Attached files
file | filename |
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EX-12 - EX-12 - El Paso Pipeline Partners, L.P. | h84358exv12.htm |
EX-32.B - EX-32.B - El Paso Pipeline Partners, L.P. | h84358exv32wb.htm |
EX-32.A - EX-32.A - El Paso Pipeline Partners, L.P. | h84358exv32wa.htm |
EX-31.B - EX-31.B - El Paso Pipeline Partners, L.P. | h84358exv31wb.htm |
EX-31.A - EX-31.A - El Paso Pipeline Partners, L.P. | h84358exv31wa.htm |
EXCEL - IDEA: XBRL DOCUMENT - El Paso Pipeline Partners, L.P. | Financial_Report.xls |
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
o | 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 1-33825
El Paso Pipeline Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 26-0789784 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
El Paso Building 1001 Louisiana Street Houston, Texas |
77002 | |
(Address of Principal Executive Offices) | (Zip Code) |
Telephone Number: (713) 420-2600
Internet Website: www.eppipelinepartners.com
Internet Website: www.eppipelinepartners.com
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o.
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
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.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a 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 o No þ.
There were 205,693,269 Common Units and 4,197,822 General Partner Units outstanding as of
November 1, 2011.
EL PASO PIPELINE PARTNERS, L.P.
TABLE OF CONTENTS
TABLE OF CONTENTS
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Below is a list of terms that are common to our industry and used throughout this document:
/d
|
= per day | FERC | = Federal Energy Regulatory Commission | |||||
BBtu
|
= billion British thermal units | GAAP | = Generally Accepted Accounting Principles | |||||
LNG
|
= liquefied natural gas | |||||||
EX-12 | ||||||||
EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32.A | ||||||||
EX-32.B | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds
per square inch.
When we refer to us, we, our, ours, the company, or EPB we are describing El Paso
Pipeline Partners, L.P. and/or our subsidiaries.
i
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
EL PASO PIPELINE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per unit amounts)
(Unaudited)
(In millions, except per unit amounts)
(Unaudited)
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010(1) | 2011 | 2010(1) | |||||||||||||
Operating revenues |
$ | 339 | $ | 331 | $ | 1,063 | $ | 992 | ||||||||
Operating expenses |
||||||||||||||||
Operation and maintenance |
100 | 114 | 296 | 289 | ||||||||||||
Depreciation and amortization |
42 | 40 | 126 | 113 | ||||||||||||
Taxes, other than income taxes |
18 | 16 | 53 | 46 | ||||||||||||
160 | 170 | 475 | 448 | |||||||||||||
Operating income |
179 | 161 | 588 | 544 | ||||||||||||
Earnings from unconsolidated affiliates |
4 | 4 | 12 | 12 | ||||||||||||
Other income, net |
1 | 5 | 5 | 25 | ||||||||||||
Interest and debt expense, net |
(66 | ) | (50 | ) | (186 | ) | (133 | ) | ||||||||
Affiliated interest income, net |
| | | 2 | ||||||||||||
Income before income taxes |
118 | 120 | 419 | 450 | ||||||||||||
Income tax expense |
| | | 2 | ||||||||||||
Net income |
118 | 120 | 419 | 448 | ||||||||||||
Net income attributable to noncontrolling interests |
(3 | ) | (47 | ) | (73 | ) | (172 | ) | ||||||||
Net income attributable to El Paso Pipeline Partners, L.P. |
$ | 115 | $ | 73 | $ | 346 | $ | 276 | ||||||||
Net income attributable to El Paso Pipeline Partners,
L.P. per limited partner unit Basic and Diluted: |
||||||||||||||||
Common units |
$ | 0.46 | $ | 0.39 | $ | 1.52 | $ | 1.37 | ||||||||
Subordinated units(2) |
$ | | $ | 0.35 | $ | | $ | 1.26 |
(1) | Retrospectively adjusted as discussed in Note 2. | |
(2) | All subordinated units were converted to common units on a one-for-one basis effective January 3, 2011. See Note 4 for further discussion. |
See accompanying notes.
1
Table of Contents
EL PASO PIPELINE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Quarters Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010(1) | 2011 | 2010(1) | |||||||||||||
Net income |
$ | 118 | $ | 120 | $ | 419 | $ | 448 | ||||||||
Unrealized actuarial gains on postretirement benefit
obligations during the period |
9 | | 9 | | ||||||||||||
Comprehensive income |
127 | 120 | 428 | 448 | ||||||||||||
Comprehensive income attributable to noncontrolling interests |
(4 | ) | (47 | ) | (74 | ) | (172 | ) | ||||||||
Comprehensive income attributable to
El Paso Pipeline Partners, L.P. |
$ | 123 | $ | 73 | $ | 354 | $ | 276 | ||||||||
(1) | Retrospectively adjusted as discussed in Note 2. |
See accompanying notes.
2
Table of Contents
El PASO PIPELINE PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except units)
(Unaudited)
(In millions, except units)
(Unaudited)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 138 | $ | 69 | ||||
Accounts and notes receivable |
||||||||
Customer, net of allowance |
43 | 50 | ||||||
Affiliates |
9 | 6 | ||||||
Other |
33 | 42 | ||||||
Materials and supplies |
32 | 31 | ||||||
Assets held for sale |
50 | | ||||||
Other |
26 | 23 | ||||||
Total current assets |
331 | 221 | ||||||
Property, plant and equipment, at cost |
7,765 | 7,975 | ||||||
Less accumulated depreciation and amortization |
2,104 | 2,283 | ||||||
Total property, plant and equipment, net |
5,661 | 5,692 | ||||||
Other long-term assets |
||||||||
Investments in unconsolidated affiliates |
73 | 71 | ||||||
Regulatory assets |
160 | 129 | ||||||
Other |
74 | 64 | ||||||
Total assets |
$ | 6,299 | $ | 6,177 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities |
||||||||
Accounts payable |
||||||||
Trade |
$ | 40 | $ | 36 | ||||
Affiliates |
39 | 39 | ||||||
Other |
26 | 54 | ||||||
Short-term financing obligations, including current maturities |
65 | 42 | ||||||
Taxes payable |
45 | 33 | ||||||
Accrued interest |
68 | 42 | ||||||
Other |
39 | 35 | ||||||
Total current liabilities |
322 | 281 | ||||||
Other long-term liabilities |
||||||||
Long-term debt and other financing obligations, less current maturities |
3,865 | 3,400 | ||||||
Other liabilities |
67 | 86 | ||||||
3,932 | 3,486 | |||||||
Commitments and contingencies (Note 7) |
||||||||
Partners capital |
||||||||
El Paso Pipeline Partners, L.P. partners capital |
||||||||
Common units (205,693,269 and 149,440,452 units issued and
outstanding at September 30, 2011 and December 31, 2010) |
3,973 | 2,686 | ||||||
Subordinated units (27,727,411 units issued and outstanding at
December 31, 2010) |
| 307 | ||||||
General partner units (4,197,822 and 3,615,578 units issued and
outstanding at September 30, 2011 and December 31, 2010) |
(2,049 | ) | (1,564 | ) | ||||
Accumulated other comprehensive income |
8 | | ||||||
Total El Paso Pipeline Partners, L.P. partners capital |
1,932 | 1,429 | ||||||
Noncontrolling interests |
113 | 981 | ||||||
Total partners capital |
2,045 | 2,410 | ||||||
Total liabilities and partners capital |
$ | 6,299 | $ | 6,177 | ||||
See accompanying notes.
3
Table of Contents
El PASO PIPELINE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010(1) | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 419 | $ | 448 | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Depreciation and amortization |
126 | 113 | ||||||
Deferred income tax expense |
| 1 | ||||||
Earnings from unconsolidated affiliates, adjusted for cash distributions |
(2 | ) | 21 | |||||
Non-cash asset write down |
| 21 | ||||||
Other non-cash income items |
16 | (7 | ) | |||||
Asset and liability changes |
||||||||
Income taxes payable |
| (12 | ) | |||||
Accumulated deferred taxes |
| (58 | ) | |||||
Other, net |
34 | (26 | ) | |||||
Net cash provided by operating activities |
593 | 501 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(202 | ) | (254 | ) | ||||
Cash paid to acquire interests in SNG, SLNG and Elba Express |
| (787 | ) | |||||
Net change in notes receivable from affiliates |
| 216 | ||||||
Other |
| 3 | ||||||
Net cash used in investing activities |
(202 | ) | (822 | ) | ||||
Cash flows from financing activities |
||||||||
Net proceeds from issuance of common and general partner units |
968 | 976 | ||||||
Net proceeds from issuance of long-term debt |
1,747 | 661 | ||||||
Payments to retire long-term debt, including other financing obligations |
(1,276 | ) | (120 | ) | ||||
Cash distributions to unitholders and general partner |
(302 | ) | (171 | ) | ||||
Cash distributions to El Paso |
(75 | ) | (236 | ) | ||||
Cash contributions from El Paso |
28 | 18 | ||||||
Excess of cash paid for SNG, SLNG and Elba Express interests over
contributed book value |
| (364 | ) | |||||
Cash paid to acquire additional interests in SNG and CIG |
(1,412 | ) | | |||||
Other |
| 1 | ||||||
Net cash (used in) provided by financing activities |
(322 | ) | 765 | |||||
Net change in cash and cash equivalents |
69 | 444 | ||||||
Cash and cash equivalents |
||||||||
Beginning of period |
69 | 36 | ||||||
End of period |
$ | 138 | $ | 480 | ||||
(1) | Retrospectively adjusted as discussed in Note 2. |
See accompanying notes.
4
Table of Contents
El PASO PIPELINE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
(In millions)
(Unaudited)
(In millions)
(Unaudited)
El Paso Pipeline Partners, L.P. Partners Capital | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Limited Partners | Other | Total | ||||||||||||||||||||||||||
General | Comprehensive | Noncontrolling | Partners | |||||||||||||||||||||||||
Common | Subordinated | Partner | Income | Total | Interests | Capital | ||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,305 | $ | 297 | $ | 194 | $ | | $ | 1,796 | $ | 1,386 | $ | 3,182 | ||||||||||||||
Net income |
154 | 38 | 84 | | 276 | 172 | 448 | |||||||||||||||||||||
Issuance of common and general partner
units, net of issuance costs |
956 | | 20 | | 976 | | 976 | |||||||||||||||||||||
Cash distributions to unitholders and
general partner |
(131 | ) | (32 | ) | (8 | ) | | (171 | ) | | (171 | ) | ||||||||||||||||
Cash distributions to El Paso |
| | (61 | ) | | (61 | ) | (175 | ) | (236 | ) | |||||||||||||||||
Cash contributions from El Paso |
| | 7 | | 7 | 11 | 18 | |||||||||||||||||||||
Non-cash contributions from
El Paso |
| | 33 | | 33 | 31 | 64 | |||||||||||||||||||||
Cash paid to general partner to acquire
interests in SLNG and Elba Express |
| | (658 | ) | | (658 | ) | | (658 | ) | ||||||||||||||||||
Cash paid to general partner to acquire
additional interest in SNG |
| | (493 | ) | | (493 | ) | | (493 | ) | ||||||||||||||||||
Other |
| 1 | (1 | ) | | | (1 | ) | (1 | ) | ||||||||||||||||||
Balance at September 30, 2010(1) |
$ | 2,284 | $ | 304 | $ | (883 | ) | $ | | $ | 1,705 | $ | 1,424 | $ | 3,129 | |||||||||||||
Balance at December 31, 2010 |
$ | 2,686 | $ | 307 | $ | (1,564 | ) | $ | | $ | 1,429 | $ | 981 | $ | 2,410 | |||||||||||||
Net income |
296 | | 50 | | 346 | 73 | 419 | |||||||||||||||||||||
Unrealized actuarial gains on
postretirement benefit obligations |
| | | 8 | 8 | 1 | 9 | |||||||||||||||||||||
Conversion of subordinated units to common
units |
307 | (307 | ) | | | | | | ||||||||||||||||||||
Issuance of common and general partner
units, net of issuance costs |
948 | | 20 | | 968 | | 968 | |||||||||||||||||||||
Cash distributions to unitholders and
general partner |
(264 | ) | | (38 | ) | | (302 | ) | | (302 | ) | |||||||||||||||||
Cash distributions to El Paso |
| | | | | (75 | ) | (75 | ) | |||||||||||||||||||
Cash contributions from El Paso |
| | | | | 28 | 28 | |||||||||||||||||||||
Cash paid to general partner to acquire
interests in CIG and SNG |
| | (1,412 | ) | | (1,412 | ) | | (1,412 | ) | ||||||||||||||||||
Acquisition of additional interests in CIG
and SNG |
| 896 | | 896 | (896 | ) | | |||||||||||||||||||||
Other |
| | (1 | ) | | (1 | ) | 1 | | |||||||||||||||||||
Balance at September 30, 2011 |
$ | 3,973 | $ | | $ | (2,049 | ) | $ | 8 | $ | 1,932 | $ | 113 | $ | 2,045 | |||||||||||||
(1) | Retrospectively adjusted as discussed in Note 2. |
See accompanying notes.
5
Table of Contents
El PASO PIPELINE PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Organization
We are a Delaware master limited partnership formed in 2007 to own and operate interstate
natural gas transportation and terminaling facilities. We own Wyoming Interstate Company, L.L.C.
(WIC), Southern LNG Company, L.L.C. (SLNG), Elba Express Company, L.L.C. (Elba Express), Southern
Natural Gas Company, L.L.C. (SNG) and an 86 percent interest in Colorado Interstate Gas Company,
L.L.C. (CIG). WIC and CIG are interstate pipeline systems serving the Rocky Mountain region, SLNG
owns the Elba Island LNG storage and regasification terminal near Savannah, Georgia, and both Elba
Express and SNG are interstate pipeline systems serving the southeastern region of the United
States. We are controlled by our general partner, El Paso Pipeline GP Company, L.L.C., a
wholly-owned subsidiary of El Paso Corporation (El Paso).
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United
States Securities and Exchange Commission (SEC). As an interim period filing presented using a
condensed format, it does not include all the disclosures required by United States GAAP, and
should be read along with our 2010 Annual Report on Form 10-K. The financial statements as of
September 30, 2011, and for the quarter and nine months ended September 30, 2011 and 2010, are
unaudited. The condensed consolidated balance sheet as of December 31, 2010 was derived from the
audited balance sheet filed in our 2010 Annual Report on Form 10-K. In our opinion, we have made
adjustments, all of which are of a normal, recurring nature to fairly present our interim period
results. Our financial statements for prior periods also include reclassifications that were made
to conform to the current year presentation, none of which impacted our reported net income,
partners capital or cash flows from operating activities. Due to the seasonal nature of our
business, information for interim periods may not be indicative of our operating results for the
entire year. Our disclosures in this Form 10-Q are an update to those provided in our 2010 Annual
Report on Form 10-K.
Effective August 2011, CIG and SNG converted their legal structure to a limited liability
company and changed their names to Colorado Interstate Gas Company, L.L.C. and Southern Natural Gas
Company, L.L.C.
On October 16, 2011, El Paso announced a definitive agreement with Kinder Morgan, Inc. (KMI)
whereby KMI will acquire El Paso in a transaction that values El Paso at approximately $38 billion
including the assumption of debt. The transaction has been approved by each companys board of
directors but remains subject to the approvals of El
Pasos shareholders, the Federal Trade Commission
and other customary regulatory and other approvals. The approval of KMI shareholders will also be
required, but a voting agreement has been executed by the majority of the shareholders of KMI to
support the transaction.
Significant Accounting Policies
There were no changes in the significant accounting policies as described in our 2010 Annual
Report on Form 10-K and no significant accounting pronouncements issued but not yet adopted as of
September 30, 2011.
2. Acquisitions and Divestitures
Acquisitions
2011 Acquisitions. In June 2011, we acquired the remaining 15 percent general partner interest
in SNG and an additional 28 percent general partner interest in CIG from El Paso for $745 million
in cash. We financed the acquisition through (i) net proceeds of $501 million from our May 2011
public offering of common units and related issuance of general partner units to El Paso, including
the underwriters June 2011 exercise of the overallotment option (see Note 3) and (ii) $244 million
borrowings under our revolving credit facility. This transaction was for the acquisition of
additional interests in already consolidated entities, thus was accounted for on a prospective
basis.
6
Table of Contents
In March 2011, we acquired an additional 25 percent general partner interest in SNG from El
Paso for $667 million in cash. We financed the acquisition through (i) net proceeds of $467 million
from our March 2011 public offering of common units and related issuance of general partner units
to El Paso (see Note 3) and (ii) $200 million borrowings under our revolving credit facility. This
transaction was for the acquisition of an additional interest in an already consolidated entity,
thus was accounted for on a prospective basis.
We have decreased our historical noncontrolling interests in SNG and CIG for both the June and
March 2011 acquisitions by $896 million and reflected that amount as an increase to general
partners capital. We reflected El Pasos general partner interest in SNG and CIG as noncontrolling
interest in our financial statements. El Pasos general partner interest in SNG was 40 percent from
January 1, 2011 to March 13, 2011 and 15 percent until the June 29, 2011 acquisition of the
remaining general partner interest. Subsequent to the June 2011 acquisition, SNG became a wholly
owned subsidiary of EPB. We reflected El Pasos 42 percent general partner interest in CIG as
noncontrolling interest in our financial statements for the period from January 1, 2011 to June 29,
2011 and 14 percent thereafter.
2010 Acquisitions. In June 2010, we acquired an additional 20 percent general partner interest
in SNG from El Paso for $493 million in cash. We financed the acquisition through (i) net proceeds
of $325 million from our June 2010 public offering of common units and the related issuance of
general partner units to El Paso (see Note 3), (ii) $110 million from the issuance of public debt,
(iii) $21 million from El Pasos repayment of our demand notes receivable and (iv) $37 million
borrowed under our revolving credit facility. We recorded the additional interest in SNG at its
historical cost of $319 million and the excess cash paid to El Paso of $174 million over
contributed book value as a decrease to general partners capital. Subsequent to our November 2010
acquisition of an additional 15 percent general partner interest in SNG, as disclosed in our 2010
Annual Report on Form 10-K, we had the ability to control SNGs operating and financial decisions
and policies and as a result consolidated SNG in our financial statements. We retrospectively
adjusted our historical financial statements to reflect the reorganization of entities under common
control and the change in reporting entity. As a result of the retrospective consolidation,
pre-acquisition earnings of the incremental interest in SNG in historical periods have been
allocated solely to our general partner. In addition, the retrospective consolidation of SNG
increased net income attributable to EPB by $10 million and $57 million for the quarter and nine
months ended September 30, 2010. We reflected El Pasos 40 percent general partner interest in SNG
as a noncontrolling interest in our financial statements for the quarter and nine months ended
September 30, 2010.
In March 2010, we acquired a 51 percent member interest in each of SLNG and Elba Express from
El Paso for $810 million. The consideration paid to El Paso consisted of $658 million in cash and
the issuance of common units and general partner units (see Note 3). We financed the cash payment
through (i) net proceeds of $420 million from the issuance of public debt in March 2010, (ii) $236
million of cash on hand from the proceeds of our January 2010 public offering of common units and
related issuance of general partner units to El Paso (see Note 3) and (iii) $2 million borrowed
under our revolving credit facility. We recorded the additional interests in SLNG and Elba Express
at their historical cost of $468 million and the excess cash paid to El Paso of $190 million over
contributed book value as a decrease to general partners capital. Subsequent to the acquisition,
we had the ability to control SLNGs and Elba Express operating and financial decisions and
policies and as a result consolidated SLNG and Elba Express in our financial statements. The
retrospective consolidation of SLNG and Elba Express increased net income attributable to EPB by
$16 million for the nine months ended September 30, 2010.
Prior to our acquisition of SLNG and Elba Express, Elba Express purchased pipeline assets from
SNG, its affiliate, for $8 million and sold pipeline assets to SNG for $18 million. We recorded
both the purchase and sale at their historical cost and accordingly, recognized no gain or loss on
these transactions.
Divestitures
Divestiture of Natural Buttes. In September 2010, CIG recorded a non-cash adjustment as an
increase of operation and maintenance expense of approximately $21 million to write down net
property, plant and equipment based on a FERC order related to the sale of the Natural Buttes
facilities. In October 2010, CIG filed a request for rehearing and clarification of the FERC order
and in October 2011, the FERC denied the request. For a further discussion of Natural Buttes, see
our 2010 Annual Report on Form 10-K.
Assets Held for Sale. In September 2011, SNG entered into an agreement to sell certain
offshore and onshore assets (including pipeline, platforms and other
related assets located in the Gulf of Mexico and Louisiana) for
approximately $50 million. At September 30, 2011, SNG
classified these assets as held for sale at fair value which approximates the sales price.
The fair value is based on observable market data which is a Level 2 measurement.
SNG deferred the
estimated loss of approximately $35 million as a regulatory asset. The sale is contingent upon
receiving an acceptable FERC approval of the abandonment application including the ability to recover the
regulatory asset in future rates, which we believe is probable.
7
Table of Contents
3. Partners Capital
We issued common units to the public and issued general partner units to El Paso. The net
proceeds from the offerings were used as partial consideration to fund acquisitions from El Paso.
The table below shows the units issued, the net proceeds for the issuances and the use of the
proceeds.
General | ||||||||||||||||
Issuance | Common | Partner | Net Proceeds | |||||||||||||
Date | Units | Units | (In millions) | Use of Proceeds | ||||||||||||
May 2011(1) |
14,725,406 | 300,519 | $ | 501 | Additional 28% interest in CIG and remaining 15% interest in SNG | |||||||||||
March 2011 |
13,800,000 | 281,725 | 467 | Additional 25% interest in SNG | ||||||||||||
September 2010 |
13,225,000 | 269,898 | 415 | Additional 49% interest in SLNG and Elba Express and additional 15% interest in SNG | ||||||||||||
June 2010 |
11,500,000 | 234,694 | 325 | Additional 20% interest in SNG | ||||||||||||
January 2010 |
9,862,500 | 201,404 | 236 | 51% interest in each of SLNG and Elba Express |
(1) | Includes the underwriters June 2011 partial exercise of the overallotment option. |
In addition, in March 2010, we issued 5,346,251 common units and 109,107 general partner
units to El Paso in conjunction with our acquisition of the 51 percent member interests in each of
SLNG and Elba Express.
As of September 30, 2011, El Paso owns a 42 percent limited partner interest in us and retains
its 2 percent general partner interest in us and all of our incentive distribution rights (IDRs).
4. Earnings Per Unit and Cash Distributions
Earnings per unit. Earnings per unit is calculated based on distributions declared to our
unitholders, including distributions related to the IDRs for the related reporting period. To the
extent net income attributable to EPB exceeds cash distributions, the excess is allocated to
unitholders and holder of IDRs based on their contractual participation rights to share in those
earnings. If cash distributions exceed net income attributable to EPB, the excess distributions are
allocated proportionately to all participating units outstanding based on their respective
ownership percentages. Additionally, the calculation of earnings per unit does not reflect an
allocation of undistributed earnings to the IDR holders beyond amounts distributable under the
terms of the partnership agreement. Payments made to our unitholders are determined in relation to
actual declared distributions and are not based on the net income allocations used in the
calculation of earnings per unit.
We have retrospectively adjusted our historical financial statements as discussed in our 2010
Annual Report on Form 10-K for the consolidation of SLNG, Elba Express and SNG following the
acquisition of controlling interests in each entity. As a result of the retrospective
consolidations, earnings prior to the acquisition of controlling interests (pre-acquisition
earnings) in SLNG, Elba Express and SNG have been allocated solely to our general partner in all
periods presented.
Net income attributable to EPB per limited partner unit is computed by dividing the limited
partners interest in net income attributable to EPB by the weighted average number of limited
partner units outstanding. Diluted earnings per limited partner unit reflects the potential
dilution that could occur if securities or other agreements to issue common units were exercised,
settled or converted into common units. For the quarter and nine months ended September 30, 2011
and 2010, the dilutive, restricted units outstanding were immaterial.
The tables below show the (i) allocation of net income attributable to EPB and the (ii) net
income attributable to EPB per limited partner unit based on the number of basic and diluted
limited partner units outstanding for the quarter and nine months ended September 30, 2011 and
2010.
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Allocation of Net Income Attributable to El Paso Pipeline Partners, L.P.
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Net income attributable to El Paso Pipeline Partners, L.P. |
$ | 115 | $ | 73 | $ | 346 | $ | 276 | ||||||||
Less: Pre-acquisition earnings allocated to general partner |
| (10 | ) | | (73 | ) | ||||||||||
Income subject to 2% allocation of general partner interest |
$ | 115 | $ | 63 | $ | 346 | $ | 203 | ||||||||
Less: General partners interest in net income attributable to
El Paso Pipeline Partners, L.P. |
(2 | ) | (1 | ) | (7 | ) | (4 | ) | ||||||||
General partners incentive distribution |
(18 | ) | (3 | ) | (43 | ) | (7 | ) | ||||||||
Limited partners interest in net income attributable to El
Paso Pipeline Partners, L.P. common and subordinated |
$ | 95 | $ | 59 | $ | 296 | $ | 192 | ||||||||
Net Income Attributable to El Paso Pipeline Partners, L.P. per Limited Partner Unit
2011 | 2010 | |||||||||||
Common | Common | Subordinated | ||||||||||
Quarter Ended September 30, | (In millions, except for per unit amounts) | |||||||||||
Distributions (1) |
$ | 100 | $ | 56 | $ | 11 | ||||||
Excess distributions |
(5 | ) | (7 | ) | (1 | ) | ||||||
Limited partners interest in net income attributable to El Paso Pipeline
Partners, L.P. |
$ | 95 | $ | 49 | $ | 10 | ||||||
Weighted average limited partner units outstanding Basic and Diluted |
205.7 | 125.9 | 27.7 | |||||||||
Net income attributable to El Paso Pipeline Partners, L.P. per limited
partner unit Basic and Diluted |
$ | 0.46 | $ | 0.39 | $ | 0.35 |
2011 | 2010 | |||||||||||
Common | Common | Subordinated | ||||||||||
Nine Months Ended September 30, | (In millions, except for per unit amounts) | |||||||||||
Distributions (1) |
$ | 287 | $ | 149 | $ | 33 | ||||||
Undistributed earnings |
9 | 8 | 2 | |||||||||
Limited partners interest in net income attributable to El Paso Pipeline
Partners, L.P. |
$ | 296 | $ | 157 | $ | 35 | ||||||
Weighted average limited partner units outstanding Basic and Diluted |
194.6 | 115.1 | 27.7 | |||||||||
Net income attributable to El Paso Pipeline Partners, L.P. per limited
partner unit Basic and Diluted |
$ | 1.52 | $ | 1.37 | $ | 1.26 |
(1) | Reflects distributions declared to our common and subordinated unitholders of $0.49 per unit and $0.41 per unit for the quarters ended September 30, 2011 and 2010 and $1.43 per unit and $1.19 per unit for the nine months ended September 30, 2011 and 2010. |
Cash Distributions to Unitholders. Our common unitholders and general partner are
entitled to receive quarterly distributions of available cash as defined in our partnership
agreement. The table below shows the quarterly distributions to our unitholders and general partner
(in millions, except for per unit amounts):
Total Quarterly | ||||||||||||||||
Distribution Per | Total Cash | Date of | Date of | |||||||||||||
Quarter Ended | Unit | Distribution | Declaration | Distribution | ||||||||||||
September 30, 2011 |
$ | 0.49 | $ | 120 | October 2011 | November 2011 | ||||||||||
June 30, 2011 |
0.48 | 116 | July 2011 | August 2011 | ||||||||||||
March 31, 2011 |
0.46 | 100 | April 2011 | May 2011 | ||||||||||||
September 30, 2010 |
0.41 | 73 | October 2010 | November 2010 | ||||||||||||
June 30, 2010 |
0.40 | 65 | July 2010 | August 2010 | ||||||||||||
March 31, 2010 |
0.38 | 56 | April 2010 | May 2010 |
The distribution for the quarter ended September 30, 2011 will be paid to all outstanding
common units on November 14, 2011 to unitholders of record at the close of business on October 31,
2011.
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Subordinated units and incentive distribution rights. As disclosed in our 2010 Annual Report
on Form 10-K, the 27,727,411 subordinated units held by affiliates of El Paso were converted on
February 15, 2011 on a one-for-one basis into common units effective January 3, 2011. The
conversion does not impact the amount of cash distribution paid or the total number of the
Partnerships outstanding units. All of our IDRs are held by a wholly owned subsidiary of
El Paso. Based on the quarterly distribution per unit declared for the quarter ended September
30, 2011, our general partner will receive incentive distributions of $18 million in accordance
with the partnership agreement for the third quarter of 2011. For a further discussion of our
subordinated units and IDRs, see our 2010 Annual Report on
Form 10-K.
5. Long-Term Debt and Other Financing Obligations
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Current maturities on long term debt |
$ | 65 | $ | 42 | ||||
Long-term debt and other financing obligations |
3,865 | 3,400 | ||||||
Total |
$ | 3,930 | $ | 3,442 | ||||
Changes in Financing Obligations. During the nine months ended September 30, 2011, we had the
following changes in our financing obligations:
Book Value | Cash | |||||||
Increase (Decrease) | Received/(Paid) | |||||||
(In millions) | ||||||||
Issuances |
||||||||
SNG senior notes |
$ | 300 | $ | 297 | ||||
El Paso Pipeline Partners Operating Company, L.L.C. (EPPOC)
senior notes |
497 | 492 | ||||||
EPPOC revolving credit facility |
965 | 958 | ||||||
Increases through September 30, 2011 |
$ | 1,762 | $ | 1,747 | ||||
Repayments and other |
||||||||
EPPOC senior notes |
$ | (37 | ) | $ | (37 | ) | ||
EPPOC revolving credit facility |
(1,235 | ) | (1,235 | ) | ||||
Other financing obligations |
(2 | ) | (4 | ) | ||||
Decreases through September 30, 2011 |
$ | (1,274 | ) | $ | (1,276 | ) | ||
SNG Debt. In June 2011, SNG and its wholly owned subsidiary, Southern Natural Issuing
Corporation, issued
$300 million aggregate principal amount of 4.4 percent senior unsecured notes, due June 15,
2021. The net proceeds of $297 million from this offering will be used for growth capital
expenditures and general partnership purposes.
Credit Facility. In May 2011, EPPOC and WIC (the borrowers) refinanced their revolving credit
facility which extended the maturity to 2016 and increased their borrowing capacity from $750
million (old credit facility) to
$1.0 billion (new credit facility), expandable to $1.5 billion for certain expansion projects
and acquisitions. Borrowings under the new credit facility are guaranteed by EPPOC and us. The
credit terms of the new credit facility are similar to the previous facility, with the exception
that certain restrictive covenants will be removed in the event that EPB receives an investment
grade rating for its senior unsecured debt from at least two of three specified rating agencies.
Currently, EPPOC is rated investment grade (BBB- stable outlook) by Fitch and below investment
grade by Moodys Investor Service (Ba1 negative outlook) and Standard & Poors (BB positive
outlook). The restrictive covenants for the new credit facility are no more restrictive than those
of the old credit facility. At September 30, 2011, we were in compliance with all of our debt
covenants.
As of September 30, 2011, we had $1.0 billion of remaining availability under our new
revolving credit facility. Our borrowing cost under the new credit facility has increased to LIBOR
plus two percent based on a credit ratings pricing grid. We also pay commitment fees of 0.4 percent
for the unutilized commitments.
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EPB Other Debt Obligations. EPPOCs senior notes are guaranteed fully and unconditionally by
its parent, EPB. EPPOC is a wholly owned subsidiary of EPB. EPBs only operating asset is its
investment in EPPOC, and EPPOCs only operating assets are its investments in CIG, WIC, SLNG, Elba
Express and SNG (collectively, the non-guarantor operating companies). EPBs and EPPOCs
independent assets and operations, other than those related to these investments and EPPOCs debt
are less than three percent of total assets and operations of EPB, and thus substantially all of
the operations and assets exist within these non-guarantor operating companies. Furthermore, there
are no significant restrictions on EPPOCs or our ability to access the net assets or cash flows
related to its controlling interests in the operating companies either through dividend or loan.
In September 2011, EPPOC issued $500 million of 5.0 percent senior notes due October 1, 2021.
The proceeds of $492 million were used to reduce outstanding indebtedness under EPBs revolving
credit facility and for general partnership purposes. The restrictive covenants under this debt
obligation are no more restrictive than the restrictive covenants under our credit facility.
6. Financial Instruments
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(In millions) | ||||||||||||||||
Long-term financing obligations, including current maturities |
$ | 3,930 | $ | 4,317 | $ | 3,442 | $ | 3,638 |
As of September 30, 2011 and December 31, 2010, the carrying amounts of cash and cash
equivalents, short-term borrowings and trade and other receivables and payables represented fair
value because of the short-term nature of these instruments. We
estimate the fair value of our long term financing obligations based on quoted market prices for the same or similar issues.
7. Commitments and Contingencies
Legal Proceedings
We and our subsidiaries and affiliates are named defendants in numerous lawsuits and
governmental proceedings and claims that arise in the ordinary course of our business. For each of
these matters, we evaluate the merits of the case or claim, 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 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. As of
September 30, 2011, we had approximately $2 million accrued for our outstanding legal proceedings.
Rates and Regulatory Matters
CIG Rate Case. In August 2011, the FERC approved an uncontested pre-filing settlement of a
rate case required under the terms of a previous settlement. The
settlement generally provides for CIGs
current tariff rates to continue until the next general rate case which will be effective after
October 1, 2014 but no later than October 1, 2016.
Pursuant to FERC guidance, regulated pipeline companies are required to recognize a regulatory
asset or liability for changes in actuarial assumptions related to their postretirement benefit
plans that would otherwise be recorded in accumulated other comprehensive income if it is probable
that amounts would be included in rates in future periods. As a result of the rate case settlement
discussed above, CIG will no longer include those costs in rates and has reclassified $9 million
from a regulatory liability to accumulated other comprehensive income at September 30, 2011.
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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
of the disposal or release of specified substances at current and former operating sites. At
September 30, 2011, our accrual was approximately $10 million for environmental matters. Our
accrual includes amounts for expected remediation costs and associated onsite, offsite and
groundwater technical studies and related environmental legal costs. Our accrual includes $6
million for environmental contingencies related to properties CIG previously owned.
Our estimates of potential liability range from approximately $10 million to approximately $33
million. Our recorded environmental liabilities reflect our current estimates of amounts we will
expend on remediation projects in various stages of completion. 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.
Superfund Matters. Included in our recorded environmental liabilities are projects where we
have received notice that we have been designated or could be designated, as a Potentially
Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), commonly known as Superfund, or state equivalents for one active site. Liability
under the federal CERCLA statute may be joint and several, meaning that we could be required to pay
in excess of our pro rata share of remediation costs. We consider the financial strength of other
PRPs in estimating our liabilities.
For the remainder of 2011, we estimate that our total remediation expenditures will be
approximately $1 million, most of which will be expended under government directed clean-up plans.
In addition, we expect to make capital expenditures for environmental matters of approximately $9
million in the aggregate for the remainder of 2011 through 2015, including capital expenditures
associated with the impact of the Environmental Protection Agency rule on emissions of hazardous
air pollutants from reciprocating internal combustion engines which are subject to regulations with
which we have to be in compliance by October 2013.
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.
Other Commitment
Letter of Credit. During 2009, SNG entered into a $57 million letter of credit associated with
estimated construction cost related to the Southeast Supply Header project. As invoices are paid
under the contract, the value of the letter of credit is reduced. At September 30, 2011, the letter
of credit has been reduced to approximately $18 million.
8. Accounts Receivable Sales Programs
We participate in accounts receivable sales programs where we sell receivables in their
entirety to a third party financial institution (through wholly-owned special purpose entities).
The sale of these accounts receivable (which are short-term assets that generally settle within 60
days) qualify for sale accounting. The third party financial institution involved in these accounts
receivable sales programs acquires interests in various financial assets and issues commercial
paper to fund those acquisitions. We do not consolidate the third party financial institution
because we do not have the power to control, direct, or exert significant influence over its
overall activities since our receivables do not comprise a significant portion of its operations.
In connection with our accounts receivable sales, we receive a portion of the sales proceeds
up front and receive an additional amount upon the collection of the underlying receivables (which
we refer to as a deferred purchase price). Our ability to recover the deferred purchase price is
based solely on the collection of the underlying receivables. The tables below contain information
related to our accounts receivable sales programs.
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Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Accounts receivable sold to the third-party financial
institution(1) |
$ | 236 | $ | 232 | $ | 751 | $ | 721 | ||||||||
Cash received for accounts receivable sold under the program |
141 | 141 | 437 | 479 | ||||||||||||
Deferred purchase price related to accounts receivable sold |
95 | 91 | 314 | 242 | ||||||||||||
Cash received related to the deferred purchase price |
96 | 95 | 323 | 299 | ||||||||||||
Amount paid in conjunction with terminated programs(2) |
| | | 50 |
(1) | During the quarters and nine months ended September 30, 2011 and 2010, losses recognized on the sale of accounts receivable were immaterial. | |
(2) | In January 2010, we terminated our previous accounts receivable sales program and paid $50 million to acquire the related senior interest in certain receivables under that program. See our 2010 Annual Report on Form 10-K for further information. |
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Accounts receivable sold and held by third-party financial institution |
$ | 79 | $ | 93 | ||||
Uncollected deferred purchase price related to accounts receivable sold (1) |
32 | 41 |
(1) | Initially recorded at an amount which approximates its fair value using observable inputs other than quoted prices in active markets. |
The deferred purchase price related to the accounts receivable sold is reflected as other
accounts receivable on our balance sheet. Because the cash received up front and the deferred
purchase price relate to the sale or ultimate collection of the underlying receivables, and are not
subject to significant other risks given their short term nature, we reflect all cash flows under
the new accounts receivable sales programs as operating cash flows on our statement of cash flows.
Under the accounts receivable sales programs, we service the underlying receivables for a fee. The
fair value of these servicing agreements, as well as the fees earned, were not material to our
financial statements for the quarters and nine months ended September 30, 2011 and 2010.
9. Investments in Unconsolidated Affiliates and Transactions with Affiliates
Investments in Unconsolidated Affiliates
WYCO and Bear Creek. CIG has a 50 percent investment in WYCO Development LLC (WYCO). CIG has
other financing obligations payable to WYCO totaling $176 million and $178 million as of September
30, 2011 and December 31, 2010, which is presented as debt and other financing obligations on our
balance sheet. WYCO paid
$1 million in cash distributions to CIG for the nine months ended September 30, 2011.
SNG owns a 50 percent ownership interest in Bear Creek Storage Company, L.L.C. (Bear Creek), a
joint venture with Tennessee Gas Pipeline Company, L.L.C. (TGP), an affiliate. For the nine months
ended September 30, 2011 and 2010, SNG received $9 million and $10 million, respectively of cash
distributions from Bear Creek. In addition, in July 2010, Bear Creek utilized its note receivable
balance under the cash management program with El Paso to pay a cash distribution to its partners,
including $23 million to SNG. We account for the investments in WYCO and Bear Creek using the
equity method of accounting. The information below related to our unconsolidated affiliates
reflects our net investment and earnings recorded from these investments.
Net Investment and Earnings
Investments | Earnings from Unconsolidated Affiliates | |||||||||||||||||||||||
September 30, | December 31, | Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
WYCO |
$ | 15 | $ | 15 | $ | | $ | | $ | 1 | $ | 1 | ||||||||||||
Bear Creek |
58 | 56 | 4 | 4 | 11 | 11 | ||||||||||||||||||
Total |
$ | 73 | $ | 71 | $ | 4 | $ | 4 | $ | 12 | $ | 12 | ||||||||||||
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Transactions with Affiliates
CIG Cash Distributions to El Paso. CIG makes quarterly distributions to its owners. We have reflected 42 percent of CIGs distributions paid to
El Paso through June 2011 and 14 percent thereafter as distributions to its noncontrolling interest
holder.
SNG Cash Distributions to El Paso. SNG makes quarterly distributions to its owners. Due to the retrospective consolidation of SNG, we have
reflected 40 percent of SNGs historical distributions paid to El Paso as distributions to its
noncontrolling interest holder in our financial statements in 2010. SNGs historical distributions
prior to consolidation in November 2010 (excluding distributions paid to its noncontrolling
interest holder) are reflected as distributions of pre-acquisition earnings and are allocated to
our general partner. For the first quarter of 2011, SNG paid the quarterly cash distribution to El
Paso, its noncontrolling interest holder, based on El Pasos 15 percent general partner interest.
Subsequent to the June 2011 acquisition as described in Note 2, SNG became a wholly owned
subsidiary of EPB.
SLNG and Elba Express Cash Distributions to El Paso. As a result of the March 2010
acquisition, SLNG and Elba Express each make quarterly distributions
to its owners. Since we consolidate SLNG and Elba Express, we have reflected 49 percent
of SLNGs and Elba Express distributions paid to El Paso as distributions to its noncontrolling
interest holder in our financial statements from March 30, 2010 to November 19, 2010. Subsequent to
the November 2010 acquisition, as described in our 2010 Annual Report on Form 10-K, SLNG and Elba
Express became wholly owned subsidiaries of EPB.
The following table summarizes the cash distributions paid to El Paso.
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
CIG Distributions to El Paso Distributions to noncontrolling interest holder |
$ | 4 | $ | 16 | $ | 44 | $ | 58 | ||||||||
SNG Distributions to El Paso Distributions to noncontrolling interest holder |
| 21 | 31 | 82 | ||||||||||||
Distributions of pre-acquisition earnings |
| 8 | | 61 | ||||||||||||
Cash distributions to El Paso |
| 29 | 31 | 143 | ||||||||||||
SLNG Distributions to El Paso Distributions to noncontrolling interest holder |
| 13 | | 20 | ||||||||||||
Elba Express Distributions to El Paso
Distributions to noncontrolling interest holder |
| | | 15 | ||||||||||||
Total cash distributions to El Paso |
$ | 4 | $ | 58 | $ | 75 | $ | 236 | ||||||||
Other Contributions. In March 2010, in conjunction with our acquisition of SLNG and Elba
Express, El Paso made a non-cash contribution of $64 million to Elba Express to eliminate its
non-interest bearing advance from El Paso. Prior to our acquisition of a 51 percent member interest
in each of SLNG and Elba Express, El Paso made a cash contribution to Elba Express of $13 million.
During 2010, El Paso made capital contributions of $5 million to SLNG to fund their share of
expansion project expenditures for 2010. El Paso made capital contributions of $13 million and $15
million to CIG and SNG respectively, to fund their share of expansion project expenditures during
the nine months ended September 30, 2011.
Notes Receivable and Payable with Affiliates. In June 2010, in conjunction with our
acquisition of an additional 20 percent general partner interest in SNG (see Note 2), El Paso
repaid $21 million of our demand notes receivable. We also have a $10 million note payable to El
Paso outstanding at September 30, 2011 and December 31, 2010. This note payable is expected to
mature in September 2012. For a further discussion of our notes payable with affiliates, see our
2010 Annual Report on Form 10-K.
Income Taxes. In February 2010, SLNG converted to a limited liability company and, prior to
the conversion, settled its current and deferred tax balances of approximately $72 million.
Settlement of the tax balances was made by the repayment of notes receivable from El Pasos cash
management program.
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Other Affiliate Balances. As of September 30, 2011 and December 31, 2010, we had accounts
receivable with affiliates arising in the ordinary course of business of $9 million and $6 million.
In addition, as of September 30, 2011 and December 31, 2010, we had net contractual gas imbalance
and trade payables, as well as other liabilities with our affiliates arising in the ordinary course
of business of approximately $39 million. We also had contractual deposits from affiliates of $9
million and $8 million included in other current liabilities on our balance sheets as of September
30, 2011 and December 31, 2010.
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 2010
Annual Report on Form 10-K. The following table shows revenues and charges from our affiliates:
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010(1) | 2011 | 2010(1) | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Operating revenues |
$ | 7 | $ | 7 | $ | 19 | $ | 19 | ||||||||
Operating expenses |
58 | 54 | 170 | 162 | ||||||||||||
Reimbursement of operating expenses |
2 | 1 | 5 | 4 |
(1) | Retrospectively adjusted as discussed in Note 2. |
10. Other
During
the second quarter of 2011, SLNG recognized $17 million of operating revenue, consisting
of a $9 million payment received in 2009 which granted BG LNG Services, LLC (BG) a cancellation
option related to their commitment on Phase B of SLNGs Elba III Expansion and $8 million received
as a result of BG exercising their cancellation option in June 2011. In addition, SLNG wrote off $3
million for certain project development costs incurred in conjunction with this expansion project.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The information contained in Item 2 updates, and should be read in conjunction with,
information disclosed in our 2010 Annual Report on Form 10-K, and our financial statements and
notes presented in Item 1 of this Quarterly Report on Form 10-Q.
Overview and Outlook
During the nine months ended September 30, 2011, we acquired an additional 40 percent interest
in SNG and an additional 28 percent interest in CIG from El Paso for an aggregate $1.4 billion and,
as a result, currently own an aggregate 100 percent of SNG and 86 percent interest in CIG. For a
further discussion of these acquisitions, see Item 1, Financial Statements, Note 2.
During the nine months ended September 30, 2011, we generated significant earnings and
continued to focus on delivering our expansion projects. We intend to grow our business through
organic expansion opportunities and through strategic asset acquisitions from third parties, El
Paso or both. In June 2011, SNG placed into service Phase II of the South System III Expansion
project and Phase II of the Southeast Supply Header (SESH) project, on time and under budget. For
further discussion of our expansion projects, see our 2010 Annual
Report on Form 10-K.
Earnings before interest expense and income taxes (EBIT) for the quarter and nine months ended
September 30, 2011 were up 47 percent and 30 percent over the same period in 2010 primarily driven
by the acquisitions from El Paso and the completion of organic growth projects in 2010 and 2011. In
2011, we expect to continue generating strong earnings and operating cash flows. Approximately 91
percent of our revenues are collected in the form of demand or reservation charges, which are not
dependent upon commodity prices or throughput levels. This coupled with the diversity of our
systems, helps mitigate against risk of changes in throughput and ongoing shifts in supply and
demand.
On October 16, 2011, El Paso announced a definitive agreement with Kinder Morgan, Inc. (KMI)
whereby KMI will acquire El Paso in a transaction that values El Paso at approximately $38 billion
including the assumption of debt. The transaction has been approved by each companys board of
directors but remains subject to the approvals of E1 Pasos shareholders, the Federal Trade Commission
and other customary regulatory and other approvals. The approval of KMI shareholders will also be
required, but a voting agreement has been executed by the majority of the shareholders of KMI to
support the transaction.
As of September 30, 2011, we had approximately $1.1 billion of liquidity, consisting of $1.0
billion of available borrowing capacity under the new credit facility and $138 million of cash on
hand. We expect our available liquidity and operating cash flows in 2011 to be sufficient to fund
our estimated 2011 capital program. As a result of our current available liquidity, we believe we
are well positioned to meet our obligations. However, our future plans may be impacted by the
completion of KMIs announced acquisition of El Paso. We will continue to assess and take further
actions where prudent to meet our long-term objectives and capital requirements. For a further
discussion, see Liquidity and Capital Resources.
Results of Operations
Our management uses EBIT as a measure to assess the operating results and effectiveness of our
business, which consists of both consolidated operations and investments in unconsolidated
affiliates. We believe EBIT is useful to our investors to provide them with the same measure used
by management to evaluate our performance so that investors may evaluate our operating results
without regard to our financing methods or capital structure. We define EBIT as net income adjusted
for items such as (i) interest and debt expense, net, (ii) affiliated interest income and expense,
net,
(iii) income tax expense and (iv) net income attributable to noncontrolling interest. 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 operating results for the quarter and nine months ended September 30, 2011
compared to the same periods in 2010, which reflects the retrospective adjustment of our historical
financial statements discussed in Item 8, Financial Statements and Supplementary Data, Note 2 of
our 2010 Annual Report on Form 10-K.
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Operating Results:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except for volumes) | ||||||||||||||||
Operating revenues |
$ | 339 | $ | 331 | $ | 1,063 | $ | 992 | ||||||||
Operating expenses |
160 | 170 | 475 | 448 | ||||||||||||
Operating income |
179 | 161 | 588 | 544 | ||||||||||||
Earnings from unconsolidated affiliates |
4 | 4 | 12 | 12 | ||||||||||||
Other income, net |
1 | 5 | 5 | 25 | ||||||||||||
EBIT before adjustment for noncontrolling interests |
184 | 170 | 605 | 581 | ||||||||||||
Net income attributable to noncontrolling interests |
(3 | ) | (47 | ) | (73 | ) | (172 | ) | ||||||||
EBIT |
181 | 123 | 532 | 409 | ||||||||||||
Interest and debt expense, net |
(66 | ) | (50 | ) | (186 | ) | (133 | ) | ||||||||
Affiliated interest income, net |
| | | 2 | ||||||||||||
Income tax expense |
| | | (2 | ) | |||||||||||
Net income attributable to El Paso Pipeline Partners, L.P. |
115 | 73 | 346 | 276 | ||||||||||||
Net income attributable to noncontrolling interests |
3 | 47 | 73 | 172 | ||||||||||||
Net income |
$ | 118 | $ | 120 | $ | 419 | $ | 448 | ||||||||
Throughput volumes (BBtu/d)(1) |
6,805 | 6,893 | 6,807 | 7,016 | ||||||||||||
(1) | Throughput volumes are presented for WIC, CIG and SNG only and exclude intrasegment volumes. Elba Express was placed in service March 2010 and although capacity is under contract, the average volumes transported during the quarter and nine months ended September 30, 2011 and 2010 were not material. |
Below is a discussion of factors impacting EBIT for the quarter and nine months ended
September 30, 2011 and 2010.
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
Variance | Variance | |||||||||||||||||||||||||||||||
Operating Revenue |
Operating Expense |
Other | Total | Operating Revenue |
Operating Expense |
Other | Total | |||||||||||||||||||||||||
Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Expansions |
$ | 16 | $ | (4 | ) | $ | (2 | ) | $ | 10 | $ | 78 | $ | (13 | ) | $ | (20 | ) | $ | 45 | ||||||||||||
Transportation revenues and
expenses |
(7 | ) | (3 | ) | | (10 | ) | (18 | ) | (10 | ) | | (28 | ) | ||||||||||||||||||
Operating and general and
administrative expenses |
| (2 | ) | | (2 | ) | | (15 | ) | | (15 | ) | ||||||||||||||||||||
Non-cash asset write down |
| 21 | | 21 | | 21 | | 21 | ||||||||||||||||||||||||
Project cancellation payment |
| | | | 17 | (3 | ) | | 14 | |||||||||||||||||||||||
Other(1) |
(1 | ) | (2 | ) | (2 | ) | (5 | ) | (6 | ) | (7 | ) | | (13 | ) | |||||||||||||||||
Total impact on EBIT before
adjustment for
noncontrolling interests |
8 | 10 | (4 | ) | 14 | 71 | (27 | ) | (20 | ) | 24 | |||||||||||||||||||||
Net income attributable to
noncontrolling interests |
| | 44 | 44 | | | 99 | 99 | ||||||||||||||||||||||||
Total impact on EBIT |
$ | 8 | $ | 10 | $ | 40 | $ | 58 | $ | 71 | $ | (27 | ) | $ | 79 | $ | 123 | |||||||||||||||
(1) | Consists of individually insignificant items. |
Expansions. Our EBIT increased during the quarter and nine months ended September 30,
2011 primarily due to expansion projects placed into service during 2010 and 2011. The increase was
driven by higher revenues partially offset by an increase in operating expenses and lower non-cash
allowance for equity funds used during construction from expansion projects (AFUDC equity), as
follows:
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2011 to 2010 | ||||||||
Quarter Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
Favorable/(Unfavorable) Variance | ||||||||
(In millions) | ||||||||
WIC System Expansion |
$ | 3 | $ | 9 | ||||
CIG Raton 2010 Expansion |
4 | 10 | ||||||
SLNG Elba III Phase A Expansion |
(2 | ) | 9 | |||||
SNG South System III |
7 | 19 | ||||||
Other |
(2 | ) | (2 | ) | ||||
Total impact on EBIT |
$ | 10 | $ | 45 | ||||
Transportation revenues and expenses. For the quarter and nine months ended September 30,
2011, SLNG experienced a $6 million and a $12 million decrease in reservation revenue primarily
driven by nonrenewal of expiring contracts on CIG, WIC and SNG. We also experienced lower usage and
interruptible revenues on our SNG system of $5 million for the nine months ended September 30, 2011
when compared to 2010 primarily due to extremely cold temperatures in
the first quarter of 2010 and unfavorable market conditions.
Additionally, WIC and CIG experienced $3 million and $10 million higher transportation expenses for
the quarter and nine months ended September 30, 2011 as a result of increased third party capacity
commitments. Throughput decreased for the nine months ended September 30, 2011 when compared to the
same period in prior year primarily due to lower demand for volumes on WIC and SNG. However, this
decrease in throughput did not have a significant impact on EBIT as a material portion of our
revenues is derived from firm reservation contracts.
Operating and General and Administrative Expenses. For the quarter and nine months ended
September 30, 2011, our operating and general and administrative expenses increased primarily due
to higher field repair and maintenance expenses and higher employee benefit costs.
Non-cash Asset Write Down. During the quarter ended September 30, 2010, we recorded a $21
million non-cash asset write down as an increase of operation and maintenance expense based on a
FERC order related to the sale of the Natural Buttes facilities. In October 2010, we filed a
request for rehearing and clarification of the FERC order and in October 2011, the FERC denied our
request. For further discussion of Natural Buttes, see Item 1, Financial Statements, Note 2.
Project Cancellation Payment. During the second quarter of 2011, SLNG recognized $17 million of
operating revenue, consisting of a $9 million payment received in 2009 which granted BG LNG
Services, LLC (BG) a cancellation option related to their commitment on Phase B of SLNGs Elba III
Expansion and $8 million received as a result of BG exercising their cancellation option in June
2011. In addition, SLNG wrote off $3 million for certain project development costs incurred in
conjunction with this expansion project.
Net Income Attributable to Noncontrolling Interests. During the quarter and nine months ended
September 30, 2011, our net income attributable to noncontrolling interests decreased as compared
to the same period in 2010 primarily due to the acquisition of the remaining 49 percent member
interest in each of SLNG and Elba Express in November 2010, the acquisition of an additional 28
percent interest in CIG in June 2011 and the acquisition of the aggregate remaining 40 percent
interest in SNG in March and June 2011.
Other Regulatory Matters. Our pipeline systems periodically file for changes in their rates,
which are subject to approval by the FERC. Changes in rates and other tariff provisions resulting
from these regulatory proceedings have the potential to positively or negatively impact our
profitability. For further discussion regarding our rate cases see our 2010 Annual Report on Form
10-K.
CIG Rate Case. In August 2011, the FERC approved an uncontested pre-filing settlement of a
rate case required under the terms of a previous settlement. The
settlement generally provides for CIGs
current tariff rates to continue until the next general rate case which will be effective after
October 1, 2014 but no later than October 1, 2016.
Interest and Debt Expense
Our interest and debt expense increased by $16 million and $53 million during the quarter and
nine months ended September 30, 2011 as compared to the same periods in 2010 primarily due to
higher average debt outstanding used to fund acquisitions and organic expansion
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projects and higher interest rates primarily as a result of the
refinancing of our revolving credit facility in May 2011. The increase in our average debt
outstanding was attributable to the 2010 issuance of approximately $1.3 billion in debt by EPPOC as
described in our 2010 Annual Report on Form 10-K and the June 2011 issuance of $300 million senior
notes by SNG. The average interest rates under our credit facility were 2.3 percent and 0.9 percent
for the quarters ended September 30, 2011 and 2010. This increase was partially offset by a
decrease in the average balance outstanding under our credit facility from approximately $537
million to $402 million for the quarter ended September 30, 2010 as compared to 2011 and from $531
million to $334 million for the nine months ended September 30, 2010 as compared to the same
period in 2011. For a further discussion of these debt obligations, see Item 1, Financial
Statements, Note 5.
Income Taxes
SLNG converted into a non-taxpaying limited liability company in February 2010 and is no
longer subject to income taxes. Prior to the conversion, SLNG incurred $2 million of income tax
expense for the nine months ended
September 30, 2010.
Distributable Cash Flow
We use the non-GAAP financial measure Distributable Cash Flow as it provides important
information relating our financial operating performance to our cash distribution capability.
Additionally, we use Distributable Cash Flow in setting forward expectations and in communications
with the board of directors of our general partner. We define Distributable Cash Flow as Adjusted
EBITDA less cash interest expense, maintenance capital expenditures,
pre-acquisition undistributed earnings from consolidated subsidiaries and other income and
expenses, net, which primarily includes deferred revenue, a non-cash allowance for AFUDC equity and
other non-cash items. Adjusted EBITDA, which is also a non-GAAP financial measure, is defined as
net income adjusted for (i) income tax expense, (ii) interest and debt expense, net of interest
income, (iii) affiliated interest income, net of affiliate interest expense, (iv) depreciation and
amortization expense, (v) the partnerships share of distributions declared by unconsolidated
affiliates for the applicable period, (vi) earnings from unconsolidated affiliates and (vii)
distributions declared by majority owned subsidiaries to El Paso for the applicable period.
We believe that the non-GAAP financial measures described above are useful to investors
because these measures are used by many companies in the industry as measures of operating and
financial performance and are commonly employed by financial analysts and others to evaluate the
operating and financial performance of the partnership and to compare it with the performance of
other publicly traded partnerships within the industry.
Neither Distributable Cash Flow nor Adjusted EBITDA should be considered an alternative to net
income, earnings per unit, operating income, cash flow from operating activities or any other
measure of financial performance presented in accordance with GAAP. These non-GAAP measures exclude
some, but not all, items that affect net income and operating income and these measures may vary
among other companies. Therefore, Distributable Cash Flow and Adjusted EBITDA may not be comparable
to similarly titled measures of other companies. Furthermore, these non-GAAP measures should not be
viewed as indicative of the actual amount of cash that we have available for distributions or that
we plan to distribute for a given period, nor do they equate to Available Cash as defined in our
partnership agreement.
Our Distributable Cash Flows were $435 million and $272 million for the nine months ended
September 30, 2011 and 2010. The increase in Distributable Cash Flow in 2011 was primarily due to
higher revenues from expansions placed in service and our increased ownership in SLNG, Elba
Express, CIG and SNG. The tables below provide our reconciliations of Distributable Cash Flow and
Adjusted EBITDA.
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Reconciliation of Distributable Cash Flow to Net Income.
Nine Months Ended September 30, | ||||||||
2011 | 2010(1) | |||||||
(In millions) | ||||||||
Net income |
$ | 419 | $ | 448 | ||||
Net income attributable to noncontrolling interests |
(73 | ) | (172 | ) | ||||
Net income attributable to El Paso Pipeline Partners, L.P. |
346 | 276 | ||||||
Add: Income tax expense |
| 2 | ||||||
Add: Interest and debt expense, net |
186 | 133 | ||||||
Less: Affiliated interest income, net |
| (2 | ) | |||||
EBIT (2) |
532 | 409 | ||||||
Add: |
||||||||
Depreciation and amortization |
126 | 113 | ||||||
Distributions declared by unconsolidated affiliates |
14 | 12 | ||||||
Net income attributable to noncontrolling interests |
73 | 172 | ||||||
Less: |
||||||||
Earnings from unconsolidated affiliates |
(12 | ) | (12 | ) | ||||
Declared distributions by majority owned subsidiaries to El Paso (3) |
(42 | ) | (211 | ) | ||||
Adjusted EBITDA |
691 | 483 | ||||||
Less: |
||||||||
Cash interest expense, net |
(180 | ) | (132 | ) | ||||
Maintenance capital expenditures |
(68 | ) | (48 | ) | ||||
Pre-acquisition undistributed earnings from consolidated subsidiaries(4) |
| (20 | ) | |||||
Other, net (5) |
(8 | ) | (11 | ) | ||||
Distributable Cash Flow |
$ | 435 | $ | 272 | ||||
(1) | Retrospectively adjusted as discussed in Note 2. | |
(2) | For a further discussion of our use of EBIT, see Results of Operations. | |
(3) | In 2011, declared distributions include $30 million from CIG and $12 million from SNG. In 2010, declared distributions include $54 million from CIG, $36 million from SLNG, $12 million from Elba Express and $109 million from SNG. | |
(4) | The amount represents SNGs undistributed earnings prior to the November 2010 acquisition by EPB. | |
(5) | Includes deferred revenue and other non-cash items such as AFUDC equity, $6 million non-cash earnings related to BGs cancellation option and related write-off in 2011, $21 million asset write down in 2010 based on FERC order related to the sale of the Natural Buttes facilities and other items. |
Reconciliation of Distributable Cash Flow to Net Cash Provided by Operating Activities.
Nine Months Ended September 30, | ||||||||
2011 | 2010(1) | |||||||
(In millions) | ||||||||
Net cash provided by operating activities |
$ | 593 | $ | 501 | ||||
Income tax expense |
| 2 | ||||||
Interest and debt expense, net |
186 | 133 | ||||||
Affiliated interest income, net |
| (2 | ) | |||||
Declared distributions by majority-owned subsidiaries to El Paso (2) |
(42 | ) | (211 | ) | ||||
SLNG pre-acquisition taxes payable |
| 12 | ||||||
SLNG pre-acquisition accumulated deferred taxes |
| 58 | ||||||
Changes in working capital and other |
(46 | ) | (10 | ) | ||||
Adjusted EBITDA |
691 | 483 | ||||||
Less: |
||||||||
Cash interest expense, net |
(180 | ) | (132 | ) | ||||
Maintenance capital expenditures |
(68 | ) | (48 | ) | ||||
Pre-acquisition undistributed earnings from consolidated subsidiaries(3) |
| (20 | ) | |||||
Other, net (4) |
(8 | ) | (11 | ) | ||||
Distributable Cash Flow |
$ | 435 | $ | 272 | ||||
(1) | Retrospectively adjusted as discussed in Note 2. | |
(2) | In 2011, declared distributions include $30 million from CIG and $12 million from SNG. In 2010, declared distributions include $54 million from CIG, $36 million from SLNG, $12 million from Elba Express and $109 million from SNG. | |
(3) | The amount represents SNGs undistributed earnings prior to the November 2010 acquisition by EPB. | |
(4) | Includes deferred revenue and other non-cash items such as AFUDC equity, $6 million non-cash earnings related to BGs cancellation option and related write-off in 2011, $21 million asset write down in 2010 based on FERC order related to the sale of the Natural Buttes facilities and other items. |
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Commitments and Contingencies
For a further discussion of our commitments and contingencies, see Item 1, Financial
Statements, Note 7, which is incorporated herein by reference and our 2010 Annual Report on Form
10-K.
Liquidity and Capital Resources
Our primary sources of cash include cash flows from operations and funds obtained through long
term financing activities and bank credit facilities. We do not typically rely on short-term
borrowings to fulfill our liquidity needs. Our primary uses of cash are funding capital expenditure
programs, meeting operating needs and paying distributions.
Available Liquidity and Liquidity Outlook for 2011. Our primary sources of cash and uses of
cash are consistent with those described in our 2010 Annual Report on Form 10-K. As of September
30, 2011, we had approximately $1.1 billion of liquidity consisting of $1.0 billion of availability
under our new revolving credit facility and $138 million of cash on hand. We may generate
additional sources of cash through future issuances of additional partnership units and/or future
debt offerings. For a further discussion of our revolving credit facility, see Item 1, Financial
Statements, Note 5.
Our cash capital expenditures for the nine months ended September 30, 2011, and the amount of
cash we expect to spend for the remainder of 2011 to grow and maintain our businesses are as
follows:
Nine Months Ended | 2011 | |||||||||||||
September 30, 2011 | Remaining | Total | ||||||||||||
(In millions) | ||||||||||||||
Maintenance |
$ | 68 | $ | 33 | $ | 101 | ||||||||
Growth |
134 | 20 | 154 | |||||||||||
Total |
$ | 202 | $ | 53 | $ | 255 | ||||||||
We continue construction on our Phase III of SNGs South System III expansion project which we
expect to place in service in June 2012. We continue to evaluate additional expansion opportunities
around our well-positioned assets. While we expect to fund maintenance capital expenditures through
internally generated funds, we intend to fund our expansion capital projects through cash on hand
and borrowings under our new credit facility. We have $65 million of current debt maturities
consisting of $55 million of senior notes and a $10 million affiliate note payable to El Paso which
we anticipate refinancing primarily through revolver borrowings.
We expect our current liquidity sources and operating cash flow to be sufficient to fund our
estimated 2011 capital program. As a result of our current available liquidity, we believe we are
well positioned to meet our obligations. However, our future plans may be impacted by the
completion of KMIs announced acquisition of El Paso. We will continue to assess and take further
actions where prudent to meet our long-term objectives and capital requirements.
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Overview of Cash Flow Activities.
Our cash flows for the nine months ended September 30, 2011 are summarized as follows:
Our cash flows for the nine months ended September 30, 2011 are summarized as follows:
2011 | ||||
(In millions) | ||||
Cash Flow from Operations |
||||
Net income |
$ | 419 | ||
Non-cash income adjustments |
140 | |||
Change in other assets and liabilities |
34 | |||
Total cash flow from operations |
$ | 593 | ||
Cash Inflows |
||||
Financing activities |
||||
Net proceeds from issuance of common and general partner units |
$ | 968 | ||
Net proceeds from issuance of long-term debt |
1,747 | |||
Cash contributions from El Paso |
28 | |||
Total other cash inflows |
$ | 2,743 | ||
Cash Outflows |
||||
Investing activities |
||||
Capital expenditures |
$ | (202 | ) | |
Financing activities |
||||
Payments to retire long-term debt, including other financing obligations |
(1,276 | ) | ||
Cash distributions to unitholders and general partner |
(302 | ) | ||
Cash distributions to El Paso |
(75 | ) | ||
Cash paid to acquire additional interests in SNG and CIG |
(1,412 | ) | ||
Total cash outflows |
$ | (3,267 | ) | |
Net change in cash and cash equivalents |
$ | 69 | ||
For the nine months ended September 30, 2011, we generated cash flow from operations of $593
million compared to $501 million in the same period in 2010. Our operating cash flow in 2011
increased as compared to 2010 primarily due to higher revenue from our WIC System Expansion, Raton
2010 Expansion, Elba III Phase A Expansion and Elba Express pipeline which were placed in service
in 2010. Also contributing to the increase was Phases I and II of the South System III expansion
project which were placed in service in 2011. Our 2010 operating cash flows were burdened primarily
due to SLNGs conversion into a limited liability company and the related pre-acquisition
settlement of its current and deferred tax balances. During the nine months ended September 30,
2011, we received $968 million in net proceeds from the issuance of additional common and general
partner units and $789 million of net proceeds from SNGs and EPPOCs debt offerings. In addition,
El Paso contributed $28 million to us to fund their share of expansion capital expenditures at SNG
and CIG.
During 2011, we utilized our cash inflows to pay distributions to El Paso of its share of CIG
and SNG distributable cash flow (see Item 1, Financial Statements, Note 9), to fund maintenance and
growth projects, to repay debt obligations as they become due and to acquire additional interests
in SNG and CIG. We made cash distributions to our unitholders of $302 million during the nine
months ended September 30, 2011 compared with $171 million in the same period in 2010, reflecting a
greater number of partnership units outstanding, an increase in our cash distribution per unit and
increased incentive distributions to our general partner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes in our quantitative and qualitative disclosures about market
risks from those reported in our 2010 Annual Report on Form 10-K.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2011, we carried out an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) of our general partner, 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 El Pasos disclosure committee in an effort to ensure that information
required to be disclosed in the SEC reports we file or submit under the Securities Exchange Act of
1934, as amended (Exchange Act) is accurate, complete and timely. Our management, including the CEO
and CFO of our general partner, does not expect that our disclosure controls and procedures or our
internal controls will prevent and/or detect all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within our company have been detected. Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives and the CEO and CFO of our general
partner have 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, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third
quarter of 2011 that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, Financial Statements, Note 7, which is incorporated herein by reference.
Additional information about our legal proceedings can be found in Part I, Item 3 of our 2010
Annual Report on Form 10-K.
Item 1A. Risk Factors
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements that are based on assumptions or beliefs that
we believe to be reasonable; however, assumed facts almost always vary from the 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 2010 Annual Report on Form
10-K under Part I, Item 1A, Risk Factors. Below are additional risk factors as a result of the
recent announcement of KMIs planned purchase of El Paso Corporation (El Paso).
Risks Related to Proposed KMI Purchase of El Paso
Our
General Partner is owned by El Paso, which recently announced an
agreement to merge with Kinder Morgan,
Inc.(KMI), which owns the general partner of Kinder Morgan Energy Partners, L.P. (KMP). KMIs
ownership of us and KMP may result in conflicts of interest.
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El Paso entered into definitive agreements with KMI, which provide for a series of
transactions whereby KMI will acquire El Paso. The closing of the merger is subject to various
conditions precedent. As a result, there is a risk that the acquisition may not be completed. In
addition, prior to closing, various restrictions are imposed in the definitive agreements on the
sale of assets owned by El Paso, which could restrict the ability of
El Paso to sell its interests in
pipeline assets to us prior to the closing of the merger. Our ability
to purchase interests in El Pasos
pipeline assets after the closing of the merger is also uncertain. KMI owns the general partner of
KMP, which also owns other interstate natural gas pipelines. KMI has indicated its intention to
sell certain of the interstate pipelines owned by El Paso to KMP and to EPB. As a result, we may
compete with KMP for the dropdown of interstate pipeline assets owned by El Paso following the
acquisition of El Paso by KMI.
Following the completion of the merger of KMI and El Paso, the directors and officers of our
general partner and its affiliates will have duties to manage our general partner in a
manner that is beneficial to KMI who would be the sole owner of our general partner. At the same
time, our general partner will have duties to manage us in a manner that is beneficial to
our unitholders. Therefore, following the completion of the merger, our general partners duties to
us may conflict with the duties of its officers and directors to KMI in the future. As a result of
these conflicts of interest following the merger, our general partner may favor its own interest or
the interests of KMI or KMP, or their owners or affiliates over the interest of our unitholders.
Additional conflicts may also arise in the future following the merger associated with (1) the
allocation of capital and the allocation of costs among KMP and us, (2) the amount of time devoted
by the officers and directors of KMI to the business of KMP in relation to us and (3) the future
business opportunities that are pursued in KMP and us. Specifically, certain conflicts may arise
as a result of KMI pursuing acquisitions or development opportunities in KMP that may also be
advantageous to us. If we are limited in our ability to pursue such opportunities, we may not
realize all or any of the commercial value of such opportunities.
The recently announced merger of El Paso and Kinder Morgan is
subject to regulatory approvals which could require us to divest certain of our assets.
The merger of El Paso and Kinder Morgan is subject to various
regulatory approvals, including approvals from the Federal Trade Commission (FTC). The FTC may impose certain
restrictions or obligations on our businesses as conditions for their
approval of the merger, which could include requiring
the divestiture of certain of our assets or businesses in order to obtain such approvals. Any required divestiture
of assets could have a material impact on our business, including our ability to grow our business and distributions.
Pending
the completion of the merger, our business and operations could be
materially adversely affected.
Uncertainty about the effect of the
merger on El Pasos employees may have an adverse effect on us. This uncertainty may impair El Pasos ability to
attract, retain and motivate personnel until the merger is completed. Employee retention may be particularly challenging
during the pendency of the merger, as employees may feel uncertain about their future roles with the combined company. If El Pasos
employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to become employees of the
combined company, it could negatively impact our business, operations and financial results. In connection with the pending merger, it is
possible that some customers, suppliers and other persons with whom we have a business relationship may delay or defer certain business
decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the merger, which could
negatively affect our revenues, earnings and cash flows, as well as the market price of our common units, regardless of whether the merger
is completed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
24
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Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
The Exhibit Index is hereby incorporated herein by reference.
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:
| 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; |
| 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; |
| may apply standards of materiality in a way that is different from what may be viewed as material to certain investors; and | ||
| 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. |
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.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, El Paso Pipeline
Partners, L.P. has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
EL PASO PIPELINE PARTNERS, L.P. |
||||
By: | El Paso Pipeline GP Company, L.L.C., | |||
its General Partner |
Date: November 4, 2011 | By: | /s/ John R. Sult | ||
John R. Sult | ||||
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
Date: November 4, 2011 | By: | /s/ Rosa P. Jackson | ||
Rosa P. Jackson | ||||
Vice President and Controller
(Principal Accounting Officer) |
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Table of Contents
EL PASO PIPELINE PARTNERS, L.P.
EXHIBIT INDEX
EXHIBIT INDEX
Each exhibit identified below is filed as a part of this report. Exhibits filed with this
Report are designated by *. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
Exhibit | ||
Number | Description | |
3.A
|
Certificate of Limited Partnership of El Paso Pipeline Partners, L.P (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-145835) filed with the SEC on August 31, 2007). | |
3.B
|
First Amended and Restated Agreement of Limited Partnership of El Paso Pipeline Partners, L.P., dated November 21, 2007 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 001-33825) filed with the SEC on November 28, 2007); Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of El Paso Pipeline Partners, L.P., dated July 28, 2008 (incorporated by reference to Exhibit 4.A to our Current Report on Form 8-K (File No. 001-33825) filed with the SEC on July 28, 2008). | |
3.C
|
Certificate of Formation of El Paso Pipeline GP Company, L.L.C. (incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-1 (File No. 333-145835) filed with the SEC on August 31. 2007). | |
3.D
|
Amended and Restated Limited Liability Company Agreement of El Paso Pipeline GP Company, L.L.C., dated November 21, 2007 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K (File No. 001-33825) filed with the SEC on November 28, 2007). | |
10.A
|
First Amended and Restated Limited Liability Company Agreement of Southern Natural Gas Company, L.L.C., dated August 1, 2011 (incorporated by reference to Exhibit 10.F of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 filed with the SEC on August 8, 2011.) | |
10.B
|
Limited Liability Company Agreement of Colorado Interstate Gas Company, L.L.C., dated August 31, 2011 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on September 7, 2011). | |
*12
|
Ratio of Earnings to Fixed Charges | |
*31.A
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.B
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.A
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.B
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*101.INS
|
XBRL Instance Document | |
*101.SCH
|
XBRL Schema Document | |
*101.CAL
|
XBRL Calculation Linkbase Document | |
*101.DEF
|
XBRL Definition Linkbase Document | |
*101.LAB
|
XBRL Labels Linkbase Document | |
*101.PRE
|
XBRL Presentation Linkbase Document |
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