In the wake of questions raised by FERC last month, El Paso Corp. last week sought to assure the Commission that the effect of the recent note sales of its two principal pipeline subsidiaries, Southern Natural Gas (Southern) and ANR Pipeline, will be to “further strengthen” the companies, increase their capital expenditures and lighten their debt loads, while keeping their capital structures for ratemaking at the same level.

In a March 12 letter, El Paso CFO Dwight Scott responded to regulators’ concerns about several transactions, including the sale of a total of $700 million in unsecured notes by Southern and ANR in late February, and the $500 million sale of El Paso’s Mid-Continent natural gas assets to Chesapeake Energy Corp. of Oklahoma City, OK, which was completed in mid-March.

Until ANR and Southern file new rate cases at the agency, their notes “will not be included in their capital structures for ratemaking purposes,” Scott told FERC’s Chief Accountant John M. Delaware. While “it is premature to determine their potential impact on rates” in the future, he said he believes “the weighted average cost of capital resulting from the financings…would not serve to increase those rates.”

Even following the pipeline note sales, the “capital structures of ANR and [Southern] remain within the FERC’s recognized zone of reasonableness.”

Southern last month sold $400 million of senior unsecured notes due in 2010. Of that amount, Southern distributed $290 million in cash to El Paso, and $310 million of intercompany obligations. In exchange, El Paso transferred to Southern its 50% interest in Citrus Corp., parent of Florida Gas Transmission (FGT), Scott said. The fair market value of the transaction was put at $600 million.

Southern kept $95 million of the proceeds from the note sale for capital expenditures and other corporate purposes. After the transactions, he noted that Southern’s pro forma capital structure would be comprised of 46% equity and 54% debt.

ANR sold $300 million in senior unsecured notes in late February. “ANR has used $263 million of the net proceeds from the notes to repay inter-company payables to El Paso and other affiliates and has retained $25 million…for its capital expenditures and other corporate purposes,” Scott noted. Separately, ANR distributed to El Paso $400 million of intercompany receivables.

In return, ANR has acquired El Paso Great Lakes Inc., which has a 50% interest in Great Lakes Transmission LP. The fair market value of the asset was estimated at about $400 million.

As a result of the transactions, ANR’s pro forma capital structure will be comprised of approximately 45% equity and 55% debt, Scott said.

“The transaction with Chesapeake Energy involves the sales of oil and gas production properties,” he noted, without offering further explanation. Chesapeake paid El Paso $500 million for an internally estimated 328 Bcfe of proved natural gas reserves, 70 Bcfe of probable and possible gas reserves, and 293,000 leasehold acres and current production of 67 MMcfe/d.

Scott did offer some details about the $1 billion financial commitment that El Paso obtained to retire a projected $825 million net balance of its Trinity River financing this month. “The financing relative to Trinity River involves a loan secured by production properties. This transaction, which is unrelated to the issuance of the notes by ANR and [Southern], replaces a preferred security that initially was supported by production properties, [Southern’s] and Tennessee Gas Pipeline Co.’s equity ownership in Bear Creek Storage Co. and by El Paso Natural Gas Co.’s equity ownership in Mojave Pipeline Co. The financing no longer relies on these equity interests for support.”

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