Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Our gas pipeline facilities are generally owned in fee. However, a substantial portion of such facilities is constructed and maintained on and across properties owned by others pursuant to rights-of-way, easements, permits, licenses or consents. Our compressor stations, with associated facilities, are located in whole or in part upon lands owned by us and upon sites held under leases or permits issued or approved by public authorities. Land owned by others, but used by us under rights-of-way, easements, permits, leases, licenses, or consents, includes land owned by private parties, federal, state and local governments, quasi-governmental agencies, or Native American tribes. The Plymouth LNG facility is located on lands owned in fee simple by us. Various credit arrangements restrict the sale or disposal of a major portion of our pipeline system. We lease our company offices in Salt Lake City, Utah.
Item 3.
Item 3.
LEGAL PROCEEDINGS
The information called for by this item is provided in “Item 8. Financial Statements and Supplementary Data - Notes to Financial Statements: Note 3. Contingent Liabilities and Commitments.”
Item 4.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
At December 31, 2014, we were indirectly owned by Williams Partners L.P., and Williams held an approximate 66 percent interest in Williams Partners L.P., comprised of an approximate 64 percent limited partner interest and all of WPZ’s 2 percent general partner interest.
We paid $234.0 million and $91.0 million in cash distributions during 2014 and 2013, respectively.
Item 6.
Item 6.
SELECTED FINANCIAL DATA
Since we meet the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, this information is omitted.
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion of critical accounting estimates, results of operations, and capital resources and liquidity should be read in conjunction with the financial statements and notes thereto included within “Part II, Item 8” of this report.
CRITICAL ACCOUNTING ESTIMATES
Our financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. We believe that the following are the most critical judgment areas in the application of accounting policies that currently affect our financial condition and results of operations.
Regulatory Accounting
We are regulated by the FERC. The Accounting Standards Codification Topic 980, Regulated Operations (Topic 980) provides that rate-regulated public utilities account for and report regulatory assets and liabilities consistent with the economic effect of the way in which regulators establish rates if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. Accounting for businesses that are regulated and apply the provisions of Topic 980 can differ from the accounting requirements for non-regulated businesses. Transactions that are recorded differently as a result of regulatory accounting requirements include the capitalization of an equity return component on regulated capital projects, capitalization of other project costs, retirements of general plant assets, employee related benefits, environmental costs, negative salvage, asset retirement obligations and other costs and taxes included in, or expected to be included in, future rates. As a rate-regulated entity, our management has determined that it is appropriate to apply the accounting prescribed by Topic 980 and, accordingly, the accompanying financial statements include the effects of the types of transactions described above that result from regulatory accounting requirements. Management’s assessment of the probability of recovery or pass through of regulatory assets and liabilities requires judgment and interpretation of laws and regulatory commission orders. If, for any reason, we cease to meet the criteria for application of regulatory accounting treatment for all or part of our operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the Balance Sheet and included in the Statement of Comprehensive Income for the period in which the discontinuance of
regulatory accounting treatment occurs, unless otherwise required to be recorded under other provisions of accounting principles generally accepted in the United States. The aggregate amounts of regulatory assets reflected in the Balance Sheet are $53.2 million and $59.4 million at December 31, 2014 and 2013, respectively. The aggregate amounts of regulatory liabilities reflected in the Balance Sheet are $27.4 million and $19.9 million at December 31, 2014 and 2013, respectively. A summary of regulatory assets and liabilities is included in Note 9 of Notes to Financial Statements.
RESULTS OF OPERATIONS
Analysis of Financial Results
This analysis discusses financial results of our operations for the years 2014 and 2013. Variances due to changes in natural gas prices and transportation volumes have little impact on revenues, because under our rate design methodology, the majority of overall cost of service is recovered through firm capacity reservation charges in our transportation rates.
Total operating revenues in 2014 remained consistent with 2013. Our transportation service and gas storage service accounted for 98 percent and 2 percent, respectively, of our operating revenues for both 2014 and 2013.
Total operating expenses increased $2.2 million, or 1 percent. This increase is due primarily to higher depreciation of $3.0 million, attributed to property additions, and higher amortization of regulatory assets of $0.8 million, associated with levelized depreciation. These increases were partially offset by lower labor and benefit expenses of $2.0 million, primarily associated with a reduction in retirement plan expense.
The decrease in our net income is primarily due to the factors noted above.
Effects of Inflation
We generally have experienced increased costs due to the effect of inflation on the cost of labor, materials and supplies, and property, plant, and equipment. A portion of the increased labor and materials and supplies cost can directly affect income through increased operation and maintenance expenses. The cumulative impact of inflation over a number of years has resulted in increased costs for current replacement of productive facilities. The majority of our property, plant, and equipment and materials and supplies inventory is subject to ratemaking treatment, and under current FERC practices, recovery is limited to historical costs. We believe that we will be allowed to recover and earn a return based on increased actual costs incurred when existing facilities are replaced. Cost-based regulation along with competition and other market factors limit our ability to price services or products based upon inflation’s effect on costs.
CAPITAL RESOURCES AND LIQUIDITY
Method of Financing
We fund our capital requirements with cash flows from operating activities, equity contributions from WPZ, collection of advances made to WPZ, accessing capital markets, and, if required, borrowings under the credit facility and advances from WPZ.
We may raise capital through private debt offerings, as well as offerings registered pursuant to offering-specific registration statements. Interest rates, market conditions, and industry conditions will affect future amounts raised, if any, in the capital markets. We anticipate that we will be able to access public and private debt markets on terms commensurate with our credit ratings to finance our capital requirements, when needed.
We, along with WPZ and Transcontinental Gas Pipe Line Company, LLC (Transco), are co-borrowers under a $3.5 billion unsecured credit facility. Total letter of credit capacity available to WPZ under the credit facility is $1.125 billion. We may borrow up to $500 million under the credit facility to the extent not otherwise utilized by WPZ and Transco.
We are a participant in WPZ’s cash management program, and we make advances to and receive advances from WPZ. At December 31, 2014, our advances to WPZ totaled approximately $135.1 million. These advances are represented by demand notes.
Please see “Item 8. Financial Statements and Supplementary Data - Notes to Financial Statements: Note 4. Debt, Financing Arrangements, and Leases - Credit Facility and Note 7. Transactions with Major Customers and Affiliates - Related Party Transactions.”
Capital Expenditures
We categorize our capital expenditures as either maintenance capital expenditures or expansion capital expenditures. Maintenance capital expenditures are those expenditures required to maintain the existing operating capacity and service capability of our assets, including replacement of system components and equipment that are worn, obsolete, completing their useful life, or necessary to remain in compliance with environmental laws and regulations. Expansion capital expenditures improve the service capability of the existing assets, increase transmission or storage capacities from existing levels or enhance revenues. We anticipate 2015 capital expenditures will be approximately $89 million. Of this total, $36 million is considered nondiscretionary due to legal, regulatory, and/or contractual requirements. In 2015, we expect to fund our capital expenditures with cash from operations.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our interest rate risk exposure is limited to our long-term debt. All of our interest on long-term debt is fixed in nature, except the interest on our revolver borrowings, as shown on the following table (in thousands of dollars):
Our total long-term debt at December 31, 2014 had a carrying value of $694.4 million and a fair market value of $766.5 million. As of December 31, 2014, the weighted-average interest rate on our long-term debt was 6.4 percent.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Management Committee of
Northwest Pipeline LLC
We have audited the accompanying balance sheet of Northwest Pipeline LLC as of December 31, 2014 and 2013, and the related statements of comprehensive income, owner’s equity, and cash flows for each of the three years in the period ended December 31, 2014. These 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northwest Pipeline LLC at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Houston, Texas
February 25, 2015
NORTHWEST PIPELINE LLC
STATEMENT OF COMPREHENSIVE INCOME
(Thousands of Dollars)
See accompanying notes.
NORTHWEST PIPELINE LLC
BALANCE SHEET
(Thousands of Dollars)
See accompanying notes.
NORTHWEST PIPELINE LLC
BALANCE SHEET
(Thousands of Dollars)
See accompanying notes.
NORTHWEST PIPELINE LLC
STATEMENT OF OWNER’S EQUITY
(Thousands of Dollars)
See accompanying notes.
NORTHWEST PIPELINE LLC
STATEMENT OF CASH FLOWS
(Thousands of Dollars)
See accompanying notes.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure and Control
At December 31, 2014, Northwest Pipeline LLC (Northwest) is indirectly owned by Williams Partners L.P. (WPZ), a publicly traded Delaware limited partnership, which is consolidated by The Williams Companies, Inc. (Williams). On February 2, 2015, WPZ was merged into Access Midstream Partners, L.P. (ACMP), another publicly traded limited partnership consolidated by Williams. ACMP was the surviving partnership and was subsequently renamed Williams Partners L.P. At February 25, 2015, Williams holds an approximate 60 percent interest in the merged partnership, comprised of an approximate 58 percent limited partner interest and all of the 2 percent general partner interest.
Northwest has no employees. Services are provided to Northwest by Williams and its affiliates. Northwest reimburses Williams and its affiliates for the costs of the employees including compensation and employee benefit plan costs and all related administrative costs.
In this report, Northwest is at times referred to in the first person as “we,” “us” or “our.”
Nature of Operations
We own and operate an interstate pipeline system for the mainline transmission of natural gas. This system extends from the San Juan Basin in northwestern New Mexico and southwestern Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near Sumas, Washington.
Regulatory Accounting
Our natural gas pipeline operations are regulated by the Federal Energy Regulatory Commission (FERC). FERC regulatory policies govern the rates that each pipeline is permitted to charge customers for interstate transportation and storage of natural gas.
The Accounting Standards Codification Regulated Operations (Topic 980) provides that rate-regulated public utilities account for and report assets and liabilities consistent with the economic effect of the manner in which independent third-party regulators establish rates. In applying Topic 980, we capitalize certain costs and benefits as regulatory assets and liabilities, respectively, in order to provide for recovery from or refund to customers in future periods. The accompanying financial statements include the effects of the types of transactions described above that result from regulatory accounting requirements. (See Note 9 for further discussion.)
Basis of Presentation
Reclassifications within the investing activities of the Statement of Cash Flows, between Capital expenditures, net of equity AFUDC* and Contributions and advances for construction costs of $6.3 million and $1.8 million for the years ended December 31, 2013 and 2012, respectively, have been made to correct the 2013 and 2012 financial statements to conform to the 2014 presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include: 1) litigation-related contingencies; 2) environmental remediation obligations; 3) impairment assessments of long-lived assets; 4) depreciation; and 5) asset retirement obligations.
Revenue Recognition
Our revenues are primarily from services pursuant to long term firm transportation and storage agreements. These agreements provide for a reservation charge based on the volume of contracted capacity and a volumetric charge based on the volume of gas delivered, both at rates specified in our FERC tariffs. We recognize revenues for reservation charges ratably over the contract period regardless of the volume of natural gas that is transported or stored. Revenues for volumetric charges, from both firm and
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
interruptible transportation services and storage injection and withdrawal services, are recognized based on volumes of natural gas scheduled for delivery at the agreed upon delivery point or based on volumes of natural gas scheduled for injection or withdrawal from the storage facility.
In the course of providing transportation services to our customers, we may receive or deliver different quantities of gas from shippers than the quantities delivered or received on behalf of those shippers. These transactions result in imbalances, which are typically settled through the receipt or delivery of gas in the future. Customer imbalances to be repaid or recovered in-kind are recorded as exchange gas due from others or due to others in the accompanying balance sheets. The difference between exchange gas due to us from customers and the exchange gas that we owe to customers is included in the exchange gas offset. These imbalances are valued at the average of the spot market rates at the Canadian border and the Rocky Mountain market as published in the SNL Financial “Bidweek Index - Spot Rates.” Settlement of imbalances requires agreement between the pipelines and shippers as to allocations of volumes to specific transportation contracts and timing of delivery of gas based on operational conditions.
As a result of the ratemaking process, certain revenues collected by us may be subject to refunds upon the issuance of final orders by the FERC in pending rate proceedings. We record estimates of rate refund liabilities considering our and third-party regulatory proceedings, advice of counsel and other risks. At December 31, 2014, we had no such rate refund liabilities.
Environmental Matters
We are subject to federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. We believe that expenditures required to meet applicable environmental laws and regulations are prudently incurred in the ordinary course of business and such expenditures would be permitted to be recovered through rates.
Property, Plant, and Equipment
Property, plant and equipment (plant), consisting principally of natural gas transmission facilities, is recorded at original cost. The FERC identifies installation, construction and replacement costs that are to be capitalized and included in our asset base for recovery in rates. Routine maintenance, repairs and renewal costs are charged to income as incurred. Gains or losses from the ordinary sale or retirement of plant are charged or credited to accumulated depreciation; certain other gains or losses are recorded in operating income.
We provide for depreciation under the composite (group) method at straight-line FERC prescribed rates that are applied to the cost of the group for transmission and storage facilities. Under this method, assets with similar lives and characteristics are grouped and depreciated as one asset. Included in our depreciation rates is a negative salvage component (net cost of removal) that we currently collect in rates. Our depreciation rates are subject to change each time we file a general rate case with the FERC. Depreciation rates used for major regulated gas plant facilities at December 31, 2014, 2013 and 2012 are as follows:
The incrementally priced Evergreen Expansion Project, which was an expansion of our pipeline system, was placed in service on October 1, 2003. The levelized rate design of this project creates a consistent revenue stream over the related 25-year and 15-year customer contract terms. The related levelized depreciation is lower than book depreciation in the early years and higher than book depreciation in the later years of the contract terms. The depreciation component of the levelized incremental rates will equal the accumulated book depreciation by the end of the primary contract terms. The FERC has approved the accounting for the differences between book depreciation and the Evergreen Expansion Project’s levelized depreciation as a regulatory asset.
We recorded regulatory debits totaling $1.5 million in 2014 and $0.9 million in 2013 and regulatory credits totaling $0.5 million in 2012 in the accompanying Statement of Comprehensive Income. These debits and credits relate primarily to the levelized depreciation adjustment for the Evergreen Project discussed above.
We record a liability and increase the basis in the underlying asset for the present value of each expected future asset retirement obligation (ARO) at the time the liability is initially incurred, typically when the asset is acquired or constructed. Measurement of AROs includes, as a component of future expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties inherent in the obligations, sometimes referred to as market-risk premium. We
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
measure changes in the liability due to passage of time by applying an interest rate to the liability balance. This amount is recognized as an increase in the carrying amount of the liability and is offset by a regulatory asset. The gross regulatory asset balances associated with ARO as of December 31, 2014 and 2013 were $63.7 million and $57.9 million, respectively. The regulatory asset is expected to be fully recovered through the net negative salvage component of depreciation included in our rates; as such, the negative salvage component of accumulated depreciation ($60.2 million and $51.2 million at December 31, 2014 and 2013, respectively) has been reclassified and netted against the amount of the ARO regulatory asset.
Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. When such a determination has been made, management’s estimate of undiscounted future cash flows attributable to the assets is compared to the carrying value of the assets to determine whether an impairment has occurred. If an impairment of the carrying value has occurred, the amount of the impairment recognized in the financial statements is determined by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.
Judgments and assumptions are inherent in management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.
Allowance for Borrowed and Equity Funds Used During Construction
Allowance for funds used during construction (AFUDC) represents the estimated cost of debt and equity funds applicable to utility plant in process of construction and is included as a cost of property, plant and equipment because it constitutes an actual cost of construction under established regulatory practices. The FERC has prescribed a formula to be used in computing separate allowances for debt and equity AFUDC. The cost of debt portion of AFUDC was $0.2 million for 2014, $0.5 million for 2013 and $0.7 million for 2012. The equity funds portion of AFUDC was $0.4 million, $0.9 million and $1.6 million for 2014, 2013, and 2012, respectively. Both are reflected in Other (Income) and Other Expenses. The composite rate used to capitalize AFUDC was approximately 9 percent for 2014, 2013, and 2012.
Income Taxes
We generally are not a taxable entity for federal or state and local income tax purposes. The tax on net income is generally borne by unitholders of our ultimate parent, WPZ. Net income for financial statement purposes may differ significantly from taxable income of WPZ’s unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the WPZ partnership agreement. The aggregated difference in the basis of our assets for financial and tax reporting purposes cannot be readily determined because information regarding each of WPZ’s unitholder’s tax attributes in WPZ is not available to us.
Accounts Receivable and Allowance for Doubtful Receivables
Accounts receivable are stated at the historical carrying amount net of allowance for doubtful accounts. Our credit risk exposure in the event of nonperformance by the other parties is limited to the face value of the receivables. We perform ongoing credit evaluations of our customers’ financial condition and require collateral from our customers, if necessary. Due to our customer base, we have not historically experienced recurring credit losses in connection with our receivables. As a result, receivables determined to be uncollectible are reserved or written off in the period of such determination.
Materials and Supplies Inventory
All inventories are stated at lower of cost or market. We determine the cost of the inventories using the average cost method.
We perform an annual review of materials and supplies inventories, including an analysis of parts that may no longer be useful due to planned replacements of compressor engines and other components on our system. Based on this assessment, we record a reserve for the value of the inventory which can no longer be used for maintenance and repairs on our pipeline. There was a minimal reserve at December 31, 2014 and 2013.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
Deferred Charges
We amortize deferred charges over varying periods consistent with the FERC approved accounting treatment and recovery for such deferred items. Unamortized debt expense, debt discount and losses on reacquired long-term debt are amortized by the bonds outstanding method over the related debt repayment periods.
Pension and Other Postretirement Benefits
We do not have employees. Certain of the costs charged to us by Williams associated with employees who directly support us include costs related to Williams’ pension and other postretirement benefit plans. (See Note 5 for further discussion.) Although the underlying benefit plans of Williams are single-employer plans, we follow multiemployer plan accounting whereby the amount charged to us, and thus paid by us, is based on our share of net periodic benefit cost.
Contingent Liabilities
We record liabilities for estimated loss contingencies, including environmental matters, when we assess that a loss is probable and the amount of the loss can be reasonably estimated. These liabilities are calculated based upon our assumptions and estimates with respect to the likelihood or amount of loss and upon advice of legal counsel, engineers, or other third parties regarding the probable outcomes of the matters. These calculations are made without consideration of any potential recovery from third-parties. We recognize insurance recoveries or reimbursements from others when realizable. Revisions to these liabilities are generally reflected in income when new or different facts or information become known or circumstances change that affect the previous assumptions or estimates.
Cash Flows from Operating Activities and Cash Equivalents
We use the indirect method to report cash flows from operating activities, which requires adjustments to net income to reconcile to net cash flows provided by operating activities. We include short-term, highly-liquid investments that have an original maturity of three months or less as cash equivalents.
Interest Payments
Cash payments for interest, net of interest capitalized, were $44.5 million in 2014 and $44.6 million in 2013 and 2012.
Accounting Standards Issued But Not Yet Adopted
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09 establishing Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (ASC 606). ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures. The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within the reporting period. Accordingly, we will adopt this standard in the first quarter of 2017. ASC 606 allows either full retrospective or modified retrospective transition and early adoption is not permitted. We continue to evaluate both the impact of this new standard on our financial statements and the transition method we will utilize for adoption.
2. RATE AND REGULATORY MATTERS
Rate Case Settlement Filing
On April 26, 2012, the FERC unconditionally approved Northwest’s Stipulation and Settlement Agreement (Settlement) filed on March 15, 2012. The Settlement specified an annual cost of service of $466.5 million and established a new general system firm transportation rate of $0.44 per dekatherm, a 7.4 percent increase over the previous rate. New rates became effective January 1, 2013, and will remain in effect for a minimum of 3 years and a maximum of 5 years.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
3. CONTINGENT LIABILITIES AND COMMITMENTS
Environmental Matters
We are subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of our business. Except as discussed below, our management believes that we are in substantial compliance with existing environmental requirements. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. We believe that, with respect to any expenditures required to meet applicable standards and regulations, the FERC would grant the requisite rate relief so that substantially all of such expenditures would be permitted to be recovered through rates. As a result, we believe that compliance with applicable environmental requirements is not likely to have a material adverse effect upon our financial position or results of operations.
Beginning in the mid-1980s, we evaluated many of our facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation might be necessary. We identified polychlorinated biphenyl (PCB) contamination in air compressor systems, soils and related properties at certain compressor station sites. Similarly, we identified hydrocarbon impacts at these facilities due to the former use of earthen pits, lubricating oil leaks or spills, and excess pipe coating released to the environment. In addition, heavy metals have been identified at these sites due to the former use of mercury containing meters and paint and welding rods containing lead, cadmium, and arsenic. The PCBs were remediated pursuant to a Consent Decree with the U.S. Environmental Protection Agency (EPA) in the late 1980s, and we conducted a voluntary clean-up of the hydrocarbon and mercury impacts in the early 1990s. In 2005, the Washington Department of Ecology required us to re-evaluate our previous clean-ups in Washington. As of December 31, 2014, all of our meter stations have been remediated to Washington’s current environmental standards. In addition, assessments have been completed at all thirteen compressor stations in Washington. Remediation has been completed at nine of these compressor stations. On the basis of the findings to date, we estimate that environmental assessment and remediation costs will total approximately $7.8 million, measured on an undiscounted basis, and are expected to be incurred through 2020. At December 31, 2014 and 2013, we had accrued liabilities totaling approximately $7.8 million and $8.7 million, respectively, for these costs. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs.
In March 2008, the EPA promulgated a new, lower National Ambient Air Quality Standard (NAAQS) for ground-level ozone. In May 2012, the EPA completed designation of new eight-hour ozone non-attainment areas. Based on the published designations, no Northwest facilities are located within the non-attainment areas. At this time, it is unknown whether future state regulatory actions associated with implementation of the 2008 ozone standard will impact our operations and increase the cost of additions to property, plant and equipment. Until any additional state regulatory actions are proposed, we are unable to estimate the cost of additions that may be required to meet any such new regulation.
In December 2014, the EPA proposed to further reduce the ground-level ozone NAAQS from the March 2008 levels. The EPA is anticipated to finalize any revisions in late 2015. Revisions to the ozone NAAQS will result in additional federal and state regulatory actions that may impact our operations. As a result, the cost of additions to property, plant, and equipment is expected to increase. We are unable at this time to estimate with any certainty the cost of additions that may be required to meet new regulations.
On January 22, 2010, the EPA set a new one-hour nitrogen dioxide (NO2) NAAQS. The effective date of the new NO2 standard was April 12, 2010. On January 20, 2012, the EPA determined pursuant to available information that no area in the country is violating the 2010 NO2 NAAQS, and thus, designated all areas of the country as “unclassifiable/attainment.” Also, at that time, the EPA noted its plan to deploy an expanded NO2 monitoring network beginning in 2013. However, on October 5, 2012, the EPA proposed a graduated implementation of the monitoring network between January 1, 2014 and January 1, 2017. Once three years of data is collected from the new monitoring network, the EPA will reassess attainment status with the one-hour NO2 NAAQS. Until that time, the EPA or states may require ambient air quality modeling on a case by case basis to demonstrate compliance with the NO2 standard. Because we are unable to predict the outcome of the EPA’s or states’ future assessment using the new monitoring network, we are unable to estimate the cost of additions that may be required to meet this regulation.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
Summary
We estimate that for all matters for which we are able to reasonably estimate a range of loss, including those noted above and others that are not individually significant, our aggregate reasonably possible losses beyond amounts accrued for all of our contingent liabilities are immaterial to our expected future annual results of operations, liquidity and financial position. These calculations have been made without consideration of any potential recovery from third-parties. We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss.
4. DEBT, FINANCING ARRANGEMENTS, AND LEASES
Long-Term Debt
Long-term debt, presented net of unamortized discount, consists of the following:
As of December 31, 2014, cumulative maturities of outstanding long-term debt (at face value) for the next five years are as follows:
In the second quarter of 2006, we entered into certain forward starting interest rate swaps prior to our issuance of fixed rate, long-term debt. The swaps, which were settled near the date of the June 2006 issuance of the 7% senior unsecured notes due 2016, hedged the variability of forecasted interest payments arising from changes in interest rates prior to the issuance of our fixed rate debt. The settlement resulted in a gain, recorded in Accumulated other comprehensive income, that is being amortized to reduce interest expense over the life of the related debt.
Restrictive Debt Covenants
At December 31, 2014, none of our debt instruments restrict the amount of distributions to our parent. Our debt agreements contain restrictions on our ability to incur secured debt beyond certain levels.
Credit Facility
On December 1, 2014, we, along with WPZ, Transcontinental Gas Pipe Line, LLC, (Transco), the lenders named therein, and an administrative agent, entered into Amendment No. 1 and Consent to the First Amended and Restated Credit Agreement, dated as of July 31, 2013. The amendment provided the consent of the lenders for this credit agreement to continue for ACMP upon consummation of the merger with WPZ and the termination of ACMP’s existing credit agreement. In addition, the amendment provided the consent that certain existing liens and guarantees of indebtedness of ACMP that were terminated in connection with the merger would not become liens and guarantees of indebtedness under this credit agreement. At December 31, 2014, no letters of credit were issued and no loans were outstanding under this credit facility. On February 2, 2015, this credit facility was terminated in connection with the merger.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
On February 2, 2015, we, along with WPZ, Transco, the lenders named therein, and an administrative agent, entered into the Second Amended and Restated Credit Agreement with aggregate commitments available of $3.5 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. The maturity date of the facility is February 2, 2020. However, the co-borrowers may request an extension of the maturity date for an additional one-year period, up to two times, to allow a maturity date as late as February 2, 2022, under certain circumstances. The agreement allows for swing line loans up to an aggregate amount of $150 million, subject to available capacity under the credit facility, and letters of credit commitments available to WPZ of $1.125 billion. We are able to borrow up to $500 million under this credit facility to the extent not otherwise utilized by the other co-borrowers.
Under the credit facility, WPZ is required to maintain a ratio of debt to EBITDA (each as defined in the credit facility) that must be no greater than 5.0 to 1.00. For the fiscal quarter and the two following fiscal quarters in which one or more acquisitions have been executed, WPZ is required to maintain a ratio of debt to EBITDA of no greater than 5.5 to 1.00. For us, the ratio of debt to capitalization (defined as net worth plus debt) must be no greater than 65 percent. Measured as of December 31, 2014, we are in compliance with this financial covenant.
Various covenants may limit, among other things, a borrower’s and its material subsidiaries’ ability to grant certain liens supporting indebtedness, a borrower’s ability to merge or consolidate, sell all or substantially all of its assets, enter into certain affiliate transactions, make certain distributions during an event of default, enter into certain restrictive agreements, and allow any material change in the nature of its business.
If an event of default with respect to a borrower occurs under the credit facility, the lenders will be able to terminate the commitments for all borrowers and accelerate the maturity of any loans of the defaulting borrower under the credit facility agreement and exercise other rights and remedies.
Other than swingline loans, each time funds are borrowed, the borrower must choose whether such borrowing will be an alternate base rate borrowing or a Eurodollar borrowing. If such borrowing is an alternate base rate borrowing, interest is calculated on the basis of the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1 percent, and (c) a periodic fixed rate equal to the London Interbank Offered Rate (LIBOR) plus 1 percent, plus, in the case of each of (a), (b), and (c), an applicable margin. If the borrowing is a Eurodollar borrowing, interest is calculated on the basis of LIBOR for the relevant period plus an applicable margin. Interest on swingline loans is calculated as the sum of the alternate base rate plus an applicable margin. The borrower is required to pay a commitment fee based on the unused portion of the credit facility. The applicable margin and the commitment fee are determined for each borrower by reference to a pricing schedule based on such borrower’s senior unsecured long-term debt ratings.
WPZ participates in a commercial paper program, and WPZ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. On February 2, 2015, WPZ amended and restated the commercial paper program for the merger and to allow a maximum outstanding of $3 billion of unsecured commercial paper notes. At December 31, 2014, WPZ had $798 million in outstanding commercial paper.
Leases
Our leasing arrangements include mostly premise and equipment leases that are classified as operating leases.
Effective October 1, 2009, we entered into an agreement to lease office space from a third party. The agreement has an initial term of approximately 10 years, with an option to renew for an additional 5 or 10 year term.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
Following are the estimated future minimum annual rental payments required under operating leases, which have initial or remaining noncancelable lease terms in excess of one year:
Operating lease rental expense, net of sublease revenues, amounted to $2.5 million, $2.3 million, and $2.2 million for 2014, 2013, and 2012, respectively.
5. BENEFIT PLANS
Certain of the benefit costs charged to us by Williams associated with employees who directly support us are described below. Additionally, allocated corporate expenses from Williams to us also include amounts related to these same employee benefits, which are not included in the amounts presented below. (See Note 7 for further discussion.)
Pension and Other Postretirement Benefit Plans
Williams has noncontributory defined benefit pension plans (Williams Pension Plan, Williams Inactive Employees Pension Plan, and The Williams Companies Retirement Restoration Plan) that provide pension benefits for its eligible employees. Pension cost charged to us by Williams was $4.2 million in 2014, $7.8 million in 2013, and $7.3 million in 2012.
Williams provides certain retiree health care and life insurance benefits for eligible participants that generally were employed by Williams on or before December 31, 1991. During 2014 and 2013, we received credits from Williams related to retiree health care and life insurance benefits of $4.3 million and $1.7 million, respectively. The credit in 2012 was minimal. These credits were recorded as regulatory liabilities.
Defined Contribution Plan
Included in compensation expense is $2.0 million for 2014 and 2013 and $2.5 million for 2012 that Williams charged us for matching contributions to this plan.
Employee Stock-Based Compensation Plan Information
The Williams Companies, Inc. 2007 Incentive Plan, as amended and restated on February 23, 2010, (Plan) was approved by stockholders on May 20, 2010. The Plan provides for Williams’ common stock-based awards to both employees and nonmanagement directors. The Plan permits the granting of various types of awards including, but not limited to, restricted stock units and stock options. Awards may be granted for no consideration other than prior and future services or based on certain financial performance targets achieved.
Williams currently bills us directly for compensation expense related to stock-based compensation awards based on the fair value of the awards. We are also billed for our proportionate share of Williams’ and other affiliates’ stock-based compensation expense through various allocation processes.
Total stock-based compensation expense, included in administrative and general expenses, for the years ended December 31, 2014, 2013 and 2012 was $1.2 million, $1.2 million and $1.6 million, respectively, excluding amounts allocated from WPZ and Williams.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and advances to affiliate-The carrying amounts approximate fair value, because of the short-term nature of these instruments.
Long-term debt - The disclosed fair value of our long-term debt, which we consider as a level 2 measurement, is determined by a market approach using broker quoted indicative period-end bond prices. The quoted prices are based on observable transactions in less active markets for our debt or similar instruments. The carrying amount and estimated fair value of our long-term debt, including current maturities, were $694.4 million and $766.5 million, respectively, at December 31, 2014, and $694.2 million and $806.1 million, respectively, at December 31, 2013.
7. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
Concentration of Off-Balance-Sheet and Other Credit Risk
During the periods presented, more than 10 percent of our operating revenues were generated from each of the following customers:
Our major customers are located in the Pacific Northwest. As a general policy, collateral is not required for receivables, but customers’ financial condition and credit worthiness are regularly evaluated and historical collection losses have been minimal.
Related Party Transactions
We are a participant in WPZ’s cash management program. At December 31, 2014 and 2013, the advances due to us by WPZ totaled approximately $135.1 million and $119.2 million, respectively. These advances are represented by demand notes and are classified as Current Assets in the accompanying Balance Sheet. The interest rate on these intercompany demand notes is based upon the daily overnight investment rate paid on WPZ’s excess cash at the end of each month, which was approximately 0.01 percent at December 31, 2014. The interest income from these advances was minimal during the years ended December 31, 2014, 2013, and 2012. Such interest income is included in Other (Income) and Other Expenses: Miscellaneous other expenses, net on the accompanying Statement of Comprehensive Income.
We have no employees. Services necessary to operate our business are provided to us by Williams and certain affiliates of Williams. We reimburse Williams and its affiliates for all direct and indirect expenses incurred or payments made (including salary, bonus, incentive compensation, and benefits) in connection with these services. Employees of Williams also provide general administrative and management services to us, and we are charged for certain administrative expenses incurred by Williams. These charges are either directly identifiable or allocated to our assets. Direct charges are for goods and services provided by Williams at our request. Allocated charges are based on a three factor formula, which considers revenues; property, plant, and equipment; and payroll. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. We were billed $102.4 million, $106.7 million, and $113.0 million in the years ended December 31, 2014, 2013, and 2012, respectively, for these services. Such expenses are primarily included in General and administrative and Operation and maintenance expenses on the accompanying Statement of Comprehensive Income.
In 2014 and 2013, we incurred reimbursable costs of $27.3 million and $89.8 million, respectively, due from Williams Field Services related to the construction of a natural gas liquids pipeline, of which $0.5 million and $38.6 million was outstanding at December 31, 2014 and 2013, respectively.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
During 2014, 2013, and 2012, we declared and paid cash distributions to our parent of $234.0 million, $91.0 million, and $137.5 million, respectively. During January 2015, we declared and paid cash distributions of $58.0 million to our parent.
During 2013, and 2012, we received contributions of $13.3 million, and $8.6 million from our parent to fund a portion of our expenditures for additions to property, plant, and equipment. No contributions were received in 2014.
We have entered into various other transactions with certain related parties, the amounts of which were not significant. These transactions and the above-described transactions are made on the basis of commercial relationships and prevailing market prices or general industry practices.
8. ASSET RETIREMENT OBLIGATIONS
Our accrued asset retirement obligations relate to our gas storage and transmission facilities. At the end of the useful life of our facilities, we are legally obligated to remove certain transmission facilities including underground pipelines, major river spans, compressor stations and meter station facilities. These obligations also include restoration of the property sites after removal of the facilities from above and below the ground.
During 2014 and 2013, our overall asset retirement obligation changed as follows (in thousands):
(1)
Changes in estimates of existing obligations are primarily due to the annual review process, which considers various factors including inflation rates, current estimates for removal cost, discount rates, and the estimated remaining life of assets. The increase in 2014 is primarily attributed to increases in current estimates for removal costs and inflation rate, and a decrease in the discount rate. The decrease in 2013 is primarily attributed to increases in the discount rate and the remaining life of the applicable property.
9. REGULATORY ASSETS AND LIABILITIES
Our regulatory assets and liabilities result from our application of the provisions of Topic 980 and are reflected on our balance sheet. Current regulatory assets are included in Exchange gas offset and Prepayments and other. Current regulatory liabilities are included in Exchange gas offset. These balances are presented on our balance sheet on a gross basis and are recoverable or refundable over various periods. Below are the details of our regulatory assets and liabilities as of December 31, 2014 and 2013:
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
The significant regulatory assets and liabilities include:
Environmental Costs We have accrued liabilities for assessment and remediation activities to bring certain sites up to current environmental standards. The accrual for these liabilities is offset by a regulatory asset. The regulatory asset is being amortized to expense consistent with amounts collected in rates.
Levelized Depreciation Levelized depreciation allows contract revenue streams to remain constant over the primary contract terms by recognizing lower than book depreciation in the early years and higher than book depreciation in later years. The depreciation component of the levelized incremental rates will equal the accumulated book depreciation by the end of the primary contract terms. The difference between levelized depreciation and straight-line book depreciation is recorded as a FERC approved regulatory asset or liability and is eliminated over the levelization period.
Grossed-Up Deferred Taxes on Equity Funds Used During Construction The regulatory asset balance was established to offset the deferred tax for the equity component of the allowance for funds used during the construction of long-lived assets. All amounts were generated during the period that we were a taxable entity. Taxes on capitalized funds used during construction and the offsetting deferred income taxes are included in the rate base and are recovered over the depreciable lives of the long-lived asset to which they relate.
Asset Retirement Obligations This regulatory asset balance is established to offset depreciation of the ARO asset and changes in the ARO liability due to the passage of time. The regulatory asset is expected to be fully recovered through the net negative salvage component of depreciation included in our rates; as such, the negative salvage component of accumulated depreciation has been reclassified and netted against the amount of the ARO regulatory asset.
Fuel Recovery These amounts reflect the value of the cumulative volumetric difference between the gas retained from our customers and the gas consumed in operations. These amounts are not included in the rate base, but are expected to be recovered or refunded by changing the fuel reimbursement factor in subsequent fuel filings.
Postretirement Benefits We seek to recover the actuarially determined cost of postretirement benefits through rates that are set through periodic general rate filings. Any differences between the annual actuarially determined cost and amounts currently being recovered in rates are recorded as regulatory assets or liabilities and collected or refunded through future rate adjustments. These amounts are not included in the rate base, and we are not currently recovering postretirement benefit costs in our rates.
NORTHWEST PIPELINE LLC
QUARTERLY FINANCIAL DATA
(Unaudited)
The following is a summary of unaudited quarterly financial data for 2014 and 2013:
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Senior Vice President - West and our Vice President and Chief Accounting Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) (Disclosure Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Senior Vice President - West and our Vice President and Chief Accounting Officer. Based upon that evaluation, our Senior Vice President - West and our Vice President and Chief Accounting Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes during the fourth quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our Internal Control over Financial Reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to our management regarding the preparation and fair presentation of financial statements in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Senior Vice President - West and our Vice President and Chief Accounting Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on our assessment, we concluded that, as of December 31, 2014, our internal control over financial reporting was effective.
This annual report does not include a report of our registered public accounting firm regarding internal control over financial reporting. A report by our registered public accounting firm is not required pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9B.
Item 9B.
OTHER INFORMATION
None.
PART III
Since we meet the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, the information required by Items 10, 11, 12, and 13 is omitted.
Item 14.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by our independent auditors in each of the last two fiscal years in each of the following categories are:
Fees for audit services include fees associated with the annual audit, the reviews for our quarterly reports on Form 10-Q, the reviews for other SEC and FERC filings and accounting consultations.
As a wholly-owned subsidiary of WPZ, we do not have a separate audit committee. The policies and procedures for pre-approving audit and non-audit services of the Audit Committee of the Board of Directors of WPZ’s general partner have been set forth in WPZ’s 2014 annual report on Form 10-K, which is available on the SEC’s website at http://www.sec.gov and at http://investor.williams.com.
PART IV
Item 15.
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
(a) 3 and b. Exhibits:
*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHWEST PIPELINE GP
(Registrant)
By
/s/ Jeffrey P. Heinrichs
Jeffrey P. Heinrichs
Controller
Date: February 25, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
/s/ Walter J. Bennett
Senior Vice President - West and Management Committee
Member (Principal Executive Officer)
Walter J. Bennett
/s/ Ted T. Timmermans
Vice President and Chief Accounting Officer
(Principal Financial Officer)
Ted T. Timmermans
/s/ Jeffrey P. Heinrichs
Controller (Principal Accounting Officer)
Jeffrey P. Heinrichs
/s/ Donald R. Chappel
Management Committee Member
Donald R. Chappel
Date: February 25, 2015
EXHIBIT INDEX
*
Filed herewith
**
Furnished herewith