part II, Item 8, Financial
Statements and Supplementary Data, Note 5.
A
default under El Paso’s $1.5 billion credit agreement by any party could
accelerate
our future borrowings, if any, under the credit agreement and our long-term
debt, which could adversely affect our liquidity
position.
We are a party to
El Paso’s $1.5 billion credit agreement. We are only liable, however, for our
borrowings under the credit agreement, which were zero at December 31, 2008.
Under the credit agreement, a default by El Paso, or any other borrower could
result in the acceleration of repayment of all outstanding borrowings, including
the borrowings of any non-defaulting party. The acceleration of repayments of
borrowings, if any, or the inability to borrow under the credit agreement, could
adversely affect our liquidity position and, in turn, our financial
condition.
Furthermore, the
indentures governing some of our long-term debt contain cross-acceleration
provisions, the most restrictive of which is $25 million. Therefore, if we
borrow $25 million or more under El Paso’s $1.5 billion credit agreement and
such borrowings are accelerated for any reason, including the default of another
party under the credit agreement, our long-term debt that contains these
provisions could also be accelerated. The acceleration of our long-term debt
could also adversely affect our liquidity position and, in turn, our financial
condition.
We
are an indirect wholly owned subsidiary of El Paso.
As an indirect
wholly owned subsidiary of El Paso, subject to limitations in our credit
agreements and indentures, El Paso has substantial control over:
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our payment
of dividends;
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•
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decisions on
our financing and capital raising
activities;
|
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•
|
mergers or
other business combinations;
|
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•
|
our
acquisitions or dispositions of assets;
and
|
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•
|
our
participation in El Paso’s cash management
program.
|
El Paso may
exercise such control in its interests and not necessarily in the interests of
us or the holders of our long-term debt.
ITEM 1B. |
UNRESOLVED STAFF
COMMENTS |
We
have not included a response to this item since no response is required under
Item 1B of Form 10-K.
A description of
our properties is included in Item 1, Business, and is incorporated herein by
reference.
We believe that we
have satisfactory title to the properties owned and used in our business,
subject to liens for taxes not yet payable, liens incident to minor
encumbrances, liens for credit arrangements and easements and restrictions that
do not materially detract from the value of these properties, our interests in
these properties or the use of these properties in our business. We believe that
our properties are adequate and suitable for the conduct of our business in the
future.
ITEM 3. |
LEGAL
PROCEEDINGS |
A
description of our legal proceedings is included in Part II, Item 8, Financial
Statements and Supplementary Data, Note 6, and is incorporated herein by
reference.
ITEM 4. |
SUBMISSION OF MATTERS
TO A VOTE OF SECURITY
HOLDERS |
Information has
been omitted from this report pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
PART
II
ITEM
5. |
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES |
All of our common
stock, par value $1 per share, is owned by a subsidiary of El Paso and,
accordingly, our stock is not publicly traded.
We pay dividends on
our common stock from time to time from legally available funds that have been
approved for payment by our Board of Directors. During 2008, we utilized $200
million of our notes receivable from the cash management program to pay
dividends to our parent. No common stock dividends were declared or paid in
2007.
ITEM 6. |
SELECTED FINANCIAL
DATA |
Information has
been omitted from this report pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The information required by this
Item is presented in a reduced disclosure format pursuant to General Instruction
I to Form 10-K. Our Management’s Discussion and Analysis (MD&A) should be
read in conjunction with our consolidated financial statements and the
accompanying footnotes. MD&A includes forward-looking statements that are
subject to risks and uncertainties that may result in actual results differing
from the statements we make. These risks and uncertainties are discussed
further in Part I, Item 1A, Risk Factors.
Overview
Our primary
business consists of the interstate transportation and storage of natural gas.
Each of these businesses faces varying degrees of competition from other
existing and proposed pipelines and LNG facilities, as well as from alternative
energy sources used to generate electricity, such as hydroelectric power,
nuclear energy, wind, solar, coal and fuel oil. Our revenues from transportation
and storage services consist of the following types.
|
|
|
|
Percent
of Total
|
Type
|
|
Description
|
|
Revenues in 2008
|
|
|
|
|
|
Reservation
|
|
Reservation
revenues are from customers (referred to as firm customers) that reserve
capacity on our pipeline systems and storage facility. These firm
customers are obligated to pay a monthly reservation or demand charge,
regardless of the amount of natural gas they transport or store, for the
term of their contracts.
|
|
87
|
|
|
|
|
|
Usage and
Other
|
|
Usage
revenues are from both firm customers and interruptible customers (those
without reserved capacity) that pay usage charges based on the volume of
gas actually transported, stored, injected or withdrawn. We also earn
revenue from other miscellaneous sources.
|
|
13
|
The FERC regulates
the rates we can charge our customers. These rates are generally a function of
the cost of providing services to our customers, including a reasonable return
on our invested capital. Because of our regulated nature and the high percentage
of our revenues attributable to reservation charges, our revenues have
historically been relatively stable. However, our financial results can be
subject to volatility due to factors such as changes in natural gas prices,
changes in supply and demand, regulatory actions, competition, declines in the
creditworthiness of our customers and weather. We have a fuel tracker on our
EPNG system related to the actual costs of fuel lost and unaccounted for and
other gas balancing costs, such as encroachments against our system gas supply
and imbalance cash out price adjustments, with a true-up mechanism for amounts
over or under retained. The fuel tracker reduces the financial impacts of our
operational gas costs.
We continue to
manage our recontracting process to mitigate the risk of significant impacts on
our revenues from expiring contracts. Our ability to extend our existing
customer contracts or remarket expiring contracted capacity is dependent on
competitive alternatives, the regulatory environment at the federal, state and
local levels and the market supply and demand factors at the relevant dates
these contracts are extended or expire. The duration of new or renegotiated
contracts will be affected by current prices, competitive conditions and
judgments concerning future market trends and volatility. Subject to regulatory
requirements, we attempt to recontract or remarket our capacity at the maximum
rates allowed under our tariffs, although at times, we enter into firm
transportation contracts at amounts that are less than these maximum
allowable rates to remain competitive. Our existing contracts mature at various
times and in varying amounts of throughput capacity. The weighted average
remaining contract term for our active contracts is approximately three years as
of December 31, 2008. Below are the contract expiration portfolio and the
associated revenue expirations for our firm transportation contracts as of
December 31, 2008, including those with terms beginning in 2009 or
later.
|
|
|
|
Percent of
Total
|
|
|
|
|
Percent of
Total
|
|
|
|
BBtu/d
(1)
|
|
Contracted
Capacity
|
|
Reservation
Revenue
|
|
|
Reservation
Revenue
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
2009
|
|
|
1,286
|
|
|
|
24
|
|
|
|
$
|
125 |
|
|
|
|
23 |
|
|
2010
|
|
|
931
|
|
|
|
18
|
|
|
|
|
95 |
|
|
|
|
17 |
|
|
2011
|
|
|
1,228
|
|
|
|
23
|
|
|
|
|
136 |
|
|
|
|
24 |
|
|
|
|
|
639
|
|
|
|
12
|
|
|
|
|
79
|
|
|
|
|
14 |
|
|
2013
|
|
|
182
|
|
|
|
4
|
|
|
|
|
17 |
|
|
|
|
3 |
|
|
2014 and
beyond
|
|
|
1,015
|
|
|
|
19
|
|
|
|
|
103 |
|
|
|
|
19 |
|
|
Total
|
|
|
5,281
|
|
|
|
100
|
|
|
|
$ |
555 |
|
|
|
|
100 |
|
|
____________
(1)
|
Excludes
EPNG capacity on the Mojave
system.
|
Results
of Operations
Our management uses
earnings before interest expense and income taxes (EBIT) as a measure to assess
the operating results and effectiveness of our business. We believe EBIT is
useful to investors because it allows them to evaluate more effectively our
operating performance using the same performance measure analyzed internally by
our management. We define EBIT as net income adjusted for (i) items that do not
impact our income from continuing operations, (ii) income taxes, (iii) interest
and debt expense and (iv) affiliated interest income. We exclude interest and
debt expense from this measure so that investors may evaluate our operating
results without regard to our financing methods. EBIT may not be comparable to
measurements used by other companies. Additionally, EBIT should be considered in
conjunction with net income and other performance measures such as operating
income or operating cash flows. Below is a reconciliation of our EBIT to net
income, our throughput volumes and an analysis and discussion of our results for
the year ended December 31, 2008 compared with 2007.
Operating
Results:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions,
|
|
|
|
except
for volumes)
|
|
Operating
revenues
|
|
$ |
590 |
|
|
$ |
557 |
|
Operating
expenses
|
|
|
(333 |
) |
|
|
(319 |
) |
Operating
income
|
|
|
257 |
|
|
|
238 |
|
Other income,
net
|
|
|
5 |
|
|
|
4 |
|
EBIT
|
|
|
262 |
|
|
|
242 |
|
Interest and
debt
expense
|
|
|
(90 |
) |
|
|
(98 |
) |
Affiliated
interest income, net
|
|
|
46 |
|
|
|
71 |
|
Income
taxes
|
|
|
(83 |
) |
|
|
(83 |
) |
Net
income
|
|
$ |
135 |
|
|
$ |
132 |
|
Throughput volumes
(BBtu/d)(1)
|
|
|
4,422 |
|
|
|
4,216 |
|
____________
(1)
|
Throughput
volumes exclude throughput transported on the Mojave system on behalf of
EPNG.
|
EBIT
Analysis:
|
|
Revenue
|
|
|
Expense
|
|
|
Other
|
|
|
EBIT
Impact
|
|
|
|
Favorable/(Unfavorable)
|
|
|
|
(In
millions)
|
|
Reservation
and other services revenues
|
|
$ |
29 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
29 |
|
Enron
bankruptcy settlement
|
|
|
4 |
|
|
|
1 |
|
|
|
— |
|
|
|
5 |
|
Operating and
general and administrative expenses
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
Asset
impairments
|
|
|
— |
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
Other (1)
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
Total impact
on
EBIT
|
|
$ |
33 |
|
|
$ |
(14 |
) |
|
$ |
1 |
|
|
$ |
20 |
|
____________
(1)
|
Consists
of individually insignificant
items.
|
Reservation
and Other Services Revenues. Our reservation and other services revenues
were higher for the year ended December 31, 2008 compared to 2007, primarily due
to an increase in reservation charges for capacity on our EPNG system resulting
from higher amounts charged on recontracted capacity in California and Arizona,
higher pipeline integrity program surcharges and increased pipeline usage by
firm customers in 2008.
In June 2008, EPNG
filed a rate case with the FERC as required under the settlement of its previous
rate case. The filing proposed an increase in our base tariff rates.
In August 2008, the FERC issued an order accepting the proposed rates to be
effective January 1, 2009, subject to refund and the outcome of a hearing and a
technical conference. The FERC issued an order in December 2008 that generally
accepted most of our proposals in the technical conference proceeding. The
FERC appointed an administrative law judge who will decide the remaining issues
should we be unable to reach a settlement with our customers in upcoming
negotiations.
Enron
Bankruptcy Settlement. During 2008 and 2007, we recorded income of
approximately $10 million and $5 million, net of amounts owed to certain
customers as a result of the Enron bankruptcy settlement.
Operating
and General and Administrative Expenses. During the year ended December
31, 2008, our operating and general, and administrative expenses increased
primarily as a result of increased maintenance costs and additional accruals for
certain outstanding legal matters.
Asset
Impairments. During 2008, we recorded impairments of approximately $14
million due to declining real estate values related to our Arizona storage
projects, which we are no longer developing. During 2007, we recorded an
impairment of approximately $9 million related to our East Valley Line Lateral
pursuant to a FERC order on our accounting treatment for the planned sale of
certain transmission facilities.
Interest
and Debt Expense
Interest and debt
expense for the year ended December 31, 2008, was $8 million lower than in 2007
primarily due to interest recorded in 2007 for EPNG’s rate refund provision
related to our rate case effective January 1, 2006.
Affiliated
Interest Income, Net
Affiliated interest
income, net for the year ended December 31, 2008, was $25 million lower than in
2007 primarily due to lower average short-term interest rates and lower average
advances to El Paso under its cash management program. The average short-term
interest rate decreased from 6.2% in 2007 to 4.4% in 2008. In addition, the
average advances due from El Paso of $1.2 billion in 2007 decreased to $1.1
billion in 2008.
Income
Taxes
Our effective tax
rate of 38 percent and 39 percent for the years ended December 31, 2008 and 2007
was higher than the statutory rate of 35 percent in both periods primarily due
to the effect of state income taxes. For a reconciliation of the statutory rate
to the effective tax rates, see Item 8, Financial Statements and Supplementary
Data, Note 2.
Liquidity
and Capital Resources
Liquidity
Overview. Our primary sources of liquidity are cash flows from operating
activities and El Paso’s cash management program. Our primary uses of cash
are for working capital and capital expenditures. We have historically advanced
cash to El Paso under its cash management program, which we reflect in investing
activities in our statement of cash flows. During 2008, we utilized $200 million
of our notes receivable from the cash management program to pay dividends to our
parent. At December 31, 2008, we had a note receivable from El Paso of
approximately $1.0 billion. We do not intend to settle this note within the next
twelve months and therefore, classified it as non-current on our balance sheet.
See Item 8, Financial Statements and Supplementary Data, Note 10, for a further
discussion of El Paso’s cash management program. We believe that cash flows from
operating activities combined with amounts available to us under El Paso’s cash
management program will be adequate to meet our capital requirements and our
existing operating needs.
In addition to the
cash management program, we are eligible to borrow amounts available under El
Paso’s $1.5 billion credit agreement and are only liable for amounts we directly
borrow. As of December 31, 2008, El Paso had approximately $0.7 billion of
capacity remaining and available to us under this credit agreement, none of
which was issued or borrowed by us. For a further discussion of this credit
agreement, see Item 8, Financial Statements and Supplementary Data, Note
5.
Extreme volatility
in the financial markets, the energy industry and the global economy will likely
continue through 2009. The global financial markets remain extremely
volatile and it is uncertain whether recent U.S. and foreign government actions
will successfully restore confidence and liquidity in the global financial
markets. This could impact our longer-term access to capital for future growth
projects as well as the cost of such capital. Based on the liquidity available
to us through cash on hand, our operating activities and El Paso’s cash
management program, we do not anticipate having a need to directly access the
financial markets in 2009 for any of our operating activities or expansion
capital needs. Additionally, although the impacts are difficult to quantify at
this point, a downward trend in the global economy could have adverse impacts on
natural gas consumption and demand. However, we believe our exposure to changes
in natural gas consumption and demand is largely mitigated by a revenue base
that is significantly comprised of long term contracts that are based on firm
demand charges and are less affected by a potential reduction in the actual
usage or consumption of natural gas.
As of December 31,
2008, El Paso had approximately $1.0 billion of cash and approximately $1.2
billion of capacity available to it under various committed credit facilities.
In light of the current economic climate and in response to the financial market
volatility, El Paso, since November 2008, has generated approximately $1.2
billion of additional liquidity through three separate note offerings and has
obtained additional revolving credit facility capacity and letter of credit
capacity. Although we do not anticipate to directly access the financial markets
in 2009, the volatility in the financial markets could impact our or El Paso’s
ability to access these markets at reasonable rates in the future.
For further detail
on our risk factors including adverse general economic conditions and our
ability to access financial markets which could impact our operations and
liquidity, see Part I, Item 1A, Risk Factors.
Capital
Expenditures. Our capital expenditures for the years ended December 31
were as follows:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions)
|
|
Maintenance
|
|
$ |
134 |
|
|
$ |
99 |
|
Expansion/Other
|
|
|
52 |
|
|
|
21 |
|
Total
|
|
$ |
186 |
|
|
$ |
120 |
|
Under our current
plan for 2009, we have budgeted to spend (i) approximately $122 million for
capital expenditures to maintain the integrity of our pipelines, to comply with
clean air regulations and to ensure the safe and reliable delivery of natural
gas to our customers and (ii) approximately $3 million to expand the capacity
and services of our pipeline systems.
Commitments
and Contingencies
For a discussion of
our commitments and contingencies, see Item 8, Financial Statements and
Supplementary Data, Note 6, which is incorporated herein by
reference.
New
Accounting Pronouncements Issued But Not Yet Adopted
See Item 8,
Financial Statements and Supplementary Data, Note 1, under New
Accounting
Pronouncements Issued But Not Yet Adopted, which is incorporated herein
by reference.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
We are exposed to
the risk of changing interest rates. At December 31, 2008, we had a note
receivable from El Paso of approximately $1.0 billion, with a variable interest
rate of 3.2% that is due upon demand. While we are exposed to changes in
interest income based on changes to the variable interest rate, the fair value
of this note receivable approximates its carrying value due to the market-based
nature of its interest rate and the fact that it is a demand note.
The table below
shows the carrying value and related weighted-average effective interest rates
on our non-affiliated fixed rate long-term debt securities estimated based on
quoted market prices for the same or similar issues.
|
|
December 31,
2008
|
|
|
|
|
|
|
Expected
Fiscal Year of Maturity of
Carrying
Amounts
|
|
|
|
|
|
December
31, 2007
|
|
|
|
2010
|
|
|
2014
and
Thereafter
|
|
|
Total
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
(In
millions, except for rates)
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt — fixed rate
|
|
$ |
54 |
|
|
$ |
1,112 |
|
|
$ |
1,166 |
|
|
$ |
1,021 |
|
|
$ |
1,166 |
|
|
$ |
1,309 |
|
Average
effective interest rate
|
|
|
7.8 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA |
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as defined by SEC rules adopted under the Securities
Exchange Act of 1934, as amended. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. It
consists of policies and procedures that:
|
•
|
Pertain to
the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Under the
supervision and with the participation of management, including the President
and Chief Financial Officer, we made an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2008. In making
this assessment, we used the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our evaluation, we
concluded that our internal control over financial reporting was effective as of
December 31, 2008.
Report
of Independent Registered Public Accounting Firm
The Board of
Directors and Stockholder of El Paso Natural Gas Company
We have audited the
accompanying consolidated balance sheets of El Paso Natural Gas Company (the
Company) as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholder’s equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits also included the
financial statement schedule listed in the Index at Item 15(a) for each of the
three years in the period ended December 31, 2008. These financial statements
and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of El Paso Natural Gas Company at December
31, 2008 and 2007, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the
consolidated financial statements, effective December 31, 2006 and January 1,
2008, the Company adopted the recognition and measurement date provisions,
respectively, of Statement of Financial Accounting Standards No. 158, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans — An
Amendment of FASB Statements No. 87, 88, 106, and 132
(R).
Houston,
Texas
February 26,
2009
EL
PASO NATURAL GAS COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(In
millions)
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$ |
590 |
|
|
$ |
557 |
|
|
$ |
588 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and
maintenance
|
|
|
213 |
|
|
|
201 |
|
|
|
184 |
|
(Gain) loss
on long-lived assets
|
|
|
14 |
|
|
|
9 |
|
|
|
(1 |
) |
Depreciation
and amortization
|
|
|
80 |
|
|
|
82 |
|
|
|
92 |
|
Taxes, other
than income taxes
|
|
|
26 |
|
|
|
27 |
|
|
|
30 |
|
|
|
|
333 |
|
|
|
319 |
|
|
|
305 |
|
Operating
income
|
|
|
257 |
|
|
|
238 |
|
|
|
283 |
|
Other income,
net
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
Interest and
debt expense
|
|
|
(90 |
) |
|
|
(98 |
) |
|
|
(95 |
) |
Affiliated
interest income, net
|
|
|
46 |
|
|
|
71 |
|
|
|
53 |
|
Income before
income taxes
|
|
|
218 |
|
|
|
215 |
|
|
|
244 |
|
Income
taxes
|
|
|
83 |
|
|
|
83 |
|
|
|
92 |
|
Net
income
|
|
$ |
135 |
|
|
$ |
132 |
|
|
$ |
152 |
|
See accompanying
notes.
EL
PASO NATURAL GAS COMPANY
CONSOLIDATED
BALANCE SHEETS
(In
millions, except share amounts)
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
— |
|
|
$ |
— |
|
Accounts and
notes receivable
|
|
|
|
|
|
|
|
|
Customer, net
of allowance of $2 in 2008 and $4 in 2007
|
|
|
66 |
|
|
|
73 |
|
Affiliates
|
|
|
6 |
|
|
|
6 |
|
Other
|
|
|
6 |
|
|
|
1 |
|
Materials and
supplies
|
|
|
43 |
|
|
|
41 |
|
Deferred
income taxes
|
|
|
12 |
|
|
|
7 |
|
Prepaids
|
|
|
15 |
|
|
|
4 |
|
Other
|
|
|
8 |
|
|
|
3 |
|
Total current
assets
|
|
|
156 |
|
|
|
135 |
|
Property,
plant and equipment, at cost
|
|
|
3,804 |
|
|
|
3,710 |
|
Less
accumulated depreciation and amortization
|
|
|
1,365 |
|
|
|
1,298 |
|
Total
property, plant and equipment, net
|
|
|
2,439 |
|
|
|
2,412 |
|
Other
assets
|
|
|
|
|
|
|
|
|
Note
receivable from affiliate
|
|
|
986 |
|
|
|
1,113 |
|
Other
|
|
|
103 |
|
|
|
133 |
|
|
|
|
1,089 |
|
|
|
1,246 |
|
Total
assets
|
|
$ |
3,684 |
|
|
$ |
3,793 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
48 |
|
|
$ |
101 |
|
Affiliates
|
|
|
21 |
|
|
|
17 |
|
Other
|
|
|
18 |
|
|
|
33 |
|
Taxes
payable
|
|
|
79 |
|
|
|
56 |
|
Accrued
interest
|
|
|
20 |
|
|
|
20 |
|
Accrued
liabilities
|
|
|
9 |
|
|
|
20 |
|
Regulatory
liabilities
|
|
|
33 |
|
|
|
19 |
|
Other
|
|
|
31 |
|
|
|
13 |
|
Total current
liabilities
|
|
|
259 |
|
|
|
279 |
|
Long-term
debt
|
|
|
1,166 |
|
|
|
1,166 |
|
Other
liabilities
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
389 |
|
|
|
370 |
|
Other
|
|
|
72 |
|
|
|
116 |
|
|
|
|
461 |
|
|
|
486 |
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
|
|
|
|
|
|
|
|
|
Common stock,
par value $1 per share; 1,000 shares authorized, issued and
outstanding
|
|
|
— |
|
|
|
— |
|
Additional
paid-in capital
|
|
|
1,268 |
|
|
|
1,268 |
|
Retained
earnings
|
|
|
530 |
|
|
|
594 |
|
Total
stockholder’s equity
|
|
|
1,798 |
|
|
|
1,862 |
|
Total
liabilities and stockholder’s equity
|
|
$ |
3,684 |
|
|
$ |
3,793 |
|
See accompanying
notes.
EL
PASO NATURAL GAS COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash flows
from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
135 |
|
|
$ |
132 |
|
|
$ |
152 |
|
Adjustments
to reconcile net income to net cash from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
80 |
|
|
|
82 |
|
|
|
92 |
|
Deferred
income taxes
|
|
|
14 |
|
|
|
37 |
|
|
|
15 |
|
(Gain) loss
on long-lived assets
|
|
|
14 |
|
|
|
9 |
|
|
|
(1 |
) |
Other
non-cash income items
|
|
|
12 |
|
|
|
8 |
|
|
|
— |
|
Asset and
liability changes
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3 |
|
|
|
9 |
|
|
|
35 |
|
Accounts
payable
|
|
|
(65 |
) |
|
|
65 |
|
|
|
(17 |
) |
Taxes
payable
|
|
|
24 |
|
|
|
(27 |
) |
|
|
55 |
|
Other current
assets
|
|
|
(13 |
) |
|
|
(5 |
) |
|
|
— |
|
Other current
liabilities
|
|
|
(13 |
) |
|
|
(88 |
) |
|
|
38 |
|
Non-current
assets
|
|
|
56 |
|
|
|
(66 |
) |
|
|
(30 |
) |
Non-current
liabilities
|
|
|
8 |
|
|
|
(31 |
) |
|
|
(17 |
) |
Net cash
provided by operating activities
|
|
|
255 |
|
|
|
125 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
(186 |
) |
|
|
(120 |
) |
|
|
(143 |
) |
Net change in
notes receivable from affiliate
|
|
|
127 |
|
|
|
(43 |
) |
|
|
(198 |
) |
Net change in
restricted cash
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
Other
|
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
Net cash used
in investing activities
|
|
|
(55 |
) |
|
|
(161 |
) |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to parent
|
|
|
(200 |
) |
|
|
— |
|
|
|
— |
|
Net proceeds
from issuance of long-term debt
|
|
|
— |
|
|
|
350 |
|
|
|
— |
|
Payments to
retire long-term debt
|
|
|
— |
|
|
|
(314 |
) |
|
|
— |
|
Net cash
provided by (used in) financing activities
|
|
|
(200 |
) |
|
|
36 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
cash and cash equivalents
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
End of
period
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
See accompanying
notes.
EL
PASO NATURAL GAS COMPANY
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S EQUITY
(In
millions, except share amounts)
|
|
Common
stock
|
|
|
Additional
Paid-in
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
January 1,
2006
|
|
|
1,000 |
|
|
$ |
— |
|
|
$ |
1,268 |
|
|
$ |
310 |
|
|
|
— |
|
|
$ |
1,578 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
152 |
|
Adoption of
SFAS No. 158, net of income taxes of $3 (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
December 31,
2006
|
|
|
1,000 |
|
|
|
— |
|
|
|
1,268 |
|
|
|
462 |
|
|
|
(4 |
) |
|
|
1,726 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
132 |
|
Reclassification
to regulatory asset (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
December 31,
2007
|
|
|
1,000 |
|
|
|
— |
|
|
|
1,268 |
|
|
|
594 |
|
|
|
— |
|
|
|
1,862 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
135 |
|
Dividend paid
to parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
Adoption of
SFAS No. 158, net of income taxes of less than $1 (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
December 31,
2008
|
|
|
1,000 |
|
|
$ |
— |
|
|
$ |
1,268 |
|
|
$ |
530 |
|
|
$ |
— |
|
|
$ |
1,798 |
|
See accompanying
notes.
EL
PASO NATURAL GAS COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
We are a Delaware
corporation incorporated in 1928, and an indirect wholly owned subsidiary of El
Paso Corporation (El Paso). Our consolidated financial statements are prepared
in accordance with U.S. generally accepted accounting principles (GAAP) and
include the accounts of all majority owned and controlled subsidiaries after the
elimination of intercompany accounts and transactions. We consolidate entities
when we either (i) have the ability to control the operating and financial
decisions and policies of that entity or (ii) are allocated a majority of the
entity’s losses and/or returns through our variable interests in that entity.
The determination of our ability to control or exert significant influence over
an entity and whether we are allocated a majority of the entity’s losses and/or
returns involves the use of judgment. Our financial statements for prior periods
include reclassifications that were made to conform to the current period
presentation. Those reclassifications did not impact our reported net income or
stockholder’s equity.
Use
of Estimates
The preparation of
our financial statements requires the use of estimates and assumptions that
affect the amounts we report as assets, liabilities, revenues and expenses and
our disclosures in these financial statements. Actual results can, and often do,
differ from those estimates.
Regulated
Operations
Our natural gas
pipelines and storage operations are subject to the jurisdiction of the Federal
Energy Regulatory Commission (FERC) under the Natural Gas Act of 1938, the
Natural Gas Policy Act of 1978 and the Energy Policy Act of 2005. We follow the
regulatory accounting principles prescribed under Statement of Financial
Accounting Standards (SFAS) No. 71, Accounting
for the
Effects of Certain Types of Regulation. Under SFAS No. 71, we record
regulatory assets and liabilities that would not be recorded under GAAP for
non-regulated entities. Regulatory assets and liabilities represent probable
future revenues or expenses associated with certain charges or credits that will
be recovered from or refunded to customers through the rate making process.
Items to which we apply regulatory accounting requirements include certain
postretirement employee benefit plan costs, an equity return component on
regulated capital projects, fuel recovery mechanism and related gas cost and
other costs included in, or expected to be included in, future
rates.
Cash
and Cash Equivalents
We consider
short-term investments with an original maturity of less than three months to be
cash equivalents.
Allowance
for Doubtful Accounts
We establish
provisions for losses on accounts receivable and for natural gas imbalances due
from shippers and operators if we determine that we will not collect all or part
of the outstanding balance. We regularly review collectibility and establish or
adjust our allowance as necessary using the specific identification
method.
Materials
and Supplies
We value materials
and supplies at the lower of cost or market value with cost determined using the
average cost method.
Natural
Gas Imbalances
Natural gas
imbalances occur when the actual amount of natural gas delivered from or
received by a pipeline system or storage facility differs from the contractual
amount delivered or received. We value these imbalances due to or from shippers
and operators utilizing current index prices. Imbalances are settled in cash or
in-kind, subject to the terms of our tariff.
Imbalances due from
others are reported in our balance sheet as either accounts receivable from
customers or accounts receivable from affiliates. Imbalances owed to others are
reported on the balance sheet as either trade accounts payable or accounts
payable to affiliates. We classify all imbalances as current as we expect to
settle them within a year.
Property,
Plant and Equipment
Our property, plant
and equipment is recorded at its original cost of construction or, upon
acquisition, at the fair value of the assets acquired. For assets we construct,
we capitalize direct costs, such as labor and materials, and indirect costs,
such as overhead, interest and an equity return component, as allowed by the
FERC. We capitalize major units of property replacements or improvements and
expense minor items.
We use the
composite (group) method to depreciate property, plant and equipment. Under this
method, assets with similar lives and characteristics are grouped and
depreciated as one asset. We apply the FERC-accepted depreciation rate to the
total cost of the group until its net book value equals its salvage value. For
certain general plant and rights-of-way, we depreciate the asset to zero. The
majority of our property, plant and equipment are on our EPNG system which has
depreciation rates ranging from one percent to 20 percent and the depreciable
lives ranging from five to 92 years consistent with our rate settlements with
the FERC. The depreciation rates on our Mojave Pipeline Company (Mojave) system
range from two percent to 33 percent per year. We re-evaluate depreciation rates
each time we file with the FERC for a change in our transportation and storage
rates.
When we retire
property, plant and equipment, we charge accumulated depreciation and
amortization for the original cost of the assets in addition to the cost to
remove, sell or dispose of the assets, less their salvage value. We do not
recognize a gain or loss unless we sell an entire operating unit. We include
gains or losses on dispositions of operating units in operating
income.
Included in our
property balances are additional acquisition costs of $152 million which
represent the excess of allocated purchase costs over the historical costs of
the facilities. These costs are amortized on a straight-line basis over a
remaining life of 24 years, and we do not recover these excess costs in our
rates. At December 31, 2008 and 2007, we had unamortized additional acquisition
costs of $58 million and $60 million.
At December 31,
2008 and 2007, we had $54 million and $98 million of construction work in
progress included in our property, plant and equipment.
We capitalize a
carrying cost (an allowance for funds used during construction) on debt and
equity funds related to our construction of long-lived assets. This carrying
cost consists of a return on the investment financed by debt and a return on the
investment financed by equity. The debt portion is calculated based on our
average cost of debt. Interest costs on debt amounts capitalized during each of
the years ended December 31, 2008, 2007 and 2006, were $1 million. These debt
amounts are included as a reduction to interest and debt expense on our income
statement. The equity portion of capitalized costs is calculated using the most
recent FERC-approved equity rate of return. The equity amounts capitalized
(exclusive of taxes) during the years ended December 31, 2008, 2007 and 2006,
were $3 million, $2 million and $2 million. These equity amounts are included as
other non-operating income on our income statement.
Asset
Impairments
We evaluate assets
for impairment when events or circumstances indicate that their carrying values
may not be recovered. These events include market declines that are believed to
be other than temporary, changes in the manner in which we intend to use a
long-lived asset, decisions to sell an asset and adverse changes in the legal or
business environment such as adverse actions by regulators. When an event
occurs, we evaluate the recoverability of our long-lived assets’ carrying values
based on the long-lived asset’s ability to generate future cash flows on an
undiscounted basis. If an impairment is indicated, or if we decide to sell a
long-lived asset or group of assets, we adjust the carrying value of the asset
downward, if necessary, to its estimated fair value. Our fair value estimates
are generally based on market data obtained through the sales process or an
analysis of expected discounted cash flows and actual amounts may differ from
these estimates. The magnitude of any impairment is impacted by a number of
factors, including the nature of the assets being sold and our established time
frame for completing the sale, among other factors.
During 2008, we
recorded impairments of approximately $14 million due to declining real estate
values related to our Arizona storage projects, which we are no longer
developing. During 2007, we recorded an impairment of approximately $9 million
related to our East Valley Line lateral pursuant to a FERC order on our
accounting treatment for the planned sale of certain transmission
facilities.
Revenue
Recognition
Our revenues are
primarily generated from natural gas transportation and storage services.
Revenues for all services are based on the thermal quantity of gas delivered or
subscribed at a price specified in the contract. For our transportation and
storage services, we recognize reservation revenues on firm contracted capacity
over the contract period regardless of the amount of natural gas that is
transported or stored. For interruptible or volumetric-based services, we record
revenues when physical deliveries of natural gas are made at the agreed upon
delivery point or when gas is injected or withdrawn from the storage facility.
We are subject to FERC regulations and, as a result, revenues we collect may be
subject to refund in a rate proceeding. We establish reserves for these
potential refunds.
Environmental
Costs and Other Contingencies
Environmental
Costs. We record liabilities at their undiscounted amounts on our balance
sheet as other current and long-term liabilities when environmental assessments
indicate that remediation efforts are probable and the costs can be reasonably
estimated. Estimates of our liabilities are based on currently available facts,
existing technology and presently enacted laws and regulations taking into
consideration the likely effects of other societal and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating contaminated sites, other companies’ clean-up
experience and data released by the Environmental Protection Agency (EPA) or
other organizations. Our estimates are subject to revision in future periods
based on actual costs or new circumstances. We capitalize costs that benefit
future periods and we recognize a current period charge in operation and
maintenance expense when clean-up efforts do not benefit future
periods.
We evaluate any
amounts paid directly or reimbursed by government sponsored programs and
potential recoveries or reimbursements of remediation costs from third parties,
including insurance coverage, separately from our liability. Recovery is
evaluated based on the creditworthiness or solvency of the third party, among
other factors. When recovery is assured, we record and report an asset
separately from the associated liability on our balance sheet.
Other
Contingencies. We recognize liabilities for other contingencies when we
have an exposure that, when fully analyzed, indicates it is both probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
Where the most likely outcome of a contingency can be reasonably estimated, we
accrue a liability for that amount. Where the most likely outcome cannot be
estimated, a range of potential losses is established and if no one amount in
that range is more likely than any other, the low end of the range is
accrued.
Income
Taxes
El Paso maintains a
tax accrual policy to record both regular and alternative minimum taxes for
companies included in its consolidated federal and state income tax returns. The
policy provides, among other things, that (i) each company in a taxable income
position will accrue a current expense equivalent to its federal and state
income taxes, and (ii) each company in a tax loss position will accrue a benefit
to the extent its deductions, including general business credits, can be
utilized in the consolidated returns. El Paso pays all consolidated U.S. federal
and state income taxes directly to the appropriate taxing jurisdictions and,
under a separate tax billing agreement, El Paso may bill or refund its
subsidiaries for their portion of these income tax payments.
Pursuant to El
Paso’s policy, we record current income taxes based on our taxable income and we
provide for deferred income taxes to reflect estimated future tax payments and
receipts. Deferred taxes represent the tax impacts of differences between the
financial statement and tax bases of assets and liabilities and carryovers at
each year end. We account for tax credits under the flow-through method, which
reduces the provision for income taxes in the year the tax credits first become
available. We reduce deferred tax assets by a valuation allowance when, based on
our estimates, it is more likely than not that a portion of those assets will
not be realized in a future period. The estimates utilized in the recognition of
deferred tax assets are subject to revision, either up or down, in future
periods based on new facts or circumstances.
We evaluate our tax
positions for all jurisdictions and for all years where the statute of
limitations has not expired in accordance with Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109. FIN No. 48 requires companies to meet a more-likely-than-not
threshold (i.e. a greater than 50 percent likelihood of a tax position being
sustained under examination) prior to recording a benefit for their tax
positions. Additionally, for tax positions meeting this more-likely-than-not
threshold, the amount of benefit is limited to the largest benefit that has a
greater than 50 percent probability of being realized upon effective
settlement.
Accounting
for Asset Retirement Obligations
We account for our
asset retirement obligations in accordance with SFAS No. 143, Accounting
for Asset Retirement Obligations and FIN No. 47,
Accounting for
Conditional Asset Retirement Obligations. We record a liability for legal
obligations associated with the replacement, removal or retirement of our
long-lived assets in the period the obligation is incurred. Our asset retirement
liabilities are recorded at their estimated fair value with a corresponding
increase to property, plant and equipment. This increase in property, plant and
equipment is then depreciated over the useful life of the long-lived asset to
which that liability relates. An ongoing expense is also recognized for changes
in the value of the liability as a result of the passage of time, which we
record as depreciation and amortization expense in our income statement. We have
the ability to recover certain of these costs from our customers and have
recorded an asset (rather than expense) associated with the depreciation of the
property, plant and equipment and accretion of the liabilities described
above.
We have legal
obligations associated with our natural gas pipeline and related transmission
facilities and storage wells. We have obligations to plug storage wells when we
no longer plan to use them and when we abandon them. Our legal obligations
associated with our natural gas transmission facilities relate primarily to
purging and sealing the pipeline if it is abandoned. We also have obligations to
remove hazardous materials associated with our natural gas transmission
facilities if they are replaced. We accrue a liability for legal obligations
based on an estimate of the timing and amount of their settlement.
We are required to
operate and maintain our natural gas pipeline and storage systems, and intend to
do so as long as supply and demand for natural gas exists, which we expect for
the foreseeable future. Therefore, we believe that the substantial majority of
our natural gas pipelines and storage system assets have indeterminate lives.
Accordingly, our asset retirement liabilities as of December 31, 2008 and 2007,
were not material to our financial statements. We continue to evaluate our asset
retirement obligations and future developments could impact the amounts we
record.
Postretirement
Benefits
We maintain a
postretirement benefit plan covering certain of our former employees. This plan
requires us to make contributions to fund the benefits to be paid out under the
plan. These contributions are invested until the benefits are paid out to plan
participants. We record the net benefit cost related to this plan in our income
statement. This net benefit cost is a function of many factors including
benefits earned during the year by plan participants (which is a function of the
level of benefits provided under the plan, actuarial assumptions and the passage
of time), expected returns on plan assets and amortization of certain deferred
gains and losses. For a further discussion of our policies with respect to our
postretirement plan, see Note 7.
Effective December
31, 2006, we began accounting for our postretirement benefit plan under the
recognition provisions of SFAS No.158, Employers’
Accounting for
Defined Benefit Pension and Other Postretirement Plans — an Amendment of
FASB
Statements No. 87, 88, 106, and 132(R) and recorded a $4 million
increase, net of income taxes of $3 million, to accumulated other comprehensive
loss related to the adoption of this standard.
Under SFAS No. 158, we record an asset or liability for our
postretirement benefit plan based on its over funded or under funded status. In
March 2007, the FERC issued guidance requiring regulated pipeline companies to
record a regulatory asset or liability for any deferred amounts related to
unrecognized gains and losses or changes in actuarial assumptions that would
otherwise be recorded in accumulated other comprehensive income for
non-regulated entities. Upon adoption of this FERC guidance, we reclassified $4
million from accumulated other comprehensive loss to a regulatory
asset.
Effective January
1, 2008, we adopted the measurement date provisions of SFAS No. 158 and changed
the measurement date of our postretirement benefit plan from September 30 to
December 31. We recorded an increase of $1 million, net of income taxes of less
than $1 million, to our January 1, 2008 retained earnings balance upon the
adoption of the measurement date provisions of this standard. For a further
discussion of our application of SFAS No. 158, see Note 7.
New
Accounting Pronouncements Issued But Not Yet Adopted
As of December 31,
2008, the following accounting standards had not yet been adopted by
us.
Fair
Value Measurements. We have adopted the provisions of SFAS No. 157, Fair
Value Measurements in measuring the fair value of financial assets and
liabilities in the financial statements. We have elected to defer the adoption
of SFAS No. 157 for certain of our non-financial assets and liabilities until
January 1, 2009, the adoption of which will not have a material impact on our
financial statements.
Business
Combinations. In December 2007, the FASB issued SFAS No. 141(R), Business
Combinations, which provides revised guidance on the accounting for
acquisitions of businesses. This standard changes the current guidance to
require that all acquired assets, liabilities, minority interest and certain
contingencies be measured at fair value, and certain other acquisition-related
costs be expensed rather than capitalized. SFAS No. 141(R) will apply to
acquisitions that are effective after December 31, 2008, and application of the
standard to acquisitions prior to that date is not
permitted.
Noncontrolling
Interests. In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which provides guidance
on the presentation of minority interest, subsequently renamed “noncontrolling
interest”, in the financial statements. This standard requires that
noncontrolling interest be presented as a separate component of equity rather
than as a “mezzanine” item between liabilities and equity, and also requires
that noncontrolling interest be presented as a separate caption in the income
statement. This standard also requires all transactions with noncontrolling
interest holders, including the issuance and repurchase of noncontrolling
interests, be accounted for as equity transactions unless a change in control of
the subsidiary occurs. We will adopt the provisions of this standard effective
January 1, 2009. The adoption of this standard will not have a material impact
on our financial statements.
2.
Income Taxes
El Paso files
consolidated U.S. federal and certain state tax returns which include our
taxable income. In certain states, we file and pay taxes directly to the state
taxing authorities. With a few exceptions, we and El Paso are no longer subject
to state and local income tax examinations by tax authorities for years prior to
1999 and U.S. income tax examinations for years prior to 2005. In June 2008, the
Internal Revenue Service’s examination of El Paso’s U.S. income tax returns for
2003 and 2004 was settled at the appellate level with approval by the Joint
Committee on Taxation. The settlement of issues raised in this examination did
not materially impact our results of operations, financial condition or
liquidity. For our open tax years, we have no unrecognized tax benefits
(liabilities for uncertain tax matters).
Components
of Income Taxes. The following table reflects the components of income
taxes included in net income for each of the three years ended December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions)
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
61 |
|
|
$ |
40 |
|
|
$ |
66 |
|
State
|
|
|
8 |
|
|
|
6 |
|
|
|
11 |
|
|
|
|
69 |
|
|
|
46 |
|
|
|
77 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
12 |
|
|
|
32 |
|
|
|
13 |
|
State
|
|
|
2 |
|
|
|
5 |
|
|
|
2 |
|
|
|
|
14 |
|
|
|
37 |
|
|
|
15 |
|
Total income
taxes
|
|
$ |
83 |
|
|
$ |
83 |
|
|
$ |
92 |
|
Effective
Tax Rate Reconciliation. Our income taxes differ from the amount computed
by applying the statutory federal income tax rate of 35 percent for the
following reasons for each of the three years ended December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions, except for rates)
|
|
Income taxes
at the statutory federal rate of 35%
|
|
$ |
76 |
|
|
$ |
75 |
|
|
$ |
85 |
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
State income
taxes, net of federal income tax effect
|
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
Non-deductible
expenses
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Income
taxes
|
|
$ |
83 |
|
|
$ |
83 |
|
|
$ |
92 |
|
Effective tax
rate
|
|
|
38 |
% |
|
|
39 |
% |
|
|
38 |
% |
Deferred
Tax Assets and Liabilities. The following are the components of our net
deferred tax liability at December 31:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions)
|
|
Deferred tax
liabilities
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
489 |
|
|
$ |
462 |
|
Regulatory
and other assets
|
|
|
27 |
|
|
|
29 |
|
Total
deferred tax liability
|
|
|
516 |
|
|
|
491 |
|
Deferred tax
assets
|
|
|
|
|
|
|
|
|
U.S. net
operating loss and tax credit carryovers
|
|
|
77 |
|
|
|
80 |
|
Other
liabilities
|
|
|
62 |
|
|
|
48 |
|
Total
deferred tax asset
|
|
|
139 |
|
|
|
128 |
|
Net deferred
tax liability
|
|
$ |
377 |
|
|
$ |
363 |
|
We believe it is
more likely than not that we will realize the benefit of our deferred tax assets
due to expected future taxable income, including the effect of future reversals
of existing taxable temporary differences primarily related to
depreciation.
Tax
Credits and Carryovers. As of December 31, 2008, we had approximately $19
million of alternative minimum tax credits that carryover indefinitely. We also
have approximately $167 million of net operating loss carryovers that expire
between 2021 and 2026. Usage of our carryovers is subject to the limitations
provided under Sections 382 and 383 of the Internal Revenue Code as well as the
separate return limitation year rules of IRS
regulations.
3.
Financial Instruments
At December 31,
2008 and 2007, the carrying amounts of cash and cash equivalents and trade
receivables and payables are representative of their fair value because of the
short-term maturity of these instruments. At December 31, 2008 and 2007, we had
an interest bearing note receivable from El Paso of approximately $1.0 billion
and $1.1 billion due upon demand, with a variable interest rate of 3.2% and
6.5%. While we are exposed to changes in interest income based on changes to the
variable interest rate, the fair value of this note receivable approximates its
carrying value due to the market-based nature of its interest rate and the fact
that it is a demand note.
In addition, the
carrying amounts and estimated fair values of our long-term debt are based on
quoted market prices for the same or similar issues and are as follows at
December 31:
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
1,166 |
|
|
$ |
1,021 |
|
|
$ |
1,166 |
|
|
$ |
1,309 |
|
4.
Regulatory Assets and Liabilities
Below are the
details of our regulatory assets and liabilities at December 31:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions)
|
|
Current
regulatory assets
|
|
|
|
|
|
|
Deferred fuel
loss and unaccounted for gas
|
|
$ |
5 |
|
|
$ |
— |
|
Other
|
|
|
2 |
|
|
|
— |
|
Total current
regulatory assets
|
|
|
7 |
|
|
|
— |
|
Non-current
regulatory assets
|
|
|
|
|
|
|
|
|
Taxes on
capitalized funds used during construction
|
|
|
22 |
|
|
|
21 |
|
Unamortized
loss on reacquired debt
|
|
|
27 |
|
|
|
30 |
|
Postretirement
benefits
|
|
|
9 |
|
|
|
8 |
|
Under-collected
state income taxes
|
|
|
6 |
|
|
|
6 |
|
Deferred fuel
variance
|
|
|
— |
|
|
|
6 |
|
Other
|
|
|
4 |
|
|
|
3 |
|
Total
non-current regulatory assets
|
|
|
68 |
|
|
|
74 |
|
Total
regulatory assets
|
|
$ |
75 |
|
|
$ |
74 |
|
|
|
|
|
|
|
|
|
|
Current
regulatory liabilities
|
|
|
|
|
|
|
|
|
Property and
plant depreciation
|
|
$ |
5 |
|
|
$ |
10 |
|
Over-collected
fuel variance
|
|
|
15 |
|
|
|
— |
|
Pipeline
integrity program
|
|
|
3 |
|
|
|
— |
|
Other
|
|
|
10 |
|
|
|
9 |
|
Total current
regulatory liabilities
|
|
|
33 |
|
|
|
19 |
|
Non-current
regulatory liabilities
|
|
|
|
|
|
|
|
|
Property and
plant depreciation
|
|
|
37 |
|
|
|
47 |
|
Postretirement
benefits
|
|
|
4 |
|
|
|
29 |
|
Over-collected
fuel variance
|
|
|
— |
|
|
|
8 |
|
Excess
deferred federal income taxes
|
|
|
2 |
|
|
|
2 |
|
Total
non-current regulatory liabilities
|
|
|
43 |
|
|
|
86 |
|
Total
regulatory liabilities
|
|
$ |
76 |
|
|
$ |
105 |
|
5.
Debt and Credit Facilities
Debt.
Our long-term debt consisted of the following at December
31:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions)
|
|
7.625% Notes
due August 2010
|
|
$ |
54 |
|
|
$ |
54 |
|
5.95% Notes
due April 2017
|
|
|
355 |
|
|
|
355 |
|
8.625%
Debentures due January 2022
|
|
|
260 |
|
|
|
260 |
|
7.50%
Debentures due November 2026
|
|
|
200 |
|
|
|
200 |
|
8.375% Notes
due June 2032
|
|
|
300 |
|
|
|
300 |
|
|
|
|
1,169 |
|
|
|
1,169 |
|
Less:
Unamortized discount
|
|
|
3 |
|
|
|
3 |
|
Total
long-term debt
|
|
$ |
1,166 |
|
|
$ |
1,166 |
|
In April 2007, we
issued $355 million of 5.95% senior notes using a portion of the net proceeds to
repurchase approximately $301 million of our 7.625% notes.
Credit
Facility. We are eligible to borrow amounts available under El Paso’s
$1.5 billion credit agreement and are only liable for amounts we directly
borrow. As of December 31, 2008, El Paso had approximately $0.7 billion of
capacity remaining and available to us under this credit agreement, none of
which was issued or borrowed by us. Our common stock and the common stock of
another El Paso subsidiary are pledged as collateral under the credit
agreement.
Under El Paso’s
$1.5 billion credit agreement and our indentures, we are subject to a number of
restrictions and covenants. The most restrictive of these include (i)
limitations on the incurrence of additional debt, based on a ratio of debt to
EBITDA (as defined in the agreements), which shall not exceed 5 to 1; (ii)
limitations on the use of proceeds from borrowings; (iii) limitations, in some
cases, on transactions with our affiliates; (iv) limitations on the incurrence
of liens; (v) potential limitations on our ability to declare and pay dividends;
and (vi) potential limitations on our ability to participate in the El Paso’s
cash management program. The indentures governing some of our long-term debt
contain cross-acceleration provisions, the most restrictive of which is $25
million. For the year ended December 31, 2008, we were in compliance with our
debt-related covenants.
6.
Commitments and Contingencies
Legal
Proceedings
Sierra
Pacific Resources and Nevada Power Company v. El Paso et al. In April
2003, Sierra Pacific Resources and Nevada Power Company filed a suit in the U.S.
District Court for the District of Nevada against us, our affiliates and
unrelated third parties, alleging that the defendants conspired to manipulate
prices and supplies of natural gas in the California-Arizona border market from
1996 to 2001. The trial court twice dismissed the lawsuit. The U.S. Court of
Appeals for the Ninth Circuit, however, reversed the dismissal and remanded the
matter to the trial court. The defendants filed motions with the trial court to
dismiss on other grounds. The court dismissed a Nevada unfair trade practices
act claim and a fraudulent concealment claim against El Paso, but the motions
were otherwise denied. Discovery is proceeding. Our costs and legal exposure
related to this lawsuit are not currently determinable.
Baldonado
et al. v. EPNG. In August 2000, a main transmission line owned and
operated by us ruptured at the crossing of the Pecos River near Carlsbad,
New Mexico. Individuals at the site were fatally injured. In June 2003, a
lawsuit entitled
Baldonado et al. v. EPNG was filed in state court in Eddy County, New
Mexico, on behalf of 26 firemen and emergency medical service personnel who
responded to the fire and who allegedly have suffered psychological trauma. The
case has been set for trial in September 2009 and discovery has commenced. Our
costs and legal exposure related to this lawsuit are currently not determinable;
however, we believe this matter will be fully covered by
insurance.
Gas
Measurement Cases. We and a number of our affiliates were named
defendants in actions that generally allege mismeasurement of natural gas
volumes and/or heating content resulting in the underpayment of royalties. The
first set of cases was filed in 1997 by an individual under the False Claims Act
and have been consolidated for pretrial purposes (In re:
Natural Gas Royalties
Qui Tam Litigation, U.S. District Court for the District of Wyoming).
These complaints allege an industry-wide conspiracy to underreport the heating
value as well as the volumes of the natural gas produced from federal and Native
American lands. In October 2006, the U.S. District Judge issued an order
dismissing all claims against all defendants. An appeal has been
filed.
Similar allegations
were filed in a second set of actions initiated in 1999 in Will
Price, et al. v. Gas Pipelines and Their Predecessors, et al., in the
District Court of Stevens County, Kansas. The plaintiffs currently seek
certification of a class of royalty owners in wells on non-federal and
non-Native American lands in Kansas, Wyoming and Colorado. Motions for class
certification have been briefed and argued in the proceedings and the parties
are awaiting the court’s ruling. The plaintiff seeks an unspecified amount of
monetary damages in the form of additional royalty payments (along with
interest, expenses and punitive damages) and injunctive relief with regard to
future gas measurement practices. Our costs and legal exposure related to these
lawsuits and claims are not currently determinable.
Bank
of America. We are a named defendant, along with Burlington Resources,
Inc. (Burlington), now a subsidiary of ConocoPhillips, in a class action lawsuit
styled Bank
of America, et al. v. El Paso Natural Gas and Burlington Resources Oil and Gas
Company, L.P., filed in October 2003 in the District Court of Kiowa
County, Oklahoma asserting royalty underpayment claims related to specified
shallow wells in Oklahoma, Texas and New Mexico. The Plaintiffs assert that
royalties were underpaid starting in the 1980s when the purchase price of gas
was lowered below the Natural Gas Policy Act maximum lawful prices. The
Plaintiffs assert that royalties were further underpaid by Burlington as a
result of post-production cost deductions taken starting in the late 1990s. This
action was transferred to Washita County District Court in 2004. A tentative
settlement reached in November 2005 was disapproved by the court in June 2007. A
class certification hearing is scheduled for April 2009. A companion case styled
Bank
of America v. El Paso Natural Gas involving similar claims made as to
certain wells in Oklahoma was settled in 2006. Our costs and legal exposure
related to this lawsuit are not currently determinable.
In addition to the
above proceedings, we and our subsidiaries and affiliates are named defendants
in numerous lawsuits and governmental proceedings that arise in the ordinary
course of our business. For each of these matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
While the outcome of these matters, including those discussed above, cannot be
predicted with certainty, and there are still uncertainties related to the costs
we may incur, based upon our evaluation and experience to date, we believe we
have established appropriate reserves for these matters. It is possible,
however, that new information or future developments could require us to
reassess our potential exposure related to these matters and adjust our accruals
accordingly, and these adjustments could be material. At December 31, 2008, we
accrued approximately $6 million for our outstanding legal matters.
Environmental
Matters
We are subject to
federal, state and local laws and regulations governing environmental quality
and pollution control. These laws and regulations require us to remove or remedy
the effect on the environment of the disposal or release of specified substances
at current and former operating sites. At December 31, 2008, we had accrued
approximately $22 million for expected remediation costs and associated onsite,
offsite and groundwater technical studies and for related environmental legal
costs; however, we estimate that our exposure could be as high as $42 million.
Our accrual includes $20 million for environmental contingencies related to
properties we previously owned.
Our accrual
represents a combination of two estimation methodologies. First, where the most
likely outcome can be reasonably estimated, that cost has been accrued. Second,
where the most likely outcome cannot be estimated, a range of costs is
established and if no one amount in that range is more likely than any other,
the lower end of the expected range has been accrued. Our environmental
remediation projects are in various stages of completion. Our recorded
liabilities reflect our current estimates of amounts we will expend to remediate
these sites. However, depending on the stage of completion or assessment, the
ultimate extent of contamination or remediation required may not be known. As
additional assessments occur or remediation efforts continue, we may incur
additional liabilities.
Below is a
reconciliation of our accrued liability from January 1, 2008 to December 31,
2008 (in millions):
Balance at
January 1, 2008
|
|
$ |
25 |
|
Additions/adjustments
for remediation activities
|
|
|
1 |
|
Payments for
remediation activities
|
|
|
(4 |
) |
Balance at
December 31, 2008
|
|
$ |
22 |
|
For 2009, we
estimate that our total remediation expenditures will be approximately $7
million, which will be expended under government directed clean-up
plans.
Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA)
Matters. We have received notice that we could be designated, or have
been asked for information to determine whether we could be designated, as a
Potentially Responsible Party (PRP) with respect to three active sites under the
CERCLA or state equivalents. We have sought to resolve our liability as a PRP at
these sites through indemnification by third parties and settlements which
provide for payment of our allocable share of remediation costs. As of December
31, 2008, we have estimated our share of the remediation costs at these sites to
be between $11 million and $15 million. Because the clean-up costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required, and in some cases we have asserted a defense to
any liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in
estimating our liabilities. Accruals for these matters are included in the
environmental reserve discussed above.
Chromium
Review. In April 2004, the State of Arizona’s Department of Environmental
Quality (ADEQ) requested information regarding the historical use of chromium
containing compounds in our operations. Since then, we have responded fully to
the request and have been working with the ADEQ on this matter. Based upon
the 38 studies now completed on our facilities in Arizona, Texas and New Mexico,
as well as on tribal lands in Arizona and New Mexico, we have determined that
the vast majority of the sites examined did not have chromium contamination
above regulatory thresholds and no further action is required at those
sites. We are undertaking further action at seven sites, but based on our
information at this time, do not anticipate substantial issues with chromium at
those sites.
It is possible that
new information or future developments could require us to reassess our
potential exposure related to environmental matters. We may incur significant
costs and liabilities in order to comply with existing environmental laws and
regulations. It is also possible that other developments, such as increasingly
strict environmental laws, regulations and orders of regulatory agencies, as
well as claims for damages to property and the environment or injuries to
employees and other persons resulting from our current or past operations, could
result in substantial costs and liabilities in the future. As this information
becomes available, or other relevant developments occur, we will adjust our
accrual amounts accordingly. While there are still uncertainties related to the
ultimate costs we may incur, based upon our evaluation and experience to date,
we believe our reserves are adequate.
Rates
and Regulatory Matters
EPNG
Rate Case. In June 2008, we filed a rate case with the FERC as required
under the settlement of our previous rate case. The filing proposed an increase
in our base tariff rates. In August 2008, the FERC issued an order accepting the
proposed rates to be effective January 1, 2009, subject to refund and the
outcome of a hearing and a technical conference. The FERC issued an order in
December 2008 that generally accepted most of our proposals in the technical
conference proceeding. The FERC appointed an administrative law judge who
will decide the remaining issues should we be unable to reach a settlement with
our customers in upcoming negotiations.
Greenhouse
Gas (GHG) Emissions. Legislative and regulatory measures to address GHG
emissions are in various phases of discussions or implementation at the
international, national, regional and state levels. In the United States, it is
likely that federal legislation requiring GHG controls will be enacted in the
next few years. In addition, the EPA is considering initiating a rulemaking to
regulate GHGs under the Clean Air Act. Legislation and regulation are also in
various stages of discussions or implementation in many of the states in which
we operate. These measures include recommendations released by the Western
Climate Initiative regarding a cap-and-trade program and targeted emission
reductions in several states in which we operate in the western United States,
as well as recent legislation enacted in California that imposes GHG emission
reduction targets. Additionally, lawsuits have been filed seeking to force the
federal government to regulate GHG emissions and individual companies to reduce
GHG emissions from their operations. These and other lawsuits may result in
decisions by state and federal courts and agencies that could impact our
operations and ability to obtain certifications and permits to construct future
projects. Our costs and legal exposure related to GHG regulations are not
currently determinable.
Other
Matters
Navajo
Nation. Approximately 900 looped pipeline miles of the north mainline of
our EPNG pipeline system are located on lands held in trust by the United States
for the benefit of the Navajo Nation. Our rights-of-way on lands crossing the
Navajo Nation are the subject of a pending renewal application filed in 2005
with the Department of the Interior’s Bureau of Indian Affairs (BIA). Subject to
final reviews and approvals by the Navajo Nation, we have reached an agreement
in principle on the terms of tribal consent to the BIA’s rights-of-way grant
through October 2025. We made a payment to the Navajo Nation in October 2008
covering a twelve-month period through October 2009 and will continue to make
annual payments per the terms of the definitive agreement. We have filed with
the FERC for recovery of these amounts in our recent rate
case.
Tuba
City Uranium Milling Facility. For a period of approximately ten years
beginning in the mid to late 1950s, Rare Metals Corporation of America, a
historical affiliate, conducted uranium mining and milling operations in the
vicinity of Tuba City, Arizona, under a contract with the United States
government as part of the Cold War nuclear program. The site of the Tuba City
uranium mill, which is on land within the Navajo Indian Reservation, reverted to
the Navajo Nation after the mill closed in 1966. The tailings at the mill site
were encapsulated and a ground water remediation system was installed by the
U.S. Department of Energy (DOE) under the Federal Uranium Mill Tailings
Radiation Control Act of 1978. In May 2007, we filed suit against the DOE and
other federal agencies requesting a judicial determination that the DOE was
fully and legally responsible for any remediation of any waste associated with
historical uranium production activity at two sites in the vicinity of the mill
facilities near Tuba City, Arizona. We are also cooperating with the Navajo
Nation in joint legislative efforts to achieve appropriations for the DOE to
assess and remediate the sites. Pending the potential remedial response by the
United States government, we have taken certain interim site control measures in
coordination with the Navajo Nation.
While the outcome
of these matters cannot be predicted with certainty, based on current
information, we do not expect the ultimate resolution of these matters to have a
material adverse effect on our financial position, operating results or cash
flows. It is possible that new information or future developments could require
us to reassess our potential exposure related to these matters. The impact of
these changes may have a material effect on our results of operations, our
financial position, and our cash flows in the periods these events
occur.
Capital
Commitments and Other Matters
Capital
Commitments. At December 31, 2008, we had capital commitments of
approximately $20 million. We have other planned capital projects that are
discretionary in nature, with no substantial contractual capital commitments
made in advance of the actual expenditures.
Operating
Leases and Other Commercial Commitments. We lease property, facilities
and equipment under various operating leases. Minimum future annual rental
commitments on operating leases as of December 31, 2008, were as
follows:
Year
Ending
December 31,
|
|
|
(In millions)
|
|
2009
|
|
$ |
2 |
|
2010
|
|
|
1 |
|
2011
|
|
|
1 |
|
Thereafter
|
|
|
2 |
|
Total
|
|
$ |
6 |
|
Rental expense on
our operating leases for each of the three years ended December 31, 2008, 2007
and 2006 was $22 million, $20 million and $17 million. These amounts include
rent allocated to us from El Paso.
We hold cancelable
easements or rights-of-way arrangements from landowners permitting the use of
land for the construction and operation of our pipeline systems. With the
exception of the rights of way on lands crossing the Navajo Nation discussed
above, our obligations under these easements are not material to our results of
our operations.
Guarantees.
We are or have been involved in various ownership and other contractual
arrangements that sometimes require us to provide additional financial support
that results in the issuance of financial and performance guarantees that are
not recorded in our financial statements. In a financial guarantee, we are
obligated to make payments if the guaranteed party fails to make payments under,
or violates the terms of, the financial arrangement. In a performance guarantee,
we provide assurance that the guaranteed party will execute on the terms of the
contract. If they do not, we are required to perform on their behalf. As of
December 31, 2008, we have financial and performance guarantees with a maximum
exposure of approximately $11 million, not otherwise recognized in the financial
statements.
7.
Retirement Benefits
Pension
and Retirement Benefits. El Paso maintains a pension plan and a
retirement savings plan covering substantially all of its U.S. employees,
including our former employees. The benefits under the pension plan are
determined under a cash balance formula. Under its retirement savings plan, El
Paso matches 75 percent of participant basic contributions up to six percent of
eligible compensation and can make additional discretionary matching
contributions depending on its performance relative to its peers. El Paso is
responsible for benefits accrued under its plans and allocates the related costs
to its affiliates.
Postretirement
Benefits. We provide postretirement medical benefits for a closed group
of employees who retired on or before March 1, 1986, and limited postretirement
life insurance for employees who retired after January 1, 1985. As such, our
obligation to accrue for other postretirement employee benefits is primarily
limited to the fixed population of retirees who retired on or before March 1,
1986. Our postretirement benefit plan costs are prefunded to the extent these
costs are recoverable through our rates. To the extent actual costs differ from
the amounts recovered in rates, a regulatory asset or liability is recorded. We
do not expect to make any contributions to our postretirement benefit plan in
2009.
Effective December
31, 2006, we began accounting for our postretirement benefit plan under the
recognition provisions of SFAS No. 158.
Under SFAS No. 158, we record an asset or liability for our
postretirement benefit plan based on its over funded or under funded status. In
March 2007, the FERC issued guidance requiring regulated pipeline companies to
record a regulatory asset or liability for any deferred amounts related to
unrecognized gains and losses or changes in actuarial assumptions that would
otherwise be recorded in accumulated other comprehensive income for
non-regulated entities. Upon adoption of this FERC guidance, we reclassified $4
million from accumulated other comprehensive loss to a regulatory
asset.
Effective January
1, 2008, we adopted the measurement date provisions of SFAS No. 158 and changed
the measurement date of our postretirement benefit plan from September 30 to
December 31. We recorded an increase of $1 million, net of income taxes of less
than $1 million, to our January 1, 2008 retained earnings balance upon the
adoption of the measurement date provisions of this standard.
Accumulated
Postretirement Benefit Obligation, Plan Assets and Funded Status.
The table below provides information about our postretirement benefit plan. In
2008, we adopted the measurement date provisions of SFAS No. 158 and the
information below for 2008 is presented and computed as of and for the fifteen
months ended December 31, 2008. For 2007, the information is presented and
computed as of and for the twelve months ended September 30,
2007.
|
|
December
31,
2008
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
Change in
accumulated postretirement benefit obligation:
|
|
|
|
|
|
|
Accumulated
postretirement benefit obligation —
beginning of period
|
|
$ |
62 |
|
|
$ |
88 |
|
Interest
cost
|
|
|
5 |
|
|
|
4 |
|
Actuarial
gain
|
|
|
(8 |
) |
|
|
(24 |
) |
Benefits paid(1)
|
|
|
(7 |
) |
|
|
(6 |
) |
Accumulated
postretirement benefit obligation — end
of period
|
|
$ |
52 |
|
|
$ |
62 |
|
Change in
plan assets:
|
|
|
|
|
|
|
|
|
Fair value of
plan assets —
beginning period
|
|
$ |
104 |
|
|
$ |
96 |
|
Actual return
on plan assets
|
|
|
(25 |
) |
|
|
14 |
|
Benefits
paid
|
|
|
(8 |
) |
|
|
(6 |
) |
Fair value of
plan assets — end
of period
|
|
$ |
71 |
|
|
$ |
104 |
|
Reconciliation
of funded status:
|
|
|
|
|
|
|
|
|
Fair value of
plan assets
|
|
$ |
71
|
|
|
$ |
104 |
|
Less:
accumulated postretirement benefit obligation
|
|
|
52
|
|
|
|
62 |
|
Fourth
quarter contributions
|
|
|
|
|
|
|
— |
|
Net asset at
December 31
|
|
$ |
19
|
|
|
$
|
42 |
|
____________
(1)
|
Amounts
shown are net of a subsidy related to the Medicare Prescription Drug,
Improvement, and Modernization Act of
2003.
|
Plan
Assets. The primary investment objective of our plan is to ensure that,
over the long-term life of the plan, an adequate pool of sufficiently liquid
assets exists to meet the benefit obligations to retirees and beneficiaries.
Investment objectives are long-term in nature covering typical market cycles.
Any shortfall of investment performance compared to investment objectives is the
result of general economic and capital market conditions. As a result of the
general decline in the markets for debt and equity securities, the fair value of
our plan’s assets and the funded status of our postretirement benefit plan
declined during 2008, which resulted in a significant decrease in our plan
assets and regulatory liability when our plan’s assets and obligation were
remeasured at December 31, 2008. The following table provides the target and
actual asset allocations in our postretirement benefit plan as of December 31,
2008 and September 30, 2007:
Asset
Category
|
|
|
Target
|
|
|
Actual
2008
|
|
|
Actual
2007
|
|
|
|
(Percent)
|
|
Equity
securities
|
|
|
65 |
|
|
|
65 |
|
|
|
63 |
|
Debt
securities
|
|
|
35 |
|
|
|
34 |
|
|
|
33 |
|
Cash and cash
equivalents
|
|
|
— |
|
|
|
1 |
|
|
|
4 |
|
Total
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Expected
Payment of Future Benefits. As of December 31, 2008, we expect the
following payments (net of an expected subsidy related to the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003) under our plan
(in millions):
Year
Ending
December
31,
|
|
2009
|
|
$ |
6 |
|
2010
|
|
|
6 |
|
2011
|
|
|
6 |
|
2012
|
|
|
6 |
|
2013
|
|
|
5 |
|
2014 —
2018
|
|
|
22 |
|
Actuarial
Assumptions and Sensitivity Analysis. Accumulated postretirement benefit
obligations and net benefit costs are based on actuarial estimates and
assumptions. The following table details the weighted average actuarial
assumptions used in determining our postretirement plan obligations and net
benefit costs for 2008, 2007 and 2006:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Percent)
|
|
Assumptions
related to benefit obligations at December 31, 2008 and
September 30,
2007 and 2006 measurement dates:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.90
|
|
|
|
6.05
|
|
|
|
5.50
|
|
Assumptions
related to benefit costs at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.05
|
|
|
|
5.50
|
|
|
|
5.25
|
|
Expected return on plan
assets(1)
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
8.00
|
|
____________
(1)
|
The
expected return on plan assets is a pre-tax rate of return based on our
targeted portfolio of investments. Our postretirement benefit plan’s
investment earnings are subject to unrelated business income taxes at a
rate of 35%. The expected return on plan assets for our postretirement
benefit plan is calculated using the after-tax rate of
return.
|
Actuarial estimates
for our postretirement benefits plan assumed a weighted average annual rate of
increase in the per capita costs of covered health care benefits of 8.6 percent
in 2008, gradually decreasing to 5.0 percent by the year 2015. Assumed health
care cost trends can have a significant effect on the amounts reported for our
postretirement benefit plan. A one-percentage point change would not have had a
significant effect on interest costs in 2008 or 2007. A one-percentage point
change in assumed health care cost trends would have the following effect as of
December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
(In
millions)
|
|
One
percentage point increase:
|
|
|
|
|
|
|
Accumulated
postretirement benefit obligation
|
|
$ |
3 |
|
|
$ |
4 |
|
One
percentage point decrease:
|
|
|
|
|
|
|
|
|
Accumulated
postretirement benefit obligation
|
|
$ |
(3 |
) |
|
$ |
(4 |
) |
Components
of Net Benefit Income. For each of the years ended December 31, the
components of net benefit income are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions)
|
|
Interest
cost
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
5 |
|
Expected
return on plan assets
|
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(6 |
) |
Amortization
of net actuarial (gain) loss
|
|
|
(2 |
) |
|
|
— |
|
|
|
1 |
|
Net
postretirement benefit income
|
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
$ |
— |
|
8.
Transactions with Major Customers
The following table
shows revenues from our major customers for each of the three years ended
December 31:
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
|
(In
millions)
|
|
Sempra Energy and Subsidiaries
(2)
|
|
$ |
85 |
|
|
$ |
93 |
|
|
$ |
152 |
|
ConocoPhillips Company(3)
|
|
|
82 |
|
|
|
47 |
|
|
|
33 |
|
Southwest Gas Corporation(4)
|
|
|
51 |
|
|
|
54 |
|
|
|
66 |
|
____________
(1)
|
Revenues
reflect rates subject to
refund.
|
(2)
|
Includes
SoCal revenues.
|
(3)
|
In
2007 and 2006, ConocoPhillips did not represent more than 10 percent of
our revenues.
|
(4)
|
In
2008 and 2007, Southwest Gas Corporation did not represent more than 10
percent of our revenues.
|
9.
Supplemental Cash Flow Information
The following table
contains supplemental cash flow information for each of the three years ended
December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions)
|
|
Interest
paid, net of capitalized interest
|
|
$ |
88 |
|
|
$ |
106 |
|
|
$ |
93 |
|
Income tax
payments
|
|
|
45 |
|
|
|
112 |
|
|
|
22 |
|
10.
Transactions with Affiliates
Cash
Management Program. We participate in El Paso’s cash management program
which matches short-term cash surpluses and needs of participating affiliates,
thus minimizing total borrowings from outside sources. El Paso uses the cash
management program to settle intercompany transactions between participating
affiliates. We have historically advanced cash to El Paso in exchange for an
affiliated note receivable that is due upon demand. During 2008, we utilized
$200 million of our notes receivable from the cash management program to pay
dividends to our parent. At December 31, 2008 and 2007, we had a note receivable
from El Paso of approximately $1.0 billion and $1.1 billion. We do not intend to
settle this note within twelve months and therefore, classified it as
non-current on our balance sheets. The interest rate on our note at December 31,
2008 and 2007 was 3.2% and 6.5%.
Income
Taxes. El Paso files consolidated U.S. federal and certain state tax
returns which include our taxable income. In certain states, we file and pay
taxes directly to the state taxing authorities. At December 31, 2008 and 2007,
we had income taxes payable of $79 million and $54 million. The majority of
these balances, as well as our deferred income taxes, will become payable to El
Paso. See Note 1 for a discussion of our income tax policy.
During 2007, we
amended our tax sharing agreement and intercompany tax billing policy with El
Paso to clarify the billing of taxes and tax related items to El Paso’s
subsidiaries. We also settled with El Paso certain tax attributes previously
reflected as deferred income taxes in our financial statements for $40 million
through our cash management program. This settlement is reflected as operating
activities in our statement of cash flows.
Other
Affiliate Balances. At December 31, 2008 and 2007, we had contractual
deposits from our affiliates of $8 million included in other current liabilities
on our balance sheets.
Affiliate
Revenues and Expenses. We provide natural gas transportation services to
an affiliate under long-term contracts. We entered into these contracts within
the ordinary course of business and the services are based on the same terms as
non-affiliates.
El Paso bills us
directly for certain general and administrative costs and allocates a portion of
its general and administrative costs to us. In addition to allocations from El
Paso, we are also allocated costs from Tennessee Gas Pipeline Company (TGP), our
affiliate, associated with our pipeline services. We also allocate costs to
Colorado Interstate Gas Company, our affiliate, for its share of our pipeline
services. The allocations from El Paso and TGP are based on the estimated level
of effort devoted to our operations and the relative size of our EBIT, gross
property and payroll.
The following table
shows overall revenues and charges from our affiliates for each of the three
years ended December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions)
|
|
Revenues from
affiliates
|
|
$ |
17 |
|
|
$ |
19 |
|
|
$ |
17 |
|
Operation and
maintenance expenses from affiliates
|
|
|
56 |
|
|
|
53 |
|
|
|
52 |
|
Reimbursements
of operating expenses charged to affiliates
|
|
|
21 |
|
|
|
17 |
|
|
|
16 |
|
11.
Supplemental Selected Quarterly Financial Information (Unaudited)
Our financial
information by quarter is summarized below. Due to the seasonal nature of our
business, information for interim periods may not be indicative of our results
of operations for the entire year.
|
|
Quarters
Ended
|
|
|
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September
30
|
|
|
December
31(1)
|
|
|
Total
|
|
|
|
(In
millions)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
141 |
|
|
$ |
152 |
|
|
$ |
145 |
|
|
$ |
152 |
|
|
$ |
590 |
|
Operating
income
|
|
|
60 |
|
|
|
74 |
|
|
|
61 |
|
|
|
62 |
|
|
|
257 |
|
Net
income
|
|
|
33 |
|
|
|
40 |
|
|
|
31 |
|
|
|
31 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
145 |
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
140 |
|
|
$ |
557 |
|
Operating
income
|
|
|
70 |
|
|
|
56 |
|
|
|
54 |
|
|
|
58 |
|
|
|
238 |
|
Net
income
|
|
|
39 |
|
|
|
31 |
|
|
|
30 |
|
|
|
32 |
|
|
|
132 |
|
____________
(1)
|
Includes
asset impairments of $14 million due to declining real estate values for
2008 related to our Arizona storage projects, which we are no longer
developing and $9 million for 2007 related to our East Valley Line lateral
pursuant to a FERC order on our accounting treatment for the planned sale
of certain transmission
facilities.
|
SCHEDULE
II
EL
PASO NATURAL GAS COMPANY
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2008, 2007 and 2006
(In
millions)
Description
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to
Costs
and
Expenses
|
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$ |
4 |
|
|
$ |
(2 |
) |
|
$ |
— |
|
|
$ |
2 |
|
Legal
reserves
|
|
|
4 |
|
|
|
8 |
|
|
|
(6 |
) |
|
|
6 |
|
Environmental
reserves
|
|
|
25 |
|
|
|
1 |
|
|
|
(4 |
) |
|
|
22 |
|
Regulatory
reserves
|
|
|
10 |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$ |
5 |
|
|
$ |
(1 |
) |
|
$ |
— |
|
|
$ |
4 |
|
Legal
reserves
|
|
|
16 |
|
|
|
4 |
|
|
|
(16 |
) |
|
|
4 |
|
Environmental
reserves
|
|
|
24 |
|
|
|
6 |
|
|
|
(5 |
) |
|
|
25 |
|
Regulatory
reserves
|
|
|
65 |
|
|
|
60 |
|
|
|
(115 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$ |
18 |
|
|
$ |
(4 |
) |
|
$ |
(9 |
) |
|
$ |
5 |
|
Legal
reserves
|
|
|
45 |
|
|
|
1 |
|
|
|
(30 |
) |
|
|
16 |
|
Environmental
reserves
|
|
|
29 |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
24 |
|
Regulatory
reserves
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
65 |
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of December 31,
2008, we carried out an evaluation under the supervision and with the
participation of our management, including our President and Chief Financial
Officer, as to the effectiveness, design and operation of our disclosure
controls and procedures. This evaluation considered the various processes
carried out under the direction of our disclosure committee in an effort to
ensure that information required to be disclosed in the SEC reports we file or
submit under the Exchange Act is accurate, complete and timely. Our management,
including our President and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent and/or
detect all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives and our President and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective at a reasonable level of
assurance at December 31, 2008. See Item 8, Financial Statements and
Supplementary Data under Management’s Annual Report on Internal Control Over
Financial Reporting.
Changes
in Internal Control Over Financial Reporting
There were no
changes in our internal control over financial reporting during the fourth
quarter of 2008 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
This annual report
does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report. See Item 8, Financial Statements and Supplementary Data, under
Management’s Annual Report on Internal Control over Financial
Reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
None.
PART
III
Item 10,
“Directors, Executive Officers and Corporate Governance;” Item 11, “Executive
Compensation;” Item 12, “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters;” and Item 13, “Certain Relationships
and Related Transactions, and Director Independence” have been omitted from this
report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit
Fees
The audit fees for
the years ended December 31, 2008 and 2007 of $751,000 and $863,000,
respectively, were primarily for professional services rendered by Ernst &
Young LLP and for the audits of the consolidated financial statements of El Paso
Natural Gas Company and its subsidiaries, the review of documents filed with the
Securities and Exchange Commission, consents, and the issuance of comfort
letters.
All
Other Fees
No other
audit-related, tax or other services were provided by our independent registered
public accounting firm for the years ended December 31, 2008 and
2007.
Policy
for Approval of Audit and Non-Audit Fees
We are an indirect
wholly owned subsidiary of El Paso and do not have a separate audit committee.
El Paso’s Audit Committee has adopted a pre-approval policy for audit and
non-audit services. For a description of El Paso’s pre-approval policies for
audit and non-audit related services, see El Paso Corporation’s proxy statement
for its 2009 Annual Meeting of Stockholders.
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
|
(a)
|
The
following documents are filed as a part of this
report:
|
1.
Financial statements
The following
consolidated financial statements are included in Part II, Item 8 of this
report:
|
|
Page
|
|
Reports of
Independent Registered Public Accounting Firms
|
21
|
|
Consolidated
Statements of Income
|
22
|
|
Consolidated
Balance Sheets
|
23
|
|
Consolidated
Statements of Cash Flows
|
24
|
|
Consolidated
Statements of Stockholder’s Equity
|
25
|
|
Notes to
Consolidated Financial Statements
|
26
|
|
|
|
|
2. Financial
statement schedules
|
|
|
|
|
|
Schedule II —
Valuation and Qualifying Accounts
|
42
|
All other schedules
are omitted because they are not applicable, or the required information is
disclosed in the financial statements or accompanying notes.
3.
Exhibits
The Exhibit Index,
which follows the signature page to this report and is hereby incorporated
herein by reference, sets forth a list of those exhibits filed herewith, and
includes and identifies contracts or arrangements required to be filed as
exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation
S-K.
Undertaking
We hereby
undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii), to
furnish to the U.S. SEC upon request all constituent instruments defining the
rights of holders of our long-term debt and our consolidated subsidiaries not
filed as an exhibit hereto for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of our total
consolidated assets.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, El
Paso Natural Gas Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 2nd day of March
2009.
|
EL
PASO NATURAL GAS COMPANY |
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ James
J. Cleary
|
|
|
|
James J.
Cleary
|
|
|
|
President
|
|
|
|
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of El Paso Natural Gas Company and in
the capacities and on the dates indicated:
|
Signature
|
|
|
Title
|
|
|
Date
|
|
|
|
|
/s/ James J.
Cleary
|
President and
Director
|
March 2,
2009
|
James J.
Cleary
|
(Principal
Executive Officer)
|
|
|
|
|
/s/ John R.
Sult
|
Senior Vice
President, Chief Financial
|
|
John R.
Sult
|
Officer and
Controller (Principal Accounting and Financial Officer)
|
|
|
|
|
/s/ James C.
Yardley
|
Chairman of
the Board
|
|
James C.
Yardley
|
|
|
|
|
|
/s/ Daniel B.
Martin
|
Senior Vice
President and
|
|
Daniel B.
Martin
|
Director
|
|
|
|
|
/s/ Thomas L.
Price
|
Vice
President and Director
|
|
Thomas L.
Price
|
|
|
|
|
|
EL
PASO NATURAL GAS COMPANY
EXHIBIT
INDEX
December
31, 2008
Each exhibit
identified below is a part of this report. Exhibits filed with this report are
designated by “*”. All exhibits not so designated are incorporated herein by
reference to a prior filing as indicated.
Exhibit
Number
|
|
Description
|
|
|
|
*3.A
|
Restated
Certificate of Incorporation dated April 8, 2003.
|
|
|
*3.B
|
By-laws dated
June 2, 2008.
|
|
|
4.A
|
Indenture
dated as of January 1, 1992, between El Paso Natural Gas Company and
Wilmington Trust Company (as successor to Citibank, N.A.), as Trustee,
(Exhibit 4.A to our Annual Report on Form 10-K for the year
ended December 31, 2004, filed with the SEC on March 29,
2005).
|
|
|
4.B
|
Indenture
dated as of November 13, 1996, between El Paso Natural Gas Company
and Wilmington Trust Company (as successor to JPMorgan Chase Bank,
formerly known as The Chase Manhattan Bank), as Trustee, (Exhibit 4.B
to our Annual Report on Form 10-K for the year ended December 31,
2004, filed with the SEC on March 29, 2005).
|
|
|
*4.C
|
Indenture
dated as of July 21, 2003, between El Paso Natural Gas Company and
Wilmington Trust Company, as Trustee.
|
|
|
*4.D
|
First
Supplemental Indenture dated as of June 10, 2002 between El Paso
Natural Gas Company and Wilmington Trust Company (as successor in interest
to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as
Trustee, to indenture dated November 13, 1996.
|
|
|
4.E
|
Second
Supplemental Indenture dated as of April 4, 2007 between El Paso
Natural Gas Company and Wilmington Trust Company, as Trustee, to indenture
dated November 13, 1996 (Exhibit 4.A to our Current Report on
Form 8-K filed with the SEC on April 9,
2007).
|
|
|
4.F
|
First
Supplemental Indenture dated as of April 4, 2007 between El Paso
Natural Gas Company and Wilmington Trust Company, as trustee, to indenture
dated as of July 23, 2003 (Exhibit 4.C to our Current Report on
Form 8-K filed with the SEC on April 9,
2007).
|
|
|
4.G
|
Form of 5.95%
Senior Note due 2017 (included in Exhibit 4.E).
|
|
|
10.A
|
Amended and
Restated Credit Agreement dated as of July 31, 2006, among El Paso
Corporation, Colorado Interstate Gas Company, El Paso Natural Gas Company,
Tennessee Gas Pipeline Company, the several banks and other financial
institutions from time to time parties thereto and JPMorgan Chase Bank,
N.A., as administrative agent and as collateral agent. (Exhibit 10.A
to our Current Report on Form 8-K filed with the SEC on
August 2, 2006.)
|
|
|
10.A.1
|
Amendment
No. 1 dated as of January 19, 2007 to the Amended and Restated
Credit Agreement dated as of July 31, 2006 among El Paso Corporation,
Colorado Interstate Gas Company, El Paso Natural Gas Company, Tennessee
Gas Pipeline Company, the several banks and other financial institutions
from time to time parties thereto and JPMorgan Chase Bank, N.A., as
administrative agent and as collateral agent (Exhibit 10.A.1 to our
Annual Report on Form 10-K for the year ended December 31, 2006,
filed with the SEC on February 28, 2007).
|
|
|
10.B
|
Amended and
Restated Security Agreement dated as of July 31, 2006, among El Paso
Corporation, Colorado Interstate Gas Company, El Paso Natural Gas Company,
Tennessee Gas Pipeline Company, the Subsidiary Guarantors and certain
other credit parties thereto and JPMorgan Chase Bank, N.A., not in its
individual capacity, but solely as collateral agent for the Secured
Parties and as the depository bank. (Exhibit 10.B to our Current
Report on Form 8-K filed with the SEC on August 2,
2006.)
|
|
|
10.C
|
Third Amended
and Restated Credit Agreement dated as of November 16, 2007, among El
Paso Corporation, El Paso Natural Gas Company, Tennessee Gas Pipeline
Company, the several banks and other financial institutions from time to
time parties thereto and JPMorgan Chase Bank, N.A., as administrative
agent and as collateral agent. (Exhibit 10.A to our Current Report on
Form 8-K filed with the SEC on November 21,
2007.)
|
Exhibit
Number
|
|
Description
|
|
|
|
10.D
|
Third
Amendment and Restated Security Agreement dated as of November 16,
2007, made by among El Paso Corporation, El Paso Natural Gas Company,
Tennessee Gas Pipeline Company, the subsidiary Grantors and certain other
credit parties thereto and JPMorgan Chase Bank, N.A., not in its
individual capacity, but solely as collateral agent for the Secured
Parties and as the depository bank. (Exhibit 10.B to our Current
Report on Form 8-K filed with the SEC on November 21,
2007).
|
|
|
10.E
|
Third Amended
and Restated Subsidiary Guarantee Agreement dated as of November 16,
2007, made by each of the Subsidiary Guarantors in favor of JPMorgan Chase
Bank, N.A., as Collateral Agent (Exhibit 10.C to our Current Report
on Form 8-K filed with the SEC on November 21,
2007.)
|
|
|
10.F
|
Registration
Rights Agreement, dated as of April 4, 2007, among El Paso Natural
Gas Company and Deutsche Bank Securities Inc., Citigroup Global Markets
Inc., ABN AMRO Incorporated, Goldman, Sachs & Co, Greenwich Capital
Markets, Inc., J.P. Morgan Securities Inc. and SG Americas Securities, LLC
(Exhibit 10.A to our Current Report on Form 8-K filed with the
SEC on April 9, 2007).
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21
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Omitted
pursuant to the reduced disclosure format permitted by General Instruction
I to Form 10-K.
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*31.A
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Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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*31.B
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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*32.A
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Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*32.B
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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48