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EXCEL - IDEA: XBRL DOCUMENT - NORTHWEST PIPELINE LLC | Financial_Report.xls |
EX-32.(A) - SECTION 906 CEO AND CFO CERTIFICATION - NORTHWEST PIPELINE LLC | d250823dex32a.htm |
EX-31.(B) - SECTION 302 CFO CERTIFICATION - NORTHWEST PIPELINE LLC | d250823dex31b.htm |
EX-31.(A) - SECTION 302 CEO CERTIFICATION - NORTHWEST PIPELINE LLC | d250823dex31a.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-7414
NORTHWEST PIPELINE GP
(Exact name of registrant as specified in its charter)
DELAWARE | 26-1157701 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
295 Chipeta Way | ||
Salt Lake City, Utah | 84108 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (801) 583-8800
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
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):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | þ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Table of Contents
NORTHWEST PIPELINE GP
FORM 10-Q
Forward Looking Statements
Certain matters contained in this report include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, managements plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe or anticipate will exist or may occur in the future are forward-looking statements. Forward-looking statements can be identified by various forms of words such as anticipates, believes, seeks, could, may, should, continues, estimates, expects, forecasts, intends, might, goals, objectives, targets, planned, potential, projects, scheduled, will, or other similar expressions. These statements are based on managements beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
| Amounts and nature of future capital expenditures; |
| Expansion and growth of our business and operations; |
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| Financial condition and liquidity; |
| Business strategy; |
| Cash flow from operations or results of operations; |
| Rate case filings; and |
| Natural gas prices and demand. |
Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
| Availability of supplies (including the uncertainties inherent in assessing and estimating future natural gas reserves), market demand, volatility of prices, and the availability and cost of capital; |
| Inflation, interest rates and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on our customers and suppliers); |
| The strength and financial resources of our competitors; |
| Development of alternative energy sources; |
| The impact of operational and development hazards; |
| Costs of, changes in, or the results of laws, government regulations (including safety and climate change regulation), environmental liabilities, litigation and rate proceedings; |
| Our allocated costs for defined benefit pension plans and other postretirement benefit plans sponsored by our affiliates; |
| Changes in maintenance and construction costs; |
| Changes in the current geopolitical situation; |
| Our exposure to the credit risks of our customers; |
| Risks related to strategy and financing, including restrictions stemming from our debt agreements, future changes in our credit ratings and the availability and cost of credit; |
| Risks associated with future weather conditions; |
| Acts of terrorism; and |
| Additional risks described in our filings with the Securities and Exchange Commission (SEC). |
Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.
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Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010, and Part II, Item 1A. Risk Factors of this Form 10-Q.
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PART I FINANCIAL INFORMATION
NORTHWEST PIPELINE GP
(Thousands of Dollars)
(Unaudited)
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
OPERATING REVENUES |
$ | 107,216 | $ | 103,562 | $ | 323,711 | $ | 312,250 | ||||||||
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OPERATING EXPENSES: |
||||||||||||||||
General and administrative |
14,448 | 13,514 | 44,497 | 41,367 | ||||||||||||
Operation and maintenance |
20,010 | 15,921 | 53,447 | 48,884 | ||||||||||||
Depreciation |
22,515 | 21,863 | 67,616 | 65,766 | ||||||||||||
Regulatory credits |
(266 | ) | (431 | ) | (800 | ) | (1,232 | ) | ||||||||
Taxes, other than income taxes |
4,427 | 4,347 | 15,041 | 13,407 | ||||||||||||
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Total operating expenses |
61,134 | 55,214 | 179,801 | 168,192 | ||||||||||||
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Operating Income |
46,082 | 48,348 | 143,910 | 144,058 | ||||||||||||
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OTHER INCOMEnet: |
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Interest income |
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Affiliated |
2 | 11 | 7 | 20 | ||||||||||||
Other |
15 | | 16 | 3 | ||||||||||||
Allowance for equity funds used during construction |
598 | 759 | 1,005 | 1,492 | ||||||||||||
Miscellaneous other (expense) income, net |
(7 | ) | (144 | ) | (145 | ) | (789 | ) | ||||||||
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Total other income - net |
608 | 626 | 883 | 726 | ||||||||||||
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INTEREST CHARGES: |
||||||||||||||||
Interest on long-term debt |
11,110 | 11,110 | 33,329 | 33,348 | ||||||||||||
Other interest |
492 | 524 | 1,506 | 2,135 | ||||||||||||
Allowance for borrowed funds used during construction |
(276 | ) | (337 | ) | (463 | ) | (675 | ) | ||||||||
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Total interest charges |
11,326 | 11,297 | 34,372 | 34,808 | ||||||||||||
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INCOME BEFORE INCOME TAXES |
35,364 | 37,677 | 110,421 | 109,976 | ||||||||||||
INCOME TAXES |
123 | 4 | 118 | 42 | ||||||||||||
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NET INCOME |
$ | 35,241 | $ | 37,673 | $ | 110,303 | $ | 109,934 | ||||||||
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See accompanying notes.
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NORTHWEST PIPELINE GP
(Thousands of Dollars)
(Unaudited)
September 30, 2011 |
December 31, 2010 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash |
$ | 6 | $ | 5 | ||||
Receivables: |
||||||||
Trade |
35,280 | 38,515 | ||||||
Affiliated companies |
2,112 | 2,118 | ||||||
Advances to affiliate |
81,117 | 45,045 | ||||||
Materials and supplies, less reserves of $14 at September 30, 2011 and $613 at December 31, 2010 |
11,180 | 11,719 | ||||||
Exchange gas due from others |
1,911 | 2,323 | ||||||
Exchange gas offset |
| 3,854 | ||||||
Prepayments and other |
4,302 | 3,415 | ||||||
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Total current assets |
135,908 | 106,994 | ||||||
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PROPERTY, PLANT AND EQUIPMENT, at cost |
3,045,886 | 2,965,097 | ||||||
Less-Accumulated depreciation |
1,068,974 | 1,017,634 | ||||||
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Total property, plant and equipment, net |
1,976,912 | 1,947,463 | ||||||
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OTHER ASSETS: |
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Deferred charges |
10,505 | 11,817 | ||||||
Regulatory assets |
59,578 | 60,176 | ||||||
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Total other assets |
70,083 | 71,993 | ||||||
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Total assets |
$ | 2,182,903 | $ | 2,126,450 | ||||
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See accompanying notes.
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NORTHWEST PIPELINE GP
BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
September 30, 2011 |
December 31, 2010 |
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LIABILITIES AND OWNERS EQUITY |
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CURRENT LIABILITIES: |
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Payables: |
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Trade |
$ | 26,087 | $ | 13,177 | ||||
Affiliated companies |
8,549 | 10,105 | ||||||
Accrued liabilities: |
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Taxes, other than income taxes |
15,856 | 10,186 | ||||||
Interest |
15,155 | 4,045 | ||||||
Exchange gas due to others |
5,094 | 13,115 | ||||||
Exchange gas offset |
1,162 | | ||||||
Other |
4,902 | 4,245 | ||||||
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Total current liabilities |
76,805 | 54,873 | ||||||
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LONG-TERM DEBT |
693,781 | 693,634 | ||||||
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES |
102,065 | 88,347 | ||||||
CONTINGENT LIABILITIES AND COMMITMENTS (Note 2) |
||||||||
OWNERS EQUITY: |
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Owners capital |
1,051,262 | 1,046,862 | ||||||
Retained earnings |
258,699 | 242,396 | ||||||
Accumulated other comprehensive income |
291 | 338 | ||||||
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Total owners equity |
1,310,252 | 1,289,596 | ||||||
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Total liabilities and owners equity |
$ | 2,182,903 | $ | 2,126,450 | ||||
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See accompanying notes.
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NORTHWEST PIPELINE GP
(Thousands of Dollars)
(Unaudited)
Nine months ended September 30, | ||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 110,303 | $ | 109,934 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Depreciation |
67,616 | 65,766 | ||||||
Regulatory credits |
(800 | ) | (1,232 | ) | ||||
Amortization of deferred charges and credits |
1,277 | 1,864 | ||||||
Allowance for equity funds used during construction |
(1,005 | ) | (1,492 | ) | ||||
Changes in current assets and liabilities: |
||||||||
Trade accounts receivable |
3,235 | 5,008 | ||||||
Affiliated receivables |
6 | 4,180 | ||||||
Exchange gas due from others |
6,858 | 7,342 | ||||||
Materials and supplies |
539 | (48 | ) | |||||
Other current assets |
(887 | ) | (276 | ) | ||||
Trade accounts payable |
(864 | ) | 7,693 | |||||
Affiliated payables |
(1,944 | ) | (13,591 | ) | ||||
Exchange gas due to others |
(6,858 | ) | (7,342 | ) | ||||
Other accrued liabilities |
17,436 | 15,806 | ||||||
Changes in noncurrent assets and liabilities: |
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Deferred charges |
(1,757 | ) | (3,105 | ) | ||||
Other deferred credits |
3,535 | 5,118 | ||||||
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Net cash provided by operating activities |
196,690 | 195,625 | ||||||
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FINANCING ACTIVITIES: |
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Proceeds from issuance of long-term debt |
| 8,000 | ||||||
Retirement of long-term debt |
| (8,000 | ) | |||||
Capital contributions from parent |
4,400 | 4,000 | ||||||
Distributions paid |
(94,000 | ) | (114,780 | ) | ||||
Other |
1,450 | (1,106 | ) | |||||
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Net cash used in financing activities |
(88,150 | ) | (111,886 | ) | ||||
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INVESTING ACTIVITIES: |
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Property, plant and equipment |
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Capital expenditures |
(72,456 | ) | (84,958 | ) | ||||
Proceeds from sales |
(11 | ) | 4,638 | |||||
Advances to affiliates |
(36,072 | ) | (3,425 | ) | ||||
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Net cash used in investing activities |
(108,539 | ) | (83,745 | ) | ||||
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NET INCREASE (DECREASE) IN CASH |
1 | (6 | ) | |||||
CASH AT BEGINNING OF PERIOD |
5 | 402 | ||||||
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CASH AT END OF PERIOD |
$ | 6 | $ | 396 | ||||
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* Increases to property, plant and equipment |
$ | (85,168 | ) | $ | (86,103 | ) | ||
Changes in related accounts payable and accrued liabilities |
12,712 | 1,145 | ||||||
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Capital expenditures |
$ | (72,456 | ) | $ | (84,958 | ) | ||
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See accompanying notes.
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NORTHWEST PIPELINE GP
(Unaudited)
1. BASIS OF PRESENTATION
General
The accompanying interim financial statements do not include all the notes in our annual financial statements, and therefore, should be read in conjunction with the financial statements and notes thereto in our 2010 Annual Report on Form 10-K. The accompanying unaudited financial statements include all adjustments both normal recurring and others which, in the opinion of our management, are necessary to present fairly our financial position at September 30, 2011, and results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In this report, Northwest Pipeline GP (Northwest) is at times referred to in the first person as we, us or our.
Accounting Standards Issued But Not Yet Adopted
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-5, Comprehensive Income (Topic 220) Presentation of Comprehensive Income (ASU 2011-5). ASU 2011-5 requires presentation of net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements. The Update requires separate presentation in both net income and other comprehensive income of reclassification adjustments for items that are reclassified from other comprehensive income to net income. The new guidance does not change the items reported in other comprehensive income. We currently report net income in the Statement of Income and report other comprehensive income in our Notes to Financial Statements. The standard is effective beginning the first quarter of 2012, with a retrospective application to prior periods. We plan to apply the new presentation beginning in 2012.
2. CONTINGENT LIABILITIES AND COMMITMENTS
Environmental Matters
We are subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of our business. Except as discussed below, our management believes that we are in substantial compliance with existing environmental requirements. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. We believe that, with respect to any expenditures required to meet applicable standards and regulations, the Federal Energy Regulatory Commission (FERC) would grant the requisite rate relief so that substantially all of such expenditures would be permitted to be recovered through rates. We believe that compliance with applicable environmental requirements is not likely to have a material effect upon our financial position or results of operations.
Beginning in the mid-1980s, we evaluated many of our facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation might be necessary. We identified polychlorinated biphenyl (PCB) contamination in air compressor systems, soils and related properties at certain compressor station sites. Similarly, we identified hydrocarbon impacts at these facilities due to the
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NORTHWEST PIPELINE GP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
former use of earthen pits and mercury contamination at certain natural gas metering sites. The PCBs were remediated pursuant to a Consent Decree with the U.S. Environmental Protection Agency (EPA) in the late 1980s, and we conducted a voluntary clean-up of the hydrocarbon and mercury impacts in the early 1990s. In 2005, the Washington Department of Ecology required us to re-evaluate our previous mercury clean-ups in Washington. Currently, we are conducting assessment and remediation activities for mercury and other constituents to bring the sites up to Washingtons current environmental standards. At September 30, 2011, we had accrued liabilities totaling approximately $7.5 million for these costs which are expected to be incurred through 2015. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs.
We are also subject to the Federal Clean Air Act (the Act) and to the Federal Clean Air Act Amendments of 1990, which added significantly to the existing requirements established by the Act.
In March 2008, the EPA promulgated a new, lower National Ambient Air Quality Standard (NAAQS) for ground-level ozone. Within two years, the EPA was expected to designate new eight-hour ozone non-attainment areas. However, in September 2009, the EPA announced it would reconsider the 2008 NAAQS for ground-level ozone to ensure that the standards were clearly grounded in science, and were protective of both public health and the environment. As a result, the EPA delayed designation of new eight-hour ozone non-attainment areas under the 2008 standards until the reconsideration is complete. In January 2010, the EPA proposed to further reduce the ground-level ozone NAAQS from the March 2008 levels. On September 22, 2011, the EPA announced that it was proceeding with required actions to implement the 2008 ozone standard and area designations. Designation of new eight-hour ozone non-attainment areas are expected to result in additional federal and state regulatory actions that will likely impact our operations and increase the cost of additions to property, plant and equipment. Until such non-attainment areas are designated, we are unable at this time to estimate the cost of additions that may be required to meet this new regulation.
Additionally, in August 2010, the EPA promulgated National Emission Standards for hazardous air pollutants (NESHAP) regulations that will impact our operations. The emission control additions required to comply with hazardous air pollutant regulations are estimated to include costs in the range of $6 million to $9 million through 2013, the compliance date.
Furthermore, the EPA promulgated the Greenhouse Gas (GHG) Mandatory Reporting Rule on October 30, 2009, which requires facilities that emit 25,000 metric tons or more carbon dioxide (CO2) equivalent per year from stationary fossil-fuel combustion sources to report GHG emissions to the EPA annually beginning March 31, 2011 for calendar year 2010. On March 18, 2011, the EPA extended this reporting deadline to September 30, 2011. On November 30, 2010, the EPA issued additional regulations that expand the scope of the Mandatory Reporting Rule to include fugitive and vented greenhouse gas emissions effective January 1, 2011. Facilities that emit 25,000 metric tons or more CO2 equivalent per year from stationary fossil-fuel combustion and fugitive/vented sources combined will be required to report GHG combustion and fugitive/vented emissions to the EPA annually beginning March 31, 2012 for calendar year 2011. Compliance with this reporting obligation is estimated to cost $3 million to $5 million over the next four to five years.
In February 2010, the EPA promulgated a final rule establishing a new one-hour nitrogen dioxide (NO2) NAAQS. The effective date of the new NO2 standard was April 12, 2010. This new standard is subject to numerous challenges in the federal court. Given the uncertainty associated with the implementation of the new standard and the broad range of actions we could be required to take to meet the standard, we have not estimated the cost of additions that may be required to meet this new regulation.
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NORTHWEST PIPELINE GP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Safety Matters
Pipeline Integrity Regulations We have developed an Integrity Management Program that we believe meets the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration final rule that was issued pursuant to the requirements of the Pipeline Safety Improvement Act of 2002. The rule requires gas pipeline operators to develop an integrity management program for transmission pipelines that could affect high consequence areas in the event of pipeline failure. The Integrity Management Program includes a baseline assessment plan along with periodic reassessments to be completed within required timeframes. In meeting the integrity regulations, we have identified high consequence areas and developed our baseline assessment plan. We are on schedule to complete the required assessments within the required timeframes. Currently, we estimate that the cost to complete the required initial assessments over the period of 2011 through 2012 and associated remediation will be primarily capital in nature and range between $65 million and $75 million. Ongoing periodic reassessments and initial assessments of any new high consequence areas will be completed within the timeframes required by the rule. Management considers the costs associated with compliance with the rule to be prudent costs incurred in the ordinary course of business and, therefore, recoverable through our rates.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
Summary
We estimate that for all matters for which we are able to reasonably estimate a range of loss, including those noted above and others that are not individually significant, our aggregate reasonably possible losses beyond amounts accrued for all of our contingent liabilities are immaterial to our expected future annual results of operations, liquidity and financial position. These calculations have been made without consideration of any potential recovery from third-parties. We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss.
Litigation, arbitration, regulatory matters, environmental matters and safety matters are subject to inherent uncertainties and there always exists uncertainty about our future results of operations. As a result, if an unforeseen, unfavorable event occurred, there exists the possibility of a material adverse impact on the results of operations in the period in which the event occurs. Management, including internal counsel, currently believes that the ultimate resolution of these matters, taken as a whole, will not have a material adverse effect upon our future liquidity or financial position. In certain circumstances, we may be eligible for insurance recoveries, or reimbursements from others. Any such recoveries or reimbursements will be recognized only when realizable.
3. DEBT AND FINANCING ARRANGEMENT
Credit Facility
In June 2011, we entered into a new $2 billion five-year senior unsecured revolving credit facility agreement (new credit facility) with Williams Partners L.P. (WPZ) and Transcontinental Gas Pipe Line Company, LLC (Transco) as co-borrowers. The new agreement is considered a modification to the previous borrowing arrangement for accounting purposes and replaced the existing $1.75 billion credit facility agreement that was scheduled to expire February 17, 2013. The new credit facility may, under certain conditions, be increased up to an additional $400 million. The full amount of the new credit facility is available to WPZ. We may borrow up to $400 million under the new credit facility to the extent not otherwise utilized by WPZ and Transco.
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NORTHWEST PIPELINE GP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Under the new credit facility, WPZ is required to maintain a ratio of debt to EBITDA (each as defined in the credit facility) that must be no greater than 5 to 1. For the fiscal quarter and the two following fiscal quarters in which one or more acquisitions for a total aggregate purchase price equal to or greater than $50 million has been executed, WPZ is required to maintain a ratio of debt to EBITDA of no greater than 5.5 to 1.00. For us, the ratio of debt to capitalization (defined as net worth plus debt) must be no greater than 65 percent. At September 30, 2011, we are in compliance with these financial covenants.
Each time funds are borrowed, the borrower may choose from two methods of calculating interest: a fluctuating base rate equal to Citibank N.A.s adjusted base rate plus an applicable margin, or a periodic fixed rate equal to London Interbank Offered Rate (LIBOR) plus an applicable margin. The borrower is required to pay a commitment fee (currently 0.25 percent) based on the unused portion of the new credit facility. The applicable margin and the commitment fee are determined for each borrower by reference to a pricing schedule based on such borrowers senior unsecured long-term debt ratings. The new credit facility contains various covenants that limit, among other things, a borrowers and its respective material subsidiaries ability to grant certain liens supporting indebtedness, a borrowers ability to merge or consolidate, sell all or substantially all of its assets, enter into certain affiliate transactions, make certain distributions during an event of default, make investments and allow any material change in the nature of its business.
The new credit facility includes customary events of default. If an event of default with respect to a borrower occurs under the new credit facility, the lenders will be able to terminate the commitments for all borrowers and accelerate the maturity of any loans of the defaulting borrower and exercise other rights and remedies.
Total letter of credit capacity available to WPZ under the new credit facility is $1.3 billion. At September 30, 2011, no letters of credit have been issued and the full $400 million under the new credit facility was available to us.
4. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and advances to affiliateThe carrying amounts of these items approximates their fair value.
Long-term debtThe fair value of our publicly traded long-term debt is valued using indicative period-end traded bond market prices. The carrying amount and estimated fair value of our long-term debt, including current maturities, were $693.8 million and $815.9 million, respectively, at September 30, 2011, and $693.6 million and $796.1 million, respectively, at December 31, 2010.
5. TRANSACTIONS WITH AFFILIATES
We are a participant in WPZs cash management program. At September 30, 2011 and December 31, 2010, the advances due to us by WPZ totaled approximately $81.1 million and $45.0 million, respectively. These advances are represented by demand notes. The interest rate on these intercompany demand notes is based upon the overnight investment rate paid on WPZs excess cash, which was approximately 0.01 percent at September 30, 2011. The interest income from these advances was minimal during the nine months ended September 30, 2011 and September 30, 2010.
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NORTHWEST PIPELINE GP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The Williams Companies, Inc. (Williams) charges its subsidiary companies for management services provided by it and other affiliated companies. Such corporate expenses charged by Williams, WPZ, and other affiliated companies, for the nine months ended September 30, 2011 and 2010, were $26.8 million and $24.7 million, respectively. These expenses are included in General and administrative expense on the accompanying Statement of Income. Management considers the cost of these services to be reasonable.
Northwest has no employees. Services are provided to us by an affiliate, Northwest Pipeline Services LLC (NPS). In return, we reimburse NPS for all direct and indirect expenses it incurs or payments it makes (including salary, bonus, incentive compensation, pension and other benefits) in connection with these services. For the nine months ended September 30, 2011 and 2010, we were billed $46.7 million and $44.2 million, respectively. Such expenses are primarily included in General and administrative and Operation and maintenance expenses on the accompanying Statement of Income.
During the periods presented, our revenues include transportation transactions and rental of communication facilities with subsidiaries of Williams. Combined revenues for these activities, for the nine months ended September 30, 2011 and 2010, were $18.4 million and $2.5 million, respectively.
During the nine months ended September 30, 2011, we declared and paid equity distributions of $94.0 million to WPZ. During October 2011, we declared and paid equity distributions of $33.0 million to WPZ. In October 2011, Williams Partners Operating LLC authorized a $0.7 million capital contribution to us to fund a portion of our expenditures for additions to property, plant and equipment.
We have entered into various other transactions with certain related parties, the amounts of which were not significant. These transactions and the above-described transactions are made on the basis of commercial relationships and prevailing market prices or general industry practices.
6. COMPREHENSIVE INCOME.
Comprehensive income is as follows:
Three months ended September 30, |
Nine months ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Net income |
$ | 35,241 | $ | 37,673 | $ | 110,303 | $ | 109,934 | ||||||||
Amortization of cash flow hedges |
(16 | ) | (15 | ) | (47 | ) | (46 | ) | ||||||||
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Total comprehensive income |
$ | 35,225 | $ | 37,658 | $ | 110,256 | $ | 109,888 | ||||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The following discussion should be read in conjunction with the Financial Statements, Notes, and Managements Discussion and Analysis contained in Items 7 and 8 of our 2010 Annual Report on Form 10-K and with the Financial Statements and Notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL RESULTS
This analysis discusses financial results of our operations for the nine-month periods ended September 30, 2011 and 2010. Variances due to changes in natural gas prices and transportation volumes have little impact on revenues, because under our rate design methodology, the majority of overall cost of service is recovered through firm capacity reservation charges in our transportation rates.
Our operating revenues increased $11.5 million, or 4 percent. This increase is primarily attributed to higher reservation charges due primarily to the Sundance Trail Expansion Project that was put into service on November 1, 2010.
Our transportation service accounted for 97 percent and 96 percent of our operating revenues for the nine-months ended September 30, 2011 and 2010, respectively. Additionally, gas storage service accounted for 3 percent and 4 percent of operating revenues for the nine-months ended September 30, 2011 and 2010, respectively.
Operating expenses increased $11.6 million, or 7 percent, due primarily to i) higher contractual services, materials and equipment of $4.1 million primarily attributed to increased expenditures on pipeline maintenance; ii) higher allocated overhead from affiliates of $2.1 million; iii) higher depreciation of $1.9 million attributed to property additions; iv) higher labor of $1.8 million; and v) higher property taxes of $1.4 million primarily attributed to higher settlements and property additions.
CAPITAL EXPENDITURES
Our capital expenditures were $72.5 million and $85.0 million for the nine months ended September 30, 2011 and 2010, respectively. Our capital expenditures estimate for 2011 is discussed in our 2010 Annual Report on Form 10-K. That estimate includes the following new capital projects proposed by us:
North and South Seattle Lateral Delivery Expansions
We have executed agreements with Puget Sound Energy to expand the North and South Seattle laterals and provide additional lateral capacity of approximately 84 MDth per day and 68 MDth per day, respectively. We estimate the expansion of the two laterals to cost between $28 million and $30 million. Both projects are currently targeted for service in fall 2012.
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Item 4. Controls and Procedures
Our management, including our Senior Vice President and our Vice President and Treasurer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) (Disclosure Controls) or our internal controls over financial reporting (Internal Controls) will prevent 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 Northwest have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Senior Vice President and our Vice President and Treasurer. Based upon that evaluation, our Senior Vice President and our Vice President and Treasurer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Third-Quarter 2011 Changes in Internal Controls
There have been no changes during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our Internal Controls.
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The information called for by this item is provided in Note 2. Contingent Liabilities and Commitments, included in the Notes to Financial Statements included under Part 1, Item 1. Financial Statements of this Form 10-Q, which information is incorporated by reference into this item.
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010, included certain risk factors that could materially affect our business, financial condition or future results. Those Risk Factors have not materially changed, except as set forth below:
Our costs of testing, maintaining or repairing our facilities may exceed our expectations, and the FERC or competition in our markets may not allow us to recover such costs in the rates we charge for our services.
We could experience unexpected leaks or ruptures on our gas pipeline system, or be required by regulatory authorities to test or undertake modifications to our systems that could result in a material adverse impact on our business, financial condition, and results of operations if the cost of testing, maintaining, or repairing our facilities exceed current expectations and the FERC or competition in our markets do not allow us to recover such costs in the rates we charge for our service. For example, in response to a recent third party pipeline rupture, the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration issued an advisory bulletin which, among other things, advises pipeline operators that if they are relying on design, construction, inspection, testing or other data to determine the pressures at which their pipelines should operate, the records of that data must be traceable, verifiable, and complete. Locating such records and, in the absence of any such records, verifying maximum pressures through physical testing or modifying or replacing facilities to meet the demands of such pressures, could significantly increase our costs. Additionally, failure to locate such records could result in reductions of allowable operating pressures, which would reduce available capacity on our pipeline.
Restrictions in our debt agreements and our leverage may affect our future financial and operating flexibility.
Our total outstanding long-term debt as of September 30, 2011, was $693.8 million.
Our debt service obligations and restrictive covenants in our credit facility and the indentures governing our senior unsecured notes could have important consequences. For example, they could:
| Make it more difficult for us to satisfy our obligations with respect to our senior unsecured notes and our other indebtedness, which could in turn result in an event of default on such other indebtedness or our outstanding notes; |
| Impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or other purposes; |
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| Diminish our ability to withstand a continued or future downturn in our business or the economy generally; |
| Require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general partnership purposes, or other purposes; |
| Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
| Place us at a competitive disadvantage compared to our competitors that have proportionately less debt. |
Our ability to repay, extend or refinance our existing debt obligations and to obtain future credit will depend primarily on our operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Our ability to refinance existing debt obligations or obtain future credit will also depend upon the current conditions in the credit markets and the availability of credit generally. If we are unable to meet our debt service obligations, or obtain future credit on favorable terms, if at all, we could be forced to restructure or refinance our indebtedness, seek additional equity capital, or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all.
We are not prohibited under our indentures from incurring additional indebtedness. Our incurrence of significant additional indebtedness would exacerbate the negative consequences mentioned above, and could adversely affect our ability to repay our senior notes.
Our debt agreements and Williams and WPZs public indentures contain financial and operating restrictions that may limit our access to credit and affect our ability to operate our business. In addition, our ability to obtain credit in the future will be affected by Williams and WPZs credit ratings.
Our public indentures contain various covenants that, among other things, limit our ability to grant certain liens to support indebtedness, merge, or sell all or substantially all of our assets. In addition, our credit facility contains certain financial covenants and restrictions on our ability and our material subsidiaries ability to grant certain liens to support indebtedness, our ability to merge or consolidate or sell all or substantially all of our assets, allow any material change in the nature of our business, enter into certain affiliate transactions, and make certain distributions during the continuation of an event of default. These covenants could adversely affect our ability to finance our future operations or capital needs or engage in, expand or pursue our business activities and prevent us from engaging in certain transactions that might otherwise be considered beneficial to us. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our current assumptions about future economic conditions turn out to be incorrect or unexpected events occur, our ability to comply with these covenants may be significantly impaired.
Williams and WPZs public indentures contain covenants that restrict their and our ability to incur liens to support indebtedness. These covenants could adversely affect our ability to finance our future operations or capital needs or engage in, expand or pursue our business activities and prevent us from engaging in certain transactions that might otherwise be considered beneficial to us. Williams and WPZs ability to comply with the covenants contained in their respective debt instruments may be affected by events beyond our and their control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, Williams or WPZs ability to comply with these covenants may be negatively impacted.
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Our failure to comply with the covenants in our debt agreements could result in events of default. Upon the occurrence of such an event of default, the lenders could elect to declare all amounts outstanding under a particular facility to be immediately due and payable and terminate all commitments, if any, to extend further credit. Certain payment defaults or an acceleration under our public indentures or other material indebtedness could cause a cross-default or cross-acceleration of our credit facility. Such a cross-default or cross-acceleration could have a wider impact on our liquidity than might otherwise arise from a default or acceleration of a single debt instrument. If an event of default occurs, or if our credit facility cross-defaults, and the lenders under the affected debt agreements accelerate the maturity of any loans or other debt outstanding to us, we may not have sufficient liquidity to repay amounts outstanding under such debt agreements.
Substantially all of Williams and WPZs operations are conducted through their respective subsidiaries. Williams and WPZs cash flows are substantially derived from loans, dividends and distributions paid to them by their respective subsidiaries. Williams and WPZs cash flows are typically utilized to service debt and pay dividends or distributions on their equity, with the balance, if any, reinvested in their respective subsidiaries as loans or contributions to capital. Due to our relationship with Williams and WPZ, our ability to obtain credit will be affected by Williams and WPZs credit ratings. If Williams or WPZ were to experience deterioration in their respective credit standing or financial condition, our access to credit and our ratings could be adversely affected. Any future downgrading of a Williams or WPZ credit rating would likely also result in a downgrading of our credit rating. A downgrading of a Williams or WPZ credit rating could limit our ability to obtain financing in the future upon favorable terms, if at all.
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ITEM 6. | EXHIBITS |
The following instruments are included as exhibits to this report.
Exhibit |
Description | |
3(a) | Statement of Partnership Existence of Northwest Pipeline GP (Exhibit 3.1 to our report on Form 8-K, filed October 2, 2007) and incorporated herein by reference. | |
3(b) | Amended and Restated General Partnership Agreement of Northwest Pipeline GP (Exhibit 3.1 to our report on Form 8-K, filed January 30, 2008) and incorporated herein by reference. | |
31(a)* | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
31(b)* | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
32(a)** | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Taxonomy Extension Schema. | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase. | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHWEST PIPELINE GP | ||
Registrant | ||
By: | /s/ R. Rand Clark | |
R. Rand Clark | ||
Controller (Duly Authorized Officer and Chief Accounting Officer) |
Date: November 2, 2011
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EXHIBIT INDEX
Exhibit |
Description | |
3(a) | Statement of Partnership Existence of Northwest Pipeline GP (Exhibit 3.1 to our report on Form 8-K, filed October 2, 2007) and incorporated herein by reference. | |
3(b) | Amended and Restated General Partnership Agreement of Northwest Pipeline GP (Exhibit 3.1 to our report on Form 8-K, filed January 30, 2008) and incorporated herein by reference. | |
31(a)* | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
31(b)* | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
32(a)** | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Taxonomy Extension Schema. | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase. | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
** | Furnished herewith. |