EL
PASO NATURAL GAS COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis
of Presentation and Significant Accounting Policies
Basis of
Presentation
We are an indirect
wholly owned subsidiary of El Paso Corporation (El Paso). We prepared
this Quarterly Report on Form 10-Q under the rules and regulations of the
United States Securities and Exchange Commission (SEC). Because this
is an interim period filing presented using a condensed format, it does not
include all of the disclosures required by U.S. generally accepted accounting
principles. You should read this Quarterly Report on Form 10-Q along with
our 2008 Annual Report on Form 10-K, which contains a summary of our
significant accounting policies and other disclosures. The financial statements
as of September 30, 2009, and for the quarters and nine months ended September
30, 2009 and 2008, are unaudited. We derived the condensed consolidated
balance sheet as of December 31, 2008, from the audited balance sheet
filed in our 2008 Annual Report on Form 10-K. In our opinion, we have made
all adjustments, which are of a normal recurring nature, to fairly present our
interim period results. We have evaluated subsequent events through the time of
filing on November 6, 2009, the date of issuance of our financial
statements. Due to the seasonal nature of our business, information
for interim periods may not be indicative of our operating results for the
entire year.
Significant Accounting
Policies
The information
below provides an update of our significant accounting policies and accounting
pronouncements as discussed in our 2008 Annual Report on Form
10-K.
Fair Value Measurements. On
January 1, 2009, we adopted new accounting and reporting standards related to
our non-financial assets and liabilities that are measured at fair value on a
non-recurring basis, which primarily relates to any impairment of long-lived
assets or investments. During the nine months ended September 30, 2009, there
were no fair value measurements recorded on a non-recurring basis.
Business Combinations and
Noncontrolling Interests. On January 1, 2009, we adopted accounting
standard updates that clarify how to account for and report acquisitions of
businesses and transactions involving noncontrolling interests. These updates
require that all acquired assets, liabilities, noncontrolling interests and
certain contingencies be measured at fair value, and certain other
acquisition-related costs be expensed rather than capitalized. Additionally, all
transactions with noncontrolling interest holders after adoption, including the
issuance and repurchase of noncontrolling interests, should be accounted for as
equity transactions unless a change in control of the subsidiary occurs. The
adoption of these accounting standard updates did not have an impact on our
financial statements. Application of these updates impacts
transactions that are entered into after December 31, 2008.
2.
Fair Value of Financial Instruments
At September 30,
2009 and December 31, 2008, the carrying amounts of trade and other receivables
and payables are representative of their fair value because of the short-term
nature of these instruments. At September 30, 2009 and December 31, 2008, we had
a note receivable from El Paso of approximately $1.2 billion and $1.0 billion
due upon demand, with a variable interest rate of 1.5% and 3.2%. 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 note being due on demand and the market-based nature of its interest
rate.
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:
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
(In
millions)
|
|
|
Long-term
debt, including current maturities
|
|
$ |
1,167 |
|
|
$ |
1,307 |
|
|
$ |
1,166 |
|
|
$ |
1,021 |
|
3. Commitments
and Contingencies
Legal
Proceedings
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 trial of this matter began in
October. The timing and the outcome of this trial are currently
uncertain and 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. In March 2009, the Tenth Circuit
Court of Appeals affirmed the dismissals and in October 2009, the plaintiff’s
petition for writ of certiorari to the United States Supreme Court was
denied.
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 were argued in March 2005 and in
September 2009, the Kansas State Court Judge denied the
motions. Plaintiffs have filed a motion for
reconsideration. The plaintiffs seek 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 occurred in April 2009. The court
certified a Texas and Oklahoma class of royalty owners. The class
certification has been appealed to the Oklahoma Court of Appeals. 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 September 30,
2009, we had accrued approximately $2 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 September 30, 2009 and December 31,
2008, we had accrued approximately $18 million and $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 $39 million at September 30, 2009. Our accrual
at September 30, 2009 includes $16 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.
For the remainder
of 2009, we estimate that our total remediation expenditures will be
approximately $1 million, which will be expended under government directed
clean-up programs.
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 September 30, 2009, we have
estimated our share of the remediation costs at these sites to be between $8
million and $13 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.
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 Matter
EPNG Rate Case. In June 2008,
we filed a rate case with the Federal Energy Regulatory Commission (FERC) as
required under the settlement of our previous rate case. The filing proposed an
increase in our base tariff rates which would increase revenue by $83 million
annually over previously effective tariff rates. In August 2008, the FERC issued
an order accepting the proposed rates 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 has appointed an administrative law
judge to preside over a hearing if we are unable to reach a negotiated
settlement with our customers on the remaining issues. The hearing is currently
scheduled to begin in early January 2010. The outcome of the hearing
is not currently determinable.
Other
Matters
Navajo Nation. In March 2009,
representatives of the Navajo Nation and EPNG executed a final agreement setting
forth the full terms and conditions of the Navajo Nation’s consent to EPNG’s
rights-of-way through the Navajo Nation. We submitted the Navajo
Nation’s consent agreement in support of EPNG’s pending application to the
United States Department of the Interior (the Department) for an extension of
the Department’s current right-of-way grant. We expect the
submission will result in the Department’s final processing of our application.
We have filed with the FERC for recovery of payments under rights of way 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. In
March 2009, the United States District Court for the District of Columbia issued
an opinion dismissing one of our claims, for which we intend to make an
appeal. Also in March, following our close cooperation with the
Navajo Nation in joint legislative efforts, President Obama signed the Fiscal
Year 2009 Omnibus Appropriations Act, which appropriated $5 million toward the
final remediation by the DOE of one of the two sites that are the subject of our
lawsuit. Pending the 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.
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. As of September 30, 2009, we have financial and performance
guarantees with a maximum exposure of approximately $11 million.
4. 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 the
first quarter of 2008, we utilized $150 million of our note receivable from the
cash management program to pay a dividend to our parent. At September
30, 2009 and December 31, 2008, we had a note receivable from
El Paso of approximately $1.2 billion and $1.0 billion. We classified $99
million of this receivable as current on our balance sheet at September 30,
2009, based on the net amount we anticipate using in the next twelve months
considering available cash sources and needs. The interest rate on this variable
rate note was 1.5% at September 30, 2009 and 3.2% at December 31,
2008.
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 September
30, 2009 and December 31, 2008, we had federal and state income
taxes payable of $140 million and $79 million. The majority of these
balances, as well as our deferred income taxes, will become payable to
El Paso.
Other Affiliate
Balances. At September 30, 2009 and December 31, 2008, we
had contractual deposits from our affiliates of $8 million, included in
other current liabilities on our balance sheets.
Affiliate Revenues and
Expenses. We enter into transactions with our affiliates within the
ordinary course of business. For a further discussion of our affiliated
transactions, see our 2008 Annual Report on Form 10-K. The following table shows
revenues and charges from our affiliates for the periods ended September
30:
|
|
|
Quarter
Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
millions)
|
|
|
Revenues from
affiliates
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
13 |
|
|
Operation and
maintenance expenses from affiliates
|
|
|
15 |
|
|
|
15 |
|
|
|
46 |
|
|
|
43 |
|
|
Reimbursement
of operating expenses charged to affiliates
|
|
|
6 |
|
|
|
6 |
|
|
|
17 |
|
|
|
16 |
|
The information
required by this Item is presented in a reduced disclosure format pursuant to
General Instruction H to Form 10-Q. In addition, this Item updates,
and should be read in conjunction with, information disclosed in our 2008 Annual
Report on Form 10-K, and our condensed consolidated financial statements
and the accompanying footnotes presented in Item 1 of this Quarterly Report
on Form 10-Q.
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 to provide them with the same measure used by El Paso to
evaluate our performance. We define EBIT as net income adjusted for items such
as (i) interest and debt expense, (ii) affiliated interest income, and (iii)
income taxes. 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 measures used by other companies.
Additionally, EBIT should be considered in conjunction with net income, income
before income taxes 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 nine
months ended September 30, 2009 compared to the same period in
2008.
|
Operating
Results:
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
millions,
except
for volumes)
|
|
|
Operating
revenues
|
|
$ |
446 |
|
|
$ |
438 |
|
|
Operating
expenses
|
|
|
(232 |
) |
|
|
(243 |
) |
|
Operating
income
|
|
|
214 |
|
|
|
195 |
|
|
Other income,
net
|
|
|
2 |
|
|
|
5 |
|
|
EBIT
|
|
|
216 |
|
|
|
200 |
|
|
Interest and
debt expense
|
|
|
(69 |
) |
|
|
(68 |
) |
|
Affiliated
interest income, net
|
|
|
14 |
|
|
|
36 |
|
|
Income
taxes
|
|
|
(61 |
) |
|
|
(64 |
) |
|
Net
income
|
|
$ |
100 |
|
|
$ |
104 |
|
|
Throughput
volumes (BBtu/d)(1)
|
|
|
3,983 |
|
|
|
4,372 |
|
____________
|
|
(1) Throughput
volumes exclude throughput transported by the Mojave Pipeline Company
(Mojave) system on behalf of
EPNG.
|
|
EBIT
Analysis:
|
|
Revenue
|
|
|
Expense
|
|
|
Other
|
|
|
EBIT
Impact
|
|
|
|
|
Favorable/(Unfavorable)
|
|
|
|
|
(In
millions)
|
|
|
Reservation
and other services revenues
|
|
$ |
15 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15 |
|
|
Enron
bankruptcy settlement
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(8 |
) |
|
Operating and
general and administrative expenses
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
|
Other (1)
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
Total
impact on EBIT
|
|
$ |
8 |
|
|
$ |
11 |
|
|
$ |
(3 |
) |
|
$ |
16 |
|
__________________
|
|
(1) Consists of
individually insignificant
items.
|
Reservation and
Other Services Revenues. Reservation and other
services revenues were higher for the nine months ended September 30, 2009
compared to 2008, primarily due to an increase of $20 million in reservation
charges for capacity on our EPNG system during the first nine months of 2009
primarily resulting from higher contracted capacity to primary delivery points
in California and an increase in EPNG’s tariff rates effective January 1, 2009,
subject to refund. Partially offsetting the increase was a $5 million
decrease in usage revenues primarily due to reduced throughput in 2009.
We may or may not
be able to sustain higher levels of contracted capacity by our customers in the
future. For instance, beginning September 1, 2009, one of our major
customers did not re-contract approximately 74 MDth/day of
capacity. To the extent that we are unable to re-market this
capacity, we estimate our revenues will be adversely affected by approximately
$7 million annually based on currently billed rates. Additionally,
although a reduction in throughput on our system is not material to our
short-term financial results due to a substantial portion of our revenues being
based on firm reservation charges under long-term contracts, it can be an
indication of the risks we may face when seeking to re-contract or renew any of
our existing firm transportation contracts.
For the nine
months ended September 30, 2009, our throughput volumes decreased compared with
the same period in 2008. The reduction in throughput was due, in
part, to a decrease in natural gas and electric generation demand due to weak
macroeconomic conditions in the southwestern U.S. as well as the introduction in
April 2009 of a new interstate natural gas pipeline with approximately 500
MDth/d of capacity serving the greater Phoenix, Arizona area. We anticipate
these factors will continue to negatively affect our throughput. If
these macroeconomic conditions continue, it could negatively impact basis
differentials over the longer term and our ability to renew firm transportation
contracts that are expiring on our system or our ability to renew such contracts
at current rates. If, however, we determine there is a significant
change in our cost of providing service or billing determinants, we have the
option to file a future rate case with the FERC to recover our prudently
incurred costs.
Enron Bankruptcy Settlement.
During the nine months ended September 30, 2008, we recorded income of
approximately $8 million as a result of settlements received from the Enron
bankruptcy.
Operating and General and
Administrative Expenses. During the nine months ended September 30, 2009,
our operating and general and administrative expenses were lower primarily as a
result of decreased repair and maintenance expenses.
EPNG Regulatory
Matters. 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 which would increase revenue by $83 million
annually over previously effective tariff rates. In August 2008, the FERC issued
an order accepting the proposed rates effective January 1, 2009, subject to
refund and the outcome of a hearing and a technical conference. In December
2008, the FERC issued an order that generally accepted most of our proposals in
the technical conference proceeding. The FERC appointed an administrative law
judge to preside over a hearing if we are unable to reach a negotiated
settlement with our customers on the remaining issues. The hearing is currently
scheduled to begin in early January 2010. The outcome of the hearing
is not currently determinable.
On October 1, 2009,
we received an order from the FERC directing us to modify the cost and revenue
component of our fuel recovery mechanism. EPNG is seeking rehearing
and clarification of certain aspects of this order, however, we do not believe
that this order will have any negative effect to previously reported
earnings. Due to this order, our future earnings may be impacted by
both positive and negative fluctuations in gas prices related to fuel imbalance
revaluations, their settlement, and other gas balance related
items. We continue to explore options to minimize the price
volatility associated with these operational pipeline activities.
Affiliated
Interest Income, Net
Affiliated interest
income, net for the nine months ended September 30, 2009, was $22 million lower
than the same period in 2008 primarily due to lower average short-term interest
rates on advances to El Paso under its cash management program. The
following table shows the average advances due from El Paso and the average
short-term interest rates for the nine months ended September 30:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
billions, except for rates)
|
|
|
Average
advance due from El Paso
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
Average
short-term interest rate
|
|
|
1.8 |
% |
|
|
4.5 |
% |
Income
Taxes
Our effective tax
rate of 38 percent for the nine months ended September 30, 2009 and 2008 was
higher than the statutory rate of 35 percent primarily due to the effect of
state income taxes.
Liquidity
and Capital Resources
Our primary sources
of liquidity are cash flows from operating activities and El Paso’s cash
management program. At September 30, 2009, we had a note receivable from
El Paso of approximately $1.2 billion of which approximately $99 million
was classified as current based on the net amount we anticipate using in the
next twelve months considering available cash sources and needs. See
Item 1, Financial Statements, Note 4, for a further discussion of El Paso’s
cash management program. Our primary uses of cash are for working capital,
capital expenditures and debt service requirements. Our cash capital
expenditures for the nine months ended September 30, 2009, and our estimated
capital expenditures for the remainder of this year to expand and maintain our
systems are listed below.
|
|
|
Nine
Months Ended
September 30, 2009
|
|
|
2009
Remaining
|
|
|
Total
|
|
|
|
|
(In
millions)
|
|
|
Maintenance
|
|
$ |
87 |
|
|
$ |
32 |
|
|
$ |
119 |
|
|
Expansion
|
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
|
$ |
91 |
|
|
$ |
32 |
|
|
$ |
123 |
|
Volatility in the
financial markets, the energy industry and the global economy will likely
continue through the remainder of 2009 and beyond. Although recent financial
market conditions have shown signs of improvement, continued volatility in the
financial markets could impact our longer-term access to capital for future
growth projects as well as the cost of such capital. Additionally, although the
impacts are difficult to quantify at this point, a prolonged recovery of the
global economy could have adverse impacts on natural gas consumption and demand.
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. However,
we may or may not be able to sustain higher levels of contracted capacity by our
customers in the future as further discussed in Results of
Operations.
We believe we have
adequate liquidity available to us to meet our capital requirements and our
existing operating needs through cash flows from operating activities and
amounts available to us under El Paso’s cash management program. As
of September 30, 2009, El Paso had approximately $2.4 billion of available
liquidity, including $1.4 billion of capacity available to it under various
committed credit facilities. In addition to the cash management program above,
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 September 30, 2009, El Paso had approximately $0.9 billion of
capacity remaining and available to us and our affiliates under this credit
agreement, and none of the amount outstanding under the facility was issued or
borrowed by us. For a further discussion of this credit agreement, see our 2008
Annual Report on Form 10-K. While we do not anticipate a need to
directly access the financial markets in the remainder of 2009 for any of our
operating activities or expansion capital needs based on liquidity available to
us, volatility in the financial markets could impact our or El Paso’s ability to
access these markets at reasonable rates in the future.
Commitments
and Contingencies
For a further
discussion of our commitments and contingencies, see Item 1, Financial
Statements, Note 3, which is incorporated herein by reference.
Climate Change and Energy
Legislation. There are various legislative and regulatory measures
relating to climate change and energy policies that have been proposed and, if
enacted, will likely impact our business.
Climate Change
Regulation. Measures to address climate change and greenhouse
gas (GHG) emissions are in various phases of discussions or implementation at
international, federal, regional and state levels. It is likely that federal
legislation requiring GHG controls will be enacted within the next few years in
the United States. Although it is uncertain what legislation will
ultimately be enacted, it is our belief that cap-and-trade or other legislation
that sets a price on carbon emissions will increase demand for natural gas,
particularly in the power sector. We believe this increased demand
will occur due to substantially less carbon emissions associated with the use of
natural gas compared with alternate fuel sources for power generation, including
coal and oil-fired power generation. However, the actual impact on
demand will depend on the legislative provisions that are ultimately adopted,
including the level of emission caps, allowances granted and the cost of
emission credits.
It is also likely
that any federal legislation enacted would increase our cost of environmental
compliance by requiring us to install additional equipment to reduce carbon
emissions from our larger facilities as well as to potentially purchase emission
credits. Based on 2007 data we reported to the California Climate
Action Registry (CCAR), our operations in the United States emitted
approximately 3.5 million tonnes of carbon dioxide equivalent emissions during
2007. We believe that approximately 2.9 million tonnes of the GHG emissions that
we reported to CCAR would be subject to regulation under the climate change
legislation that passed in the U.S. House of Representatives in July 2009, with
approximately 57 percent of this amount being subject to the cap-and-trade rules
contained in the proposed legislation and the remainder being subject to
performance standards. As proposed, the portion of our GHG emissions
that would be subject to performance standards could require us to install
additional equipment or initiate new work practice standards to reduce emission
levels at many of our facilities, the costs of which would likely be
material. Although we believe that many of these costs should be
recoverable in the rates charged to our customers, recovery is still uncertain
at this time.
The Environmental
Protection Agency (EPA) finalized regulations to monitor and report GHG
emissions on an annual basis and recently proposed new regulations to regulate
GHGs under the Clean Air Act, which EPA has indicated could be finalized as
early as March 2010. In addition, various lawsuits have been filed
seeking to force further regulation of GHG emissions, as well as to require
specific companies to reduce GHG emissions from their operations. Enactment of
additional regulations, as well as lawsuits, could result in delays and have
negative impacts on our ability to obtain permits and other regulatory approvals
with regard to existing and new facilities, could impact our costs of
operations, as well as require us to install new equipment to control emissions
from our facilities, the costs of which would likely be material.
Energy
Legislation. In conjunction with these climate change
proposals, there have been various federal and state legislative and regulatory
proposals that would create additional incentives to move to a less carbon
intensive “footprint”. These proposals would establish renewable
portfolio standards at both the federal and state level, some of which would
require a material increase of renewable sources, such as wind and solar power
generation, over the next several decades. Additionally, the
proposals would establish incentives for energy efficiency and
conservation. Although the ultimate targets that would be established
in these areas are uncertain at this time, such proposals if enacted could negatively impact natural gas
usage over the longer term.
Omitted from this
report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Evaluation
of Disclosure Controls and Procedures
As of September 30,
2009, we carried out an evaluation under the supervision and with the
participation of our management, including our President and our 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
objective and our President and our Chief Financial Officer concluded that our
disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e)
and 15d – 15(e)) were effective as of September 30, 2009.
Changes
in Internal Control Over Financial Reporting
During the third
quarter of 2009, we implemented a new financial accounting system and
consolidated financial chart of accounts. The system implementation efforts were
carefully planned and executed. Training sessions were administered to
individuals who are impacted by the new system and chart of accounts, and system
controls and functionality were reviewed and successfully tested prior and
subsequent to implementation. Following evaluation, management
believes that the new system has been successfully implemented. There
were no other changes in our internal control over financial reporting during
the third quarter of 2009 that have materially affected or are reasonably likely
to materially affect our internal control over financial reporting.
See Part I,
Item 1, Financial Statements, Note 3, which is incorporated herein by
reference.
CAUTIONARY
STATEMENTS 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.
Important factors
that could cause actual results to differ materially from estimates or
projections contained in forward-looking statements are described in our 2008
Annual Report on Form 10-K under Part I, Item 1A, Risk Factors. There have
been no material changes in these risk factors since that report.
Omitted from this
report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Omitted from this
report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Omitted from this
report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
None.
The
Exhibit Index is hereby incorporated herein by reference and sets forth a
list of those exhibits filed herewith.
The agreements
included as exhibits to this report are intended to provide information
regarding their terms and not to provide any other factual or disclosure
information about us or the other parties to the agreements. The agreements may
contain representations and warranties by the parties to the agreements,
including us, solely for the benefit of the other parties to the applicable
agreement and:
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should not in
all instances be treated as categorical statements of fact, but rather as
a way of allocating the risk to one of the parties if those statements
prove to be inaccurate;
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·
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may have been
qualified by disclosures that were made to the other party in connection
with the negotiation of the applicable agreement, which disclosures are
not necessarily reflected in the
agreement;
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·
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may apply
standards of materiality in a way that is different from what may be
viewed as material to certain
investors; and
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·
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were made
only as of the date of the applicable agreement or such other date or
dates as may be specified in the agreement and are subject to more recent
developments.
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Accordingly, these
representations and warranties may not describe the actual state of affairs as
of the date they were made or at any other time.
Pursuant to the
requirements 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.
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EL
PASO NATURAL GAS COMPANY
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Date: November
6, 2009
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/s/
James J. Cleary
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James J.
Cleary
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President
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(Principal
Executive Officer)
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Date: November
6, 2009
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/s/
John R. Sult
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John R.
Sult
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Senior
Vice President,
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Chief
Financial Officer and Controller
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(Principal
Accounting and Financial Officer)
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EL PASO
NATURAL GAS COMPANY
EXHIBIT
INDEX
Each exhibit
identified below is filed as a part of this report.
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Exhibit
Number
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Description
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12
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Ratio of
Earnings to Fixed Charges.
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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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