| Where any forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions or bases to be reasonable and in good faith, assumed facts or bases almost always vary from the actual results, and differences between assumed facts or bases and actual results can be material, depending upon the circumstances |
| Where, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis |
| We cannot assure you, however, that the statement of expectation or belief will result or be achieved or accomplished |
| The words “believe,” “expect,” “estimate,” “anticipate” and similar expressions will generally identify forward-looking statements |
| All of our forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements |
| In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report |
| With this in mind, you should consider the risks discussed elsewhere in this report and other documents we file with the SEC from time to time and the following important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or on our behalf |
| Risks Related to Our Business Our operations are subject to operational hazards and uninsured risks |
| Our operations are subject to the inherent risks normally associated with those operations, including pipeline ruptures, explosions, pollution, release of toxic substances, fires, adverse weather conditions (such as hurricanes and flooding) and other hazards, each of which could result in damage to or destruction of our facilities or damages to persons and property |
| In addition, our operations and assets face possible risks associated with acts of aggression |
| If any of these events were to occur, we could suffer substantial losses |
| Many of our insurance coverages have material deductibles and self-insurance levels, as well as limits on our maximum recovery |
| As a result, our financial condition and operations could be adversely affected if a significant event occurs that is not fully covered by insurance |
| The success of our pipeline business depends, in part, on factors beyond our control |
| Most of the natural gas and NGL we transport and store are owned by third parties |
| As a result, the volume of natural gas and NGL involved in these activities depends on the actions of those third parties and is beyond our control |
| Further, the following factors, most of which are beyond our control, may unfavorably 24 _________________________________________________________________ [86]Table of Contents impact our ability to maintain or increase current throughput, to renegotiate existing contracts as they expire or to remarket unsubscribed capacity on our pipeline systems: • service area competition; • expiration and/or turn back of significant contracts; • changes in regulation and action of regulatory bodies; • future weather conditions; • price competition; • drilling activity and availability of natural gas supplies; • decreased availability of conventional gas supply sources and the availability and timing of other gas supply sources, such as LNG; • decreased natural gas demand due to various factors, including increases in prices and the increased availability or popularity of alternative energy sources such as hydroelectric power; • increased costs of capital; • opposition to energy infrastructure development, especially in environmentally sensitive areas; • adverse general economic conditions; • expiration and/or renewal of existing interests in real property, including real property on Native American lands; and • unfavorable movements in natural gas and NGL prices in certain supply and demand areas |
| The revenues of our pipeline businesses are generated under contracts that must be renegotiated periodically |
| Substantially all of our pipeline subsidiaries’ revenues are generated under contracts which expire periodically and must be renegotiated and extended or replaced |
| We cannot assure that we 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 |
| In particular, our ability to extend and replace contracts could be adversely affected by factors we cannot control, including: • competition by other pipelines, including the change in rates or upstream supply of existing pipeline competitors, as well as the proposed construction by other companies of additional pipeline capacity or LNG terminals in markets served by our interstate pipelines; • changes in state regulation of local distribution companies, which may cause them to negotiate short-term contracts or turn back their capacity when their contracts expire; • reduced demand and market conditions in the areas we serve; • the availability of alternative energy sources or gas supply points; and • regulatory actions |
| If we are unable to renew, extend or replace these contracts or if we renew them on less favorable terms, we may suffer a material reduction in our revenues, earnings and cash flows |
| Fluctuations in energy commodity prices could adversely affect our pipeline businesses |
| Revenues generated by our transmission, storage and LNG contracts depend on volumes and rates, both of which can be affected by the prices of natural gas, LNG and NGL Increased prices could result in a reduction of the volumes transported by our customers, such as power companies who, depending on the price 25 _________________________________________________________________ [87]Table of Contents of fuel, may not dispatch gas-fired power plants |
| Increased prices could also result in industrial plant shutdowns or load losses to competitive fuels as well as local distribution companies’ loss of customer base |
| The success of our transmission, storage and LNG operations is subject to continued development of additional oil and natural gas reserves and our ability to access additional supplies from interconnecting pipelines or LNG facilities to offset the natural decline from existing wells connected to our systems |
| A decline in energy prices could cause a decrease in these development activities and could cause a decrease in the volume of reserves available for transmission, storage and processing through our systems |
| Pricing volatility may, in some cases, impact the value of under or over recoveries of retained gas, imbalances and system encroachments |
| If natural gas prices in the supply basins connected to our pipeline systems are higher than prices in other natural gas producing regions, our ability to compete with other transporters may be negatively impacted |
| Furthermore, fluctuations in pricing between supply sources and market areas could negatively impact our transportation revenues |
| Fluctuations in energy prices are caused by a number of factors, including: • regional, domestic and international supply and demand; • availability and adequacy of transportation facilities; • energy legislation; • federal and state taxes, if any, on the sale or transportation of natural gas and NGL; • abundance of supplies of alternative energy sources; and • political unrest among oil producing countries |
| The expansion of our pipeline systems by constructing new facilities subjects us to construction and other risks that may adversely affect the financial results of our pipeline businesses |
| We may expand the capacity of our existing pipeline, storage or LNG facilities by constructing additional facilities |
| Construction of these facilities is subject to various regulatory, development and operational risks, including: • the ability to obtain all necessary approvals and permits by regulatory agencies on a timely basis on terms that are acceptable to us; • potential changes of federal, state and local statutes and regulations, including environmental requirements that prevent a project from proceeding or increase the anticipated cost of the expansion project; • impediments on our ability to acquire rights-of-ways or land rights on a timely basis or within our anticipated costs; • the ability to construct projects within anticipated costs, including the risk that we may incur cost overruns resulting from inflation or increased costs of equipment, materials, labor, or other factors beyond our control, that may be material; • anticipated future growth in natural gas supply does not materialize; and • the lack of transportation, storage or throughput commitments that result in write-offs of development costs |
| Any of these risks could prevent a project from proceeding, delay its completion or increase its anticipated costs |
| As a result, new facilities may not achieve our expected investment return, which could adversely affect our financial position or results of operations |
| A substantial decrease in natural gas and oil prices could adversely affect the financial results of our exploration and production business |
| Our future financial condition, revenues, results of operations, cash flows and future rate of growth depend primarily upon the prices we receive for our natural gas and oil production |
| Natural gas and oil prices historically have been volatile and are likely to continue to be volatile in the future, especially given current world geopolitical conditions |
| The prices for natural gas and oil are subject to a variety of additional factors that are beyond our control |
| These factors include: • the level of consumer demand for, and the supply of, natural gas and oil; • commodity processing, gathering and transportation availability; • the level of imports of, and the price of, foreign natural gas and oil; • the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; • domestic governmental regulations and taxes; • the price and availability of alternative fuel sources; • the availability of pipeline capacity; • weather conditions; • market uncertainty; • political conditions or hostilities in natural gas and oil producing regions; • worldwide economic conditions; and • decreased demand for the use of natural gas and oil because of market concerns about global warming or changes in governmental policies and regulations due to climate change initiatives |
| Further, because the majority of our proved reserves at December 31, 2005 were natural gas reserves, we are substantially more sensitive to changes in natural gas prices than we are to changes in oil prices |
| Declines in natural gas and oil prices would not only reduce revenue, but could reduce the amount of natural gas and oil that we can produce economically and, as a result, could adversely affect the financial results of our exploration and production business |
| Changes in natural gas and oil prices can have a significant impact on the calculation of our full cost ceiling test |
| A significant decline in natural gas and oil prices could result in a downward revision of our reserves and a write-down of the carrying value of our natural gas and oil properties, which could be substantial, and would negatively impact our net income and stockholders’ equity |
| The success of our exploration and production business is dependent, in part, on factors that are beyond our control |
| The performance of our exploration and production business is dependent upon a number of factors that we cannot control, including: • the results of future drilling activity; • the availability of rigs, equipment and labor to support drilling activity and production operations; • our ability to identify and precisely locate prospective geologic structures and to drill and successfully complete wells in those structures in a timely manner; • our ability to expand our leased land positions in desirable areas, which often are subject to intensely competitive conditions; • increased competition in the search for and acquisition of reserves; 27 _________________________________________________________________ [89]Table of Contents • significant increases in future drilling, production and development costs, including drilling rig rates and oil field services costs; • adverse changes in future tax policies, rates, and drilling or production incentives by state, federal, or foreign governments; • increased federal or state regulations, including environmental regulations, that limit or restrict the ability to drill natural gas or oil wells, reduce operational flexibility, or increase capital and operating costs; • our lack of control over jointly owned properties and properties operated by others; • the availability of alternative sources of energy; • declines in production volumes, including those from the Gulf of Mexico; and • continued access to sufficient capital to fund drilling programs to develop and replace a reserve base with rapid depletion characteristics |
| Our natural gas and oil drilling and producing operations involve many risks and may not be profitable |
| Our operations are subject to all the risks normally incident to the operation and development of natural gas and oil properties and the drilling of natural gas and oil wells, including well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of natural gas, oil, brine or well fluids, release of contaminants into the environment and other environmental hazards and risks |
| Additionally, our offshore operations may encounter usual marine perils, including hurricanes and other adverse weather conditions, damage from collisions with vessels, governmental regulations and interruption or termination by governmental authorities based on environmental and other considerations |
| Each of these risks could result in damage to property, injuries to people or the shut in of existing production as damaged energy infrastructure is repaired or replaced |
| We maintain insurance coverage to reduce exposure to potential losses resulting from these operating hazards |
| The nature of the risks is such that some liabilities could exceed our insurance policy limits, or, as in the case of environmental fines and penalties, cannot be insured which could adversely affect our future results of operations, cash flows or financial condition |
| Our drilling operations are also subject to the risk that we will not encounter commercially productive reservoirs |
| Estimating our reserves, production and future net cash flow is difficult |
| Estimating quantities of proved natural gas and oil reserves is a complex process that involves significant interpretations and assumptions |
| It requires interpretations and judgment of available technical data, including the evaluation of available geological, geophysical, and engineering data |
| It also requires making estimates based upon economic factors, such as natural gas and oil prices, production costs, severance and excise taxes, capital expenditures, workover and remedial costs, and the assumed effect of governmental regulation |
| Due to a lack of substantial, if any, production data, there are greater uncertainties in estimating proved undeveloped reserves, proved non-producing reserves and proved developed reserves that are early in their production life |
| As a result, our reserve estimates are inherently imprecise |
| Also, we use a 10 percent discount factor for estimating the value of our reserves, as prescribed by the SEC, which may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which our exploration and production business or the natural gas and oil industry, in general, are subject |
| Any significant variations from the interpretations or assumptions used in our estimates or changes of conditions could cause the estimated quantities and net present value of our reserves to differ materially |
| 28 _________________________________________________________________ [90]Table of Contents Our reserve data represents an estimate |
| You should not assume that the present values referred to in this report represent the current market value of our estimated natural gas and oil reserves |
| The timing of the production and the expenses related to the development and production of natural gas and oil properties will affect both the timing of actual future net cash flows from our proved reserves and their present value |
| Changes in the present value of these reserves could cause a write-down in the carrying value of our natural gas and oil properties, which could be substantial, and would negatively affect our net income and stockholders’ equity |
| A portion of our estimated proved reserves are undeveloped |
| Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations |
| The reserve data assumes that we can and will make these expenditures and conduct these operations successfully, but future events, including commodity price changes, may cause these assumptions to change |
| The success of our exploration and production business depends upon our ability to replace reserves that we produce |
| Unless we successfully replace the reserves that we produce, our reserves will decline, eventually resulting in a decrease in natural gas and oil production and lower revenues and cash flows from operations |
| We historically have replaced reserves through both drilling and acquisitions |
| The business of exploring for, developing or acquiring reserves requires substantial capital expenditures |
| Our operations require continued access to sufficient capital to fund drilling programs to develop and replace a reserve base with rapid depletion characteristics |
| If we do not continue to make significant capital expenditures, or if our capital resources become limited, we may not be able to replace the reserves that we produce, which would negatively affect our future revenues, cash flows and results of operations |
| We face competition from third parties to acquire and develop natural gas and oil reserves |
| The natural gas and oil business is highly competitive in the search for and acquisition of reserves |
| We must identify and precisely locate prospective geologic structures, drill and successfully complete wells in those structures in a timely manner |
| Our ability to expand our leased land positions in desirable areas is impacted by intensely competitive leasing conditions |
| Competition for reserves and producing natural gas and oil properties is intense and many of our competitors have financial and other resources that are substantially greater than those available to us |
| Our competitors include the major and independent natural gas and oil companies, individual producers, gas marketers and major pipeline companies, as well as participants in other industries supplying energy and fuel to industrial, commercial and individual consumers |
| If we are unable to compete effectively in the acquisition and development of reserves, our future profitability may be negatively impacted |
| Ultimately, our future success in the production business is dependent on our ability to find or acquire additional reserves at costs that allow us to remain competitive |
| Our use of derivative financial instruments could result in financial losses |
| Some of our subsidiaries use futures, swaps and option contracts traded on the New York Mercantile Exchange, over-the-counter options and price and basis swaps with other natural gas merchants and financial institutions |
| To the extent we have positions that are not designated or qualify as hedges, changes in commodity prices, interest rates, volatility, correlation factors and the liquidity of the market could cause our revenues, net income and cash requirements to be volatile |
| We could incur financial losses in the future as a result of volatility in the market values of the energy commodities we trade, or if one of our counterparties fails to perform under a contract |
| The valuation of these financial instruments involves estimates |
| Changes in the assumptions underlying these estimates can occur, changing our valuation of these instruments and potentially resulting in financial losses |
| The use of derivatives could require the posting of collateral with our counterparties which can impact our working capital (current assets and liabilities) and liquidity when commodity prices or interest rates change |
| For additional information 29 _________________________________________________________________ [91]Table of Contents concerning our derivative financial instruments, see Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 8, Financial Statements and Supplementary Data, Note 10 |
| Our businesses are subject to the risk of payment defaults by our counterparties |
| We frequently extend credit to our counterparties following the performance of credit analysis |
| Despite performing this analysis, we are exposed to the risk that we may not be able to collect amounts owed to us |
| Although in many cases we have collateral to secure the counterparty’s performance, it could be inadequate and we could suffer losses |
| Our foreign operations and investments involve special risks |
| Our activities in areas outside the United States, including material investment exposure in our power, pipeline and exploration and production projects in Brazil (see Part II, Item 8, Financial Statements and Supplementary Data, Note 16), are subject to the risks inherent in foreign operations, including: • loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, wars, insurrection and other political risks; • the effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems; and • changes in laws, regulations and policies of foreign governments, including those associated with changes in the governing parties |
| Retained liabilities associated with businesses that we have sold could exceed our estimates and we could experience difficulties in managing these liabilities |
| We have sold a significant number of assets over the years, including the sale of many assets since 2001 |
| Pursuant to various purchase and sale agreements relating to businesses and assets sold, we have either retained certain liabilities or indemnified certain purchasers against liabilities that they might incur in the future |
| These liabilities in many cases relate to breaches of warranties, environmental, asset maintenance, tax, litigation, personal injury and other representations that we have provided |
| Although we believe that we have established appropriate reserves for these liabilities, we could be required to accrue additional reserves in the future and these amounts could be material |
| In addition, as we exit businesses, we have experienced substantial reductions and turnover in our workforce that previously supported the ownership and operation of such assets |
| There is the risk that such reductions and turnover in our workforce prior to closing could result in difficulties in managing the businesses that we are exiting or managing the liabilities retained after closing, including a reduction in historical knowledge of the assets and businesses in managing the liabilities or defending any associated litigation |
| Risks Related to Legal and Regulatory Matters The outcome of pending governmental investigations could be materially adverse to us |
| We are subject to numerous governmental investigations including those involving allegations of round trip trades, price reporting of transactional data to the energy trade press, natural gas and oil reserve revisions, accounting treatment of certain hedges of our anticipated natural gas production, sales of crude oil of Iraqi origin under the United Nation’s Oil for Food Program and the rupture of one of our pipelines near Carlsbad, New Mexico |
| These investigations involve, among others, one or more of the following governmental agencies: the SEC, FERC, a grand jury of the US District Court for the Southern District of New York, US Senate Permanent Subcommittee of Investigations, the House of Representatives International Relations Subcommittee, the US Department of Transportation Office of Pipeline Safety and the Department of Justice |
| We are cooperating with the governmental agency or agencies in each of these investigations |
| The outcome of each of these investigations is uncertain |
| Because of the uncertainties associated with the ultimate outcome of each of these investigations and the costs to the Company of responding and participating in these 30 _________________________________________________________________ [92]Table of Contents on-going investigations, no assurance can be given that the ultimate costs and sanctions, if any, that may be imposed upon us will not have a material adverse effect on our business, financial condition or results of operation |
| The agencies that regulate our pipeline businesses and their customers affect our profitability |
| Our pipeline businesses are regulated by the FERC, the US Department of Transportation, the US Department of Interior, and various state, local and tribal regulatory agencies |
| Regulatory actions taken by those agencies have the potential to adversely affect our profitability |
| In setting authorized rates of return in recent FERC decisions, the FERC has utilized a proxy group of companies that includes local distribution companies that are not faced with as much competition or risks as interstate pipelines |
| The inclusion of these lower risk companies may create downward pressure on tariff rates when subjected to review by the FERC in future rate proceedings |
| If our pipelines’ tariff rates were reduced or re-designed in a future proceeding, if our pipelines’ volume of business under their currently permitted rates was decreased significantly, or if our pipelines were required to substantially discount the rates for their services because of competition or because of regulatory pressure, the profitability of our pipeline businesses could be reduced |
| In addition, increased regulatory requirements relating to the integrity of our pipelines requires additional spending in order to maintain compliance with these requirements |
| Any additional requirements that are enacted could significantly increase the amount of these expenditures |
| Further, state agencies that regulate our pipelines’ local distribution company customers could impose requirements that could impact demand for our pipelines’ services |
| Environmental compliance and remediation costs and the costs of environmental liabilities could exceed our estimates |
| Our operations are subject to various environmental laws and regulations regarding compliance and remediation obligations |
| Compliance obligations can result in significant costs to install and maintain pollution controls, fines and penalties resulting from any failure to comply, and potential limitations on our operations |
| Remediation obligations can result in significant costs associated with the investigation and remediation or clean-up of contaminated properties (some of which have been designated as Superfund sites by the Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)), as well as damage claims arising out of the contamination of properties or impact on natural resources |
| It is not possible for us to estimate exactly the amount and timing of all future expenditures related to environmental matters because of: • The uncertainties in estimating pollution control and clean up costs, including for sites for which only preliminary site investigation or assessments have been completed; • The discovery of new sites or additional information at existing sites; • The uncertainty in quantifying liability under environmental laws that impose joint and several liability on all potentially responsible parties; and • The nature of environmental laws and regulations, including the interpretation and enforcement thereof |
| Currently, various legislative and regulatory measures to address greenhouse gas (GHG) emissions (including carbon dioxide and methane) are in various phases of discussion or implementation |
| These include the Kyoto Protocol, proposed federal legislation and state actions to develop statewide or regional programs, each of which have imposed or would impose reductions in GHG emissions |
| These actions could result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any GHG emissions program |
| These actions could also impact the consumption of natural gas and oil, thereby affecting our pipeline and exploration and production operations |
| 31 _________________________________________________________________ [93]Table of Contents Although we believe we have established appropriate reserves for our environmental liabilities, we could be required to set aside additional amounts due to these uncertainties which could significantly impact our future consolidated results of operations, cash flows or financial position |
| For additional information concerning our environmental matters, see Part I, |