==============================================================================================================================================================
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-K
X
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Fiscal Year Ended December 31, 2006
OR
_ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
File No. 1-2921
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
(Exact
name of registrant as specified in its charter)
|
Delaware
|
44-0382470
|
|
(State
or other jurisdiction
of
|
(I.R.S.
Employer
|
|
incorporation
or
organization)
|
Identification
No.)
|
|
5444
Westheimer
Road
|
77056-5306
|
|
Houston,
Texas
|
(Zip
Code)
|
|
(Address
of principal executive
offices)
|
|
Registrant's
telephone number, including area code: (713)
989-7000
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of each Class
|
Name
of each exchange on which
registered
|
|
4.80%
Senior Notes due 2008,
Series B
|
New
York Stock
Exchange
|
|
6.05%
Senior Notes due 2013,
Series B
|
New
York Stock
Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes __
No P
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes __
No
P
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 P
No
___
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. P
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
Accelerated
filer
Non-accelerated filer P
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
No
P
Panhandle
Eastern Pipe Line Company, LP meets the conditions set forth in General
Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form
10-K
with the reduced disclosure format. Items 1, 2 and 7 have been reduced and
Items
4, 6, 10, 11, 12 and 13 have been omitted in accordance with Instruction
I.
(61
total
number of pages)
==============================================================================================================================================================
FORM
10-K
DECEMBER
31, 2006
Table
of Contents
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Page
|
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PART
I
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1
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5
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10
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10
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||
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10
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||
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11
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PART
II
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||
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11
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||
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11
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11
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18
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19
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19
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19
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19
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PART
III
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||
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19
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||
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20
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||
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20
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||
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20
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20
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PART
IV
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||
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21
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23
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F-1
|
||
PART
I
Our
Business
Introduction.
Panhandle Eastern Pipe Line Company, LP (PEPL),
a
Delaware limited partnership (together with its subsidiaries, Panhandle
or
the
Company),
is an
indirect wholly-owned subsidiary of Southern Union Company (Southern
Union Company
and,
together with its subsidiaries, Southern
Union).
The
Company is subject to the rules and regulations of the Federal Energy Regulatory
Commission (FERC).
The
Company’s entities include the following:
|
·
|
PEPL,
an indirect wholly-owned subsidiary of Southern Union
Company;
|
|
·
|
Trunkline
Gas Company, LLC (Trunkline),
a direct wholly-owned subsidiary of
PEPL;
|
|
·
|
Sea
Robin Pipeline Company, LLC (Sea
Robin),
an indirect wholly-owned subsidiary of
PEPL;
|
|
·
|
Trunkline
LNG Holdings, LLC (LNG
Holdings),
an indirect wholly-owned subsidiary of
PEPL;
|
|
·
|
Trunkline
LNG Company, LLC (Trunkline
LNG),
a direct wholly-owned subsidiary of LNG Holdings;
and
|
|
·
|
Pan
Gas Storage, LLC (d.b.a. Southwest
Gas Storage),
a direct wholly-owned subsidiary of
PEPL.
|
Services.
The
Company owns and operates a large natural gas open-access interstate pipeline
network. The pipeline network, consisting of the PEPL transmission system,
the
Trunkline transmission system and the Sea Robin transmission system, serves
customers in the Midwest and Southwest with a comprehensive array of
transportation and storage services. PEPL’s transmission system consists of four
large diameter pipelines extending approximately 1,300
miles from producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas
through Missouri, Illinois, Indiana and Ohio and terminating in Michigan.
Trunkline’s transmission system consists of two large diameter pipelines
extending approximately 1,400
miles from the Gulf Coast areas of Texas and Louisiana through Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. Sea Robin’s transmission system consists of two
offshore Louisiana natural gas supply systems extending approximately
81
miles
into the Gulf of Mexico. In connection with its gas transmission and storage
systems, the Company has five gas storage fields located in Illinois, Kansas,
Louisiana, Michigan and Oklahoma. Southwest Gas Storage operates four of these
fields and Trunkline operates one. Through Trunkline LNG, the Company owns
and
operates a liquefied natural gas (LNG)
terminal in Lake Charles, Louisiana, which is one
of
the largest operating LNG facilities in North America based on its current
sustainable send out capacity of approximately 1.8
billion cubic feet per day (Bcf/d).
Panhandle
earns the majority of its revenue by entering into firm transportation and
storage contracts, providing capacity for customers to transport or store
natural gas in its facilities. Approximately 35
percent of the Company’s total operating revenue comes from long-term service
agreements with local distribution company customers and their affiliates.
The
Company also provides firm transportation services under contract to gas
marketers, producers, other pipelines, electric power generators and a variety
of end-users. In addition, the Company’s pipelines offer both firm and
interruptible transportation to customers on a short-term or seasonal basis.
Demand for gas transmission on the Company’s pipeline systems is seasonal, with
the highest throughput and a higher portion of annual total operating revenues
and net earnings occurring in the traditional winter heating season in the
first
and fourth calendar quarters.
The
following table provides a summary of transportation volumes (in a trillion
British thermal units) associated with the reported results of operations for
the periods presented:
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
PEPL
|
579
|
609
|
573
|
||||||
|
Trunkline
|
486
|
459
|
527
|
||||||
|
Sea
Robin
|
115
|
146
|
184
|
||||||
|
Trunkline
LNG Usage Volumes
|
149
|
108
|
170
|
||||||
The
following table provides a summary of certain statistical information associated
with the Company at December 31, 2006:
|
As
of
|
|||
|
December
31,
|
|||
|
2006
|
|||
|
Approximate
Miles of Pipelines
|
|||
|
PEPL
|
6,000
|
||
|
Trunkline
|
3,500
|
||
|
Sea
Robin
|
450
|
||
|
Peak
Day Delivery Capacity (Bcf/d)
|
|||
|
PEPL
|
2.8
|
||
|
Trunkline
|
1.5
|
||
|
Sea
Robin
|
1
|
||
|
Trunkline
LNG
|
2.1
|
||
|
Underground
Storage Capacity-Owned (Bcf)
|
72
|
||
|
Underground
Storage Capacity-Leased (Bcf)
|
16
|
||
|
Trunkline
LNG Terminal Storage Capacity (Bcf)
|
9
|
||
|
Average
Number of Transportation Customers
|
500
|
||
|
Weighted
Average Remaining Life in Years of Firm Transportation
Contracts
|
|||
|
PEPL
|
4.6
|
||
|
Trunkline
|
9.9
|
||
|
Sea
Robin (1)
|
N/A
|
||
|
Weighted
Average Remaining Life in Years of Firm Storage Contracts
|
|||
|
PEPL
|
6.3
|
||
|
Trunkline
|
1.7
|
||
|
___________________
|
|||
|
(1)
Sea Robin contracts are interruptible without any firm contracts
in
place.
|
|||
Recent
System Enhancements
LNG
Expansion Projects. Trunkline
LNG’s Phase I expansion project was placed into service on April 5, 2006 with a
total project cost of $141
million, plus capitalized interest. The expanded vaporization capacity portion
of the project was placed into service on September 18, 2005. Phase II went
into
service on July 8, 2006. The final cost of Phase II was $79
million, plus capitalized interest. The expansions increased sustainable
send-out capacity from .63
Bcf/d
to 1.8
Bcf/d, and storage increased from 6.3
Bcf
to 9
Bcf. BG
LNG Services has contracted for all of the capacity at the facility through
2028
with a rate moratorium through 2015. Approximately $671,000
and $102
million of costs are included in the line item Construction
work-in-progress
for the
expansion projects at December 31, 2006 and December 31, 2005, respectively.
On
February 11, 2005, Trunkline received approval from FERC to construct, own
and
operate a 36-inch diameter, 23-mile
natural gas pipeline loop from the LNG terminal. The pipeline creates additional
transport capacity in association with the Trunkline LNG expansion and also
includes new and expanded delivery points with major interstate pipelines.
The
new 36-inch pipeline was placed into service on July 22, 2005.
For
information related to ongoing and potential expansion projects of the Company,
see Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
Significant
Customers. The
following table provides the percentage and related average contract lives
of
the Company’s significant customers at December 31, 2006:
|
Percent
of
|
Weighted
|
||||||
|
Revenues
|
Average
Life
|
||||||
|
For
Year Ended
|
of
Contracts at
|
||||||
|
Customer
|
December
31, 2006
|
December
31, 2006
|
|||||
|
BG
LNG Services (1)
|
24
|
%
|
17
years
|
||||
|
ProLiance
|
12
|
7.8
years
|
|||||
|
Ameren
Corp. (2)
|
10
|
7.1
years
|
|||||
|
Other
top 10 customers
|
19
|
4.1
years
|
|||||
|
Remaining
customers
|
35
|
4.5
years
|
|||||
|
Total
percentage
|
100
|
%
|
|||||
|
___________________
|
|||||||
|
(1)
BG LNG Services’ contracts were extended with the completion of Phase I
and Phase II in the second and third quarters of 2006, respectively.
For
additional information, see Item
8. Financial Statements and Supplementary Data, Note 3 – Regulatory
Matters.
|
|||||||
|
(2)
Includes Ameren Corp. subsidiaries such as Union Electric, Central
Illinois Light Company, Illinois Power and Central Illinois Public
Service.
|
|||||||
The
Company’s customers are subject to change during the year as a result of
capacity release provisions that allow them to release all or part of their
capacity, which generally occurs for a limited time period. Under the terms
of
the Company’s tariff, a temporary capacity release does not relieve the original
customer from its payment obligations if the replacement customer fails to
pay.
Regulation
The
Company is subject to regulation by various federal, state and local
governmental agencies, including those specifically described below. See also
Item
1. Business - Environmental, Item 1A. Risk Factors and
Item
8. Financial Statements and Supplementary Data, Note 3 - Regulatory
Matters.
FERC
has
comprehensive jurisdiction over PEPL, Southwest Gas Storage, Trunkline,
Trunkline LNG and Sea Robin as natural gas companies within the meaning of
the
Natural Gas Act of 1938. For natural gas companies, FERC’s jurisdiction relates,
among other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged.
FERC
has
authority to regulate rates and charges for transportation or storage of natural
gas in interstate commerce. FERC also has authority over the construction and
operation of pipeline and related facilities utilized in the transportation
and
sale of natural gas in interstate commerce, including the extension, enlargement
or abandonment of service using such facilities. PEPL, Trunkline, Sea Robin,
Trunkline LNG and Southwest Gas Storage hold certificates of public convenience
and necessity issued by FERC, authorizing them to construct and operate the
pipelines, facilities and properties now in operation for which such
certificates are required, and to transport and store natural gas in interstate
commerce.
The
following table summarizes the status of the rate proceedings applicable to
the
Company:
|
Date
of Last
|
|||||||
|
Company
|
Rate
Filing
|
Status
|
|||||
|
PEPL
|
May 1992 | Settlement effective April 1997 | |||||
|
Trunkline
|
January 1996 | Settlement effective May 2001 | |||||
|
Sea
Robin
|
April 2001 | Settlement effective May 2002 | |||||
|
Trunkline
LNG
|
June 2001 | Settlement effective January 2002 | |||||
|
Southwest
Gas Storage
|
April 1989 |
Settlement
effective October 1989 (1)
|
|
||||
|
___________________
|
|||||||
|
(1)
For information related to a complaint filed with FERC against
Southwest
Gas Storage under Section 5 of the Natural Gas Act, see Item
8. Financial Statements and Supplementary Data, Note 3 -
Regulatory
Matters.
|
|||||||
The
Company is also subject to the Natural Gas Pipeline Safety Act of 1968 and
the
Pipeline Safety Improvement Act of 2002, which regulate the safety of gas
pipelines.
For
a
discussion of the effect of certain FERC orders on the Company, see Item
8. Financial Statements and Supplementary Data, Note 3 - Regulatory
Matters.
Competition
The
interstate pipeline systems of the
Company
compete
with those of other interstate and intrastate pipeline companies in the
transportation and storage of natural gas. The principal elements of competition
among pipelines are rates, terms of service, flexibility and reliability of
service.
Natural
gas competes with other forms of energy available to the Company’s customers and
end-users, including electricity, coal and fuel oils. The primary competitive
factor is price. Changes in the availability or price of natural gas and other
forms of energy, the level of business activity, conservation, legislation
and
governmental regulation, the capability to convert to alternate fuels and other
factors, including weather and natural gas storage levels, affect the demand
for
natural gas in the areas served by the Company.
Federal
and state regulation of natural gas interstate pipelines has changed
dramatically in the last two decades and could continue to change over the
next
several years. These regulatory changes have resulted, and will continue to
result, in increased competition in the pipeline business. In order to meet
competitive challenges, the Company will need to adapt its marketing strategies,
the type of transportation and storage services provided and its pricing and
rate responses to competitive forces. The Company also will need to respond
to
changes in state regulation in its market areas that allow direct sales to
all
retail end-user customers or, at a minimum, broader customer classes than now
allowed.
FERC
policy allows the issuance of certificates authorizing the construction of
new
interstate pipelines that are competitive with existing pipelines. A number
of
new pipeline and pipeline expansion projects are under development to transport
large additional volumes of natural gas to the Midwest from the Rockies. These
pipelines, which include Kinder Morgan’s Rockies Express Pipeline project and El
Paso Corporation’s Continental Connector project, could potentially compete with
the Company.
The
Company’s direct competitors include Alliance Pipeline LP, ANR Pipeline Company,
Natural Gas Pipeline Company of America, Northern Border Pipeline Company,
Texas
Gas Transmission Corporation, Northern Natural Gas Company, Vector Pipeline,
Columbia Gulf Transmission and Midwestern Gas Transmission.
Environmental
The
Company’s operations are subject to federal, state and local laws and
regulations regarding water quality, hazardous and solid waste management,
air
quality control and other environmental matters. These laws and regulations
require the Company to conduct its operations in a specified manner and to
obtain and comply with a wide variety of environmental registrations, licenses,
permits, inspections and other approvals. Failure to comply with environmental
requirements may expose the Company to significant fines, penalties and/or
interruptions in
operations.
The Company’s environmental policies and procedures are designed to achieve
compliance with such laws and regulations. These evolving laws and regulations
and claims for damages to property, employees, other persons and the
environment, resulting from current or past operations, may result in
significant expenditures and liabilities in the future. The Company engages
in a
process of updating and revising its procedures for the ongoing evaluation
of
its operations to identify potential environmental exposures and enhance
compliance with regulatory requirements. For additional information concerning
the impact of environmental regulation on the Company, see Item
8. Financial Statements and Supplementary Data, Note 13 - Commitments and
Contingencies.
Insurance
The
Company maintains insurance coverage provided under its policies similar to
other comparable companies in the same lines of business. The insurance policies
are subject to terms, conditions, limitations and exclusions that do not fully
compensate the Company for all losses. Insurance deductibles range from
$100,000
to $5 million for the various policies utilized by the Company. Furthermore,
as
the Company renews its policies, it is possible that full insurance coverage
may
not be obtainable on commercially reasonable terms due to the recent more
restrictive insurance markets.
Employees
At
January 31, 2007, the Company had 996
employees. Of these employees, 218
were
represented by the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial,
and
Service Workers International AFL-CIO, CLC. In May
2006,
the Company entered into a new agreement with this union that expires
on
May 27,
2009.
Available
Information
PEPL
files annual, quarterly and special reports and other information with the
Securities and Exchange Commission (SEC)
as
required. Any document that PEPL files with the SEC may be read or copied at
the
SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for information on the public reference
room. PEPL’s SEC filings are also available at the SEC’s website at
http://www.sec.gov and through its parent Southern Union’s website at
http://www.sug.com.
The
risks
and uncertainties described below are not the only ones faced by the Company.
Additional risks and uncertainties that it is unaware of, or that it currently
deems immaterial, also may become important factors that affect it. If any
of
the following risks occur, the Company’s business, financial condition or
results of operations could be materially and adversely affected.
The
Company has substantial debt and depends on its ability to access the capital
markets.
The
Company has a significant amount of debt outstanding. As of December 31, 2006,
consolidated debt on the Consolidated Balance sheet totaled $1.65
billion outstanding compared to total capitalization (long and short term debt
plus partners’ capital) of $2.69
billion.
Some
of
the Company’s debt obligations contain financial covenants related to
debt-to-capital ratios and interest coverage ratios. The Company’s failure to
comply with any of these covenants could result in an event of default which,
if
not cured or waived, could result in the acceleration of outstanding debt
obligations or render it unable to borrow under certain credit agreements.
Any
such acceleration could cause a material adverse change in the Company’s
financial condition.
The
Company relies on access to both short-term and long-term credit as a
significant source of liquidity for capital requirements not satisfied by the
cash flow from its operations. Any worsening of the Company’s financial
condition could hamper its ability to access the credit markets. External events
could also increase the Company’s cost of borrowing or adversely affect its
ability to access the capital markets.
Further,
in order for the Company to receive equity contributions or loans from its
parent Southern Union, certain state regulatory approvals are required. This
may
limit the Company’s overall access to sources of capital otherwise available.
Restrictions on the Company’s ability to access capital markets could affect its
ability to execute its business plan or limit its ability to pursue improvements
or acquisitions on which it may otherwise rely for future growth.
The
Company plans to refinance its current debt of $462.3 million outstanding
at
December 31, 2006 with proceeds from bank financings. The Company is in the
final stages of planning for the refinancing of debt coming due in March
2007.
While an inability to repay these obligations could cause a material adverse
change to the Company’s financial condition, the Company reasonably believes
that it has the ability to refinance these obligations within the required
timeframes, although there can be no assurances that the anticipated
refinancings will occur.
Credit
ratings downgrades could increase the Company’s financing costs and could limit
its ability to access the capital markets.
As
of
December 31, 2006, the Company’s debt is currently rated Baa3
by
Moody's Investor Services, Inc., BBB-
by
Standard & Poor's and BBB
by
Fitch Ratings. If its current ratings are downgraded below investment grade
or
if there are times when it is placed on "credit watch," both borrowing costs
and
the costs of maintaining certain contractual relationships could increase.
The
Company’s credit rating can be impacted by the credit rating and activities of
its parent company, Southern Union Company. Thus, adverse impacts to Southern
Union and its activities, which may include activities unrelated to the Company
may have adverse impacts on the Company’s credit rating and financing and
operating costs.
The
Company is controlled by Southern Union.
The
Company is an indirect wholly-owned subsidiary of Southern Union Company.
Southern Union executives serve as the board of managers and as executive
officers of the Company. Accordingly, Southern Union controls and directs all
of
the Company’s business affairs and may unilaterally effect changes to its
management team and decides all matters submitted for member approval. In
circumstances involving a conflict of interest between Southern Union, on the
one hand, and the Company’s creditors, on the other hand, the Company can give
no assurance that Southern Union would not exercise its power to control the
Company in a manner that would benefit Southern Union to the detriment of its
creditors.
The
Company is subject to operating risks.
The
Company’s operations are subject to all operating hazards and risks incident to
handling, storing, transporting and providing customers with natural gas,
including explosions, pollution, release of toxic substances, fires and other
hazards, each of which could result in damage to or destruction of its
facilities or damage to persons and property. If any of these events were to
occur, the Company could suffer substantial losses. Moreover, as a result,
the
Company has been, and likely will be, a defendant in legal proceedings and
litigation arising in the ordinary course of business. Although the Company
maintains insurance coverage, such coverage may not be adequate to protect
the
Company from all material expenses related to these risks.
The
Company is subject to extensive federal, state and local laws and regulations
regulating the environmental aspects of its business that may increase its
costs
of operations, expose it to environmental liabilities and require it to make
material unbudgeted expenditures.
The
Company is subject to extensive federal, state and local laws and regulations
regulating the environmental aspects of its business (including air emissions).
These laws and regulations are complex and have tended to become increasingly
strict over time. These laws and regulations have necessitated, and in the
future may necessitate, increased capital expenditures and operating costs.
In
addition, certain environmental laws can impose liability without regard to
fault concerning contamination at a broad range of properties, including those
currently or formerly owned, leased or operated properties and properties where
the Company disposed of, or arranged for the disposal of waste.
The
Company is currently monitoring or remediating contamination at a number of
its
facilities and at third party waste disposal sites pursuant to environmental
laws and regulations and indemnification agreements. The Company cannot predict
with certainty the sites for which it may be responsible, the amount of
resulting cleanup obligations that may be imposed on it or the amount and timing
of future expenditures related to environmental remediation because of the
difficulty of estimating cleanup costs and the uncertainty of payment by other
potentially responsible parties.
Costs
and
obligations can also arise from claims for toxic torts and natural resource
damages or from releases of hazardous materials on other properties as a result
of ongoing operations or disposal of waste. Compliance with amended, new or
more
stringently enforced existing environmental requirements, or the future
discovery of contamination, may require material unbudgeted expenditures. These
costs or expenditures could have a material adverse effect on the Company’s
business, financial condition or results of operations, particularly if such
costs or expenditures are not fully recoverable from insurance or through the
rates charged to customers or if they exceed any amounts that have been
reserved.
Terrorist
attacks, such as the attacks that occurred on September 11, 2001, have
resulted in increased costs, and the consequences of the War on Terror and
the
Iraq conflict may adversely impact the Company’s results of
operations.
The
impact that terrorist attacks, such as the attacks of September 11, 2001,
may have on the energy industry in general, and on the Company in particular,
is
not known at this time. Uncertainty surrounding military activity may affect
its
operations in unpredictable ways, including disruptions of fuel supplies and
markets and the possibility that infrastructure facilities, including pipelines,
LNG facilities, gathering facilities and processing plants could be direct
targets of, or indirect casualties of, an act of terror or a retaliatory strike.
The Company may have to incur significant additional costs in the future to
safeguard its physical assets.
The
Company’s business is highly regulated.
The
Company’s transportation and storage business is subject to regulation by
federal and state regulatory authorities. FERC, the U.S. Department of
Transportation and various state and local regulatory agencies regulate the
interstate pipeline business. In particular, FERC regulates services provided
and rates charged by the Company. In addition, the U.S. Coast Guard has
oversight over certain issues related to the importation of LNG.
The
Company’s rates and operations are subject to regulation by federal regulators
as well as the actions of the Congress and state legislatures and, in some
respects, state regulators. The Company cannot predict or control what effect
future actions of regulatory agencies may have on its business or its access
to
the capital markets. Furthermore, the nature and degree of regulation of natural
gas companies has changed significantly during the past 25 years and there
is no assurance that further substantial changes will not occur or that existing
policies and rules will not be applied in a new or different
manner.
Should
new regulatory requirements regarding the security of its pipeline system or
new
accounting requirements for certain entities be imposed, the Company could
be
subject to additional costs that could adversely affect its business, financial
condition and results of operations if these costs are deemed unrecoverable
in
rates.
See
information concerning a complaint filed against Southwest Gas Storage under
Section 5 of the Natural Gas Act in Item
8. Financial Statements and Supplementary Data, Note 3 - Regulatory
Matters.
The
pipeline business of the Company is subject to
competition.
The
interstate pipeline business of the Company competes with those of other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service and the flexibility and reliability of service. Natural gas
competes with other forms of energy available to the Company’s customers and
end-users, including electricity, coal and fuel oils. The primary competitive
factor is price. Changes in the availability or price of natural gas and other
forms of energy, the level of business activity, conservation, legislation
and
governmental regulations, the capability to convert to alternate fuels, and
other factors, including weather and natural gas storage levels, affect the
demand for natural gas in the areas served by the Company.
The
success of the pipeline business of the Company depends, in part, on factors
beyond its control.
Third
parties own most of the natural gas transported and stored through the pipeline
systems operated by the Company. As a result, the volume of natural gas
transported and stored depends on the actions of those third parties and is
beyond the Company’s control. Further, other factors beyond the Company’s
control may unfavorably impact its ability to maintain or increase current
transmission and storage rates, to renegotiate existing contracts as they expire
or to remarket unsubscribed capacity.
The
success of the Company depends on the continued development of additional
natural gas reserves in the vicinity of its facilities and its ability to access
additional reserves to offset the natural decline from existing wells connected
to its system.
The
amount of revenue generated by the Company ultimately depends upon its access
to
the reserves of available natural gas. As the reserves available through the
supply basins connected to the Company’s system naturally decline, a decrease in
development or production activity could cause a decrease in the volume of
natural gas available for transmission. Investments by third parties in the
development of new natural gas reserves connected to the Company’s facilities
depend on many factors beyond the Company’s control.
Fluctuations
in energy commodity prices could adversely affect the business of the
Company.
If
natural gas prices in the supply basins connected to the pipeline systems of
the
Company are higher than prices in other natural gas producing regions,
especially Canada, the volume of gas transported by the Company may be
negatively impacted.
The
pipeline business of the Company is dependent on a small number of customers
for
a significant percentage of its sales.
The
Company’s top three customers accounted for 46
percent of its 2006 revenue. The loss of any one or more of these customers
could have a negative adverse effect on the Company’s business, financial
condition or results of operations.
The
pipeline revenues of the Company are generated under contracts that must be
renegotiated periodically.
The
pipeline revenues of the Company are generated under natural gas transportation
contracts that expire periodically and must be replaced. At December 31, 2006,
the weighted-average remaining life of contracts was 7.5
years,
with some contracts expiring each year. Although the Company will actively
pursue the renegotiation, extension and/or replacement of all of its contracts,
it cannot assure that it will be able to extend or replace these contracts
when
they expire or that the terms of any renegotiated contracts will be as favorable
as the existing contracts. If the Company is unable to renew, extend or replace
these contracts, or if the Company renews them on less favorable terms, it
may
suffer a material reduction in revenues and earnings.
The
Company is exposed to the credit risk of its customers in the ordinary course
of
business.
Transportation
service contracts obligate customers to pay charges for reservation of capacity,
or reservation charges, regardless of whether they transport natural gas on
the
pipeline system. As a result, the Company’s profitability will depend upon the
continued financial performance and creditworthiness of its customers rather
than just upon the amount of capacity provided under service
contracts.
Generally,
customers are rated investment grade or, as permitted by the Company’s tariff,
are required to make pre-payments or deposits, or to provide other collateral,
if their creditworthiness does not meet certain criteria. Nevertheless, the
Company cannot predict to what extent future declines in customers'
creditworthiness may negatively impact its business.
Substantial
risks are involved in operating a natural gas pipeline
system.
Numerous
operational risks are associated with the operation of a complex pipeline
system. These include adverse weather conditions, accidents, the breakdown
or
failure of equipment or processes, the performance of pipeline facilities below
expected levels of capacity and efficiency, the collision of equipment with
pipeline facilities (such as may occur if a third party were to perform
excavation or construction work near the facilities), and other catastrophic
events beyond the Company’s control. In particular, the Company’s pipeline
system, especially those portions that are located offshore, may be subject
to
adverse weather conditions including hurricanes, earthquakes, tornadoes, extreme
temperatures and other natural phenomena, making it more difficult for the
Company to realize the historic rates of return associated with these assets
and
operations. It is also possible that infrastructure facilities could be direct
targets or indirect casualties of an act of terror. A casualty occurrence might
result in injury or loss of life, extensive property damage or environmental
damage. Insurance proceeds may not be adequate to cover all liabilities or
expenses incurred or revenues lost.
Cautionary
Factors That May Affect Future Results
The
disclosure and analysis in this Form 10-K contains some forward-looking
statements that set forth anticipated results based on management’s plans and
assumptions. From time to time, the Company also provides forward-looking
statements in other materials it releases to the public as well as oral
forward-looking statements. Such statements give the Company’s current
expectations or forecasts of future events; they do not relate strictly to
historical or current facts. The Company has tried, wherever possible, to
identify such statements by using words such as “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions
in connection with any discussion of future operating or financial performance.
In particular, these include statements relating to future actions, future
performance or results of current and anticipated services, expenses, interest
rates, the outcome of contingencies, such as legal proceedings, and financial
results.
The
Company cannot guarantee that any forward-looking statement will be realized,
although management believes that the Company has been prudent in its plans
and
assumptions. Achievement of future results is subject to risks, uncertainties
and potentially inaccurate assumptions. If known or unknown risks or
uncertainties should materialize, or if underlying assumptions should prove
inaccurate, actual results could differ materially from past results and those
anticipated, estimated or projected. Readers should bear this in mind as they
consider forward-looking statements.
The
Company undertakes no obligation to update publicly forward-looking statements,
whether as a result of new information, future events or otherwise. Readers
are
advised, however, to consult any further disclosures the Company makes on
related subjects in its 10-K, 10-Q and 8-K reports to the SEC. Also note that
the Company provides the following cautionary discussion of risks, uncertainties
and possibly inaccurate assumptions relevant to its businesses. These are
factors that, individually or in the aggregate, management believes could cause
the Company’s actual results to differ materially from expected and historical
results. The Company notes these factors for investors as permitted by the
Private Securities Litigation Reform Act of 1995. Readers should understand
that
it is not possible to predict or identify all such factors. Consequently,
readers should not consider the following to be a complete discussion of all
potential risks or uncertainties.
Factors
that could cause actual results to differ materially from those expressed in
the
Company’s forward-looking statements include, but are not limited to, the
following:
|
·
|
changes
in demand for natural gas by the Company’s customers, in the composition
of the Company’s customer base and in the sources of natural gas available
to the Company;
|
|
·
|
additional
level of competition potentially increasing the number of discounted
revenue transactions;
|
|
·
|
the
effects of inflation and the timing and extent of changes in the
prices
and overall demand for and availability of natural gas as well as
electricity, oil, coal and other bulk materials and
chemicals;
|
|
·
|
adverse
weather conditions, such as warmer than normal weather in the Company’s
service territories, and the operational impact of disasters such
as
hurricanes;
|
|
·
|
changes
in laws or regulations, third-party relations and approvals, decisions
of
courts, regulators and governmental bodies affecting or involving
the
Company, including deregulation initiatives and the impact of rate
and
tariff proceedings before FERC and various state regulatory
commissions;
|
|
·
|
the
speed and degree to which additional competition is introduced to
the
Company’s business and the resulting effect on
revenues;
|
|
·
|
the
outcome of pending and future
litigation;
|
|
·
|
the
Company’s ability to comply with or to challenge successfully existing or
new environmental regulations;
|
|
·
|
unanticipated
environmental liabilities;
|
|
·
|
the
Company’s ability to acquire new businesses and assets and integrate those
operations into its existing operations, as well as its ability to
expand
its existing businesses and
facilities;
|
|
·
|
the
Company’s ability to control costs successfully and achieve operating
efficiencies, including the purchase and implementation of new
technologies for achieving such
efficiencies;
|
|
·
|
the
impact of factors affecting operations such as maintenance or repairs,
environmental incidents, gas pipeline system constraints and relations
with labor unions representing bargaining-unit
employees;
|
|
·
|
exposure
to customer concentration with a significant portion of revenues
realized
from a relatively small number of customers and any credit risks
associated with the financial position of those
customers;
|
|
·
|
changes
in the ratings of the Company’s debt securities or any of its
subsidiaries;
|
|
·
|
changes
in interest rates and other general capital markets conditions, and
in the
Company’s ability to continue to access the capital
markets;
|
|
·
|
acts
of nature, sabotage, terrorism or other acts causing damage greater
than
the Company’s insurance coverage
limits;
|
|
·
|
market
risks beyond the Company’s control affecting its risk management
activities including market liquidity, commodity price volatility
and
counterparty creditworthiness; and
|
|
·
|
other
risks and unforeseen events.
|
N/A
See
Item
1. Business for
information concerning the general location and characteristics of the important
physical properties and assets of the Company.
The
Company and certain of its affiliates are occasionally parties to lawsuits
and
administrative proceedings incidental to their businesses involving, for
example, claims for personal injury and property damage, contractual matters,
various tax matters, and rates and licensing. The Company and certain of its
affiliates are also subject to various federal, state and local laws and
regulations relating to the environment. Reference is made to Item
1, Business - Regulation,
as well
as to Item
8. Financial Statements and Supplementary Data, Note 3 - Regulatory Matters
and
Note 13 - Commitments and Contingencies,
for a
discussion of the Company’s legal proceedings. Also see Item
1A. Risk Factors - Cautionary Factors That May Affect Future
Results.
Item
4,
Submission of Matters to a Vote of Security Holders, has been omitted from
this
report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
PART
II
All
of
the partnership interests in the Company are privately held by Southern Union
Panhandle, LLC, a wholly-owned subsidiary of Southern Union, and Southern Union.
See Item
8. Financial Statements and Supplementary Data, Note 1 - Corporate
Structure.
Item
6,
Selected Financial Data, has been omitted from this report pursuant to the
reduced disclosure format permitted by General Instruction I to Form
10-K.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
provided as a supplement to the accompanying consolidated financial statements
and notes to help provide an understanding of the Company’s financial condition,
results of operations and changes in financial condition. The following section
includes an overview of the Company’s business as well as recent developments
that the Company believes are important in understanding its results of
operations and in anticipating future trends in those operations. Subsequent
sections include an analysis of the Company’s results of operations on a
consolidated basis and information relating to the Company’s liquidity and
capital resources, quantitative and qualitative disclosures about market risk
and other matters. The information required by this Item is presented in a
reduced disclosure format pursuant to General Instruction I to Form 10-K. The
Notes to Consolidated Financial Statements contain information that is pertinent
to the analysis of the Company’s financial condition and its results of
operations, including a discussion of the Company’s significant accounting
policies.
Overview
The
Company’s business purpose is to provide natural gas transportation and storage
in a safe, efficient and dependable manner. The Company operates approximately
10,000
miles of interstate pipelines that transport up to 5.3
Bcf/d
of natural gas. For additional information related to the Company’s line of
business, locations of operations and services provided, see Item
1. Business.
Historically,
much of the Company’s business was conducted through long-term contracts with
customers. Over the past years some of the Company’s customers have shifted to
shorter term transportation services contracts. This shift, which can increase
the volatility of revenues, is primarily due to changes in market conditions
and
competition with other pipelines, new supply sources, changing supply sources
and volatility in natural gas prices. However, changes in commodity prices
and
volumes transported do not generally have a significant short-term impact on
revenues because the majority of the Company’s revenues are related to firm
capacity reservation charges. For additional information related to the
Company’s related risk factors and the weighted average remaining lives of firm
transportation and storage contracts, See
Item
1A. Risk Factors and
Item
1. Business,
respectively.
The
Company’s regulated transportation and storage businesses periodically file (or
can be required to file) for changes in their rates, which are subject to
approval by FERC. Changes in rates and other tariff provisions resulting from
these regulatory proceedings have the potential to negatively impact the
Company’s results of operations and financial condition. For information related
to the status of current rate filings, see Item
1. Business - Regulation.
The
following table illustrates the results of operations of the Company for the
periods presented:
Results
of Operations
|
Year
Ended
|
|||||||||
|
December
31,
|
|||||||||
|
Year
Ended
|
Year
Ended
|
2006
Versus 2005
|
|||||||
|
December
31,
|
December
31,
|
Favorable/(Unfavorable)
|
|||||||
|
2006
|
2005
|
Variances
|
|||||||
|
|
(In
thousands)
|
||||||||
|
Operating
revenue:
|
|||||||||
|
Transportation
and storage of natural gas
|
$
|
451,513
|
$
|
434,537
|
$
|
16,976
|
|||
|
LNG
terminalling revenue
|
111,821
|
62,569
|
49,252
|
||||||
|
Other
revenue
|
13,848
|
8,127
|
5,721
|
||||||
|
Total
operating revenue
|
577,182
|
505,233
|
71,949
|
||||||
|
Operating
expenses:
|
|||||||||
|
Operation,
maintenance and general
|
206,181
|
204,461
|
(1,720
|
)
|
|||||
|
Depreciation
and amortization
|
72,724
|
62,171
|
(10,553
|
)
|
|||||
|
Taxes,
other than on income
|
25,405
|
28,196
|
2,791
|
||||||
|
Total
operating expenses
|
304,310
|
294,828
|
(9,482
|
)
|
|||||
|
Operating
income
|
272,872
|
210,405
|
62,467
|
||||||
|
Other
income (expense):
|
|||||||||
|
Interest
expense, net
|
(61,989
|
)
|
(48,285
|
)
|
(13,704
|
)
|
|||
|
Other,
net
|
14,911
|
4,069
|
10,842
|
||||||
|
Total
other expense, net
|
(47,078
|
)
|
(44,216
|
)
|
(2,862
|
)
|
|||
|
Earnings
before income taxes
|
225,794
|
166,189
|
59,605
|
||||||
|
Income
taxes
|
88,039
|
64,627
|
(23,412
|
)
|
|||||
|
Net
earnings
|
$
|
137,755
|
$
|
101,562
|
$
|
36,193
|
|||
Operating
Revenue. For
the
12 months ended December 31, 2006, operating revenue increased $71.9 million
versus the same time period during 2005. The increase was primarily due to:
|
·
|
A
$49.3 million increase in LNG terminalling revenue due to expanded
vaporization capacity, a base capacity increase on the BG LNG Services
contract and higher volumes resulting from an increase in LNG cargoes;
|
|
·
|
Increased
transportation and storage revenue of $17 million due to higher
reservation revenues of $15.6
million, which were primarily driven by higher average rates on contracts,
higher parking revenues of $1.6
million and higher storage revenues of $4.7
million due to increased contracted capacity. These increases were
partially offset by lower usage revenues of $4.9
million, of which $3.1
million resulted from the impact on Sea Robin in 2006 of the hurricanes
that occurred in the third quarter of 2005 and $1.8
million resulted from lower overall capacity utilization at Trunkline;
and
|
|
·
|
Increased
other revenue of $5.7 million primarily due to $3.7
million of non-recurring operational sales of gas in 2006 and
$1.1
million of higher liquids revenue.
|
Operating
Expenses.
Operating expenses for the 12 months ended December 31, 2006 increased $9.5
million versus the same time period during 2005 primarily due to:
|
·
|
Increased
depreciation and amortization expense of $10.6 million due to an
increase in property, plant and equipment placed in service, including
the
Trunkline LNG Phase I and Phase II expansions;
and
|
|
·
|
An
increase in operation, maintenance and general expenses of $1.7 million
primarily due to approximately $3.2
million of higher pipeline integrity assessment costs, approximately
$1.6
million of higher maintenance project costs, $1.3
million for inspections of facilities due to Hurricane Rita, a
$3.8
million decrease in 2005 due to a change in vacation pay practice
and a
corresponding accrual reduction and $2.1
million of higher fuel and electric power tracker costs associated
with
higher LNG cargo activity. These increases were partially offset
by a
$9.7
million decrease in insurance related costs due to accrued losses
recorded
in 2005 associated with the hurricanes and lower 2006 premiums and
a
$4.4
million decrease in benefit costs primarily related to lower
postretirement benefit expenses including the impact of enactment
of
Medicare Part D reimbursements and benefit plan
changes.
|
Such
increases were partially offset by a decrease in taxes, other than on income
of
$2.8
million primarily due to refunds of franchise and sales taxes received during
2006.
Allocated
corporate costs are expected to increase in 2007 due to Southern Union’s
disposition of certain assets in 2006 resulting in the Company receiving a
larger proportionate share of corporate costs.
Other
Income (Expense). Other
income, net for the 12 months ended December 31, 2006 decreased $2.9 million
versus the same time period during 2005. Interest expense increased $13.7
million primarily due to a
decrease in capitalized interest resulting from the Trunkline LNG Phase I and
Phase II in-service dates of April 2006 and July 2006, respectively, higher
debt
balances and higher LIBOR rates. Other, net increased $10.8 million primarily
due to higher
related party interest income caused by increases in the underlying LIBOR-based
rates and higher related party receivable balances in 2006.
Income
Taxes. Income
taxes during the year ended December 31, 2006, versus the same time period
during 2005, increased $23.4 million due to higher pretax income. The effective
federal and state income tax rate for years ended December 31, 2006 and 2005
was
39 percent and 38.9 percent, respectively.
Liquidity
and Capital Resources
Based
on
the Company’s current level of operations, management believes that cash flow
from operations, available existing cash, and other sources, including liquid
working capital and new borrowings, will be adequate to meet liquidity needs
for
the next several years, although no assurances can be given as to the
sufficiency of cash flows or the ability to refinance existing
obligations.
Operating
Activities. Cash
generated from internal operations constitutes the Company’s primary
source of liquidity. Additional sources of liquidity include use of available
credit facilities, project and bank financings, issuance of long-term debt
and
proceeds from asset dispositions.
Cash
flows from operating activities for the 12 months ended December 31, 2006 were
$249.2
million versus $205.4
million for the same time period during 2005. Changes in operating assets and
liabilities used cash of $17.6
million and provided $1
million
for the years ended December 31, 2006 and 2005, respectively. The $43.8
million increase in cash flows from operating activities for the year ended
December 31, 2006 versus 2005 was primarily attributable to the increase in
net
earnings.
Investing
Activities.
The
Company’s business strategy includes making prudent capital expenditures across
its base of interstate transmission assets. Changes in cash flow resulting
from
investing activities associated with these objectives resulted primarily from
ongoing expansion of its existing asset base through additions to property,
plant and equipment. Historically, the Company has utilized its operating cash
flow to satisfy its general capital requirements and has accessed the capital
markets only for extraordinary capital expenditures.
Cash
flows used in investing activities for the 12 months ended December 31, 2006
increased by approximately $514.7
million versus the same time period in 2005. Such increase in investing
activities is primarily due to an increase in net loans made to related parties
of approximately $483.2
million and an increase in capital expenditures of $34
million.
Principal
Capital Expenditure Projects
The
following is a summary of the Company’s major ongoing and potential expansion
projects.
LNG
Terminal Enhancement. The
Company has received approval from FERC and commenced construction of an
additional enhancement at its Trunkline LNG terminal. This infrastructure
enhancement project, which is expected to cost approximately $250
million, plus capitalized interest, will increase send out flexibility at the
terminal and lower fuel costs. The project is expected to be in operation in
2008. Approximately $40.8
million
and
$9.4
million of costs are included in the line item Construction
work-in-progress
at
December 31, 2006 and 2005, respectively.
Compression
Modernization. The
Company has received approval from FERC to modernize and replace various
compression facilities on PEPL. Such replacements will be made at 12 different
compressor stations and are expected to be installed by the end of 2009. The
estimated cost of these replacements is approximately $290
million, which includes the compression component of a PEPL east end enhancement
project already under construction. The Company has also filed for FERC approval
to replace approximately 32
miles
of existing pipeline on the east end of the PEPL system at an estimated cost
of
approximately $60
million, which would further improve system integrity. The project is planned
to
be completed in late 2007. Approximately $11.6
million and $46.3
million of costs, related to the compression modernization and east end
enhancement projects, respectively, are included in the line item Construction
work-in-progress at
December 31, 2006.
Trunkline
Field Zone Expansion Project. Trunkline
has announced a field zone expansion project, which includes adding capacity
to
its pipeline system in Texas and Louisiana to increase deliveries to Henry
Hub.
The field zone expansion project includes the previously announced north Texas
expansion as well as additional capacity to Henry Hub. Trunkline will increase
the capacity along existing right’s of way from Kountze, Texas, to Longville,
Louisiana, by approximately 510
million cubic feet per day with the construction of approximately 45
miles
of 36-inch diameter pipeline. The project includes horsepower additions and
modifications at existing compressor stations. Trunkline also will create
additional capacity to Henry Hub with the construction of a 13.5-mile,
36-inch diameter pipeline loop from Kaplan, Louisiana, directly into Henry
Hub.
The Henry Hub lateral will provide capacity of 475
million cubic feet per day from Kaplan, Louisiana to Henry Hub. Trunkline filed
the project with FERC on September 11, 2006 with an anticipated in-service
date
during the fourth quarter of 2007. The cost estimate has been revised to
approximately $200
million, plus capitalized interest, including a $40
million contribution in aid of construction (CIAC)
to a
subsidiary of Energy Transfer, L.P. (Energy
Transfer),
a
non-affiliated entity, toward construction costs to be incurred by Energy
Transfer to move its delivery point to a location near Buna, Texas, increasing
the field zone project capacity by up to 330,000
dekatherms per day. The
ultimate return and accounting for the CIAC to Energy Transfer depends on
completion of construction by Energy Transfer, additional capacity created
and
sale by Trunkline of the additional capacity. Approximately $12.5
million of costs for this project are included in the line item Construction
work-in-progress
at
December 31, 2006.
Hurricane
- Related Expenditures.
Late in
the third quarter of 2005, after coming through the Gulf of Mexico, Hurricanes
Katrina and Rita came ashore along the Upper Gulf Coast. These hurricanes caused
damage to property and equipment owned by Sea Robin, Trunkline, and Trunkline
LNG and construction project delays at the Trunkline LNG terminal. As of
December 31, 2006, the Company has incurred capital expenditure outlays of
$30.8
million primarily related to replacement or abandonment of damaged property
and
equipment and incremental Trunkline LNG terminal construction costs. Estimated
capital outlays of approximately $9.3
million are expected in early 2007.
The
Company anticipates reimbursement from its property insurance carriers for
a
significant portion of damages from Hurricane Rita in excess of its
$5
million
deductible. Such reimbursement is currently estimated by the Company’s property
insurance carrier ultimately to be limited to 70
percent of the portion of the claimed damages accepted by the insurance carrier,
but the amount is subject to the level of total ultimate claims from all
companies relative to the carrier’s $1
billion
total limit on payout per claim. As of December 31, 2006, the Company has
received payments of $1.6
million from the insurance carriers. No receivables due from the insurance
carriers have been recorded as of December 31, 2006.
In
addition, after the 2005 hurricanes, the Mineral Management Service mandated
inspections by leaseholders and pipeline operators along the hurricane tracks.
The Company has detected exposed pipe and other facilities on Trunkline and
Sea
Robin that must be recovered to comply with applicable regulations. Capital
expenditures are estimated at $4.8
million, $1.1
million of which is included in the line item Construction
work in progress
at
December 31, 2006. The Company will seek recovery of these capital and other
related expense amounts as part of the hurricane related claims.
The
following table presents a summary of property, plant and equipment additions
related to major projects.
|
Year
|
Year
|
Year
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||
|
Property,
Plant and Equipment Additions
|
2006
|
2005
|
2004
|
|||||||
|
(In
thousands)
|
||||||||||
|
LNG
Terminal Expansions
|
$
|
26,176
|
$
|
66,436
|
$
|
87,709
|
||||
|
LNG
Terminal Enhancement
|
30,869
|
8,827
|
614
|
|||||||
|
Trunkline
LNG Loop
|
3,173
|
25,329
|
21,321
|
|||||||
|
Trunkline
LNG Field Zone Expansion
|
12,314
|
169
|
-
|
|||||||
|
Pipeline
Integrity
|
20,223
|
21,816
|
18,378
|
|||||||
|
East
End Enhancement
|
52,102
|
1,012
|
-
|
|||||||
|
Information
Technology
|
14,142
|
6,162
|
6,226
|
|||||||
|
Hurricanes
|
20,296
|
900
|
-
|
|||||||
|
Compression
Modernization
|
11,642
|
-
|
-
|
|||||||
|
Air
Emmission Compliance
|
15,346
|
11,481
|
7,521
|
|||||||
|
Other
|
38,538
|
47,283
|
41,935
|
|||||||
|
Total
(1)
|
$
|
244,821
|
$
|
189,415
|
$
|
183,704
|
||||
|
____________________
|
||||||||||
|
(1)
Includes net capital accruals totaling $15,910, $(5,537) and $10,657
for
the years ended December 31, 2006, December 31, 2005 and December
31,
2004, respectively.
|
||||||||||
Financing
Activities. As
of
December 31, 2006, the Company’s debt was rated BBB
by
Fitch Ratings, Inc., BBB-
by
Standard & Poor’s and Baa3
by
Moody’s Investor Services, Inc. The Company’s notes are subject to certain
requirements, such as the maintenance of a fixed charge coverage ratio and
a
leverage ratio, which if not maintained, restrict the ability of the Company
to
make certain payments and impose limitations on the ability of the Company
to
subject its property to liens. At December 31, 2006, the Company, based on
the
currently most restrictive debt covenant requirements, was subject to a
$216.5
million limitation on additional restricted payments including dividends and
loans to affiliates, and a limitation of $299
million of additional secured or subsidiary level indebtedness or other defined
liens based on a limitation on liens covenant. The Company is also subject
to a
limitation of $286.5
million of total additional indebtedness. If
the
Company’s debt ratings by Moody’s Investor Services, Inc. were to fall below
Baa3, or if its debt ratings by Standard and Poor’s were to fall below BBB-,
then the allowable restricted payments would be reduced to $166.4
million. At December 31, 2006, the Company was in compliance with all
covenants.
On
December 1, 2006, LNG Holdings, as borrower, and PEPL and CrossCountry Citrus
(an indirect subsidiary of Southern Union), as guarantors, entered into a
$465
million unsecured term loan facility due April 4, 2008 (2006
Term Loan)
with
various financial institutions. The proceeds of the 2006 Term Loan were used
to
repay approximately $455
million of existing indebtedness of Transwestern Holding Company, LLC, a
wholly-owned subsidiary of CrossCountry Energy. The interest rate under the
2006
Term Loan is a floating rate tied to a LIBOR rate or prime rate at the Company’s
option, in addition to a margin tied to the rating of the Company’s unsecured
senior funded debt. At December 31, 2006, the interest rate was 6.22
percent, including a credit spread over LIBOR of 87.5
basis points.
Pursuant
to the 2006 Term Loan, on December 1, 2006, LNG Holdings loaned the proceeds
of
the 2006 Term Loan to CrossCountry Citrus in exchange for an interest-bearing
promissory note with a principal amount of $465
million. Accrued interest under the promissory note is payable quarterly. The
interest rate under the promissory note is based on the interest rate under
the
2006 Term Loan, plus a credit spread over LIBOR of 112.5
basis points. At December 31, 2006, the interest rate was 7.35
percent.
Retirement
of Debt Obligations
The
Company plans to refinance its debt coming due in March 2007 with proceeds
from
a $455 million multi-year bank term loan to LNG Holdings (2007
Expected TLNG Term Loan).
The
Company is near the final stages of consummating this refinancing, which
is
expected to close on or about March 12, 2007. The Company will use Wachovia
Capital Markets and UniCredit Markets and Investment Banking as lead arrangers
for the 2007 Expected TLNG Term Loan, which will be guaranteed by PEPL and
Trunkline LNG. Borrowings based on the current term sheet under the 2007
Expected TLNG Term Loan will bear interest at LIBOR, plus a credit spread
based
on the senior unsecured credit ratings by Standard & Poor’s and Moody’s
Investors Service for PEPL. Should the Company not be successful in the
aforementioned refinancing effort, the Company would implement alternative
refinancing plans, including a combination of drawing down on its $148.7
million demand note with Southern Union (which has available capacity with
its
revolving credit facility), obtaining loans or advances from other subsidiaries
of Southern Union, utilizing cash from operations and additional commitments
from third-party lenders, which are subject to material adverse change clauses
and other customary terms and conditions, to repay the March 2007 obligations
at
maturity in the event the 2007 Expected TLNG Term Loan is not completed in
the
required timeframe.
The
Company believes, based on its investment grade credit ratings and general
financial condition, successful historical access to capital markets, current
economic and capital market conditions and market expectations regarding
the
Company’s future earnings and cash flows, that it will be able to refinance
these obligations under acceptable terms within the required timeframes.
However, there can be no assurance the Company will be successful in its
implementation of these refinancing plans and the Company’s inability to do so
would cause a material adverse change to the Company’s financial
condition.
For
additional information related to the Company’s debt, see Item
8. Financial Statements and Supplementary Data, Note 11 - Debt.
Cash
flows provided by financing activities for the 12 months ended December 31,
2006
increased by approximately $496.3
million versus the same period in 2005 primarily due to an increase in net
debt
issuances of approximately $209.4
million, a decrease in net debt retirements of approximately $258.4 million
and
an increase in bank overdrafts of approximately $28.1
million.
Other
Matters
Master
Limited Partnership. As
part of its Strategic Plan and Outlook, Southern Union announced that it is
pursuing the creation of a master limited partnership structure utilizing the
assets of Southwest Gas Storage.
Regulation. FERC
is
responsible under the Natural Gas Act for assuring that rates charged by
interstate pipelines are "just and reasonable." To enforce that requirement,
FERC applies a ratemaking methodology that determines an allowed rate of return
on common equity for the companies it regulates. On October 25, 2006, a group
including producers and various trade associations filed a complaint under
Section 5 of the Natural Gas Act against Southwest Gas Storage requesting that
FERC initiate an investigation into Southwest Gas Storage’s rates, terms and
conditions of service and grant immediate interim rate relief. FERC initiated
a
Section 5 proceeding on December 21, 2006 setting this issue for hearing.
Pursuant to FERC order, Southwest Gas Storage filed a cost and revenue study
with FERC on February 20, 2007, with a hearing scheduled for August 27, 2007.
The ultimate resolution of the Southwest Gas Storage matter has many variables
and potential outcomes and it is impossible to predict its timing or materiality
at this time. No proceeding has been initiated against PEPL, but any potential
rate reductions from such a proceeding would be expected to be mitigated by
the
impact of significant ongoing capital spending at PEPL for pipeline integrity,
safety, environmental (including air emissions), compression modernization
and
other requirements.
For
other
regulatory information, see
Item
8. Financial Statements and Supplementary Data, Note 3 - Regulatory
Matters.
Environmental
Matters. The
Company is subject to federal, state and local laws and regulations relating
to
the protection of the environment. These evolving laws and regulations may
require expenditures over a long period of time to control environmental
impacts. The Company has established procedures for the ongoing evaluation
of
its operations to identify potential environmental exposures. These procedures
are designed to achieve compliance with such laws and regulations. For
additional information concerning the impact of environmental regulation on
the
Company, see
Item
8. Financial Statements and Supplementary Data, Note 13 - Commitments and
Contingencies.
Off-Balance
Sheet Arrangements and Aggregate Contractual
Obligations.
PEPL
provided a guarantee related to the bridge financing entered into by Southern
Union on November 17, 2004 of $407
million to fund a portion of Southern Union’s equity investment in CCE Holdings,
LLC (Bridge
Loan).
The
Bridge Loan was subject to standard terms and conditions and was due and payable
on May 17, 2005. The
Bridge Loan was repaid in February 2005 and PEPL has been released from all
related obligations.
Contractual
Commitments.
The
following table summarizes the Company’s expected contractual obligations by
payment due date as of December 31, 2006.
|
Contractual
Obligations (In thousands)
|
|||||||||||||||||||||
|
2012
and
|
|||||||||||||||||||||
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
thereafter
|
|||||||||||||||
|
Operating
Leases (1)
|
$
|
53,398
|
$
|
11,250
|
$
|
6,997
|
$
|
6,353
|
$
|
5,561
|
$
|
4,979
|
$
|
18,258
|
|||||||
|
Total
long term debt (2)
|
1,638,054
|
462,290
|
758,336
|
60,623
|
40,500
|
-
|
316,305
|
||||||||||||||
|
Interest
payments on debt (3)
|
310,615
|
79,564
|
49,006
|
27,048
|
21,437
|
19,766
|
113,794
|
||||||||||||||
|
Firm
capacity payments (4)
|
55,436
|
8,901
|
7,455
|
7,186
|
5,810
|
5,351
|
20,733
|
||||||||||||||
|
OPEB
funding (5)
|
39,060
|
7,812
|
7,812
|
7,812
|
7,812
|
7,812
|
-
|
||||||||||||||
|
Total
|
$
|
2,096,563
|
$
|
569,817
|
$
|
829,606
|
$
|
109,022
|
$
|
81,120
|
$
|
37,908
|
$
|
469,090
|
|||||||
|
___________________
|
|||||||||||||||||||||
|
(1)
Lease of various assets utilized for operations.
|
|||||||||||||||||||||
|
(2)
The long-term debt cash obligations exclude $9.6 million of unamortized
debt premium as of December 31, 2006.
|
|||||||||||||||||||||
|
(3)
Interest payments on debt are based upon the applicable stated
or variable
interest rates as of December 31, 2006.
|
|||||||||||||||||||||
|
(4)
Charges for third party storage capacity.
|
|||||||||||||||||||||
|
(5)
Panhandle is committed to the funding levels of $7.8 million per
year
until modified by future rate proceedings, the timing of which
is
uncertain.
|
|||||||||||||||||||||
Postretirement
Benefits.
Certain
changes that were approved in the fourth quarter of 2005 relating to the
Company’s postretirement health care plan have reduced the Company’s accumulated
postretirement benefit obligation by approximately $24.3
million and future expenses by approximately $1
million
per quarter. For additional information on postretirement benefits, see
Item
8. Financial Statements and Supplementary Data, Note 14 -
Benefits.
Vacation
Plan Change. Beginning
January 1, 2006, non-union employees earned vacation on a monthly accrual basis
versus having their complete vacation entitlement earned at the beginning of
the
year. At December 31, 2005, the Company reduced the previously accrued
obligation by $3.8
million to reflect this vacation plan change.
Inflation.
The
Company believes that inflation has caused and will continue to cause increases
in certain operating expenses and has required and will continue to require
it
to replace assets at higher costs. The Company continually reviews the adequacy
of its rates in relation to the impact of market conditions, the increasing
cost
of providing services and the inherent regulatory lag in adjusting those
rates.
New
Accounting Pronouncements
FIN
48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109” (FIN
48): Issued
by
the Financial Accounting Standards Board (FASB)
in July
2006, the Interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.
FIN 48
prescribes a recognition and measurement threshold attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company has evaluated this guidance
and
does not believe its consolidated financial statements will be materially
impacted.
FASB
Statement No. 157, “Fair Value Measurements”:
Issued
by the FASB in September 2006, this Statement defines fair value, establishes
a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this Statement simplifies and codifies related
guidance within generally accepted accounting principles. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
is
currently evaluating the impact of this Interpretation on its consolidated
financial statements.
FASB
Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)”:
Issued
by the FASB in September 2006, the Statement requires an employer to recognize
the overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement
of
financial position and to recognize changes in that funded status in the year
in
which the changes occur through accumulated other comprehensive income. The
Statement also requires an employer to measure the funded status of a plan
as of
the date of its year-end statement of financial position, with limited
exceptions. The recognition and disclosure provisions of this Statement, which
is effective for fiscal years ending after December 15, 2006, were adopted
by
the Company effective December 31, 2006. See Item
8. Financial Statements and Supplementary Data, Note 14 -
Benefits
for the
impact the adoption of Statement No. 158 had on the Company.
FASB
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No.
115”:
Issued
by the FASB in February 2007, this Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in
earnings. The Statement does not affect any existing accounting literature
that
requires certain assets and liabilities to be carried at fair value. The
Statement is effective for fiscal years beginning after November 15, 2007.
The
Company is currently evaluating the impact of this Statement on its consolidated
financial statements.
SEC
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (SAB No. 108):
In
September 2006, the SEC provided guidance on the consideration of the effects
of
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB No. 108 establishes a dual approach
that requires quantification of financial statement errors based on the effects
of the error on each of the Company’s financial statements and the related
financial statement disclosures. SAB No. 108 is effective for fiscal years
ending after November 15, 2006. The adoption of SAB No. 108 did not materially
impact the Company’s consolidated financial statements.
See
Item
8. Financial Statements and Supplementary Data, Note 2 - Summary of Significant
Accounting Policies - New Accounting Principles.
The
Company has long-term debt which subjects the Company to the risk of loss
associated with movements in market interest rates.
At
December 31, 2006, the Company had issued fixed-rate long-term debt aggregating
$727.1
million in principal amount (including net premiums on debt of $9.6
million) and having a fair value of $737.5
million. These instruments are fixed-rate and, therefore, do not expose the
Company to the risk of earnings loss due to changes in market interest rates.
However, the fair value of these instruments would increase by approximately
$23.3
million if interest rates were to decline by ten percent from December 31,
2006
levels. In general, such an increase in fair value would impact earnings and
cash flows only if the Company were to reacquire all or a portion of these
instruments in the open market prior to their maturity.
The
Company’s floating-rate obligations aggregated $920.6
million at December 31, 2006. The floating-rate obligations expose the Company
to the risk of increased interest expense in the event of increases in
short-term interest rates. If
the
floating rates were to increase by ten percent from December 31, 2006 levels,
the Company’s consolidated interest expense would increase by approximately
$470,000
for each month during which such increase continued. This amount has been
determined by considering the impact of the hypothetical interest rates on
the
variable rate borrowings outstanding as of December 31, 2006.
In
March
2004, the Company entered into interest rate swaps to hedge the risk associated
with the fair value of its $200 million 2.75 percent Senior Notes. These swaps
are designated as fair value hedges and qualify for the short cut method under
FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities.
As of
December 31, 2006 and December 31, 2005 the fair value position of the swaps
was
a liability of $1.3
million
and $5.7
million, respectively, recorded as a reduction to current portion of long-term
debt and long-term debt, respectively. Under the swap agreements, the Company
will receive fixed interest payments at a rate of 2.75
percent per annum and will make floating interest payments based on the
six-month LIBOR. No ineffectiveness is assumed in the hedging relationship
between the debt instrument and the interest rate swaps. As of December 31,
2006, these swaps have an average interest rate of 5.89
percent.
See
Item
8. Financial Statements and Supplementary Data, Note 11 - Debt.
The
information required here is included in the report as set forth in the Index
to
Consolidated Financial Statements on page F-1.
None.
Evaluation
of Disclosure Controls and Procedures
The
Company has established disclosure controls and procedures to ensure that
information required to be disclosed by the Company, including consolidated
entities, in reports filed or submitted under the Securities Exchange Act of
1934, as amended (Exchange
Act)
is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. The Company’s disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
it files or submits under the Exchange Act is accumulated and communicated
to
management, including the Company’s Chief Operating Officer (COO)
and
Chief Financial Officer (CFO),
as
appropriate, to allow timely decisions regarding required disclosure. The
Company performed an evaluation under the supervision and with the participation
of management, including its COO and CFO, and with the participation of
personnel from its legal, internal audit, risk management and financial
reporting departments, of the effectiveness of the design and operation of
the
Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this report. Based on that
evaluation, the Company’s COO and CFO concluded that the Company’s disclosure
controls and procedures were effective as of December 31, 2006. Management
has
also communicated that determination to the Board of Managers and Southern
Union’s Audit Committee, which also serves as the Company’s Audit
Committee.
Changes
in Internal Controls Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended December 31, 2006 that have materially
affected, or is reasonably likely to materially affect, the Company’s internal
controls over financial reporting.
All
information required to be reported on Form 8-K for the quarter ended December
31, 2006, was appropriately reported.
PART
III
Item
10,
Directors, Executive Officers and Corporate Governance, has been omitted from
this report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
Item
11,
Executive Compensation, has been omitted from this report pursuant to the
reduced disclosure format permitted by General Instruction I to Form
10-K.
Item
12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, has been omitted from this report pursuant to the reduced
disclosure format permitted by General Instruction I to Form 10-K.
Item
13,
Certain Relationships and Related Transactions, and Director Independence,
has
been omitted from this report pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
Below
is
a summary of fees billed to the Company by its principal audit firm for the
years ended December 31, 2006 and 2005.
|
Fee
Category
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
Audit
Fees (1)
|
|||||||
|
PricewaterhouseCoopers
LLP
|
$
|
999
|
$
|
1,184
|
|||
|
Audit-Related
Fees (2)
|
|||||||
|
PricewaterhouseCoopers
LLP
|
-
|
-
|
|||||
|
All
Other Fees (3)
|
-
|
-
|
|||||
|
Total
Fees
|
$
|
999
|
$
|
1,184
|
|||
|
___________________
|
|||||||
|
(1)
Audit Fees consists of fees billed for professional services
rendered in
connection with the audit of the annual financial statements,
review of
the quarterly financial statements and state and federal
regulatory
audits.
|
|||||||
|
(2)
Audit-Related Fees consists of fees billed for accounting
research and
professional services rendered in connection with debt offerings,
registration statements, and review of internal controls.
|
|||||||
|
(3)
All Other Fees consists of fees associated with other services
provided by
the principal audit firm.
|
|||||||
The
audit
committee has adopted a policy requiring pre-approval of all auditing and
non-audit services (including the fees and terms thereof) to be provided to
the
Company by its independent auditor, other than non-audit services not recognized
to be non-audit services at the time of the engagement that meet the
de
minimis
exceptions described in Section 10A(i)(1)(B)(i) of the Securities Exchange
Act
of 1934; provided that they are approved by the Audit Committee prior to the
completion of the audit.
PART
IV
(a)(1)
and (2) Financial
Statements and Financial Statement Schedules.
(a)(3) Exhibits.
Exhibit No. Description
|
3(a)
|
Certificate
of Formation of Panhandle Eastern Pipe Line Company,
LP. (Filed as Exhibit 3.A to the Form 10-K for the year ended December
31,
2004 and incorporated herein by reference.)
|
|
3(b)
|
Limited
Partnership Agreement of Panhandle Eastern Pipe Line Company, LP,
dated as
of June 29, 2004, between Southern Union Company and Southern Union
Panhandle LLC. (Filed as Exhibit 3.B to the Form 10-K for the year
ended
December 31, 2004 and incorporated herein by
reference.)
|
|
4(a)
|
Indenture
dated as of March 29, 1999, among CMS Panhandle Holding
Company,
Panhandle
Eastern Pipe Line Company and NBD Bank, as Trustee. (Filed as Exhibit
4(a)
to the Form 10-Q for the quarter ended March 31, 1999, and incorporated
herein
by
reference.)
|
|
4(b)
|
1st
Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank,
as
Trustee, including a form of Guarantee by Panhandle Eastern Pipe
Line
Company of the obligations of CMS Panhandle Holding Company. (Filed
as
Exhibit 4(b) to the Form 10-Q for the quarter ended March 31, 1999,
and
incorporated herein by reference.)
|
|
4(c)
|
2nd
Supplemental Indenture dated as of March 27, 2000, between Panhandle,
as
Issuer and Bank One Trust Company, National Association, as Trustee.
(Filed as Exhibit 4(e) to the Form S-4 filed on June 22, 2000, and
incorporated herein by reference.)
|
|
4(d)
|
3rd
Supplemental Indenture dated as of August 18, 2003, between Panhandle,
as
Issuer and Bank One Trust Company, National Association, as Trustee.
(Filed as Exhibit 4(d) to the Form 10-Q for the quarter ended September
30, 2003, and incorporated herein by reference.)
|
|
4(e)
|
4th
Supplemental Indenture dated as of March 12, 2004, between Panhandle,
as
Issuer
and
J.P. Morgan Trust Company, National Association, as Trustee. (Filed
as
Exhibit
4.E
to the Form 10-K for the year ended December 31, 2004 and incorporated
herein
by
reference.)
|
|
4(f)
|
Indenture
dated as of February 1, 1993, between Panhandle and Morgan Guaranty
Trust
Company effective January 1, 1982, as amended December 3, 1999. (Filed
as
Exhibit 4 to the Form S-3 filed February 19, 1993, and incorporated
herein
by reference.)
|
|
10(a)
|
Credit
Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle
Eastern Pipe Line Company, LP and CrossCountry Citrus, LLC, as guarantors,
the financial institutions listed therein and Bayerische Hypo- Und
Vereinsbank AG, New York Branch, as administrative agent, dated as
of
December 1, 2006. (Filed as Exhibit 10.1 to Panhandle’s Current Report on
Form 8-K filed on December 7, 2006 and incorporated herein by
reference.)
|
|
10(b)
|
$465,000,000
Promissory Note made by CrossCountry Citrus, LLC, as borrower, in
favor of
Trunkline LNG Holdings LLC, as holder, dated as of December 1, 2006.
(Filed as Exhibit 10.2 to Panhandle’s Current Report on Form 8-K filed on
December 7, 2006 and incorporated herein by reference.)
|
|
Power
of Attorney
|
|
Certificate
by President and Chief Operating Officer pursuant to Rule 13a - 14(a)
or
15d - 14(a) promulgated under the Securities Exchange Act of 1934,
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certificate
by Senior Vice President and Chief Financial Officer pursuant to
Rule 13a
- 14(a) or 15d - 14(a) promulgated under the Securities Exchange
Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
Certificate
by President and Chief Operating Officer pursuant to Rule 13a - 14(b)
or
15d - 14(b) promulgated under the Securities Exchange Act of 1934
and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
|
|
|
Certificate
by Senior Vice President and Chief Financial Officer pursuant to
Rule 13a
- 14(b) or 15d - 14(b) promulgated under the Securities Exchange
Act of
1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section
1350.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Panhandle Eastern Pipe Line Company, LP has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 1, 2007.
| PANHANDLE EASTERN PIPE LINE COMPANY, LP | |
|
By:
|
/s/ ROBERT O. BOND |
| Robert O. Bond | |
| President and Chief Operating Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
has been signed by the following persons on behalf of Panhandle Eastern Pipe
Line Company, LP and in the capacities indicated as of March 1,
2007.
|
SIGNATURE
|
TITLE
|
|
|
(i)
|
Principle
executive officer:
/s/
ROBERT O. BOND
Robert O. Bond
|
President
and Chief Operating Officer
|
|
(ii)
|
Principal
financial officer:
/s/
RICHARD N. MARSHALL
Richard N. Marshall
|
Senior
Vice President and Chief Financial Officer
|
|
(iii)
|
Principal
accounting officer:
/s/
GARY W. LEFELAR
Gary W. Lefelar
|
Senior
Vice President and Chief Accounting Officer
|
|
(iv)
|
A
majority of the Board of Directors of Southern Union Company, Sole
Member
of Southern Union Panhandle, LLC, General Partner of Panhandle Eastern
Pipe Line Company, L.P.
|
|
|
SIGNATURE
|
TITLE
|
|
|
/s/
GEORGE L. LINDEMANN
George L. Lindemann
|
Chairman,
Southern Union Company
|
|
|
/s/
DAVID BRODSKY
David Brodsky
|
Director,
Southern Union Company
|
|
|
/s/
FRANK W. DENIUS
Frank W. Denius
|
Director,
Southern Union Company
|
|
|
/s/
KURT A. GITTER, M.D.
Kurt A. Gitter, M.D.
|
Director,
Southern Union Company
|
|
|
/s/
HERBERT H. JACOBI
Herbert H. Jacobi
|
Director,
Southern Union Company
|
|
|
/s/
ADAM M. LINDEMANN
Adam M. Lindemann
|
Director,
Southern Union Company
|
|
|
/s/
THOMAS N. McCARTER, III
Thomas N. McCarter, III
|
Director,
Southern Union Company
|
|
|
/s/
GEORGE ROUNTREE, III
George Rountree, III
|
Director,
Southern Union Company
|
|
|
/s/
ALAN D. SCHERER
Alan D. Scherer
|
Director,
Southern Union Company
|
|
|
*By:
|
/s/ RICHARD N. MARSHALL |
*By:
|
/s/ ROBERT O. BOND |
| Senior Vice President and Chief Financial Officer | President and Chief Operating Officer | ||
| Attorney-in-fact | Attorney-in-fact |
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Financial
Statements and Supplementary Data:
|
|
|
F-2
|
|
|
F-3
- F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7-F-35
|
|
|
F-36
|
All
schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements or related
notes.
F-1
CONSOLIDATED
STATEMENT OF OPERATIONS
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||||
|
(In
thousands)
|
|||||||||
|
Operating
revenue
|
|||||||||
|
Transportation
and storage of natural gas
|
$
|
451,513
|
$
|
434,537
|
$
|
423,011
|
|||
|
LNG
terminalling revenue
|
111,821
|
62,569
|
56,537
|
||||||
|
Other
revenue
|
13,848
|
8,127
|
9,616
|
||||||
|
Total
operating revenue
|
577,182
|
505,233
|
489,164
|
||||||
|
Operating
expenses
|
|||||||||
|
Operation,
maintenance and general
|
206,181
|
204,461
|
212,106
|
||||||
|
Depreciation
and amortization
|
72,724
|
62,171
|
60,182
|
||||||
|
Taxes,
other than on income
|
25,405
|
28,196
|
26,867
|
||||||
|
Total
operating expenses
|
304,310
|
294,828
|
299,155
|
||||||
|
Operating
income
|
272,872
|
210,405
|
190,009
|
||||||
|
Other
income (expense)
|
|||||||||
|
Interest
expense, net
|
(61,989
|
)
|
(48,285
|
)
|
(48,429
|
)
|
|||
|
Other,
net
|
14,911
|
4,069
|
2,409
|
||||||
|
Total
other income (expense)
|
(47,078
|
)
|
(44,216
|
)
|
(46,020
|
)
|
|||
|
Earnings
before income taxes
|
225,794
|
166,189
|
143,989
|
||||||
|
Income
taxes (Note
6)
|
88,039
|
64,627
|
56,056
|
||||||
|
Net
earnings
|
$
|
137,755
|
$
|
101,562
|
$
|
87,933
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
December
31, 2006
|
December
31, 2005
|
|||||
|
Assets
|
(In
thousands)
|
|||||
|
Current
assets
|
||||||
|
Cash
and cash equivalents
|
$
|
531
|
$
|
585
|
||
|
Accounts
receivable, billed and unbilled,
|
||||||
|
less
allowances of $1,176 and $1,168, respectively
|
61,047
|
55,786
|
||||
|
Accounts
receivable - related parties (Note 4)
|
17,994
|
9,556
|
||||
|
Gas
imbalances - receivable
|
68,013
|
105,233
|
||||
|
System
gas and operating supplies
|
127,303
|
89,620
|
||||
|
Deferred
income taxes, net (Note 6)
|
3,117
|
2,086
|
||||
|
Note
receivable - Southern Union (Note 4)
|
-
|
110,580
|
||||
|
Note
receivable - CrossCountry Citrus (Note 4)
|
6,664
|
-
|
||||
|
Other
|
10,691
|
11,501
|
||||
|
Total
current assets
|
295,360
|
384,947
|
||||
|
Property,
plant and equipment (Note
7)
|
||||||
|
Plant
in service
|
2,418,917
|
2,163,474
|
||||
|
Construction
work-in-progress
|
166,085
|
176,370
|
||||
|
2,585,002
|
2,339,844
|
|||||
|
Less
accumulated depreciation and amortization
|
207,606
|
145,550
|
||||
|
Net
property, plant and equipment
|
2,377,396
|
2,194,294
|
||||
|
Investment
in affiliate (Note
9)
|
1,457
|
1,468
|
||||
|
Note
receivable - Southern Union (Note 4)
|
148,655
|
-
|
||||
|
Note
receivable - CrossCountry Citrus (Note 4)
|
458,336
|
-
|
||||
|
Intangible
customer contract, net (Note 8)
|
7,618
|
8,031
|
||||
|
Debt
issuance cost
|
2,376
|
3,634
|
||||
|
Non-current
system gas
|
14,850
|
25,087
|
||||
|
Other
|
2,472
|
1,853
|
||||
|
Total
assets
|
$
|
3,308,520
|
$
|
2,619,314
|
||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED BALANCE SHEET
(CONTINUED)
|
December
31, 2006
|
December
31, 2005
|
|||||
|
(In
thousands)
|
||||||
|
Partners'
capital
|
||||||
|
Partners'
capital
|
$
|
1,041,723
|
$
|
903,968
|
||
|
Accumulated
other comprehensive income
|
15,477
|
1,339
|
||||
|
Tax
sharing note receivable - Southern Union
|
(16,431
|
)
|
(50,862
|
)
|
||
|
Total
partners' capital
|
1,040,769
|
854,445
|
||||
|
Long-term
debt (Note 11)
|
1,185,391
|
1,179,534
|
||||
|
Total
capitalization
|
2,226,160
|
2,033,979
|
||||
|
Current
liabilities
|
||||||
|
Current
portion of long-term debt (Note 11)
|
461,011
|
-
|
||||
|
Accounts
payable
|
6,679
|
3,054
|
||||
|
Accounts
payable - overdrafts
|
23,776
|
7,866
|
||||
|
Accounts
payable - related parties (Note 4)
|
15,962
|
8,560
|
||||
|
Gas
imbalances - payable
|
144,137
|
124,297
|
||||
|
Accrued
taxes
|
12,030
|
15,228
|
||||
|
Accrued
interest
|
19,669
|
19,569
|
||||
|
Fuel
tracker obligation (Note 2)
|
12,418
|
32,863
|
||||
|
Labor
and benefit accruals
|
16,868
|
16,643
|
||||
|
Other
operating expense accruals
|
9,832
|
11,938
|
||||
|
Capital
accruals
|
26,929
|
11,681
|
||||
|
Post-retirement
benefits - current (Note 14)
|
-
|
7,812
|
||||
|
Other
|
20,623
|
22,365
|
||||
|
Total
current liabilities
|
769,934
|
281,876
|
||||
|
Deferred
income taxes, net (Note 6)
|
243,697
|
205,787
|
||||
|
Post-retirement
benefits (Note 14)
|
4,436
|
26,103
|
||||
|
Other
|
64,293
|
71,569
|
||||
|
Commitments
and contingencies (Note 13)
|
||||||
|
Total
partners' capital and liabilities
|
$
|
3,308,520
|
$
|
2,619,314
|
||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
||||||||
|
Cash
flows provided by (used in) operating activities
|
|||||||||
|
Net
earnings
|
$
|
137,755
|
$
|
101,562
|
$
|
87,933
|
|||
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|||||||||
|
Depreciation
and amortization
|
72,724
|
62,171
|
60,182
|
||||||
|
Gain
on extinguishment of debt
|
-
|
-
|
(231
|
)
|
|||||
|
Deferred
income taxes, net
|
59,898
|
42,133
|
39,574
|
||||||
|
Gain
on sale of assets
|
(2,267
|
)
|
-
|
-
|
|||||
|
Debt
premium and discount amortization, net
|
(1,333
|
)
|
(1,293
|
)
|
(5,033
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||||
|
Accounts
receivable
|
(13,699
|
)
|
(9,970
|
)
|
1,759
|
||||
|
Inventory
|
6,821
|
(6,683
|
)
|
(31,693
|
)
|
||||
|
Gas
imbalances - receivable
|
-
|
735
|
(9,148
|
)
|
|||||
|
Other
assets
|
614
|
310
|
(8,293
|
)
|
|||||
|
Payables
|
11,027
|
4,687
|
(3,564
|
)
|
|||||
|
Accrued
taxes
|
3,966
|
24,587
|
8,490
|
||||||
|
Interest
accrued
|
100
|
450
|
(1,898
|
)
|
|||||
|
Gas
imbalances - payable
|
-
|
(465
|
)
|
36,518
|
|||||
|
Other
liabilities
|
(26,384
|
)
|
(12,851
|
)
|
8,714
|
||||
|
Net
cash flows provided by operating activities
|
249,222
|
205,373
|
183,310
|
||||||
|
Cash
flows provided by (used in) investing activities
|
|||||||||
|
Net
increase in note receivable - Southern Union
|
(38,075
|
)
|
(19,835
|
)
|
(3,395
|
)
|
|||
|
Increase
in note receivable - related party
|
(465,000
|
)
|
-
|
-
|
|||||
|
Capital
and investment expenditures
|
(228,911
|
)
|
(194,952
|
)
|
(173,047
|
)
|
|||
|
Sale
of assets
|
2,450
|
-
|
-
|
||||||
|
Other
|
(650
|
)
|
(657
|
)
|
(209
|
)
|
|||
|
Net
cash flows used in investing activities
|
(730,186
|
)
|
(215,444
|
)
|
(176,651
|
)
|
|||
|
Cash
flows provided by (used in) financing activities
|
|||||||||
|
Increase
(decrease) in bank overdrafts
|
15,910
|
(12,237
|
)
|
13,496
|
|||||
|
Debt
issuance
|
465,000
|
255,626
|
200,000
|
||||||
|
Debt
retirements
|
-
|
(258,433
|
)
|
(209,671
|
)
|
||||
|
Premium
on debt issuance
|
-
|
-
|
(190
|
)
|
|||||
|
Debt
issuance costs
|
-
|
(354
|
)
|
(1,050
|
)
|
||||
|
Net
cash flows provided by (used in) financing activities
|
480,910
|
(15,398
|
)
|
2,585
|
|||||
|
Change
in cash and cash equivalents
|
(54
|
)
|
(25,469
|
)
|
9,244
|
||||
|
Cash
and cash equivalents at beginning of period
|
585
|
26,054
|
16,810
|
||||||
|
Cash
and cash equivalents at end of period
|
$
|
531
|
$
|
585
|
$
|
26,054
|
|||
|
Supplemental
disclosures of cash flow information
|
|||||||||
|
Cash
paid during the period for:
|
|||||||||
|
Interest
(net of interest rate swap and amounts capitalized)
|
$
|
69,570
|
$
|
63,180
|
$
|
68,250
|
|||
|
Income
taxes (net of refunds)
|
26,674
|
7
|
66
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED
STATEMENT OF PARTNERS' CAPITAL AND COMPREHENSIVE
INCOME
|
Partners'
Capital
|
Accumulated
Other Comprehensive Income (Loss)
|
Members'
Capital
|
Retained
Earnings (Deficit)
|
Tax
Sharing Note Receivable-Southern Union
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||||
|
Balance
January 1, 2004
|
$
|
-
|
$
|
1,372
|
$
|
679,465
|
$
|
51,452
|
$
|
(85,471
|
)
|
$
|
646,818
|
|||||
|
Adjustment
to pushdown of purchase price and related costs
|
-
|
-
|
(16,444
|
)
|
-
|
-
|
(16,444
|
)
|
||||||||||
|
Tax
sharing receivable - Southern Union (see Note 4)
|
-
|
-
|
-
|
-
|
(5,467
|
)
|
(5,467
|
)
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
47,201
|
-
|
47,201
|
||||||||||||
|
Unrealized
gain related to interest rate swaps, net of tax
|
-
|
405
|
-
|
-
|
-
|
405
|
||||||||||||
|
Comprehensive
income prior to change in legal ownership structure
|
-
|
405
|
-
|
47,201
|
-
|
47,606
|
||||||||||||
|
Change
in legal ownership structure (See Note 1)
|
761,674
|
-
|
(663,021
|
)
|
(98,653
|
)
|
-
|
-
|
||||||||||
|
Tax
sharing receivable - Southern Union (See Note 4)
|
-
|
-
|
-
|
-
|
19,967
|
19,967
|
||||||||||||
|
|
||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net
earnings
|
40,732
|
-
|
-
|
-
|
-
|
40,732
|
||||||||||||
|
Unrealized
loss related to interest rate swaps, net of tax
|
-
|
(546
|
)
|
-
|
-
|
-
|
(546
|
)
|
||||||||||
|
Comprehensive
income
|
40,732
|
(546
|
)
|
-
|
-
|
-
|
40,186
|
|||||||||||
|
Balance
December 31, 2004
|
$
|
802,406
|
$
|
1,231
|
$
|
-
|
$
|
-
|
$
|
(70,971
|
)
|
$
|
732,666
|
|||||
|
Tax
sharing receivable - Southern Union (See Note 4)
|
-
|
-
|
-
|
-
|
20,109
|
20,109
|
||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net
earnings
|
101,562
|
-
|
-
|
-
|
-
|
101,562
|
||||||||||||
|
Unrealized
gain related to interest rate swaps, net of tax
|
-
|
108
|
-
|
-
|
-
|
108
|
||||||||||||
|
Comprehensive
income
|
101,562
|
108
|
-
|
-
|
-
|
101,670
|
||||||||||||
|
Balance
December 31, 2005
|
$
|
903,968
|
$
|
1,339
|
$
|
-
|
$
|
-
|
$
|
(50,862
|
)
|
$
|
854,445
|
|||||
|
Tax
sharing receivable - Southern Union (See Note 4)
|
-
|
-
|
-
|
-
|
34,431
|
34,431
|
||||||||||||
|
Adjustment
to initially apply FASB Statement No. 158, net of tax
|
-
|
15,248
|
-
|
-
|
-
|
15,248
|
||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net
earnings
|
137,755
|
-
|
-
|
-
|
-
|
137,755
|
||||||||||||
|
Realized
gain related to interest rate swaps, net of tax
|
-
|
(1,110
|
)
|
-
|
-
|
-
|
(1,110
|
)
|
||||||||||
|
Comprehensive
income
|
137,755
|
(1,110
|
)
|
-
|
-
|
-
|
136,645
|
|||||||||||
|
Balance
December 31, 2006
|
$
|
1,041,723
|
$
|
15,477
|
$
|
-
|
$
|
-
|
$
|
(16,431
|
)
|
$
|
1,040,769
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Corporate Structure
Panhandle
Eastern Pipe Line Company, LP (PEPL
and,
together with its subsidiaries,
the
Company)
is an
indirect wholly-owned subsidiary of Southern Union Company (Southern
Union Company
and,
together with its subsidiaries, Southern
Union).
The
Company is primarily engaged in the interstate transportation and storage of
natural gas and also provides liquefied natural gas (LNG)
terminalling and regasification services. The Company is subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
The
Company’s entities include the following:
|
·
|
PEPL,
an indirect wholly-owned subsidiary of Southern Union
Company;
|
|
·
|
Trunkline
Gas Company, LLC (Trunkline),
a direct wholly-owned subsidiary of
PEPL;
|
|
·
|
Sea
Robin Pipeline Company, LLC (Sea
Robin),
an indirect wholly-owned subsidiary of
PEPL;
|
|
·
|
Trunkline
LNG Holdings, LLC (LNG
Holdings),
an indirect wholly-owned subsidiary of
PEPL;
|
|
·
|
Trunkline
LNG Company, LLC (Trunkline
LNG),
a direct wholly-owned subsidiary of LNG Holdings;
and
|
|
·
|
Pan
Gas Storage, LLC (d.b.a. Southwest
Gas Storage),
a direct wholly-owned subsidiary of
PEPL.
|
The
Company’s pipeline assets include approximately 10,000
miles of interstate pipelines that transport natural gas from the Gulf of
Mexico, South Texas and the panhandle regions of Texas and Oklahoma to major
U.S. markets in the Midwest and Great Lakes region. The pipelines have a
combined peak day delivery capacity of 5.3
billion cubic feet per day (Bcf/d)
and
72
billion cubic feet (Bcf)
of
owned underground storage capacity. Trunkline LNG, located on Louisiana's Gulf
Coast, operates one of the largest
LNG import terminals in North America, based on current send out capacity,
and
has 9.0
Bcf
of above ground LNG storage capacity.
On
June
29, 2004, PEPL was converted from a Delaware limited liability company to a
Delaware limited partnership. Pursuant to the conversion, all rights and
liabilities of Panhandle Eastern Pipe Line Company, LLC vested in PEPL. As
a
result of the conversion, retained earnings and member’s capital were
reclassified as partners’ capital. There was no effect on the Company’s results
of operations (including income taxes), cash flows or financial position as
a
result of this conversion. Southern Union Panhandle, LLC, a wholly-owned
subsidiary of Southern Union Company, serves as the general partner of PEPL
and
owns a one
percent general partner interest in PEPL. Southern Union Company owns a
99
percent limited partner interest in PEPL.
2.
Summary of Significant Accounting Policies and Other
Matters
Basis
of Presentation. The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
The
Company does not currently apply Financial Accounting Standards Board
(FASB)
Statement No. 71, Accounting
for the Effects of Certain Types of Regulation (Statement
No. 71).
In
1999 the Company discontinued application of Statement No. 71 primarily due
to
the level of discounting from tariff rates and its inability to recover all
costs. The accounting required by the statement differs from the accounting
required for businesses that do not apply its provisions. Transactions that
are
generally recorded differently as a result of applying regulatory accounting
requirements include, among others, recording of regulatory assets, the
capitalization of an equity component on regulated capital projects and
depreciation differences.
Principles
of Consolidation.
The
consolidated financial statements include the accounts of all majority-owned
subsidiaries, after eliminating significant intercompany transactions and
balances. Investments in businesses not controlled by PEPL, but over which
it
has significant influence, are accounted for using the equity method.
Investments that are variable interest entities are consolidated if the Company
is allocated a majority of the entity’s gains and/or losses, including fees paid
by the entity.
Use
of Estimates.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-7
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
and Cash Equivalents.
All
liquid investments with maturities of three months or less at the date of
purchase are considered cash equivalents. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
System
Gas and Operating Supplies.
System
gas and operating supplies consist of gas held for operations and materials
and
supplies, carried at the lower of weighted average cost or market. The gas
held
for operations that the Company does not expect to consume in operations in
the
next 12 months has been reflected in non-current assets. Gas held for operations
at December 31, 2006 was $129.4
million, or 20,965,000
million British thermal units (MMBtu),
of
which $14.9
million was classified as non-current. Gas held for operations at December
31,
2005 was $102.5
million, or 14,145,000
MMBtu, of which $25.1
million was classified as non-current. Materials and supplies inventory was
$13.2
million and $12.3
million at December 31, 2006 and 2005, respectively.
Gas
Imbalances. Gas
imbalances occur as a result of differences in volumes of gas received and
delivered. The Company records gas imbalance in-kind receivables and payables
at
cost or market, based on whether net imbalances have reduced or increased system
gas balances, respectively. Net imbalances that have reduced system gas are
valued at the cost basis of the system gas, while net imbalances that have
increased system gas and are owed back to customers are priced, along with
the
corresponding system gas, at market.
Fuel
Tracker. Liability
accounts are maintained for net volumes of fuel gas owed to customers
collectively. Whenever fuel is due from customers from prior under-recovery
based on contractual and specific tariff provisions, Trunkline and Trunkline
LNG
record an asset. The Company’s other companies that are subject to fuel tracker
provisions record an expense when fuel is underrecovered. The pipelines’ fuel
reimbursement is in-kind and non-discountable. At December 31, 2006, the
consolidated fuel tracker liability was $12.4
million, or 1,709,400
MMBtu. At December 31, 2005, the consolidated fuel tracker liability was
$32.9
million, or 2,949,000
MMBtu.
Property,
Plant and Equipment. Ongoing
additions of property, plant and equipment (PP&E) are stated at cost. The
Company capitalizes all construction-related direct labor and material costs,
as
well as indirect construction costs. The cost of renewals and betterments that
extend the useful life of PP&E is also capitalized. The cost of repairs and
replacements of minor items of PP&E is charged to expense as incurred.
When
PP&E is retired, the original cost less salvage value is charged to
accumulated depreciation and amortization. When entire regulated operating
units
of property, plant and equipment are retired or sold or non-regulated properties
are retired or sold, the property and related accumulated depreciation and
amortization accounts are reduced, and any gain or loss is recorded in
income.
Depreciation
is generally computed using the straight-line method. The composite
weighted-average depreciation
rates were
approximately 3.0
percent, 2.9
percent and 3.1
percent
for
2006, 2005 and 2004, respectively.
Computer
software, which is a component of PP&E, is stated at cost and is generally
amortized on a straight-line basis over its useful life on a product-by-product
basis. The amortization period for computer software is between four
and
ten
years.
Asset
Impairment.
The
Company applies the provisions of FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
to
account for impairments on long-lived assets. Impairment losses are recognized
for long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
assets’ carrying value. The amount of impairment is measured by comparing the
fair value of the asset to its carrying amount. Certain of the Company’s assets
were evaluated in 2006 because indicators of potential impairment resulting
from
impacts associated with Hurricanes Rita and Katrina were evident. The analysis
indicated, based on probability weighted estimated cash flows, that an
impairment did not exist.
Related
Party Transactions. Related
party expenses primarily include payments for services provided by Southern
Union. Other income is primarily related to interest income from the Notes
receivable from Southern
F-8
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Union
and
CrossCountry Citrus, LLC (CrossCountry
Citrus),
an
indirect wholly-owned subsidiary of Southern Union. See Note
4 - Related Party Transactions.
A
portion
of the Company’s revenues for the transportation of natural gas includes
revenues from Missouri Gas Energy, a division of Southern Union that is a gas
utility having a service territory covering Kansas City, Missouri and parts
of
western Missouri.
PEPL
and
certain of its subsidiaries are not treated as separate taxpayers for federal
and certain state income tax purposes. Instead, the Company’s income is taxable
to Southern Union. The Company has entered into a tax sharing agreement with
Southern Union pursuant to which the Company will be required to make payments
to Southern Union in order to reimburse Southern Union for federal and state
taxes that it pays on the Company’s income, or to receive payments from Southern
Union to the extent that tax losses generated by the Company are utilized by
Southern Union. In addition, the Company’s subsidiaries that are corporations
are included in consolidated and combined federal and state income tax returns
filed by Southern Union. The Company’s liability generally is equal to the
liability which the Company and its subsidiaries would have incurred based
upon
the Company’s taxable income if the Company was a taxpayer filing separately
from Southern Union, except that the Company will receive credit under an
intercompany note for any increased liability resulting from its tax basis
in
its assets having been reduced as a result of the like-kind exchange under
Section 1031 of the Internal Revenue Code of 1986, as amended (Code).
In
addition, Southern Union has agreed to pay the Company any indemnification
payments that it receives from CMS Energy, the former parent company of
Panhandle with respect to its tax liability for periods prior to the acquisition
of Panhandle by Southern Union. The tax sharing agreement can be amended from
time to time. Depending upon the terms of the tax sharing agreement, the
Company’s liability to Southern Union may be greater or less than the tax
liability that the Company would have incurred if it were a corporation
unaffiliated with Southern Union.
Unamortized
Debt Premium, Discount and Expense.
The
Company amortizes premiums, discounts and expenses incurred in connection with
the issuance of long-term debt consistent with the terms of the respective
debt
instrument.
Environmental
Expenditures. Environmental
expenditures that relate to an existing condition caused by past operations
that
do not contribute to current or future revenue generation are expensed.
Environmental expenditures relating to current or future revenues are expensed
or capitalized as appropriate. Liabilities are recorded when environmental
assessments and/or clean-ups are probable and the costs can be reasonably
estimated. Remediation obligations are not discounted because the timing of
future cash flow streams is not predictable.
Revenues.
The
Company’s revenues from transportation and storage of natural gas and LNG
terminalling are based on capacity reservation charges and commodity usage
charges. Reservation revenues are based on contracted rates and capacity
reserved by the customers and are recognized monthly. Revenues from commodity
usage charges are also recognized monthly, based on the volumes received from
or
delivered to the customer, depending on the tariff of that particular entity
of
the Company, with any differences in received and delivered volumes resulting
in
an imbalance. Volume imbalances generally are settled in-kind with no impact
on
revenues, with the exception of Trunkline, which settles imbalances in cash
pursuant to its tariff, and records gains and losses on such cashout sales
as a
component of revenue, to the extent not owed back to customers.
Significant
Customers and Credit Risk.
The
Company manages trade credit risks to minimize exposure to uncollectible trade
receivables. Prospective and existing customers are reviewed for
creditworthiness based upon pre-established standards. Customers that do not
meet minimum standards are required to provide additional credit support. The
Company utilizes the allowance method for recording its allowance for
uncollectible accounts, which is primarily based on the application of
historical bad debt percentages applied against the Company’s aged accounts
receivable. Increases in the allowance are recorded as a component of operation
expenses. Reductions in the allowance are recorded when receivables are written
off. The Company has recorded an allowance for doubtful accounts totaling
$1.2
million and $1.2
million at December 31, 2006 and 2005, respectively, relating to its trade
receivables.
F-9
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents the balance in the allowance for doubtful accounts
and
activity for the years ended December 31, 2006, 2005 and 2004:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||
|
Allowance
for Doubtful Accounts
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
|||||||||
|
Beginning
Balance
|
$
|
1,168
|
$
|
1,289
|
$
|
1,464
|
||||
|
Additions:
Charged to Cost and Expenses
|
9
|
(76
|
)
|
-
|
||||||
|
Deductions:
Write-off of Uncollectible Accounts
|
(1
|
)
|
(45
|
)
|
(61
|
)
|
||||
|
Other
|
-
|
-
|
(114
|
)
|
||||||
|
Ending
Balance
|
$
|
1,176
|
$
|
1,168
|
$
|
1,289
|
||||
The
following table presents the relative contribution to the Company’s total
operating revenue of each customer that comprised at least ten percent of its
operating revenues for the years ended December 31, 2006, 2005 and 2004.
|
Percent
of Operating Revenue for
|
||||||||||
|
Years
Ended
|
||||||||||
|
December
31,
|
||||||||||
|
Customer
|
2006
|
2005
|
2004
|
|||||||
|
BG
LNG Services
|
24
|
%
|
17
|
%
|
15
|
%
|
||||
|
ProLiance
|
12
|
16
|
17
|
|||||||
|
Ameren
Corp
|
10
|
11
|
12
|
|||||||
|
CMS
Energy Corporation (1)
|
2
|
8
|
10
|
|||||||
|
Other
top 10 customers
|
17
|
14
|
14
|
|||||||
|
Remaining
customers
|
35
|
34
|
32
|
|||||||
|
Total
percentage
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
___________________
|
||||||||||
|
(1)
Primarily Consumers Energy
|
||||||||||
Interest
Cost Capitalized. The
Company capitalizes a carrying cost on funds invested in its construction of
long-lived assets that includes a return on the investment financed by debt,
which is recorded as capitalized interest. The capitalized interest is
calculated based on the Company’s average cost of debt. Capitalized interest for
the year ended December 31, 2006, 2005 and 2004 was $4.6
million, $8.8
million and $4.8
million, respectively. The capitalized interest amounts are included as a
reduction of interest expense. Capitalized carrying cost for debt is reflected
as an increase in the cost of the asset on the balance sheet.
Retirement
Benefits.
Effective December 31, 2006, the Company adopted the recognition and disclosure
provisions of Statement No. 158. Statement No. 158 does not amend the expense
recognition processes of Statement No. 106, Employers’
Accounting for Postretirement Benefits Other Than Pensions
(Statement
No. 106),
but
requires employers to recognize in their balance sheets the overfunded or
underfunded status of defined benefit postretirement plans, measured as the
difference between the fair value of the plan assets and the benefit obligation.
Each overfunded plan is recognized as an asset and each underfunded plan is
recognized as a liability. Employers must recognize the change in the funded
status of the plan in the year in which the change occurs through Accumulated
other comprehensive income in
Partners’ capital.
The
Company accounted for the measurement of its defined benefit postretirement
plans under Statement No. 106 prior to the adoption of the recognition and
disclosure provisions of Statement No. 158.
F-10
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Under
Statement No. 106, changes in the funded status were not immediately recognized,
rather they were deferred and recognized ratably over future periods. Upon
adoption of the recognition provisions of Statement No. 158, the Company
recognized the amounts of these prior changes in the funded status of its
postretirement benefit plans through Accumulated
other comprehensive income.
The
Company provides benefits to substantially all employees under a defined
contribution 401(k) plan. Under the 401(k) plan, the Company provides a matching
contribution of 50 percent of the employee’s contribution to the 401(k) plan
that does not exceed 4 percent of the employee’s eligible pay. The Company makes
additional contributions to the 401(k) plan with
the
amount generally varying based on age and years of service.
See
Note
14 - Benefits.
Derivatives
and Hedging Activities. The
Company follows FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended, (Statement
No. 133)
to
account for derivative and hedging activities. In accordance with this
statement, all derivatives are recognized on the Consolidated Balance Sheet
at
their fair value. On the date the derivative contract is entered into, the
Company designates the derivative as (i) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (a
fair
value hedge);
(ii) a
hedge of a forecasted transaction or the variability of cash flows to be
received or paid in conjunction with a recognized asset or liability (a
cash
flow hedge);
or
(iii) an instrument that is held for trading or non-hedging purposes (a
trading
or non-hedging instrument).
For
derivatives treated as a fair value hedge, the effective portion of changes
in
fair value are recorded as an adjustment to the hedged item. The ineffective
portion of a fair value hedge is recognized in earnings if the short cut method
of assessing effectiveness is not used. Upon termination of a fair value hedge
of a debt instrument, the resulting gain or loss is amortized to earnings
through the maturity date of the debt instrument. For derivatives treated as
a
cash flow hedge, the effective portion of changes in fair value is recorded
in
Accumulated
other comprehensive income until
the
related hedge items impact earnings. Any ineffective portion of a cash flow
hedge is reported in earnings immediately. For derivatives treated as trading
or
non-hedging instruments, changes in fair value are reported in current-period
earnings. Fair value is determined based upon quoted market prices and
mathematical models using current and historical data. See Note
5 - Derivative Instruments and Hedging Activities.
Asset
Retirement Obligations.
The
Company follows the provisions of FASB Statement No. 143, Accounting
for Asset Retirement Obligations
(Statement
No. 143)
and
FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations (FIN No. 47)
to
account for its asset retirement obligations (AROs).
These
ARO assets and liabilities are related to certain offshore lateral lines in
the
Company’s system.
The
Company adopted FIN No. 47 as of December 31, 2005. Upon adoption of FIN No.
47,
the Company recorded an increase in net property, plant and equipment and a
liability for an ARO of $882,000.
This new asset and liability related to obligations associated with the removal
and disposal of asbestos and asbestos-containing materials on the Company’s
system.
Statement
No. 143 requires an ARO to be recorded when a legal obligation to retire the
asset exists. FIN No. 47 clarifies that an ARO should be recorded for all assets
with legal retirement obligations, even if the enforcement of the obligation
is
contingent upon the occurrence of events beyond the company’s control
(Conditional
ARO).
The
fair values of the AROs were calculated using an expected present value
technique. This technique reflects assumptions such as removal and remediation
costs, inflation and profit margins that third parties would demand to settle
the obligation. The Company did not include a market risk premium for
unforeseeable circumstances in its fair value estimates because such a premium
could not be reliably estimated.
Although
a number of other assets in the Company’s system are subject to agreements or
regulations which give rise to an ARO or a Conditional ARO upon the Company’s
discontinued use of these assets, AROs were not recorded for most of these
assets because the fair values of these AROs were not reliably estimable. The
principal reason the fair values of these AROs were not subject to reliable
estimation was because the lives of the underlying assets are indeterminate.
Management has concluded that the Company’s pipeline system, as a whole, has an
indeterminate life. In reaching this conclusion, management considered its
intent for operating the pipeline system, the economic life of the underlying
assets, its past practices and industry practice.
F-11
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company intends to operate the pipeline system indefinitely as a going concern.
Individual component assets have been and will continue to be replaced, but
the
pipeline system will continue in operation as long as supply and demand for
natural gas exists. Based on the widespread use of natural gas in industrial
and
power generation activities and current estimates of recoverable reserves,
management expects supply and demand to exist for the foreseeable
future.
The
Company has in place a rigorous repair and maintenance program that keeps the
pipeline system in good working order. Therefore, although some of the
individual assets on the pipeline system may be replaced, the pipeline system
itself will remain intact indefinitely. AROs generally do not arise unless
a
pipeline system (or portion thereof) is abandoned. The Company does not intend
to make any such abandonments as long as supply and demand for natural gas
remains relatively stable.
The
following table is a general description of ARO and associated long-lived
assets.
|
December
31, 2006
|
(In
thousands)
|
|||
|
In
Service
|
||||
|
ARO
Description
|
Date
|
Long-Lived
Assets
|
Amount
|
|
|
Retire
offshore lateral lines
|
Various
|
Offshore
lateral lines
|
$
3,962
|
|
|
Remove
asbestos
|
Various
|
Mainlines
and compressors
|
$
882
|
The
following table is a reconciliation of the carrying amount of the ARO liability
for the periods presented.
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
||||||||
|
Beginning
Balance
|
$
|
8,200
|
$
|
5,657
|
$
|
7,479
|
|||
|
Incurred
|
1,189
|
2,371
|
-
|
||||||
|
Settled
|
(414
|
)
|
(285
|
)
|
(2,365
|
)
|
|||
|
Accretion
Expense
|
633
|
457
|
543
|
||||||
|
Ending
Balance
|
$
|
9,608
|
$
|
8,200
|
$
|
5,657
|
|||
Income
Taxes. Since
its
conversion to a limited partnership, PEPL has been treated as a disregarded
entity for federal income tax purposes. Accordingly, for federal and certain
state income tax purposes, PEPL’s subsidiaries are not treated as separate
taxpayers; instead, their income is directly taxable to Southern Union Company.
Pursuant to a tax sharing agreement with Southern Union Company, the Company
will pay its share of taxes based on its taxable income, which will generally
equal the liability that the Company would have incurred as a separate taxpayer.
The Company will receive credit under an intercompany note from Southern Union
Company for differences in tax depreciation resulting from the like-kind
exchange over the taxable life of the related assets.
Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets, such as net operating loss carryforwards, may be reduced
by
a valuation allowance if, based on the weight of available evidence, it is
more
likely than not that some portion or all of the deferred tax assets will not
be
realized.
Stock
Based Compensation.
The
Company follows FASB Statement No. 123(R), Accounting
for Stock-Based Compensation
(Statement
No. 123R),
to
account for stock-based employee compensation. The Company adopted Statement
No.
123R effective January 1, 2006, using the modified prospective method. The
statement requires the Company to measure all employee stock-based compensation
using a fair value method and record
F-12
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
such
expense in its Consolidated Statement of Operations. Prior to the adoption
of
Statement No. 123R, the Company used the intrinsic value method of accounting
for stock-based compensation awards in accourdance with APB Opinion No. 25
(APB
No. 25),
Accounting
for Stock Issued to Employees
which
generally resulted in no compensation expense for employee stock options with
an
exercise price no less than fair value on the date of grant. For more
information, see Note
15 - Stock-based Compensation.
Pursuant
to the modified prospective application method of transition, the Company has
not adjusted results of operations for prior periods. The following table
reflects pro forma net earnings that the Company would have realized if it
had
elected to adopt the fair value approach of Statement No. 123 prior to January
1, 2006:
|
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
(In
thousands)
|
|||||||
|
Net
earnings, as reported
|
$
|
101,562
|
$
|
87,933
|
|||
|
Add
stock-based compensation expense included in
|
|||||||
|
reported
net earnings, net of related taxes
|
710
|
-
|
|||||
|
Deduct
stock-based employee
|
|||||||
|
compensation
expense determined
|
|||||||
|
under
fair value based method for
|
|||||||
|
all
awards, net of related taxes
|
1,001
|
207
|
|||||
|
Pro
forma net earnings
|
$
|
101,271
|
$
|
87,726
|
|||
New
Accounting Principles
Accounting
Principles Recently Adopted.
FASB
Statement No. 123R, “Share-Based Payment (revised
2004)”:
Issued
by
the Financial Accounting Standards Board (FASB)
in
December 2004, the statement revises FASB Statement No. 123, Accounting
for Stock-Based Compensation,
supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees,
and
amends FASB Statement No. 95, Statement
of Cash Flows.
The
Company adopted Statement No. 123R, effective January 1, 2006, using the
modified prospective method. The statement requires the Company to measure
all
employee stock-based compensation using a fair value method and record such
expense in its Consolidated Statement of Operations. The Company’s additional
compensation expense resulting from the implementation of this statement was
$705,000
($568,000
net of tax) in 2006. Based upon unvested stock-based compensation awards
outstanding at December 31, 2006, the Company estimates additional compensation
expense resulting from the implementation of this statement will be
$819,000
for 2007, $821,000
for 2008 and $527,000
for 2009. The Company did not make any amendments to existing stock option
arrangements as a result of considering Statement 123R’s adoption. Upon the
Company’s adoption of Statement No. 123R, no cumulative effect of a change in
accounting principle was required to be recorded since the Company has
historically granted all options at their grant date fair value and,
accordingly, there is no historical intrinsic value option compensation expense
to adjust. See Note
15 - Stock Based Compensation.
FASB
Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)”:
Issued
by the FASB in September 2006, the Statement requires an employer to recognize
the overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement
of
financial position and to recognize changes in that funded status in the year
in
which the changes occur through comprehensive income. The Statement also
requires an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. The
recognition and disclosure provisions of the Statement, which is effective
for
fiscal years ending after December 15, 2006, were adopted by the Company
effective December 31, 2006. See Note
14 - Benefits for
the
impact the adoption of Statement No. 158 had on the Company.
F-13
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEC
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (SAB No. 108):
In
September 2006, the SEC provided guidance on the consideration of the effects
of
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB No. 108 establishes a dual approach
that requires quantification of financial statement errors based on the effects
of the error on each of the Company’s financial statements and the related
financial statement disclosures. SAB
No.
108 is effective for fiscal years ending after November 15, 2006. The adoption
of SAB No. 108 did not materially impact the Company’s consolidated financial
statements.
Accounting
Principles Not Yet Adopted.
FIN
48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109” (FIN
48): Issued
by
the FASB in July 2006, the Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109, Accounting
for Income Taxes.
FIN 48
prescribes a recognition and measurement threshold attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company has evaluated this guidance
and
does not believe its consolidated financial statements will be materially
impacted.
FASB
Statement No. 157, “Fair Value Measurements”:
Issued
by the FASB in September 2006, this Statement defines fair value, establishes
a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this Statement simplifies and codifies related
guidance within generally accepted accounting principles. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
is
currently evaluating the impact of this Interpretation on its consolidated
financial statements.
FASB
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No.
115”:
Issued
by the FASB in February 2007, this Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in
earnings. The Statement does not affect any existing accounting literature
that
requires certain assets and liabilities to be carried at fair value. The
Statement is effective for fiscal years beginning after November 15, 2007.
The
Company is currently evaluating the impact of this Statement on its consolidated
financial statements.
3.
Regulatory Matters
Trunkline
LNG’s Phase I expansion project was placed into service on April 5, 2006 with a
total project cost of $141
million, plus capitalized interest. The expanded vaporization capacity portion
of the expansion was placed into service on September 18, 2005. Phase II went
into service on July 8, 2006. The final cost of Phase II was $79
million, plus capitalized interest. The expansions increased sustainable
send-out capacity from .63
Bcf/d
to 1.8
Bcf/d, and storage increased from 6.3
Bcf
to 9.0
Bcf.
BG LNG Services has contracted for all of the capacity at the facility through
2028 with a rate moratorium through 2015. Approximately $671,000
and $102
million of costs are included in the line item Construction
work-in-progress
for the
expansion projects at December 31, 2006 and December 31, 2005,
respectively.
On
February 11, 2005, Trunkline received approval from FERC to construct, own
and
operate a 36-inch diameter, 23-mile natural gas pipeline loop from the LNG
terminal. The pipeline creates additional transport capacity in association
with
the Trunkline LNG expansion and also includes new and expanded delivery points
with major interstate pipelines. The new 36-inch pipeline was placed into
service on July 22, 2005.
The
Company has received approval from FERC and commenced construction of an
additional enhancement at its Trunkline LNG terminal. This infrastructure
enhancement project, which is expected to cost approximately $250
million, plus capitalized interest, will increase send out flexibility at the
terminal and lower fuel costs. The project is scheduled to be in operation
in
2008. In addition, Trunkline LNG and BG LNG Services agreed to
F-14
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
extend
the existing terminal and pipeline services agreements through 2028,
representing a five-year extension. Approximately $40.8
million and $9.4
million of costs are included in the line item Construction
work-in-progress
at
December 31, 2006 and 2005, respectively.
The
Company has received approval from FERC to modernize and replace various
compression facilities on PEPL. Such replacements will be made at 12
different compressor stations and are expected to be installed by the end of
2009. The estimated cost of these replacements is approximately $290
million, which includes the compression component of a PEPL east end project
already under construction. The Company has also filed for FERC approval to
replace approximately 32
miles
of existing pipeline on the east end of the PEPL system at an estimated cost
of
approximately $60
million, which would further improve system integrity. The project is planned
to
be completed in late 2007. Approximately $11.6
million and $46.3
million of costs, related to the compression modernization and east end
enhancement projects, respectively, are included in the line item Construction
work-in-progress at
December 31, 2006.
Trunkline
has announced a field zone expansion project, which includes adding capacity
to
its pipeline system in Texas and Louisiana to increase deliveries to Henry
Hub.
The field zone expansion project includes the previously announced north Texas
expansion as well as additional capacity to Henry Hub. Trunkline will increase
the capacity along existing right’s of way from Kountze, Texas, to Longville,
Louisiana, by approximately 510
million cubic feet per day with the construction of approximately 45
miles
of 36-inch diameter pipeline. The project includes horsepower additions and
modifications at existing compressor stations. Trunkline also will create
additional capacity to Henry Hub with the construction of a 13.5-mile,
36-inch diameter pipeline loop from Kaplan, Louisiana, directly into Henry
Hub.
The Henry Hub lateral will provide capacity of 475
million cubic feet per day from Kaplan, Louisiana to Henry Hub. Trunkline filed
the project with FERC on September 11, 2006 with an anticipated in-service
date
during the fourth quarter of 2007. The cost estimate has been revised to
approximately $200
million, plus capitalized interest including a $40
million contribution in aid of construction (CIAC)
to a
subsidiary of Energy Transfer, L.P. (Energy
Transfer),
a
non-affiliated entity, to move its delivery point to a location near Buna,
Texas, increasing the field zone project capacity by up to 330,000
dekatherms per day. The
ultimate return and accounting for the CIAC to Energy Transfer depends on
completion of construction by Energy Transfer, additional capacity created
and
sale by Trunkline of the additional capacity. Approximately
$12.5
million of costs for this project are included in the line item Construction
work-in-progress at
December 31, 2006.
FERC
is
responsible under the Natural Gas Act for assuring that rates charged by
interstate pipelines are "just and reasonable." To enforce that requirement,
FERC applies a ratemaking methodology that determines an allowed rate of
return
on common equity for the companies it regulates. On October 25, 2006, a group
including producers and various trade associations filed a complaint under
Section 5 of the Natural Gas Act against Southwest Gas Storage requesting
that
FERC initiate an investigation into Southwest Gas Storage’s rates, terms and
conditions of service and grant immediate interim rate relief. FERC initiated
a
Section 5 proceeding on December 21, 2006 setting this issue for hearing.
Pursuant to FERC order, Southwest Gas Storage filed a cost and revenue study
with FERC on February 20, 2007, with a hearing scheduled for August 27, 2007.
The ultimate resolution of the Southwest Gas Storage matter has many variables
and potential outcomes and it is impossible to predict its timing or materiality
at this time. No proceeding has been initiated against PEPL, but any potential
rate reductions from such a proceeding would be expected to be mitigated
by the
impact of significant ongoing capital spending at PEPL for pipeline integrity,
safety, environmental (including air emissions), compression modernization
and
other requirements.
On
December 15, 2003, the U.S. Department of Transportation issued a Final Rule
requiring pipeline operators to develop integrity management programs to
comprehensively evaluate their pipelines, and take measures to protect pipeline
segments located in what the regulation defines as “high consequence areas”
(HCAs).
This
rule resulted from the enactment of the Pipeline Safety Improvement Act of
2002.
The rule requires operators to have identified HCAs along their pipelines by
December 2004, and to have begun baseline integrity assessments, comprised
of
in-line inspection (smart pigging), hydrostatic testing or direct assessment, by
June 2004. Operators must rank the risk of their pipeline segments containing
HCAs and must complete assessments on at least 50 percent of the segments using
one or more of these methods by December 2007. Assessments will generally be
conducted on the higher risk segments first, with the balance being completed
by
December 2012. The costs of utilizing these methods typically range from a
few
thousand dollars per mile to well over $15,000 per mile. In addition, some
system modifications will be necessary to accommodate the in-line inspections.
While identification and location of all the HCAs has been completed, it is
impossible to determine the scope of required remediation activities prior
to
completion of the assessments and inspections. Therefore, the costs of
implementing the requirements of this regulation are impossible to determine
with certainty at this time. The required modifications and inspections are
estimated to range from approximately $21 million to $28 million per
year,
inclusive of remediation costs.
PEPL
received an accounting order from FERC on January 26, 2007 denying certain
accounting treatment that had been applied and requiring restatements to its
previously filed FERC Form 2s. The changes do not affect PEPL’s Form 10-K
reported amounts. The Company is currently working to finalize the restatements
within the six month timeframe prescribed by FERC.
F-15
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Related Party Transactions
PEPL
receives transportation revenues from Missouri Gas Energy, a Southern Union
division, which account for less than one
percent of annual consolidated revenues. The following table provides a summary
of related party transactions for the periods presented.
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||
|
Related
Party Transactions
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
|||||||||
|
Transportation
and storage
|
||||||||||
|
of
natural gas
|
$
|
4,282
|
$
|
3,962
|
$
|
3,902
|
||||
|
Operation
and maintenance:
|
||||||||||
|
Management
and royalty fees
|
14,423
|
12,630
|
12,215
|
|||||||
|
Other
expenses
|
20,592
|
19,126
|
24,607
|
|||||||
|
Other
income, net
|
11,506
|
3,749
|
1,779
|
|||||||
Pursuant
to a demand note with Southern Union Company under a cash management program,
the Company has loaned excess cash, net of repayments, totaling $148.7
million to Southern Union since Southern Union acquired the Company. Net loans
of $38.1
million were recorded during the year ended December 31, 2006. The Company
is
credited with interest on the note at a one month LIBOR rate. Included
in Other,
net
in the
accompanying Consolidated Statement of Operations is interest income of
$8.4
million, $3.5
million and $1.6
million for the years ended December 31, 2006, 2005 and 2004, respectively,
related to interest on the Note
receivable - Southern Union.
The
originally forecasted draw down on the Note
receivable - Southern Union
in 2006
did not occur due to lower capital expenditures and higher operating cash flows
than expected. Due to uncertainties regarding the timing of the Company’s cash
flows, including financings, capital expenditures, operating cash flows, the
Company is reflecting the Note
receivable - Southern Union as
a
non-current asset at December 31, 2006. The Company does have access to the
funds via the demand note and does expect repayment to ultimately occur, with
a
portion or all amounts possibly drawn during 2007.
On
December 1, 2006, LNG Holdings, as borrower, and PEPL and CrossCountry Citrus,
LLC (CrossCountry
Citrus)
as
guarantors, entered into a $465
million unsecured term loan facility due April 4, 2008 (2006
Term Loan)
with
various financial institutions. On December 1, 2006, LNG Holdings loaned the
proceeds of the 2006 Term Loan to CrossCountry Citrus in exchange for an
interest-bearing promissory note with a principal amount of $465
million, the amount of the proceeds of the 2006 Term Loan. Accrued interest
under the promissory note is payable quarterly. The interest rate under the
promissory note is based on the interest rate under the 2006 Term Loan, which
at
December 31, 2006 was a floating rate at 6.22
percent, plus a credit spread over LIBOR of 112.5 basis points. Included in
Other,
net
in the
accompanying Consolidated Statement of Operations is interest income of
$2.9
million for the one month period ended December 31, 2006 related to interest
on
the Note
receivable - related party.
Southern
Union structured the acquisition of PEPL (Panhandle
Acquisition)
in a
manner intended to qualify as a like-kind exchange of property under Section
1031 of the Code. For tax purposes, the Company’s assets that were part of the
exchange were recorded at the tax basis of the Southern Union Company assets
for
which they were exchanged. The resulting transaction generated an estimated
deferred tax liability of approximately $91
million at the acquisition date and a corresponding receivable from Southern
Union reflected as a reduction to Partners
Capital
on the
Company’s Consolidated Balance Sheet. Repayment of the receivable from Southern
Union is limited to actual tax liabilities otherwise payable by the Company
pursuant to the tax sharing agreement with Southern Union Company. For the
years
ended December 31, 2006 and 2005, the Company recorded $34.4
million and $20.1
million of income tax liability settlements against the tax sharing note
receivable, respectively. The 2006 adjustment to the tax sharing note receivable
included $27.3
million resulting from a IRS audit of the Southern Union federal income tax
return for the period ended June 30, 2003.
F-16
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
November 17, 2004, CCE Holdings, LLC (CCE
Holdings),
a
joint venture in which Southern Union owned a 50 percent interest, acquired
100
percent of the equity interest of CrossCountry Energy, LLC (CrossCountry
Energy)
from
Enron Corp. and certain of its subsidiaries, including Transwestern Pipeline
Company, LLC (Transwestern)
and
Florida Gas Transmission Company (Florida Gas) for approximately $2.45
billion in cash, including the assumption of certain consolidated debt. On
November 5, 2004, CCE Holdings entered into an Administrative Services Agreement
(Management
Agreement)
with SU
Pipeline Management LP (Manager),
a
Delaware limited partnership and a wholly-owned subsidiary of Southern Union,
and the Company. Under the terms of the Management Agreement, the Company
covenants, to the extent permitted by applicable law, to cause Manager to
perform the duties and obligations of Manager. Manager assembled an integrated
pipeline management team, which included employees of the Company and CCE
Holdings, as well as Southern Union Company. Pursuant to the Management
Agreement, Manager was responsible for the operations and administrative
functions of the enterprise and provided services to CCE Holdings from November
17, 2004 to December 1, 2006. The Management Agreement was terminated following
the disposition of Transwestern by CCE Holdings on December 1, 2006 and the
redemption of the outstanding 50 percent Class B interest in CCE Holdings
resulting in Southern Union owning 100 percent of CCE Holdings. The Company
and
Southern Union continue to provide services to Florida Gas, which is jointly
owned with El Paso Corporation, a non-affiliated entity, using cost allocation
methods consistent with prior practices.
The
following table provides a summary of the accounts receivable and payable
related party balances included in the Consolidated Balance Sheet at the dates
indicated.
|
Related
Party
|
December
31, 2006
|
December
31, 2005
|
|||||
|
Accounts
receivable - related parties:
|
(In
thousands)
|
||||||
|
Southern
Union (1)
|
$
|
14,448
|
$
|
6,837
|
|||
|
Other
(2)
|
3,546
|
2,719
|
|||||
|
17,994
|
9,556
|
||||||
|
Accounts
payable - related parties:
|
|||||||
|
Southern
Union (3)
|
$
|
14,978
|
$
|
8,410
|
|||
|
Other
(4)
|
984
|
150
|
|||||
|
$
|
15,962
|
$
|
8,560
|
||||
|
___________________
|
|||||||
|
(1)
Primarily related to expenditures made on behalf of Southern
Union and
interest associated with the Note receivable – Southern
Union.
|
|||||||
|
(2)
Primarily related to interest from CrossCountry Citrus in 2006
and
CrossCountry Energy transition service costs in 2005.
|
|||||||
|
(3)
Primarily related to corporate services and payroll funding provided
by
Southern Union and reimbursable medical and insurance costs paid
by
Southern Union on behalf of the Company.
|
|||||||
|
(4)
Primarily related to various administrative and operating costs
paid by
other affiliate companies on behalf of the Company.
|
|||||||
5.
Derivatives Instruments and Hedging Activities
The
company uses interest rate swaps to reduce interest rate risks and to manage
interest expense. By entering into these agreements, the Company converts
floating-rate debt into fixed-rate debt or converts fixed-rate debt to floating.
Interest differentials paid or received under the swap agreements are reflected
as an adjustment to interest expense. These interest rate swaps are financial
derivative instruments that qualify for hedge treatment.
On
April
29, 2005, existing LNG Holdings’ bank loans due in January 2007 were repaid in
full using the proceeds from a credit agreement entered into on April 26, 2005
which is due in March 2007. Interest rate swaps previously designated as cash
flow hedges of the LNG Holdings’ bank loans were terminated upon repayment of
the loans on April 29, 2005. As a result, a gain of $3.5
million ($2.1
million, net of tax), was recorded in Accumulated
other comprehensive income
in the
Consolidated Balance Sheet and is being amortized to interest expense through
the maturity date of the original bank loans in 2007, of which $384,000
($229,000
net of tax) remains at December 31, 2006.
Prior
to
the termination in April 2005 of the original loans due January 2007, the
Company’s subsidiary LNG Holdings was party to interest rate swap agreements
that fixed the interest rate applicable to floating rate long-term
F-17
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
debt
and
that qualified for hedge accounting. From January 1, 2005 through the
termination date of the swap agreements on April 29, 2005, there was no swap
ineffectiveness. For the year ended December 31, 2004, the amount of swap
ineffectiveness was not significant. From January 1, 2005 through the
termination date, an unrealized gain of $1.4
million ($842,000,
net of tax) was recorded in Accumulated
other comprehensive income
related
to these swaps. For the period from the termination date through December 31,
2005, a gain of $1.2
million ($739,000,
net of tax) was amortized to interest expense. For the year ended December
31,
2006, a realized gain of $1.9
million ($1.1
million, net of tax) was included in Accumulated
other comprehensive income
related
to these swaps. Current market pricing models were used to estimate fair values
of interest rate swap agreements.
In
March
2004, the Company entered into interest rate swaps to hedge the risk associated
with the fair value of its $200
million 2.75
percent Senior Notes. See
Note 11 - Debt.
These
swaps are designated as fair value hedges and qualify for the short cut method
under Statement No. 133. As of December 31, 2006 and December 31, 2005 the
fair
value position of the swaps was a liability of $1.3
million and $5.7
million, respectively, recorded as a reduction to current portion of long-term
debt and long-term debt, respectively. Under the swap agreements, the Company
will receive fixed interest payments at a rate of 2.75
percent per annum and will make floating interest payments based on the
six-month LIBOR. No ineffectiveness is assumed in the hedging relationship
between the debt instrument and the interest rate swaps. As of December 31,
2006, these swaps have an average interest rate of 5.89
percent.
6.
Income Taxes
The
separate components of income tax expense for the periods presented consist
of
the following:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||
|
Income
Tax Expense
|
2006
|
2005
|
2004
|
|||||||
|
(In
thousands)
|
||||||||||
|
Current
income taxes
|
||||||||||
|
Federal
|
$
|
21,170
|
$
|
20,153
|
$
|
14,756
|
||||
|
State
|
6,971
|
2,341
|
1,726
|
|||||||
|
Total
current income taxes
|
28,141
|
22,494
|
16,482
|
|||||||
|
Deferred
income taxes
|
||||||||||
|
Federal
|
52,574
|
34,330
|
32,861
|
|||||||
|
State
|
7,324
|
7,803
|
6,713
|
|||||||
|
Total
deferred income taxes
|
59,898
|
42,133
|
39,574
|
|||||||
|
Total
income tax expense
|
$
|
88,039
|
$
|
64,627
|
$
|
56,056
|
||||
The
actual income tax expense differs from the amount computed by applying the
statutory federal tax rate of 35%
to
income before income taxes as follows:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
Income
Tax Expense --
|
December
31,
|
December
31,
|
December
31,
|
|||||||
|
Reconciliation
to Statutory Rate
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
|||||||||
|
Income
tax, computed at the statutory rate
|
$
|
79,028
|
$
|
58,166
|
$
|
50,396
|
||||
|
Adjustments:
|
||||||||||
|
State
income tax, net of federal effect
|
9,292
|
6,594
|
5,485
|
|||||||
|
Permanent
differences and other
|
(281
|
)
|
(133
|
)
|
175
|
|||||
|
Total
income tax expense
|
$
|
88,039
|
$
|
64,627
|
$
|
56,056
|
||||
|
Effective
tax rate
|
39.0
|
%
|
38.9
|
%
|
38.9
|
%
|
||||
F-18
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
principal components of the Company’s deferred tax assets (liabilities)
recognized in the Consolidated Balance Sheets for the years ended December
31,
2006 and 2005 are as follows:
|
December
31,
|
December
31,
|
||||||
|
Net
Deferred Income Tax Asset (Liability) Components
|
2006
|
2005
|
|||||
|
|
(In
thousands)
|
||||||
|
Property,
plant and equipment
|
$ |
(242,510
|
)
|
$
|
(206,859
|
)
|
|
|
Current
Assets
|
|
(338
|
)
|
|
-
|
||
|
Investments
|
(183
|
)
|
(196
|
)
|
|||
|
Other
deferred debits
|
4,080
|
-
|
|||||
|
Other
assets
|
-
|
5,554
|
|||||
|
Current
liabilities
|
2,197
|
-
|
|||||
|
Deferred
credits and other liabilities
|
17,094
|
19,174
|
|||||
|
Long
term debt
|
3,018
|
-
|
|||||
|
Other
|
(102
|
)
|
-
|
||||
|
State
deferred income taxes, net of federal tax effect
|
(23,836
|
)
|
(21,374
|
)
|
|||
|
Net
deferred income tax asset (liability)
|
$
|
(240,580
|
)
|
$
|
(203,701
|
)
|
|
|
Gross
deferred tax liabilities
|
$
|
(266,969
|
)
|
$
|
(229,442
|
)
|
|
|
Gross
deferred tax assets
|
26,389
|
25,741
|
|||||
|
Net
deferred income tax asset (liability)
|
$
|
(240,580
|
)
|
$
|
(203,701
|
)
|
|
|
Non
current deferred income tax asset (liability)
|
$
|
(243,697
|
)
|
$
|
(205,787
|
)
|
|
|
Current
tax asset
|
3,117
|
2,086
|
|||||
|
Net
deferred income tax asset (liability)
|
$
|
(240,580
|
)
|
$
|
(203,701
|
)
|
|
7.
Property, Plant and Equipment
|
Lives
|
December
31,
|
December
31,
|
||||||||
|
Property,
Plant and Equipment
|
In
Years
|
2006
|
2005
|
|||||||
|
|
(In
thousands)
|
|||||||||
|
Transmission
|
36-46
|
$
|
1,400,547
|
$
|
1,285,848
|
|||||
|
Gathering
|
26
|
44,402
|
45,822
|
|||||||
|
Underground
storage
|
36-46
|
279,845
|
275,603
|
|||||||
|
General
plant - LNG
|
20-40
|
619,018
|
494,827
|
|||||||
|
General
plant - other (1)
|
1-6
|
75,105
|
61,374
|
|||||||
|
Construction
work-in-progress
|
166,085
|
176,370
|
||||||||
|
Total
property, plant and equipment
|
2,585,002
|
2,339,844
|
||||||||
|
Less
accumulated depreciation and amortization
|
207,606
|
145,550
|
||||||||
|
Net
property, plant and equipment
|
$
|
2,377,396
|
$
|
2,194,294
|
||||||
|
(1)
Includes capitalized computer software costs totaling:
|
||||||||||
|
Computer
software cost
|
$
|
56,804
|
$
|
53,716
|
||||||
|
Less
accumulated amortization
|
16,734
|
12,386
|
||||||||
|
Net
computer software costs
|
$
|
40,070
|
$
|
41,330
|
||||||
Amortization
expense of capitalized computer software costs for years 2006, 2005 and 2004
was
$6.6
million, $5.9
million and $5.1
million, respectively. The amortization period for computer software is between
four
and
ten
years.
F-19
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Intangible Customer Contract
The
Panhandle Acquisition resulted in the recognition of an intangible asset related
to the BG LNG contract with Trunkline LNG. The following table shows the
carrying amount and accumulated amortization related to this intangible.
|
Useful
|
||||||||||
|
Lives
|
December
31,
|
December
31,
|
||||||||
|
Intangible
customer contract
|
In
Years
|
2006
|
2005
|
|||||||
|
|
(In
thousands)
|
|||||||||
|
Customer
contract
|
25
|
$
|
9,503
|
$
|
9,503
|
|||||
|
Accumulated
amortization
|
1,885
|
1,472
|
||||||||
|
Intangible
customer contract, net
|
$
|
7,618
|
$
|
8,031
|
||||||
Amortization
expense on the customer contract for 2006, 2005 and 2004 was $413,000,
$465,000
and $136,000,
respectively. The Company estimates the annual amortization expense for years
2007-2011 and thereafter will be $346,000
per year.
Certain
intangibles are included in Property, plant and equipment. See Note
7 - Property, Plant and Equipment.
9.
Investment in Affiliates
The
Company owns a 29 percent interest in the Lee 8 partnership, which operates
a 2.4 Bcf natural gas storage facility in Michigan. The remaining interests
in the Lee 8 partnership are currently owned by Proliance Energy (51 percent)
and Howard Energy Company (20 percent). The Company accounts for its investment
in the Lee 8 partnership using the equity method of accounting.
10.
Financial Instruments
The
Company’s financial instruments include $1.65
billion of total debt outstanding, including the current portion of long-term
debt, at December 31, 2006 and $1.18
billion at December 31, 2005, with an approximate fair value of $1.66
billion and $1.20
billion as of December 31, 2006 and 2005, respectively. Estimated fair
value amounts of long-term debt were obtained from independent parties. Judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates determined as of December 31, 2006 and 2005
are not necessarily indicative of the amounts the Company could have realized
in
current market exchanges.
The
$148.7
million and $110.6
million Note Receivable from Southern Union at December 31, 2006 and December
31, 2005, respectively, is at fair value as the interest rate is calculated
using an interest rate equal to the one month LIBOR rate. See Note
4 - Related Party Transactions.
The
$465
million Note receivable -related party at December 31, 2006 is at fair value
as
the interest rate is calculated using a floating rate tied to LIBOR or prime
interest rates at the Company’s option, in addition to a margin tied to the
rating of the Company’s unsecured senior funded debt plus a credit spread over
LIBOR of 112.5
basis points. See Note
4 - Related Party Transactions.
F-20
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11.
Debt
|
December
31, 2006
|
December
31, 2005
|
|||||||||||||||
|
Long-term
Debt
|
Year
Due
|
Book
Value
|
Fair
Value
|
Book
Value
|
Fair
Value
|
|||||||||||
|
|
(In
thousands)
|
|||||||||||||||
|
2.75%
Senior Notes
|
2007
|
$
|
200,000
|
$
|
200,000
|
$
|
200,000
|
$
|
200,000
|
|||||||
|
4.80%
Senior Notes
|
2008
|
300,000
|
300,000
|
300,000
|
300,000
|
|||||||||||
|
6.05%
Senior Notes
|
2013
|
250,000
|
251,053
|
250,000
|
254,450
|
|||||||||||
|
6.50%
Senior Notes
|
2009
|
60,623
|
61,721
|
60,623
|
63,228
|
|||||||||||
|
8.25%
Senior Notes
|
2010
|
40,500
|
43,180
|
40,500
|
45,135
|
|||||||||||
|
7.00%
Senior Notes
|
2029
|
66,305
|
71,947
|
66,305
|
73,521
|
|||||||||||
|
Term
Loan
|
2007
|
255,626
|
255,626
|
255,626
|
255,626
|
|||||||||||
|
Term
Loan
|
2008
|
465,000
|
465,000
|
-
|
-
|
|||||||||||
|
Unamortized
debt premium, net
|
9,613
|
9,613
|
12,205
|
12,205
|
||||||||||||
|
Total
debt outstanding
|
1,647,667
|
$ |
1,658,140
|
1,185,259
|
$
|
1,204,165
|
||||||||||
|
Current
portion of long-term debt
|
(461,011
|
)
|
-
|
|||||||||||||
|
Interest
rate swaps (2.75% Senior Notes)
|
(1,265
|
)
|
(5,725
|
)
|
||||||||||||
|
Total
long-term debt
|
$
|
1,185,391
|
$
|
1,179,534
|
||||||||||||
The
Company has $1.65
billion of debt recorded at December 31, 2006. Debt of $727.1
million, including net premiums of $9.6
million, is at fixed rates ranging from 4.80
percent to 8.25
percent, with an average interest rate for 2006 of 5.51
percent including debt premium, discount and issuance cost amortization and
5.78
percent excluding debt premium, discount and issuance cost amortization. The
$920.6
million of floating rate debt had an average interest rate of 6.1
percent for the year ended December 31, 2006.
On
December 1, 2006, LNG Holdings, as borrower, and PEPL and CrossCountry Citrus
(an indirect subsidiary of Southern Union), as guarantors, entered into the
$465
million 2006 Term Loan with various financial institutions. The proceeds of
the
2006 Term Loan were used to repay approximately $455
million of existing indebtedness of Transwestern Holding Company, LLC, a
wholly-owned subsidiary of CrossCountry Energy. The interest rate under the
2006
Term Loan is a floating rate tied to a LIBOR rate or prime rate at the Company’s
option, in addition to a margin tied to the rating of the Company’s unsecured
senior funded debt. At December 31, 2006, the interest rate was 6.22
percent, including a credit spread over LIBOR of 87.5
basis points.
Pursuant
to the 2006 Term Loan, on December 1, 2006, LNG Holdings loaned the proceeds
of
the 2006 Term Loan to CrossCountry Citrus in exchange for an interest-bearing
promissory note with a principal amount of $465
million. Accrued interest under the promissory note is payable quarterly. The
interest rate under the promissory note is based on the interest rate under
the
2006 Term Loan, plus a credit spread over LIBOR of 112.5
basis points. At December 31, 2006, the interest rate was 7.35
percent.
The
Company’s notes are subject to certain requirements, such as the maintenance of
a fixed charge coverage ratio and a leverage ratio, which if not maintained,
restrict the ability of the Company to make certain payments and impose
limitations on the ability of the Company to subject its property to liens.
At
December 31, 2006, the Company, based on the currently most restrictive debt
covenant requirements, was subject to a $216.5
million limitation on additional restricted payments including dividends and
loans to affiliates, and a limitation of $299
million of additional secured or subsidiary level indebtedness or other defined
liens based on a limitation on liens covenant. The Company is also subject
to a
limitation of $286.5
million of total additional indebtedness. At December 31, 2006, the Company
was
in compliance with all covenants.
At
December 31, 2006, the Company had scheduled payments of $462.3
million, $758.3 million, $60.6 million, $40.5 million, nil and $316.3 million
for the years 2007 through 2011 and in total thereafter,
respectively.
LNG
Holdings, as borrower, and PEPL and Trunkline LNG, as guarantors, entered into
a
credit agreement dated as of April 26, 2005, with a consortium of banks for
a
senior term loan financing in the aggregate principal amount of $255.6
million, which matures on March 15, 2007. The senior term loan carries a
floating interest rate tied to LIBOR or prime interest rates at the Company’s
option, in addition to a margin which is tied to the rating of the
F-21
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Company’s
unsecured senior funded debt. On April 29, 2005, the proceeds from the credit
agreement were used to repay all outstanding indebtedness under LNG Holdings’
floating rate bank loans that were due in 2007.
Retirement
of Debt Obligations
The
Company plans to refinance its debt coming due in March 2007 with proceeds
from
a $455 million multi-year bank term loan to LNG Holdings (2007
Expected TLNG Term Loan).
The
Company is near the final stages of consummating this refinancing, which
is
expected to close on or about March 12, 2007. The Company will use Wachovia
Capital Markets and UniCredit Markets and Investment Banking as lead arrangers
for the 2007 Expected TLNG Term Loan, which will be guaranteed by PEPL and
Trunkline LNG. Borrowings based on the current term sheet under the 2007
Expected TLNG Term Loan will bear interest at LIBOR, plus a credit spread
based
on the senior unsecured credit ratings by Standard & Poor’s and Moody’s
Investors Service for PEPL. Should the Company not be successful in the
aforementioned refinancing effort, the Company would implement alternative
refinancing plans, including a combination of drawing down on its $148.7
million
demand note with Southern Union (which has available capacity with its revolving
credit facility), obtaining loans or advances from other subsidiaries of
Southern Union, utilizing cash from operations and additional commitments
from
third-party lenders, which are subject to material adverse change clauses
and
other customary terms and conditions, to repay the March 2007 obligations
at
maturity in the event the 2007 Expected TLNG Term Loan is not completed in
the
required timeframe.
The
Company believes, based on its investment grade credit ratings and general
financial condition, successful historical access to capital markets, current
economic and capital market conditions and market expectations regarding
the
Company’s future earnings and cash flows, that it will be able to refinance
these obligations under acceptable terms within the required timeframes.
However, there can be no assurance the Company will be successful in its
implementation of these refinancing plans and the Company’s inability to do so
would cause a material adverse change to the Company’s financial
condition.
12.
Comprehensive Income
The
table
below provides an overview of comprehensive income for the periods
indicated.
|
Year
ended
|
Year
ended
|
Year
ended
|
|||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
(In
thousands)
|
||||||||
|
Net
earnings
|
$
|
137,755
|
$
|
101,562
|
$
|
87,933
|
|||
|
Realized
(gain) loss on cash flow hedging
|
|||||||||
|
activities,
net of taxes of $(742), $1,587 and $3,407, respectively
|
(1,105
|
)
|
2,495
|
5,345
|
|||||
|
Unrealized
gain (loss) on cash flow hedging
|
|||||||||
|
activities
net of taxes of $(3), $(1,515) and $(3,502), respectively
|
(5
|
)
|
(2,387
|
)
|
(5,486
|
)
|
|||
|
Total
other comprehensive income (loss)
|
(1,110
|
)
|
108
|
(141
|
)
|
||||
|
Total
comprehensive income (loss)
|
$
|
136,645
|
$
|
101,670
|
$
|
87,792
|
|||
The
table
below provides an overview of the components in Accumulated
other comprehensive income
as of
the periods indicated:
|
2006
|
2005
|
|||||
|
|
(In
thousands)
|
|||||
|
Other
postretirement plan - net actuarial loss and prior service credit,
net of
tax
|
$
|
15,248
|
$
|
-
|
||
|
Interest
rate hedges, net of tax
|
229
|
1,339
|
||||
|
Accumulated
other comprehensive income, net of tax
|
$
|
15,477
|
$
|
1,339
|
||
F-22
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
13.
Commitments and Contingencies
Leases.
The
Company utilizes assets under operating leases in several areas of operation.
Consolidated rental expense amounted to $11.3
million in 2006, $12.9
million in 2005 and $13.4
million in 2004. Future minimum rental payments under the Company’s various
operating leases for the years 2007 through 2011 are
$11.3
million, $7 million, $6.4 million, $5.6 million and $5 million, respectively,
and $18.3 million in total thereafter.
Capital
Expenditures.
The
Company estimates expenditures associated with its Trunkline field zone
expansion and LNG terminal enhancement to be approximately $450
million, with approximately $300
million to be incurred in 2007, plus capitalized interest. These estimates
were
developed for budgeting purposes and are subject to revision.
Litigation. The
Company is involved in legal, tax and regulatory proceedings before various
courts, regulatory commissions and governmental agencies regarding matters
arising in the ordinary course of business, some of which involve substantial
amounts. Where appropriate, the Company has made accruals in accordance with
FASB Statement No. 5, Accounting
for Contingencies,
in
order to provide for such matters. The Company believes the final disposition
of
these proceedings will not have a material adverse effect on its
consolidated financial position, results of operations or cash
flows.
Hope
Land
Mineral Corporation (Hope
Land)
contends that it owns the storage rights to property that contains a portion
of
the Company’s Howell storage field. During June 2003, the Michigan Court of
Appeals reversed the trial court’s previous order, which had granted summary
judgment in favor of the Company and dismissed the case. The Company filed
an
appeal of the Court of Appeals order with the Michigan Supreme Court, which
was
denied in December of 2003. In April 2005, Hope Land filed trespass and unjust
enrichment complaints against the Company to prevent running of the statute
of
limitations. The Company then filed an action for condemnation to obtain the
storage rights from Hope Land. Pursuant to a pre-filing settlement with Hope
Land, the Company obtained legal title to the storage rights upon the filing
of
the condemnation action. The unjust enrichment claims were dismissed and then
reinstated on December 6, 2006. Trial is scheduled for April, 2007. The Company
does not believe the outcome of this case will have a material adverse effect
on its consolidated financial position, results of operations
or cash flows.
Jack
Grynberg, an individual, has filed actions against a number of companies,
including the Company, now transferred to the U.S. District Court for the
District of Wyoming, for damages for mis-measurement of gas volumes and Btu
content, resulting in lower royalties to mineral interest owners. On October
20,
2006, the District Judge adopted in part the earlier recommendation of the
Special Master in the case and ordered the dismissal of the case against the
Company. Grynberg is appealing that action. A similar action, known as the
Will
Price litigation, also has been filed against a number of companies, including
the Company, in U.S. District Court for the District of Kansas. The Company
is
currently awaiting the decision of the trial judge on the defendants’ motion to
dismiss the Will Price action. The Company believes that its measurement
practices conformed to the terms of its FERC gas tariff, which was filed with
and approved by FERC. As a result, the Company believes that it has meritorious
defenses to these lawsuits (including FERC-related affirmative defenses, such
as
the filed rate/tariff doctrine, the primary/exclusive jurisdiction of FERC,
and
the defense that the Company complied with the terms of its tariff) and will
continue to vigorously defend against them, including any appeal from the
dismissal of the Grynberg case. The Company does not believe the outcome of
these cases will have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
In
1993,
the U.S. Department of the Interior announced its intention to seek, through
the
Mineral Management Service (MMS),
additional royalties from gas producers as a result of payments received by
such
producers in connection with past take-or-pay settlements and buyouts and buy
downs of gas sales contracts with natural gas pipelines. PEPL and Trunkline,
with respect to certain producer contract settlements, may be contractually
required to reimburse or, in some instances, to indemnify producers against
such
royalty claims. The potential liability of the producers to the government
and
of the pipelines to the producers involves complex issues of law and fact,
which
are likely to take substantial time to resolve. If required to reimburse or
indemnify the producers, PEPL and Trunkline may file with FERC to recover these
costs from pipeline customers. The Company believes these commitments and
contingencies will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
F-23
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Environmental
Matters. The
Company’s operations are subject to federal, state and local laws and
regulations regarding water quality, hazardous and solid waste management,
air
quality control and other environmental matters. These laws and regulations
require the Company to conduct its operations in a specified manner and to
obtain and comply with a wide variety of environmental registrations, licenses,
permits, inspections and other approvals. Failure to comply with environmental
requirements may expose the Company to significant fines, penalties and/or
interruptions in operations. The Company’s environmental policies and procedures
are designed to achieve compliance with such laws and regulations. These
evolving laws and regulations and claims for damages to property, employees,
other persons and the environment resulting from current or past operations
may
result in significant expenditures and liabilities in the future. The Company
engages in a process of updating and revising its procedures for the ongoing
evaluation of its operations to identify potential environmental exposures
and
enhance compliance with regulatory requirements. The Company follows the
provisions of AICPA Statement of Position 96-1, Environmental
Remediation Liabilities,
for
recognition, measurement, display and disclosure of environmental remediation
liabilities.
Environmental
Remediation.
The
Company is responsible for environmental remediation at certain sites on its
gas
transmission systems. The contamination resulted from the past use of lubricants
containing polychlorinated biphenyls (PCBs)
in
compressed air systems; the past use of paints containing PCBs; and the prior
use of wastewater collection facilities and other on-site disposal areas. The
Company has developed and is implementing a program to remediate such
contamination. Remediation and decontamination has been completed at each of
the
35 compressor station sites where auxiliary buildings that house the air
compressor equipment were impacted by the past use of lubricants containing
PCBs. At some locations, PCBs have been identified in paint that was applied
many years ago. A program has been implemented to remove and dispose of PCB
impacted paint during painting activities. At one location on the Trunkline
system, PCBs were recently discovered on the painted surfaces of equipment
in a
building that is outside of the scope of the compressed air system program
and
the existing PCB impacted paint program. The estimated cost to remediate the
painted surfaces at this location is approximately $300,000.
An assessment program is being developed to determine whether this condition
exists at any of the other 78 similar buildings on the PEPL and Trunkline
systems. Until the results of the assessment program are available, the costs
associated with remediation of the painted surfaces cannot be reasonably
estimated at this time.
Other
remediation typically involves the management of contaminated soils and may
involve remediation of groundwater. Activities vary with site conditions and
locations, the extent and nature of the contamination, remedial requirements,
complexity and sharing of responsibility. The ultimate liability and total
costs
associated with these sites will depend upon many factors. If remediation
activities involve statutory joint and several liability provisions, strict
liability, or cost recovery or contribution actions, the Company could
potentially be held responsible for contamination caused by other parties.
In
some instances, such as the Pierce Waste Oil sites described below, the Company
may share liability associated with contamination with other potentially
responsible parties. The Company may also benefit from contractual indemnities
that cover some or all of the cleanup costs. These sites are generally managed
in the normal course of business or operations. The Company believes the outcome
of these matters will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
PEPL
and
Trunkline, together with other non-affiliated parties, have been identified
as
potentially liable for conditions at three former waste oil disposal sites
in
Illinois - the Pierce Oil Springfield site, the Dunavan Waste Oil site and
the
McCook site (collectively, the
Pierce Waste Oil sites).
PEPL
and Trunkline received notices of potential liability from the United States
Environmental Protection Agency (U.S.
EPA)
for the
Dunavan site by letters dated September 30, 2005. The notices demanded
reimbursement to the U.S. EPA for costs incurred to date in the amount of
approximately $1.8
million and encouraged each potentially responsible party (PRP)
to
voluntarily negotiate an administrative settlement agreement with the U.S.
EPA
within certain limited time frames providing for the PRPs to conduct or finance
the response activities required at the site. The demand was declined in a
joint
letter dated December 15, 2005 by the major PRPs including PEPL and Trunkline.
Although no formal notice has been received for the Pierce Oil Springfield
site,
special notice letters are anticipated and the process of listing the site
on
the National Priority List has begun. No formal notice has been received for
the
McCook site. The Company believes the outcome of these matters will not have
a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
F-24
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
June
16, 2005, PEPL experienced a release of liquid hydrocarbons near Pleasant Hill,
Illinois. The release occurred in the form of a mist at a valve that was in
use
to reduce the pressure in the pipeline as part of maintenance activities. The
hydrocarbon mist affected several acres of adjacent agricultural land and a
nearby marina. Approximately 27 gallons of hydrocarbons reached the Mississippi
River. PEPL contacted appropriate federal and state regulatory agencies and
the
U.S. EPA took the lead role in overseeing the subsequent cleanup activities,
which have been completed. PEPL has resolved claims of affected boat owners
and
the marina operator. PEPL received a violation notice from the Illinois
Environmental Protection Agency (Illinois
EPA)
alleging that PEPL was in apparent violation of several sections of the Illinois
Environmental Protection Act by allowing the release. The violation notice
did
not propose a penalty. Responses to the violation notice were submitted and
the
responses were discussed with the agency. On December 14, 2005, the Illinois
EPA
notified PEPL that the matter might be considered for referral to the Office
of
the Attorney General, the State’s Attorney or the U.S. EPA for formal
enforcement action and the imposition of penalties. By letter dated November
22,
2006, PEPL received a follow-up information request from the Illinois EPA on
the
status of certain measures PEPL had agreed to undertake in connection with
the
original responses to the violation notice. The Company believes the outcome
of
this matter will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
On
July
10, 2006, PEPL identified the possible subsurface release of approximately
745
gallons of methanol from a tank located at the Howell compressor station.
Subsequent testing of the tank and associated piping confirmed that a release
had taken place. Impacted soils were excavated in accordance with state specific
regulatory requirements. The impacted soils were transported to an authorized
disposal facility. The appropriate federal and state environmental agencies
were
notified of this release. The Michigan Department of Environmental Quality
(MDEQ)
conducted an inspection of the remediation effort on October 17, 2006 and
indicated that an appropriate response and remediation action had been
implemented. A final remediation report was submitted to the MDEQ and US EPA
on
January 25, 2007.
The
table
below reflects the amount of accrued liabilities recorded in the Consolidated
Balance Sheet at December 31, 2006 and December 31, 2005 to cover probable
environmental response actions:
|
December
31,
|
December
31,
|
|||||
|
2006
|
2005
|
|||||
|
(In
thousands)
|
||||||
|
Current
|
$
|
1,962
|
$
|
2,337
|
||
|
Noncurrent
|
6,760
|
8,385
|
||||
|
Total
Environmental Liabilities
|
$
|
8,722
|
$
|
10,722
|
||
During
the year ended December 31, 2006, the Company spent $2.4
million related to environmental cleanup programs.
Air
Quality Control. The
U.S.
EPA issued a final rule on regional ozone control (NOx
SIP Call)
in
April 2004 that impacts the Company in two midwestern states, Indiana and
Illinois. Based on a U.S. EPA guidance document negotiated with gas industry
representatives in 2002, the Company is required in states that follow the
EPA
guidance to reduce nitrogen oxide (NOx)
emissions by 82 percent on the identified large internal combustion engines
and
will be able to trade off engines within the Company in an effort to create
a
cost effective NOx reduction solution. The final implementation date is May
2007. The rule will affect 20 large internal combustion engines on the Company’s
system in Illinois and Indiana with an approximate cost of $22.3
million for capital improvements through 2007, based on current projections.
Approximately $21.6
million of the $22.3
million of capital
expenditures has been incurred as of December 31, 2006. Indiana has promulgated
state regulations to address the requirements of the NOx SIP Call rule that
essentially follow the EPA guidance.
The
Illinois EPA has distributed several draft versions of a rule to control NOx
emissions from reciprocating engines and turbines statewide. The latest draft
requires controls on engines regulated under the U.S. EPA NOx SIP Call by May
1,
2007 and the remaining engines by January 1, 2011. The state is requiring the
controls to comply with U.S. EPA rules regarding the NOx SIP Call, ozone
non-attainment and fine particulate standards.
F-25
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Illinois EPA has held multiple meetings with industry representatives to discuss
the draft rule and is expected to propose the rule in the first quarter of
2007.
The rule is currently being reviewed for potential impact to the Company. As
currently drafted, the rule applies to all PEPL and Trunkline stations in
Illinois and significant expenditures in addition to the $22.3
million associated with NOx reductions described above would be required for
emission control.
In
2002,
the Texas Commission on Environmental Quality enacted the Houston/Galveston
SIP
regulations requiring reductions in NOx emissions in an eight-county area
surrounding Houston. Trunkline’s Cypress compressor station is affected and
requires the installation of emission controls. New regulations also require
certain grandfathered facilities in Texas to enter into the new source permit
program which may require the installation of emission controls at one
additional facility owned by the Company. Management estimates capital
improvements of $16.9
million will be needed at the two affected Texas locations. Approximately
$16.1
million of the $16.9
million of capital expenditures have been incurred as of December 31,
2006.
The
U.S.
EPA promulgated various Maximum Achievable Control Technology rules in February
2004. The rules require that PEPL and Trunkline control Hazardous Air Pollutants
(HAPs)
emitted
from certain internal combustion engines at major HAPs sources. Most PEPL and
Trunkline compressor stations are major HAPs sources. The HAPs pollutant of
concern for PEPL and Trunkline is formaldehyde. As promulgated, the rule seeks
to reduce formaldehyde emissions by 76 percent from these engines. Catalytic
controls will be required to reduce emissions under these rules with a final
implementation date of June 2007. PEPL and Trunkline could have up to 20
internal combustion engines subject to the rules. Management expects that
compliance with these regulations will necessitate an estimated expenditure
of
$410,000
for capital improvements, based on current projections.
Spill
Control. Environmental
regulations were recently modified for U.S. EPA’s Spill Prevention, Control and
Countermeasures program. The Company is currently reviewing the impact to its
operations and expects to expend resources on tank integrity testing and any
associated corrective actions as well as potential upgrades to containment
structures. Costs associated with tank integrity testing and resulting
corrective actions cannot be estimated with certainty at this time, but the
Company believes such costs will not have a material adverse effect on its
consolidated financial position, results of operations or cash
flows.
Other
Commitments and Contingencies.
Kaplan
Compressor Station Damage.
On April
21, 2006, Trunkline experienced a fire at its Kaplan, Louisiana compressor
station which resulted in damages to the facilities. While assessment is
currently ongoing, Trunkline initially estimates capital expenditures associated
with the fire will be approximately $11
million, $3.3
million of which is included in the line item Construction
work in progress
at
December 31, 2006, before consideration of potential insurance recoveries which
are subject to a $5
million
deductible. The Company does not expect this incident to have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
Hurricane
Damage.
Late in
the third quarter of 2005, after coming through the Gulf of Mexico, Hurricanes
Katrina and Rita came ashore along the Upper Gulf Coast. These hurricanes caused
damage to property and equipment owned by Sea Robin, Trunkline and Trunkline
LNG. Based on the latest damage assessments, there are revenue, expense and
capital impacts resulting from Hurricanes Katrina and Rita in 2005 and 2006,
mostly impacting Sea Robin and Trunkline LNG. During 2006 and 2005, revenue
reductions resulting from the hurricanes were approximately $3
million
for each year, not including lost opportunity revenues, and expense of
approximately $2
million
and $7
million
was incurred in 2006 and 2005 respectively. As of December 31, 2006 the Company
has incurred $30.8
million of capital expenditures related to the hurricanes primarily for
replacement or abandonment of damaged property and equipment and construction
project delays at the Trunkline LNG terminal.
The
Company anticipates reimbursement from its property insurance carriers for
a
significant portion of damages from Hurricane Rita in excess of its
$5
million
deductible. Such reimbursement is currently estimated by the Company’s property
insurance carrier ultimately to be limited to
70
percent of the portion of the claimed damages accepted by the insurance carrier,
but the amount is subject to the level of total ultimate claims from all
companies relative to the carrier’s $1
billion
total limit on payout per claim. As of December 31, 2006, the
F-26
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Company
has received payments of $1.6
million from the insurance carriers. No receivables due from the insurance
carriers have been recorded as of December 31, 2006.
In
addition, after the 2005 hurricanes, the MMS mandated inspections by
leaseholders and pipeline operators along the hurricane tracks. The Company
has
detected exposed pipe and other facilities on Trunkline and Sea Robin that
must
be re-covered to comply with regulations. As a result, there was approximately
$1.3
million of inspection related expense recorded in 2006. Capital expenditures
are
estimated at $4.8
million, $1.1
million of which had been incurred as of December 31, 2006. The Company will
seek recovery of these expense and capital amounts as part of the hurricane
related claims.
Energy
Transfer Commitment.
In
November 2006, PEPL provided a guaranty to a subsidiary of Energy Transfer,
a
non-affiliate, for the full performance by Trunkline of a $40
million CIAC obligation related to a modification of the field zone expansion
project. The CIAC would be made by Trunkline upon movement of Energy Transfer’s
delivery point to a location near Buna, Texas, expected to be completed in
late
2007. The
ultimate return and accounting for the CIAC to Energy Transfer depends on
completion of construction by Energy Transfer, additional capacity created
and
sale by Trunkline of the additional capacity.
Controlled
Group Pension Liabilities.
Southern
Union (including certain of its divisions) sponsors a number of defined benefit
pension plans for employees. Under applicable pension and tax laws, upon being
acquired by Southern Union, the Company became a member of Southern Union’s
“controlled group” with respect to those plans, and, along with Southern Union
and any other members of that group, is jointly and severally liable for any
failure by Southern Union (along with any other persons that may be or become
a
sponsor of any such plan) to fund any of these pension plans or to pay any
unfunded liabilities that these plans may have if they are ever terminated.
In
addition, if any of the obligations of any of these pension plans is not paid
when due, a lien in favor of that plan or the Pension Benefit Guaranty
Corporation may be created against the assets of each member of Southern Union’s
controlled group, including the Company and each of its subsidiaries. Based
on
the latest actuarial information available as of December 31, 2006, the
aggregate amount of the projected benefit obligations of these pension plans
was
approximately $163
million and the estimated fair value of all of the assets of these plans was
approximately $108.6
million.
14.
Benefits
Postretirement
Benefit Plans.
The
Company has postretirement health care and life insurance plans (other
postretirement plans)
which
cover substantially all employees. The health care plans generally provide
for
cost sharing between the Company and its retirees in the form of retiree
contributions, deductibles and coinsurance on the amount the Company pays
annually to provide future retiree health care coverage under certain of these
plans.
The
following tables summarize the impact of adopting Statement No. 158 on the
Company’s other postretirement plans reported in the Consolidated Balance Sheet
at December 31, 2006:
|
Other
Postretirement Plans
|
||||||||||
|
SFAS
158
|
||||||||||
|
adoption
|
Post-SFAS
|
|||||||||
|
Pre-SFAS
158
|
adjustment
|
158
|
||||||||
|
|
(in
thousands)
|
|||||||||
|
Postretirement
liabilities, noncurrent (included in Post-retirement
benefits)
|
$
|
24,677
|
$
|
(20,241
|
)
|
$
|
4,436
|
|||
|
Accumulated
deferred income taxes
|
-
|
4,993
|
4,993
|
|||||||
|
Accumulated
other comprehensive income, net of tax
|
-
|
15,248
|
15,248
|
|||||||
|
Accumulated
other comprehensive income, pre-tax
|
-
|
20,241
|
20,241
|
|||||||
The
adoption of Statement No. 158 had no effect on the Consolidated Statement of
Operations for the year ended December 31, 2006, or for any prior period
presented, has not negatively impacted any financial covenants, and is
not expected to affect the Company’s operating results in future
periods.
F-27
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement
benefit liabilities are accrued on an actuarial basis during the years an
employee provides services. The following table represents a reconciliation
of
the Company’s other postretirement benefit plans at December 31, 2006 and
2005.
|
Other
Postretirement Benefits
|
|||||||
|
At
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Change
in Benefit Obligation:
|
|||||||
|
Benefit
obligation at beginning of period
|
$
|
39,594
|
$
|
62,845
|
|||
|
Service
cost
|
1,323
|
2,264
|
|||||
|
Interest
Cost
|
1,781
|
2,926
|
|||||
|
Actuarial
gain
|
(8,340
|
)
|
(4,156
|
)
|
|||
|
Benefits
paid
|
32
|
-
|
|||||
|
Plan
amendments
|
-
|
(24,285
|
)
|
||||
|
Benefit
obligation at end of period
|
$
|
34,390
|
$
|
39,594
|
|||
|
Change
in Plan Assets:
|
|||||||
|
Fair
value of plan assets at beginning of period
|
$
|
20,400
|
$
|
12,196
|
|||
|
Return
on plan assets
|
1,707
|
392
|
|||||
|
Employer
contributions
|
7,815
|
7,812
|
|||||
|
Benefits
paid
|
32
|
-
|
|||||
|
Fair
value of plan assets at end of period
|
$
|
29,954
|
$
|
20,400
|
|||
|
Funded
Status:
|
|||||||
|
Funded
status
|
$
|
(4,436
|
)
|
$
|
(19,194
|
)
|
|
|
Unrecognized
net actuarial loss
|
10,101
|
||||||
|
Unrecognized
prior service credit
|
(24,822
|
)
|
|||||
|
Net
amounts recognized
|
$
|
(33,915
|
)
|
||||
|
Amounts
recognized in the Consolidated Balance Sheet (1):
|
|||||||
|
Accrued
benefit liability
|
$
|
(4,436
|
)
|
$
|
33,915
|
||
|
Net
asset (liability) recognized
|
$
|
(4,436
|
)
|
$
|
(33,915
|
)
|
|
|
___________________
|
|||||||
|
(1)
As of December 31, 2006, the Company's other postretirement benefit
plan had non-current liabilities of $4,436.
|
|||||||
The
amounts in Accumulated
other comprehensive income
that
have not yet been recognized in net periodic benefit cost consist
of:
|
Other
Postretirement Benefits
|
||||||
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
|
(In
thousands)
|
|||||
|
Net
actuarial loss
|
$
|
924
|
N/A
|
|||
|
Prior
service credit
|
(21,165
|
)
|
N/A
|
|||
|
Total
amount recognized
|
$
|
(20,241
|
)
|
N/A
|
||
The
estimated prior service credit for other postretirement plans that will be
amortized from Accumulated
other comprehensive income
during
2007 is $3.6
million. No plan assets are expected to be returned to the Company in
2007.
F-28
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
weighted-average assumptions used to determine benefit obligations for the
years
ended December 31, 2006, 2005, and 2004 were as follows:
|
Other
Postretirement Benefits
|
|||||||||
|
Years
Ended
|
|||||||||
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
|||||||||
|
Discount
rate
|
5.91
|
%
|
5.50
|
%
|
5.75
|
%
|
|||
|
Rate
of compensation increase
|
|||||||||
|
(average)
|
N/A
|
N/A
|
N/A
|
||||||
|
Health
care cost trend rate
|
11.00
|
%
|
12.00
|
%
|
13.00
|
%
|
|||
The
following summarizes the assumed health care cost trend rates in measuring
the
accumulated postretirement benefit obligation:
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Health
care cost trend rate assumed for next year
|
11.00
|
%
|
12.00
|
%
|
13.00
|
%
|
|||
|
Ultimate
trend rate
|
4.85
|
%
|
4.65
|
%
|
4.75
|
%
|
|||
|
Year
that the rate reaches the ultimate trend rate
|
2013
|
2012
|
2012
|
||||||
Net
periodic benefit cost for the years ended December 31, 2006, 2005 and 2004
includes the components noted in the table below.
|
Postretirement
Benefits
|
|||||||||
|
Years
Ended
|
|||||||||
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
||||||||
|
Service
cost
|
$
|
1,323
|
$
|
2,264
|
$
|
2,327
|
|||
|
Interest
cost
|
1,781
|
2,926
|
3,004
|
||||||
|
Expected
return on plan assets
|
(1,378
|
)
|
(891
|
)
|
(425
|
)
|
|||
|
Prior
service cost amortization
|
(3,643
|
)
|
(1,077
|
)
|
-
|
||||
|
Recognized
actuarial loss
|
508
|
231
|
-
|
||||||
|
Net
periodic benefit cost
|
$
|
(1,409
|
)
|
$
|
3,453
|
$
|
4,906
|
||
F-29
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
weighted-average assumptions used to determine net periodic benefit cost for
the
years ended December 31, 2006, 2005 and 2004 were as noted in the table below.
|
Years
Ended
|
|||||||||
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
|||||||||
|
Discount
rate
|
5.50
|
%
|
5.75
|
%
|
6.25
|
%
|
|||
|
Expected
return on assets -
|
|||||||||
|
tax
exempt accounts
|
7.00
|
%
|
7.00
|
%
|
7.00
|
%
|
|||
|
Expected
return on assets -
|
|||||||||
|
taxable
accounts
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
|||
|
Rate
of compensation increase
|
N/A
|
N/A
|
N/A
|
||||||
|
Health
cost trend rates:
|
|||||||||
|
Medical
|
11.00
|
%
|
12.00
|
%
|
13.00
|
%
|
|||
|
Dental
|
N/A
|
N/A
|
8.00
|
%
|
|||||
The
Company employs a building block approach in determining the expected long-term
rate of return on the plans’ assets. Historical markets are studied and
long-term historical relationships between equities and fixed-income are
preserved consistent with the widely accepted capital market principle that
assets with higher volatility generate a greater return over the long run.
Current market factors such as inflation and interest rates are evaluated before
long-term market assumptions are determined. The long-term portfolio return
is
established via a building block approach with proper consideration of
diversification and rebalancing. Peer data and historical returns are reviewed
to check for reasonableness and appropriateness.
The
following summarizes the assumed health care cost trend rates used in
determining the net periodic benefit cost for the periods
presented:
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Health
care cost trend rate assumed for next year
|
11.00
|
%
|
12.00
|
%
|
13.00
|
%
|
|||
|
Ultimate
trend rate
|
4.65
|
%
|
4.75
|
%
|
4.75
|
%
|
|||
|
Year
that the rate reaches the ultimate trend rate
|
2012
|
2012
|
2012
|
||||||
Assumed
health care cost trend rates have a significant effect on the amounts reported
for health care plans. A one-percentage-point change in assumed health care
cost
trend rates would have the following effects:
|
One
Percentage Point
|
One
Percentage Point
|
|||||
|
Increase
in Health Care
|
Decrease
in Health Care
|
|||||
|
Trend
Rate
|
Trend
Rate
|
|||||
|
|
(In
thousands)
|
|||||
|
Effect
on total service and interest cost components
|
$
|
641
|
$
|
(508
|
)
|
|
|
Effect
on accumulated post-retirement benefit obligation
|
$
|
6,106
|
$
|
(4,905
|
)
|
|
Discount
Rate Selection.
The
discount rate for each measurement date has been determined consistent with
the
discount rate selection guidance in Statement No. 106 (as amended by Statement
No. 158) using the Citigroup Pension Discount Curve as published on the Society
of Actuaries website as the hypothetical portfolio of high-quality debt
instruments that would provide the necessary cash flows to pay the benefits
when
due.
Postretirement
Health Care and Life Insurance Plans’ Asset
Information.
The
assets of the postretirement health care and life insurance plans are
invested in accordance with sound investment practices that emphasize long-term
investment fundamentals. The investment committee has adopted an
F-30
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
investment
objective of income and growth for the postretirement plans. This investment
objective: (i) is a risk-averse balanced approach that emphasizes a stable
and
substantial source of current income and some capital appreciation over the
long-term; (ii) implies a willingness to risk some declines in value over the
short-term, so long as the postretirement plans are positioned to generate
current income and exhibits some capital appreciation; (iii) is expected to
earn
long-term returns sufficient to keep pace with the rate of inflation over most
market cycles (net of spending and investment and administrative expenses),
but
may lag inflation in some environments; (iv) diversifies the postretirement
plans in order to provide opportunities for long-term growth and to reduce
the
potential for large losses that could occur from holding concentrated positions;
and (iv) recognizes that investment results over the long-term may lag those
of
a typical balanced portfolio since a typical balanced portfolio tends to be
more
aggressively invested. Nevertheless, the postretirement plans are expected
to
earn a long-term return that compares favorably to appropriate market
indices.
It
is
expected that these objectives can be obtained through a well-diversified
portfolio structure in a manner consistent with the investment
policy.
The
Company’s weighted average asset allocation by asset category for the
measurement periods presented is as follows:
|
Year
Ended
|
|||||||
|
December
31,
|
|||||||
|
Asset
Category
|
2006
|
2005
|
|||||
|
|
|||||||
|
Equity
securities
|
25
|
%
|
0
|
%
|
|||
|
Debt
securities
|
70
|
%
|
0
|
%
|
|||
|
Other
- cash equivalents
|
5
|
%
|
100
|
%
|
|||
|
Total
|
100
|
%
|
100
|
%
|
|||
Based
on
the other postretirement
plan objectives, asset allocations are maintained as follows: equity of 25
percent to 35 percent, fixed income of 65 percent to 75 percent, and cash and
cash equivalents of 0 percent to 10 percent.
The
above
referenced asset allocations for other postretirement benefits are based upon
guidelines established by the Company’s Investment Policy and is monitored by
the Investment Committee of the board of directors in conjunction with an
external investment advisor. On occasion, the asset allocations may fluctuate
versus these guidelines as a result of administrative oversight by the
Investment Committee.
The
Company expects to contribute approximately $7.8
million to its postretirement plans in 2007 and approximately $7.8 million
annually thereafter until modified by rate case proceedings.
The
estimated benefit payments, which reflect expected future service, as
appropriate, that are projected to be paid are as follows:
|
Expected
Benefits
|
||||||||||
|
Before
Effect of
|
Payments
|
|||||||||
|
Years
|
Medicare
Part D
|
Medicare
Part D
|
Net
|
|||||||
|
(In
thousands)
|
||||||||||
|
2007
|
$
|
138,001
|
$
|
-
|
$
|
138,001
|
||||
|
2008
|
231,578
|
-
|
231,578
|
|||||||
|
2009
|
387,284
|
-
|
387,284
|
|||||||
|
2010
|
653,621
|
4,543
|
649,078
|
|||||||
|
2011
|
1,052,927
|
6,959
|
1,045,968
|
|||||||
|
2012-2016
|
12,533,744
|
387,951
|
12,145,793
|
|||||||
F-31
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Medicare Prescription Drug Act was signed into law December 8, 2003. The Act
introduces a prescription drug benefit under Medicare (Medicare
Part D)
as well
as a federal subsidy, which is not taxable, to sponsors of retiree healthcare
benefit plans that provide a prescription drug benefit that is at least
actuarially equivalent to Medicare Part D.
Defined
Contribution Plan.
The
Company sponsors a defined contribution savings plan (Savings
Plan)
that is
available to all employees. The Company contributes 50 percent of the first
four
percent of the participant’s compensation paid into the Savings Plan. Company
contributions are 100 percent vested after five years of continuous service.
Company
contributions to the Savings Plan during the years ended December 31, 2006,
2005
and 2004 were $1.3 million, $1.2 million and $1.3 million,
respectively.
The
Company also provides certain retiree benefits through employer contributions
to
a qualified defined contribution plan, referred to as Retirement Power Accounts,
with the amount generally varying based on age and years of service. Company
contributions to Retirement Power Accounts during the years ended December
31,
2006, 2005 and 2004 were $4 million, $4 million and $4.3 million
respectively
15.
Stock-Based Compensation
Stock
Award Plans.
On May
9, 2005, the stockholders of Southern Union Company adopted the Southern Union
Company Amended and Restated 2003 Stock and Incentive Plan (Amended
2003 Plan).
The
Amended 2003 Plan allows for awards in the form of stock options (either
incentive stock options or non-qualified options), stock appreciation rights,
stock bonus awards, restricted stock, performance units or other equity-based
and liability-based rights. The persons eligible to receive awards under the
Amended 2003 Plan include all of the employees, directors, officers, agents
and
other service providers of Southern Union Company and its affiliates and
subsidiaries, of which the Company is an indirect wholly-owned subsidiary.
The
Amended 2003 Plan provides that each non-employee director will receive annually
a restricted stock award or, at the election of the non-employee director,
options having an equivalent value, which will be granted at such time or times
as the compensation committee shall determine. Under the Amended 2003 Plan:
(i)
no participant may receive in any calendar year awards covering more than
500,000
shares; (ii) the exercise price for a stock option may not be less than 100
percent of the fair market value of the common stock on the date of grant;
and
(iii) no award may be granted more than ten years after the date of the Amended
2003 Plan.
On
May 2,
2006 the stockholders of Southern Union Company adopted the Second Amended
and
Restated 2003 Plan (Second
Amended 2003 Plan)
which
included the following changes to the Amended 2003 Plan:
|
·
|
An
increase from 7,000,000
to 9,000,000 in the aggregate number of shares of stock that may
be issued
under the plan;
|
|
·
|
An
increase from 725,000
to 1,500,000 in the total number of shares of stock that may be issued
pursuant to stock awards, performance units and other equity-based
rights;
and
|
|
·
|
An
increase from 4,000
to 5,000 in the maximum number of shares of restricted common stock
that
each non-employee director is eligible to receive
annually.
|
Contingent
upon the Second Amended 2003 Plan becoming effective, the Compensation Committee
of the Board of Directors approved a grant of 5,000
shares of restricted common stock to each of the non-employee directors. The
restricted stock awards contain certain restrictions that expired on January
2,
2007. The Second Amended 2003 Plan was approved by the Massachusetts Department
of Telecommunications and Energy on October 13, 2006 and became effective upon
the filing of a Form S-8 with the SEC on November 8, 2006.
Stock
Options.
Effective January 1, 2006, the Company adopted Statement No. 123R, using the
modified prospective application method of transition, as defined in Statement
No. 123R. After adoption of Statement No. 123R, the Company records the grant
date fair value of share-based payment arrangements, net of estimated
forfeitures, as compensation expense using a straight-line basis over the
awards’ requisite service period. Prior to adoption, the Company used the
intrinsic value method of accounting for stock-based compensation awards in
accordance with APB No. 25, which generally resulted in no compensation expense
for employee stock options with an exercise price no less than fair value on
the
date of grant. Under the modified prospective application method, Statement
No.
123R applies to new awards and to awards modified, repurchased, or cancelled
after December 31, 2005. Compensation cost for the portion of awards for which
the requisite service has not been
F-32
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
rendered
that are outstanding as of December 31, 2005 is recognized as the requisite
service is rendered on or after January 1, 2006. Additionally, no transition
adjustment is generally permitted for the deferred tax assets associated with
outstanding equity instruments.
The
Company previously disclosed the fair value of stock options granted and the
assumptions used in determining fair value, pursuant to Statement No. 123,
Accounting
for Stock-Based Compensation.
The
Company historically used a Black-Scholes valuation model to determine the
fair
value of stock options granted. Stock options (either incentive stock options
or
non-qualified options) and stock appreciation rights generally vest over a
three-, four-or five-year period from the date of grant and expire ten years
after the date of grant. As of December 31, 2005, outstanding stock options
totaled 353,861
of which 29,739
were vested. The remaining 324,122
stock options vest over future periods and are used to determine compensation
expense pursuant to the transition provisions of Statement No. 123R.
The
Company attributes the requisite service period to the vesting period. The
adoption of Statement No. 123R reduced Operating
income,
Earnings
before income taxes,
and
Net
earnings
by
$705,000,
$705,000 and $568,000,
respectively, for the year ended December 31, 2006.
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes option pricing model. The Company’s expected volatilities are
based on historical volatility of the Southern Union Company stock and other
factors. To the extent that volatility of Southern Union Company’s stock price
increases in the future, the estimates of the fair value of options granted
in
the future could increase, thereby increasing share-based compensation expense
in future periods. The Company’s estimate of the forfeiture rate was based
primarily upon historical experience of employee turnover. To the extent that
the Company revises this estimate in the future, the share-based compensation
could be materially impacted in the quarter of revision, as well as in the
following quarters. Additionally, the expected dividend yield is considered
for
each grant on the date of grant. The Company’s expected term of options granted
was derived from the average midpoint between vesting and the contractual term.
In the future, as information regarding post-vesting termination becomes more
accessible, the Company may change the method of deriving the expected term.
This change could impact the fair value of options granted in the future. The
Company expects to refine the method of deriving the expected term no later
than
January 1, 2008. The risk-free rate is based on the U.S. Treasury yield curve
in
effect at the time of grant.
The
following table represents the Black-Scholes estimated ranges under the
Company’s plans as of December 31, 2006:
|
Year
ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Expected
volatility
|
32.90%
|
|
37.04%
to 37.36%
|
|
36.75%
|
|
||||
|
Expected
dividend yield
|
1.43%
|
|
0.00%
|
|
0.00%
|
|
||||
|
Risk-free
interest rate
|
4.69%
|
|
4.06%
to 4.52%
|
|
4.95%
|
|
||||
|
Expected
life
|
6.00
years
|
6.25
years
|
6.00
years
|
|||||||
F-33
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of the status of the Company’s outstanding stock options as of December 31,
2004, 2005 and 2006, and changes during the twelve months ended December 31,
2004, 2005 and 2006 is presented below:
|
Weighted
|
||||||
|
Shares
|
Average
|
|||||
|
Under
|
Exercise
|
|||||
|
Option
|
Price
|
|||||
|
Outstanding
January 1, 2004
|
-
|
$
|
-
|
|||
|
Granted
|
249,193
|
16.83
|
||||
|
Exercised
|
-
|
-
|
||||
|
Forfeited
|
(31,423
|
)
|
16.83
|
|||
|
Outstanding
December 31, 2004
|
217,770
|
$
|
16.83
|
|||
|
Granted
|
176,337
|
22.90
|
||||
|
Exercised
|
(31,425
|
)
|
16.83
|
|||
|
Forfeited
|
(8,821
|
)
|
16.83
|
|||
|
Outstanding
December 31, 2005
|
353,861
|
$
|
19.88
|
|||
|
Granted
(1)
|
-
|
-
|
||||
|
Exercised
|
(18,280
|
)
|
17.37
|
|||
|
Forfeited
|
(9,759
|
)
|
20.13
|
|||
|
Outstanding
December 31, 2006
|
325,822
|
$
|
20.01
|
|||
|
Exercisable
December 31, 2004
|
22,050
|
$
|
16.83
|
|||
|
Exercisable
December 31, 2005
|
29,739
|
$
|
16.83
|
|||
|
Exercisable
December 31, 2006
|
92,120
|
$
|
19.67
|
|||
|
___________________
|
||||||
|
(1)
Excludes 37,114 stock appreciation rights (SARs)
which vest in equal increments on December 27, 2007 through 2009.
Each SAR
entitles the holder to shares of Southern Union's common stock
equal to
the fair market value of Southern Union's common stock in excess
of $28.07
for each SAR on the applicable vesting date.
|
||||||
As
of
December 31, 2006, there was $2.2
million of total unrecognized compensation cost related to non-vested stock
option and SAR compensation arrangements granted under the stock option plans.
That cost is expected to be recognized over a weighted-average contractual
period of 2.7
years. The total fair value of options vested as of December 31, 2006 was
$803,000.
Compensation expense recognized related to stock options and SARs totaled
$705,000
($568,000,
net of tax) for the year ended December 31, 2006. The aggregate intrinsic value
of total options and SARs outstanding and exercisable at December 31, 2006
was
$2.6
million and $763,000,
respectively.
The
intrinsic value of options exercised during the twelve month period ended
December 31, 2006 was approximately $155,000.
The Company realized an additional tax benefit of approximately $60,000
for the amount of intrinsic value in excess of compensation cost recognized
during the year ended December 31, 2006.
Restricted
Stock.
The
Second Amended 2003 Plan also provides for grants of restricted stock and
restricted stock units. The restrictions associated with a grant of restricted
stock under the Second Amended 2003 Plan generally expire equally over a period
of three or four years. Restrictions on restricted stock expire at the end
of
the applicable period, which is also the requisite service period.
F-34
PANHANDLE
EASTERN PIPE LINE COMPANY, LP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of the status of non vested restricted stock awards as of December 31, 2006
and
changes during the twelve months ended December 31, 2006, is presented
below:
|
Number
of
|
Weighted-Average
|
||||||
|
Restricted
Shares
|
Grant-Date
|
||||||
|
Nonvested
Restricted Stock
|
Outstanding
(1)
|
Fair-Value
|
|||||
|
Nonvested
restricted shares at January 1, 2005
|
-
|
$
|
-
|
||||
|
Granted
|
43,050
|
24.08
|
|||||
|
Vested
|
-
|
-
|
|||||
|
Forfeited
|
-
|
-
|
|||||
|
Nonvested
restricted shares at December 31, 2005
|
43,050
|
$
|
24.08
|
||||
|
Granted
(2)
|
-
|
|
-
|
||||
|
Vested
|
(11,036
|
)
|
24.08
|
||||
|
Forfeited
|
(6,872
|
)
|
24.06
|
||||
|
Nonvested
restricted shares at December 31, 2006
|
25,142
|
$
|
24.08
|
||||
|
___________________
|
|||||||
|
(1)
There was no restricted stock activity during the year ended December
31,
2004.
|
|||||||
|
(2)
Excludes 52,846 equity-based units (Cash
Restricted Units),
which vest in equal increments on December 27, 2007 through 2009.
Each
Cash Restricted Unit entitles the holder to a cash payment equal
to the
closing price of the Company's common stock on the applicable vesting
date.
|
|||||||
As
of
December 31, 2006, there was $2
million
of total unrecognized compensation cost related to non-expired, restricted
stock
and Cash Restricted Unit compensation arrangements granted under the restricted
stock plans. That cost is expected to be recognized over a weighted-average
contractual period of 2.6
years. The total fair value of restricted shares that vested during the year
ended December 31, 2006 was $266,000.
Compensation expense recognized related to restricted stock and Cash Restricted
Units totaled $236,000
($144,000,
net of tax) during the year ended December 31, 2006.
The
intrinsic value of restricted stock vested during the year ended December 31,
2006 was approximately $303,000.
16.
Quarterly Financial Information (Unaudited)
The
following table provides certain quarterly financial information for the periods
presented.
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
|||||||||||
|
2006
|
(In
thousands)
|
||||||||||||||
|
Operating
revenue
|
$
|
144,643
|
$
|
134,109
|
$
|
143,397
|
$
|
155,033
|
$
|
577,182
|
|||||
|
Operating
income
|
73,721
|
58,479
|
66,717
|
73,955
|
272,872
|
||||||||||
|
Net
earnings
|
39,065
|
28,057
|
32,836
|
37,797
|
137,755
|
||||||||||
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
||||||||||
|
2005
|
(In
thousands)
|
||||||||||||||
|
Operating
revenue
|
$
|
135,400
|
$
|
110,421
|
$
|
115,945
|
$
|
143,467
|
$
|
505,233
|
|||||
|
Operating
income
|
62,514
|
40,395
|
46,109
|
61,387
|
210,405
|
||||||||||
|
Net
earnings
|
31,470
|
18,670
|
21,470
|
29,952
|
101,562
|
||||||||||
To
Southern Union Company and the
Board
of Managers of
Panhandle
Eastern Pipe Line Company, LP:
In
our
opinion, the accompanying
consolidated balance sheets and
the
related consolidated
statements of operations, of partners' capital and comprehensive income and
of
cash flows
present
fairly, in all material respects, the financial position of Panhandle
Eastern Pipe Line Company, LP and subsidiaries (the “Company”) at December 31,
2006 and 2005, and the results of their operations and their cash flows for
each
of the three years in the period ended December 31, 2006 in conformity with
the
accounting principles generally accepted in the United States of
America.
These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in
accordance with the standards of the Public Company Accounting Oversight
Board
(United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
As
discussed in Note 14 to the consolidated financial statements, the Company
adopted the recognition and disclosure provisions of FASB Statement No. 158,
"Employers' Accounting for Defined Pension and Other Postretirement Plans-
an
amendment of FASB Statements No. 87, 88, 106 and 132(R)", as of December
31,
2006.
/s/
PricewaterhouseCoopers LLP
Houston,
Texas
March
1,
2007
F-36
Exhibit
24
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS
that
each person whose signature appears below hereby constitutes and appoints Robert
O. Bond and Richard N. Marshall, or any of them, acting individually or
together, as such person’s true and lawful attorney(s)-in-fact and agent(s),
with full power of substitution and revocation, to act in any capacity for
such
person and in such person’s name, place and stead, to sign the Annual Report on
Form 10-K for the fiscal year ended December 31, 2006 of Panhandle Eastern
Pipe
Line Company, LP, a Delaware limited partnership and any amendments thereto,
and
to file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and the New York Stock
Exchange.
Dated:
March 1, 2007
|
/s/ George L. Lindemann
George
L. Lindemann
|
/s/ Robert O. Bond
Robert
O. Bond
|
|
/s/ David Brodsky
David
Brodsky
|
/s/ Richard N. Marshall
Richard
N. Marshall
|
|
/s/ Frank W. Denius
Frank
W. Denius
|
/s/ Gary W. Lefelar
Gary
W. Lefelar
|
|
/s/ Kurt A. Gitter, M.D.
Kurt A. Gitter, M.D.
|
|
|
/s/ Herbert H. Jacobi
Herbert
H. Jacobi
|
|
|
/s/ Adam M. Lindemann
Adam
M. Lindemann
|
|
|
/s/ Thomas N. McCarter, III
Thomas
N. McCarter, III
|
|
|
/s/ George Rountree, III
George
Rountree, III
|
|
| /s/ Allan D. Scherer
Allan
D. Scherer
|
|
Exhibit
31.1
CERTIFICATIONS
I,
Robert
O. Bond, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of Panhandle Eastern Pipe Line Company,
LP;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as
of, and for, the periods presented in this report;
4.
The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date: March
1,
2007 /s/
ROBERT O. BOND
Name:
Robert O. Bond
Title:
President and Chief Operating Officer
Exhibit
31.2
CERTIFICATIONS
I,
Richard N. Marshall, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of Panhandle Eastern Pipe Line Company,
LP;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as
of, and for, the periods presented in this report;
4.
The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
March 1, 2007 /s/
RICHARD N. MARSHALL
Name:
Richard N. Marshall
Title:
Senior Vice President and Chief
Financial Officer
Exhibit
32.1
CERTIFICATION
PUSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PUSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report on Form 10-K of Panhandle Eastern Pipe Line
Company, LP (the "Company") for the annual period ended December 31, 2006 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert O. Bond, as President and Chief Operating Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge (i) the Report fully
complies with the requirements of Section 13 (a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and (ii) the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/
ROBERT O. BOND
Name:
Robert O. Bond
Title:
President and Chief Operating Officer
Date:
March 1, 2007
This
Certification is being furnished solely to accompany the Report pursuant to
18
U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and shall not be deemed “filed” by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and shall not be
incorporated by reference into any filing of the Company under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Report, irrespective of any
general incorporation language contained in such filing.
A
signed
original of this written statement required by Section 906, or other documents
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
Exhibit
32.2
CERTIFICATION
PUSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PUSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report on Form 10-K of Panhandle Eastern Pipe Line
Company, LP (the "Company") for the annual period ended December 31, 2006 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Richard N. Marshall, as Senior Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge (i)
the Report fully complies with the requirements of Section 13 (a) or 15(d)
of
the Securities Exchange Act of 1934, as amended, and (ii) the information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/
RICHARD N. MARSHALL
Name:
Richard N. Marshall
Title:
Senior Vice President and Chief Financial Officer
Date:
March 1, 2007
This
Certification is being furnished solely to accompany the Report pursuant to
18
U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and shall not be deemed “filed” by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and shall not be
incorporated by reference into any filing of the Company under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Report, irrespective of any
general incorporation language contained in such filing.
A
signed
original of this written statement required by Section 906, or other documents
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request.