In December 1999, GulfTerra Texas filed a petition with the FERC for
approval of its rates for interstate transportation service. In June 2002, the
FERC issued an order that required revisions to GulfTerra Texas' proposed
maximum rates. The changes ordered by the FERC involve reductions to rate of
return, depreciation rates and revisions to the proposed rate design, including
a requirement to separately state rates for gathering service. FERC also ordered
refunds to customers for the difference, if any, between the originally proposed
levels and the revised rates ordered by the FERC. We believe the amount of any
rate refund would be minimal since most transportation services are discounted
from the maximum rate. GulfTerra Texas has established a reserve for refunds. In
July 2002, GulfTerra Texas requested rehearing on certain issues raised by the
FERC's order, including the depreciation rates and the requirement to separately
state a gathering rate. On February 25, 2004, the FERC issued an order denying
GulfTerra Texas' request for rehearing and ordered GulfTerra Texas to file,
within 45 days from the issuance of the order, a calculation of refunds and a
refund plan. On March 22, 2004, the FERC extended the 45 day time limit to July
12, 2004. On July 12, 2004, GulfTerra Texas filed its response including its
recalculations of rates, plan for unbundling gathering and transmission rates,
and its refund plan. The amount of refunds we calculated are immaterial.
Additionally, the FERC ordered GulfTerra Texas to file a new rate case or
justification of existing rates within three years from the date of the order.
In March 2004, GulfTerra Texas filed for rehearing of the triennial rate case
requirement, and the request remains pending.
In July 2002, Falcon Gas Storage, a competitor, also requested late
intervention and rehearing of the order. Falcon asserts that GulfTerra Texas'
imbalance penalties and terms of service preclude third parties from offering
imbalance management services. The FERC denied Falcon's late intervention in
February 2004. Meanwhile in December 2002, GulfTerra Texas amended its Statement
of Operating Conditions to provide shippers the option of resolving daily
imbalances using a third-party imbalance service provider.
Falcon filed a formal complaint in March 2003 at the Railroad Commission of
Texas claiming that GulfTerra Texas' imbalance penalties and terms of service
preclude third parties from offering hourly imbalance management services on the
GulfTerra Texas system. GulfTerra Texas filed a response specifically denying
Falcon's assertions and requesting that the complaint be denied. The hearing on
this matter, scheduled for June 29, 2004, has been postponed and no new hearing
date has been established. The City Board of Public Service of San Antonio filed
an intervention in opposition to Falcon's complaint.
While the outcome of all of our rates and regulatory matters cannot be
predicted with certainty, based on information known to date, we do not expect
the ultimate resolution of these matters to have a material adverse effect on
our financial position, results of operations or cash flows. As new information
becomes available or relevant developments occur, we will establish accruals as
We conduct a portion of our business through joint ventures (including our
Cameron Highway, Deepwater Gateway and Poseidon joint ventures) we form to
construct, operate and finance the development of our onshore and offshore
midstream energy businesses. We are obligated to make our proportionate share of
additional capital contributions to our joint ventures only to the extent that
they are unable to satisfy their obligations from other sources, including
proceeds from credit arrangements.
10. ACCOUNTING FOR HEDGING ACTIVITIES
A majority of our commodity purchases and sales, which relate to sales of
oil and natural gas associated with our production operations, purchases and
sales of natural gas associated with pipeline operations, sales of natural gas
liquids and purchases or sales of gas associated with our processing plants and
our gathering activities, are at spot market or forward market prices. We use
futures, forward contracts, and swaps to limit our exposure to fluctuations in
the commodity markets and allow for a fixed cash flow stream from these