Investments in, Earnings from and Transactions with Unconsolidated Affiliates

9 Months Ended

Sep. 30, 2011

Investments in, Earnings from and Transactions with Unconsolidated Affiliates [Abstract]

Investments in, Earnings from and Transactions with Unconsolidated Affiliates

15. Investments in, Earnings from and Transactions with Unconsolidated Affiliates

Our net investments in and earnings (losses) from our unconsolidated affiliates are as follows as of September 30, 2011 and December 31, 2010 and for the quarters and nine months ended September 30:


					Earnings (Losses) from
	Investment				Unconsolidated Affiliates
					Quarters Ended						Nine Months Ended
	September 30,		December 31,		September 30,						September 30,
	2011		2010		2011			2010			2011			2010
	(In millions)				(In millions)
Net Investment and Earnings (Losses)
Ruby	$	1,069	$	—	$	(1	)	$	—		$	(1	)	$	—
Citrus⁽¹⁾		897		822		25			27			74			67
Four Star ⁽²⁾		351		393		(3	)		(2	)		(4	)		(3	)
Gulf LNG⁽³⁾		237		266		(1	)		(1	)		(1	)		(1	)
Bolivia-to-Brazil Pipeline		108		104		10			1			13			10
Other⁽⁴⁾		94		88		6			3			17			94

Total	$	2,756	$	1,673	$	36		$	28		$	98		$	167


⁽¹⁾		As of September 30, 2011, we had outstanding receivables of approximately $37 million, included in other long term assets, related to a promissory note from Citrus whereby we will lend up to $150 million.

⁽²⁾		We recorded amortization of our purchase cost in excess of the underlying net assets of Four Star Oil and Gas Company (Four Star) of $8 million and $9 million for the quarters ended September 30, 2011 and 2010 and $26 million and $28 million for the nine months ended September 30, 2011 and 2010.

⁽³⁾		As of September 30, 2011 and December 31, 2010, we had outstanding advances and receivables of $150 million and $85 million, included in other long term assets, related to our investment in Gulf LNG. On October 1, 2011, the Gulf LNG Clean Energy project was placed in service.

⁽⁴⁾		Includes our investment in Gasoductos de Chihuahua for the nine months ended September 30, 2010. In April 2010, we completed the sale of our interest in this investment and recorded a pretax gain of approximately $80 million. See Note 2.

Ruby. As of September 30, 2011, we have an equity investment in the Ruby pipeline project totaling approximately $1,069 million. Prior to September 2011, we reflected Ruby Pipeline Holding Company, L.L.C. (Ruby) as a consolidated variable interest entity because we were its primary beneficiary. In mid-September 2011, we met certain conditions of our lenders and our partner, Global Infrastructure Partners (GIP), and El Paso’s guarantee of GIP’s preferred interests in Ruby and Cheyenne Plains Investment Company, L.L.C. Cheyenne Plains expired. Accordingly, we no longer reflect approximately $769 million of preferred interests in subsidiaries between liabilities and equity on our balance sheet, which included $700 million of GIP’s investment in preferred stock of subsidiaries and $69 million in accrued preferred returns. As a result of us meeting these conditions, GIP transferred its $145 million convertible preferred stock in Cheyenne Plains to us in exchange for additional preferred stock in Ruby. Following these events, Ruby and Cheyenne Plains are no longer considered variable interest entities. Although we continue to operate the Ruby pipeline, we do not have a controlling financial interest in Ruby; therefore, we deconsolidated it prospectively in our financial statements.

Prior to deconsolidation, Ruby’s individual assets and liabilities were reflected on our balance sheet, Ruby’s consolidated financial results were reflected in our income statement, and GIP’s returns on its preferred interests in Ruby and Cheyenne Plains were recorded in net income attributable to noncontrolling interests on our income statement. Upon Ruby’s deconsolidation in mid-September 2011, we no longer reflected the individual assets and liabilities of Ruby on our balance sheet and began recording Ruby’s earnings in earnings (losses) from unconsolidated affiliates on our income statement. At the time of deconsolidation, amounts on our balance sheet consisted primarily of approximately $3,673 million in property, plant and equipment, $348 million in regulatory and other assets, $125 million in price risk management liabilities associated with interest rate swaps on Ruby’s debt, $138 million in other liabilities, and $1,447 million in long term debt. For a further discussion of Ruby, see Notes 9 and 12 and our 2010 Annual Report on Form 10-K.

Upon deconsolidation, we were required to assess our investment in Ruby for impairment based on fair value, which is a different model than assessing recoverability of the Ruby pipeline based on estimated undiscounted cash flows while it was consolidated. Our fair value assessment was based on a number of factors, including the present value of anticipated distributable cash flows to be produced from the underlying operations of the Ruby investment. Determining these cash flows required the use of assumptions related to the future demand for Ruby’s capacity, forecasted commodity prices and interest rates, anticipated economic conditions, the timing of GIP’s conversion of their preferred interest into a common equity interest, and other inputs, many of which are not available as observable market data. As a result, our estimate of fair value was a Level 3 fair value measurement. As a result of the deconsolidation of Ruby and our fair value assessments, we recorded a third quarter non-cash loss of approximately $475 million based on the difference between the net carrying value in Ruby and the estimated fair value of our investment in Ruby. We also recorded a non-cash loss of $125 million related to the recognition of the accumulated other comprehensive loss associated with interest rate swaps on Ruby’s debt. Subsequent to deconsolidation, Ruby’s interest rate swaps continue to hedge Ruby’s project level debt.

Summarized Financial Information of Unconsolidated Affiliates. Below is summarized financial information of our proportionate share of the operating results of our unconsolidated affiliates before preferred interests for the quarters and nine months ended September 30, 2011 and 2010.


	Quarters Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(In millions)
Summarized Financial Information
Operating results data:
Operating revenues	$	181	$	126	$	478	$	386
Operating expenses		95		63		264		201
Net income		46		40		120		119

We received distributions and dividends from our unconsolidated affiliates of $17 million for each of the quarters ended September 30, 2011 and 2010 and $48 million and $53 million for the nine months ended September 30, 2011 and 2010. Our transactions with unconsolidated affiliates were not material to our operating results during the quarters and nine months ended September 30, 2011 and 2010.

Other Investment-Related Matters. We currently have outstanding disputes and other matters related to an investment in two Brazilian power plant facilities (Manaus/Rio Negro) formerly owned by us. We have filed lawsuits to collect amounts due to us (approximately $62 million of Brazilian reais-denominated accounts receivable) by the plants’ power purchaser, which are also guaranteed by the purchaser’s parent, Eletrobras, Brazil’s state-owned utility. The power utility that purchased the power from these facilities and its parent have asserted counterclaims that would largely offset our accounts receivable. Absent resolution of these matters through settlement, we anticipate that the ultimate resolution will likely occur through legal proceedings in the Brazilian courts. We believe the receivables are collectible and therefore have not established an allowance against the receivables owed. We have reviewed our obligations under the power purchase agreements and have accrued what we believe is an appropriate amount in relation to the asserted counterclaims. We believe the remaining counterclaims are without merit. Based on the anticipated timing of the resolution of the legal proceedings, we have classified our accounts receivable and the accrual for the counterclaims as a non-current asset and liability in our financial statements.

Our project companies that previously owned the Manaus and Rio Negro power plants have also been assessed approximately $75 million of Brazilian reais-denominated ICMS taxes by the Brazilian taxing authorities for payments received by the companies from the plants’ power purchaser from 1999 to 2001. By agreement, the power purchaser has been indemnifying our project companies for these ICMS taxes, along with related interest and penalties. In the third quarter of 2010, a court hearing the Rio Negro case seized funds from certain of El Paso’s Rio Negro bank accounts in partial satisfaction of and as security for this potential tax liability. In order to prevent collection efforts by the tax authorities for this matter against our project companies, security must be provided for the potential tax liability to the court’s satisfaction. The power purchaser and the taxing authorities have agreed upon the posting of shares in a subsidiary of the power purchaser’s parent as security. The court hearing the Rio Negro case has now accepted these shares as security and we have been advised that the court hearing the Manaus case has now ruled in a similar fashion. The power purchaser asked the court hearing the Rio Negro case to vacate its order encumbering the assets belonging to our Rio Negro project company and its shareholders. That court has now lifted its order in respect of the project company’s assets. Until this tax matter is fully resolved, our ability to collect amounts due to us from the power purchaser could be impacted. Any potential taxes owed by the Manaus and Rio Negro project companies are also guaranteed by the purchaser’s parent. Based on our assessment, we have not established any accruals for this matter.

The ultimate resolution of the matters discussed above is unknown at this time, and adverse developments related to either our ability to collect amounts due to us or related to these disputes and claims could require us to record additional losses in the future.