UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Natural Gas Pipeline Company of America LLC ) Docket No. RP17-303-000

NATURAL GAS PIPELINE COMPANY OF AMERICA LLC’S

MOTION TO TERMINATE SECTION 5 INVESTIGATION

AND REQUEST FOR EXPEDITED ACTION

Pursuant to Rule 212 of the Federal Energy Regulatory Commission’s (“FERC” or the

“Commission”) Rules of Practice and Procedure (“Rules”), Natural Gas Pipeline Company of

America LLC (“Natural” or “NGPL”) hereby moves the Commission to exercise its discretion to

terminate this section 5 investigation (“Second Section 5 Investigation”)1 based on extraordinary

circumstances not considered in the Commission’s January 19, 2017 Order Instituting

Investigation and Setting Matter for Hearing Pursuant to Section Five of the Natural Gas Act

(“Investigation Order”).2 Due to the impending resignation of Commissioner Norman Bay

effective February 3, 2017, and the resulting lack of a quorum, Natural requests that the

Commission act on this Motion on an expedited basis and issue an order no later than

February 2, 2017. Because the decision to initiate a section 5 investigation is within the

Commission’s sole discretion, the Commission may act on this Motion without considering

answers by parties to the case. In support hereof, Natural states as follows:

1 This issue is appropriately before the Commission, which has broad discretion both to initiate and to terminate a NGA section 5 rate investigation. See Wisconsin v. Federal Power Commission, 373 U.S. 294 (1963) (“Wisconsin”); Minneapolis Gas Co. v. FPC, 294 F.2d 212 (D.C. Cir. 1961) (“Minneapolis Gas

Co.”) (holding that the Commission has clear authority to act on a Motion to Terminate where no initial decision has yet been issued); Northern Natural Gas Co., 151 FERC ¶ 61,178 (2010) (“Northern

Natural”) (terminating a NGA section 5 proceeding in reliance on the precedent set by Wisconsin and Minneapolis Gas Co.). 2 158 FERC ¶ 61,044 (2017).

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MOTION TO TERMINATE

Executive Summary

On January 19, 2017, the Commission initiated an investigation, pursuant to section 5 of

the Natural Gas Act (“NGA”),3 to determine whether the rates currently charged by Natural are

just and reasonable. In the Investigation Order, based on its review of FERC Form No. 2 data

for 2014 and 2015, the Commission estimated Natural’s return on equity (“ROE”) for those

calendar years to be 28.5 percent and 20.8 percent, respectively. In its Motion to Take Notice

filed in this docket on January 23, 2017, Natural demonstrated how FERC’s ROE estimates are

grossly overstated due to a calculation error that incorrectly includes fuel revenues while

excluding fuel expenses.4 Correcting only this error, (and removing the associated power

expenses for electric compression) and making no other corrections or adjustments, results in

estimated ROEs of 17.7 percent and 15.7 percent for 2014 and 2015, respectively.

Natural submits that extraordinary circumstances support termination of this section 5

investigation. The calculation error in the Investigation Order and the substantial reduction in

the estimated returns after the correction described above should be enough for the Commission

to exercise its discretion to terminate this proceeding. The case for termination is even more

compelling due to Natural’s current financial condition and the extraordinary challenges that

Natural’s owners face in returning the company to a sound financial footing. A full

understanding of Natural’s financial situation, as set forth herein, demonstrates that Natural is

not overearning. This proceeding has been initiated at a time when Natural’s owners are

3 15 U.S.C. § 717d (2012). 4 Natural’s Motion to Take Notice is incorporated herein by reference and made a part hereof. For ease of reference, Appendix A to the Motion to Take Notice is attached hereto as Attachment A.

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attempting to continue making progress on their plan to further reduce Natural’s debt and interest

expense, and invest additional capital to ensure that Natural will continue to be in a position to

provide safe and reliable service. The Investigation Order jeopardizes that progress and will, at a

minimum, certainly make that progress more costly. The Commission’s decision to initiate this

rate investigation is supported by an analysis contained on a single sheet of paper that

understates Natural’s debt cost by approximately $170 million. The Commission’s short-sighted

analysis ignores publicly available information demonstrating Natural’s true financial condition.

The analysis highlights a significant flaw in the Commission’s process for reviewing pipelines’

rates. Natural is filing this Motion to Terminate to allow the Commission to consider Natural’s

true financial condition and conclude that termination of this investigation is in the public

interest.

In light of this section 5 Investigation, and based on the challenges it faces in commercial

and financial markets, Natural will necessarily have to undertake a comprehensive review of its

existing rates and services to determine if a filing under section 4 of the NGA to raise its rates

and make other service changes, is appropriate. Natural’s preference has been to focus on

improving its financial stability under its existing rate and tariff structure; this unwarranted

intervention by the Commission requires Natural to reevaluate that preference. Termination of

this Second Section 5 Investigation will allow Natural to continue to execute its strategy to

improve its financial position while maintaining stability of rates and service for Natural’s

customers.

Natural’s Motion also is informed by its initial contacts with some of its customers who

have expressed an interest in an expeditious resolution to this case. In order to facilitate

termination of this Investigation, Natural is prepared to make the following commitment:

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Natural agrees not to file a general section 4 rate case and place a rate increase in effect before

July 1, 2019,5 unless a section 5 investigation is initiated by the Commission or a customer

before that date. Natural respectfully requests that the Commission issue an order on this Motion

by February 2, 2017.

I. Since the Commission’s First Section 5 Investigation, Natural Has Struggled to

Regain a Sound Financial Footing.

In February 2008, Myria Holdings (“Myria”), an investment holding company, acquired

from Kinder Morgan, Inc. (“KMI”) an 80 percent, and controlling, interest in Natural’s parent,

NGPL PipeCo LLC (“PipeCo”). The Myria acquisition implied an enterprise value of

approximately $6.0 billion. In 2008, PipeCo had approximately $3.0 billion of publicly-traded

debt with original maturities of 5 years, 10 years, and 30 years. This debt was used to fund

Natural’s operations. Although the capital structure was approximately 50 percent debt and 50

percent equity, and PipeCo was rated investment grade (“IG”) at the time, the debt carried an

average interest rate of approximately 7%. This capitalization required fixed annual interest

costs of approximately $210 million.

Shortly after the Myria acquisition, in November 2009, the Commission initiated an

investigation pursuant to section 5 of the Natural Gas Act into the justness and reasonableness of

Natural’s rates (“First Section 5 Investigation”).6 The First Section 5 Investigation dramatically

reduced Natural’s revenues as a result of a Settlement in 2010 (“Settlement”). 7 Pursuant to the

Settlement, Natural implemented phased-in rate reductions of its fixed fuel retention percentages

5 This effective date for a rate increase takes into account the 30-day notice period and maximum five-month suspension period provided for in section 4 of the NGA. 6 Natural Gas Pipeline Co. of Am. LLC, 129 FERC ¶ 61,158 (2009). 7 Natural Gas Pipeline Co. of Am. LLC, 132 FERC ¶ 61,082 (2010).

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as well as its maximum recourse reservation rates for transportation and storage services.

Specifically, the fuel retention percentages were reduced by 45 percent, maximum reservation

rates for transportation were reduced by 8 percent and the maximum reservation rates for storage

were reduced by 3 percent. The impact on Natural’s transportation and storage revenues was

substantial, with revenues dropping from $665 million in 2009 to $579 million in 2012

(excluding revenues relating to fuel), as reported in Natural’s Form No. 2 filings.

In the Settlement, Natural further agreed to file information reports on a periodic and

ongoing basis detailing Natural’s fuel collections, fuel use, gas lost, and power used for

compression, with a trigger for future fuel retention adjustments should the net fuel recoveries

fall outside an agreed-upon tolerance band. During the past five years, Natural has experienced a

net under recovery of fuel costs, as demonstrated in its transparency report filings.8 Thus, the

fuel mechanism under the Settlement has worked to the benefit of Natural’s customers.

In 2012, $1.25 billion of PipeCo’s debt issued prior to the First Section 5 Investigation

matured and Natural faced a major refinancing challenge. In the face of declining revenues, due

in part to the First Section 5 Investigation, and the obligation to service an unsustainably highly

levered capital structure, the Myria ownership group declined to invest equity to reduce Natural’s

debt load. Instead, PipeCo issued replacement debt at significantly higher interest rates because

its reduced cash flow had eroded its credit quality. This refinancing included debt issued with an

interest rate of 9.6 percent and increased PipeCo’s average fixed interest rate on its debt to

approximately 7.6 percent requiring average interest payments of $230 million per year. At the

8 In the informational filing made August 1, 2013, for the twenty-four months ended June 30, 2013, the net under recovery was 649,171 Dth. In the most recent filing made August 1, 2016 for the thirty-six months ended March 31, 2016, the net under recovery was 811,254 Dth. However, since the under recoveries in both reports were within the tolerance, no increase to Natural’s currently effective fuel factors was permitted.

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same time, operating cash flows per year continued to trend lower, partially due to the rate

reductions from the settlement of the First Section 5 Investigation.

Natural faced a severe strain on its finances over the next three years as a result of the

increased fixed interest payment obligations, decreased revenues related to the First Section 5

Investigation and competitive market pressures. Through the first three quarters of 2015, cash

flow from operations and from the available line of credit was barely sufficient to service

Natural’s debt, make minimum investments in sustaining capital, and meet O&M expenses. By

the fourth quarter of 2015, Natural faced a liquidity crisis and stood at the brink of bankruptcy.

Natural was rescued from filing for bankruptcy protection through a restructuring plan

under which KMI and Brookfield Infrastructure Partners L.P. (“Brookfield”) (collectively, KMI

and Brookfield may be referred to as the “Owners”) acquired full ownership of PipeCo from

Myria for $242 million. At the time of this acquisition, the implied enterprise value of Natural

was $3.4 billion, a decrease of more than $2.5 billion since the Myria acquisition.

The new Owners put a plan in place to inject equity that would reduce debt and return the

capital structure to one more resembling a traditional pipeline capital structure and achieve an IG

credit rating. This capital restructuring, if achieved, would allow Natural to free up cash flow for

reinvestment in its pipeline system to remain competitive in a dynamically changing market.

Immediately following the sale, the Owners injected $85 million in equity contributions in

December 2015, to address immediate liquidity issues. In April of 2016, the Owners injected

additional equity of $623 million in order to reduce approximately 20 percent of its debt. The

Owners are making progress, but while PipeCo has improved its credit situation, it still has sub-

IG credit ratings of BB- (S&P) and Ba3 (Moody’s) and is considered “highly levered” with a

capital structure of approximately 70 percent debt and 30 percent equity. Even these non-IG

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ratings assume continued investment by the Owners to de-lever the company. If that de-levering

does not occur, one can assume that these ratings will be subjected to downgrading. Natural was

on a path to regain its financial footing but additional time and stable cash flows are required in

order to recapitalize its balance sheet. Natural’s plan is now in danger. Moody’s has described

the new Second Section 5 Investigation into Natural’s rates as “Credit Negative.”

Since the First Section 5 Investigation, Natural’s value has declined precipitously and its

cost of debt is significantly higher than that estimated by the Commission. Nevertheless,

Natural’s new Owners have made the necessary capital commitments to start to move Natural to

a more sound financial footing. During the period from December 1, 2015 to December 31,

2016, the Owners have improved Natural’s financial position through $708 million in equity

injections while receiving no dividends, continuing a pattern from the previous years for the

prior owners. All cash flows have been used exclusively for the pipeline’s operations or used to

service debt.

On December 15, 2017 the next tranche of PipeCo’s debt will mature. This $1.25 billion

of debt will have to be refinanced in the capital markets. Given that PipeCo remains a sub-IG

issuer, the success of this refinancing relies upon continued stability or improvement of Natural’s

financial results. The Commission’s Section 5 investigation creates considerable uncertainty and

jeopardizes Natural’s capital restructuring plan. As noted, Moody’s has described the Second

Section 5 Investigation as “Credit Negative.” Contributing additional risk to Natural’s

operations through uncertainty over its future revenues substantially increases the risk of

executing the refinancing and, at a minimum, will increase the interest cost.

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II. The Commission Should Exercise its Discretion to Terminate this Investigation

Based on Extraordinary Circumstances Not Considered in the Investigation Order.

A. The Commission Has Broad Discretion to Open or Terminate a Section 5

Investigation.

The Commission has broad discretion to decide whether to issue an order opening an

investigation under section 5 of the NGA,9 and whether to terminate an investigation in its early

stages.10 This is especially true where new information, not considered by the Commission’s

order opening the investigation, comes to light. In fact, the Commission terminated a section 5

investigation on these grounds in Northern Natural after a customer group filed a motion to

terminate that introduced new information not considered at the time the investigation was

initiated.11 In the decision to open its Second Section 5 Investigation of Natural’s rates, in

addition to the significant overestimation of Natural’s return due to the calculation error

described in the Motion to Take Notice, the Commission failed to consider important public

information relating to Natural’s financial stability. Most importantly, the Commission failed to

consider how a rate decrease ordered as a result of the Second Section 5 Investigation may affect

Natural’s investors and bondholders. The Commission’s Second Section 5 Investigation will

impair Natural’s ongoing efforts to reduce its debt at reasonable costs and recapitalize its balance

sheet.

The Commission has a responsibility under the NGA to ensure that interstate natural gas

pipeline rates are just and reasonable, but the Commission must also ensure that its regulatory

actions do not impair the financial integrity of the companies it regulates.12 This requires a

9 See Northern Natural, 130 FERC ¶ 61,134, at P 18 n.12. 10 See Wisconsin, 373 U.S. 294; Minneapolis Gas Co., 294 F.2d 212; Northern Natural, 151 FERC ¶ 61,178. 11 See Northern Natural, 131 FERC ¶ 61,178, at P 14 (citing Wisconsin, 373 U.S. at 308-14). 12 FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944) (“Hope”); Permian Basin Area Rate Cases, 390 U.S. 747 (1968).

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delicate balancing of interests that the United States Supreme Court articulated in FPC v. Hope

Natural Gas Company. Hope held that the Commission has an obligation to ensure that

pipelines regulated under the NGA have an opportunity to earn a rate of return that is “sufficient

to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to

attract capital.”13 Hope also clarified that rate analyses are to be based upon the end result, as

opposed to the method used to achieve the “just and reasonable” rate.14 This end-results test

requires a balancing of investor and consumer interests.

Financial integrity is the cornerstone of how Hope defines the legitimate investor interest.

Interpreting what is meant by “the financial integrity of the company whose rates are being

regulated, Hope states:

From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock.15

To assess a natural gas company’s financial integrity, the Hope Court noted that the Commission

considered “[t]he company’s efficient management, established markets, financial record,

affiliations, and its prospective business place it in a strong position to attract capital upon

favorable terms when it is required.”16

In Jersey Central, the D.C. Circuit vacated and remanded a Commission order issued

under parallel provisions of the Federal Power Act for failing to consider, in addition to the

13 320 U.S. at 603. 14 Id. at 602; see also Jersey Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1176 (D.C. Cir. 1987) (“Jersey

Central”). 15 320 U.S. at 603. 16 Id. at 605.

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consumer interest, Hope’s end-results test, and the impact the Commission’s order had on “the

investor interest in maintaining financial integrity and access to capital markets.”17 The

Commission had ignored testimony offered by the utility to show:

that it had paid no dividends on its common stock for four years and faced a further prolonged inability to pay such dividends[;]…was unable to sell senior securities; that its only source of external capital was the Revolving Credit Agreement, which was subject to termination and which placed the outstanding bank loans the company was allowed to maintain below the level necessary for the upcoming year; that the need to pay interest on the company's debt and dividends on its preferred stock meant that common equity investors not only were earning a zero return, but were also forced to pay these interest costs and dividends and that ‘continued confiscation of earnings from the common equity holder ... will prolong the Company's inability to restore itself to a recognized level of credit worthiness’; that its ‘inability to realize fully its operating and capital costs so as to provide a fair rate of return on its invested capital has pushed its financial capability to the limits’; that ‘adequate and prompt relief is necessary in order to maintain the past high quality of service’; and that the rate increase requested was ‘the minimum necessary to restore the financial integrity of the Company.’18

The court ordered the Commission to consider the information related to financial integrity

offered by the utility and the impact of the Commission’s actions on the utility’s financial

position before making a rate determination. The court held that the Commission had committed

plain legal error for failing even to acknowledge that the utility raised a Hope financial integrity

issue.19

Hope, Jersey Central, and Northern Natural each demonstrate that the Commission may

not engage in rate regulation under NGA section 5 based solely on a rote review of figures from

a static form. Hope is clear that, results matter, not just numbers, and it is not just the consumer

17 810 F.2d at 1178. 18 Id. 19 Id.

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that has to be protected – investors require protection too. In the sections below, Natural

demonstrates how the results of the Commission’s action in this case will undermine the plan

that Natural’s investors have to return the company to a sound financial footing and restore its

investment grade credit rating. The information provided below demonstrates why the

Commission should terminate this Second Section 5 Investigation consistent with the long line of

precedent interpreting its section 5 rate authority. In order to balance its investors’ interests with

the customers’ interest, and to facilitate termination of the Second Section 5 Investigation,

Natural will agree not to file a general section 4 rate case and place a rate increase in effect

before July 1, 2019, unless a section 5 investigation is initiated by the Commission or a customer

before that date.

B. The Commission Failed to Take into Account Natural’s Financial Condition

and How its Second Section 5 Investigation Will Undermine Natural’s

Efforts to Improve its Balance Sheet.

The Commission has chosen to implement a section 5 rate investigation at a critical

juncture in the implementation of Natural’s efforts to reduce its debt and return to a more

balanced and traditional pipeline capital structure. The rate uncertainty created by the

Commission’s action threatens to derail these efforts and undermines the Owners’ plans to

stabilize Natural’s finances and reinvest in the pipeline. Since their December 2015 acquisition

of PipeCo from Myria, the Owners have embarked upon an aggressive restructuring program

relying on equity injections to pay down Natural’s debt (issued by PipeCo) to recapitalize

Natural’s balance sheet, correct its anomalous capital structure, and restore PipeCo to an

investment grade credit rating. This restructuring program needs to continue as the majority of

Natural’s cash flow is still consumed by interest payments on its debt, not to make distributions

to its Owners. The initiation of this Second Section 5 Investigation introduces significant

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uncertainty into Natural’s ability to continue to implement the restructuring program and is

unwarranted based on the actual returns to Natural’s owners.

The Commission’s calculation of Natural’s ROE infers returns to the Natural’s Owners

that are not reflective of reality. The actual returns to the Owners for 2014 and 2015 have been

negative and equity injections have been required over the past year to stabilize the business.

The Commission’s Second Section 5 Investigation takes a short-sighted view of Natural’s

finances and focuses only on the information in Natural’s Form No. 2 to reach the erroneous

conclusion that Natural may be earning an excessive ROE. But the Form No. 2 information

paints only a partial picture of Natural’s finances and does not reflect Natural’s true financial

picture.

The Commission’s analysis uses a proxy cost of debt of 4.80 percent in 2014 and 5.03

percent in 2015,20 when in reality the actual interest rates on the debt used to finance Natural’s

operations averaged 7.6 percent for each of those years. Using a proxy cost of debt that adjusts

each year is not reflective of the reality of a long-term fixed-rate capital structure. The long-term

debt from the time of the purchase by Natural’s prior owners was made up of fixed-rate bonds

with an average maturity of 12 years. The first tranche of this debt matured in 2012, with the

next tranche not maturing until the end of 2017 and the final tranche not maturing until 2037.

This is all publicly available information. The Commission’s use of a proxy cost of debt that

changes each year and which is not based on Natural’s actual situation, is not reflective of the

reality that Natural’s long-term financing is already established, with actual fixed rates which

only change with debt maturities and refinancings. In deciding whether to initiate a section 5

20 See Investigation Order, Appendix at n.1.

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investigation, rather than relying on a proxy debt cost to calculate a pipeline’s ROE, the

Commission should rely on actual information on the pipeline’s debt, all of which is readily

available from public sources.

The Commission’s estimated ROE for Natural suggests that its Owners achieved

significant cash returns from Natural in 2014 and 2015. This is absolutely not the case. In fact,

actual cash flows have been negative. The Commission’s estimated ROE calculation includes a

cash cost of debt of approximately $29 million in 2014 and $31 million in 2015.21 In reality, the

interest paid on Natural’s debt was approximately $230 million in each of 2014 and 2015. In

2016, even after the significant decrease in debt load achieved through the equity injections, the

interest paid was over $202 million. These interest payments, together with the cash required to

fund Natural’s operations and support a robust pipeline integrity program, resulted in negative

net income in 2014 and 2015, and actual cash flows over this period were negative by $75

million prior to financing activities. This two- year period of negative returns resulted in Natural

encountering significant liquidity issues and the eventual need for Natural’s new owners to

invest over $700 million in equity to stabilize the business. This equity infusion was especially

critical at the end of 2015 as Natural was about to commence its Chicago Market Expansion

project, and would not have had the funding for this project without the equity infusions of the

Owners.

The Commission’s Second Section 5 Investigation comes just prior to the maturity of a

$1.25 billion tranche of PipeCo’s publicly-traded debt. The Owners’ plan to rebalance Natural’s

capital structure is reliant on the successful refinancing of this large tranche of debt and the

21 See id. at Appendix “Interest on Debt”.

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ability to decrease the interest payments Natural is required to make each year. The additional

uncertainty the Commission’s action puts on Natural’s rates, revenues, and cash flows will

increase the risk rating that debt investors assign to potential new debt issued by PipeCo. This

additional risk will in turn increase the interest rate these debt investors will demand and could

result in higher rates for Natural.

The Commission’s short-sighted analysis also completely ignores how Natural is viewed

by the investment community. The uncertainty that the Commission’s investigation has created

over Natural’s finances going forward resonated almost immediately in the investment

community. Ratings agencies are already questioning the effect that the FERC investigation will

have on Natural and calling the outlook negative. In a Credit Outlook issued on January 26,

2017, Moody’s called FERC’s investigation “credit negative”: “The rate review is negative for

NGPL, adding regulatory and future rate uncertainty”22 Moody’s has not downgraded Natural’s

credit rating yet, but any downgrade would certainly make it significantly more costly for

Natural to refinance its debt on acceptable terms and perpetuate the imbalance in its capital

structure. Furthermore, in a Midstream Recap note published by U.S. Capital Advisors

(“USCA”) on January 20, 2017, another analyst noted the disconnect between what is reported

on Natural’s Form No. 2 and its actual capital structure:

NGPL and WIC began reporting no debt within their rate base on their Form 2s beginning in 2012/2013 (100% equity rate base despite NGPL having ~$3B of debt at the time). As a result, when we calculated ROEs based on the reported capitalization structure, their ROEs looked materially lower, with NGPL down to an estimated ~9% in 2015 . . . .

22 See Attachment B.

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A successful rebalancing of Natural’s capital structure and refinancing of the debt due in

2017 will benefit all of Natural’s customers. The continuity of Natural’s ownership and the

continued execution of its restructuring program will provide the necessary cash flow to allow

Natural to continue to provide safe and reliable transportation and storage services. For example,

Natural’s plan, if executed, will permit it to continue to meet all sustaining capital and O&M

needs, including maintaining a robust $350 million multi-year integrity management program

that exceeds current regulatory requirements. It is also important to note that integrity

management costs are expected to increase as new regulatory pipeline safety initiatives take

effect. Although Natural will not compromise its spending on safety related programs, the

regulatory and financial uncertainty created by the Commission’s Second Section 5

Investigation, will cause the Owners to reevaluate their future investment plans. By contrast,

termination of the Second Section 5 Investigation will permit stable revenue and free cash flow

after debt service which will enhance Natural’s ability to invest in its current assets to maintain

service with no rate increase to customers, and pursue expansion opportunities, such as its

expansions designed to reverse flows and ship gas south to markets along the Gulf Coast at

competitive rates. Natural is centrally positioned within the interstate grid, and able to meet

these demands for changing gas flows through repurposing of existing pipe. If Natural is not in a

financial position to address these demands, alternatives may require more greenfield

construction at higher costs to consumers and greater environmental disruption.

The Commission’s Second Section 5 Investigation is creating regulatory and financial

uncertainty for Natural at a time when its owners are actively trying to restructure its debt-laden

balance sheet. With the cloud of this Second Section 5 Investigation hanging over these efforts,

it will be more difficult for Natural to achieve its financial goals. Accordingly, Natural is filing

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this Motion asking for forbearance in the Commission’s rate review while Natural’s owners

work to return the pipeline to a sound financial footing.

C. The Commission Should Correct its Decision to Open the Second Section 5

Investigation and Terminate this Proceeding.

Natural recognizes that the Investigation Order is just the first step in what the

Commission intends to be a thorough review of Natural’s rates through a cost and revenue study

and then an evidentiary hearing. Natural appreciates the remarks of Chairman Bay,

Commissioner LaFleur, and Commissioner Honorable, at the January 19, 2017 open meeting

stating that they will not “prejudge” the outcome of the Investigation. The point of this Motion

to Terminate is not to show that Natural’s positions will prevail at the end of the hearing process

in this case, but to show that the Second Section 5 Investigation should not have been initiated in

the first place. Natural believes that, had the Commission reviewed the public record compiled

here, it would have determined that, notwithstanding whatever the analysis of its Form No. 2s

showed, Natural is not earning an unreasonable return on equity for the benefit of its Owners.

Quite to the contrary, in order to place Natural on a sound financial footing, the Owners have

invested significant capital in Natural without extracting a single cent of return on equity.

Regrettably, the Commission’s decision to initiate the Second Section 5 Investigation, as

demonstrated in the Motion to Take Notice and this Motion to Terminate, is already resonating

in the investment community and may affect Natural’s Owners’ ability to execute on their plans

to return Natural to a sound financial footing. A prompt termination of this Second Section 5

Investigation by February 2, 2017, will help to salvage Natural’s plans to improve its financial

outlook.

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D. In Light of the Second Section 5 Investigation, Natural Is Considering Filing

a General Section 4 Case as Soon as July 1, 2017.

Absent the Commission’s initiation of this Investigation, Natural had no immediate plans

to pursue a rate increase by filing a general section 4 rate case. To support the restructuring

efforts and to address the contractual risks described above, Natural’s preference has been to

keep its existing rates in place and to manage its restructuring needs and operating risks with

equity contributions, supported by low cost and efficient operations to maintain its competitive

position and continue its productive business relationships with its customers. Unfortunately,

FERC’s intervention into Natural’s rates will give Natural little choice but to undertake a

comprehensive review of its rates, rate design zone boundaries, and services in light of changing

market conditions. Such a proceeding will have to set rates based on Natural’s actual cost of

debt and a return that reflects the risks to Natural that were not captured in the Investigation

Order.

This review could result in Natural filing a general section 4 case as early as July 1, 2017,

proposing a rate increase and significant changes in transportation and storage services to take

effect on January 1, 2018 (assuming the maximum suspension period), subject to refund. Based

on the Track II timing requirements imposed in the Investigation Order, which will lead to an

initial decision by the administrative law judge in the section 5 proceeding at the end of February

2018, with a Commission order to follow after that, Natural’s customers could be exposed to rate

increase (with a refund floor set at Natural’s existing rates) well before any prospective rate

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decrease takes effect as a result of this Investigation.23 Natural would prefer not to go down this

path.

III. Natural Will Forego Filing a General Section 4 Rate Increase as Part of a

Termination of this Second Section 5 Investigation.

In light of Natural’s request that the Commission forebear exercise of its NGA section 5

authority at this time and terminate this Investigation, in order to reassure its customers that it

will not file for a rate increase, or otherwise alter the structure of existing services, in a general

section 4 rate case, Natural is prepared to make the following commitment: Natural agrees not to

file a general section 4 rate case and place a rate increase in effect before July 1, 2019,24 unless a

section 5 investigation is initiated by the Commission, a customer, or a state commission before

that date.

IV. Natural Requests that the Commission Act on this Motion by February 2, 2017.

Based on the impending resignation of Commissioner Bay effective February 3, 2017,

and the resulting lack of a quorum on the Commission, Natural also respectfully requests that the

Commission grant this Motion by February 2, 2017. Natural also request that the Commission

waive the acceptance of answers to this Motion. Because the decision to initiate and terminate

the Second Section 5 Investigation is at the Commission’s sole discretion, no party to this

proceeding will be prejudiced by such a waiver of acceptance of answers.

23 See e.g., Panhandle Complainants v. Southwest Gas Storage Co., 120 FERC ¶ 61,207 (2007). 24 This effective date for a rate increase takes into account the 30-day notice period and maximum five-month suspension period provided for in section 4 of the NGA.

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Conclusion

For all the foregoing reasons, Natural respectfully requests that the Commission waive

the acceptance of answers to this Motion, and grant this Motion and terminate this proceeding by

February 2, 2017.

Respectfully submitted, /s/ J. Curtis Moffatt

________________________________ Maria K. Pavlou J. Curtis Moffatt Vice President, Legal Deputy General Counsel, Vice President Natural gas Pipeline Company C. Todd Piczak of America LLC Assistant General Counsel 3250 Lacey Road, Suite 700 Kinder Morgan, Inc., as Operator of Downers Grove, IL 6051507918 Natural Gas Pipeline Company (630) 725-3092 of America LLC Maria_Pavlou@kindermorgan.com 1001 Louisiana Street Houston, Texas 77002 (713) 420-4998 (713) 420-3882

Curt_Moffatt@kindermorgan.com Todd_Piczak@kindermorgan.com

Suedeen G. Kelly Paul Korman Akin Gump Strauss Hauer & Feld, LLP A. Gregory Junge 1333 New Hampshire, Ave., NW Van Ness Feldman, LLP Washington, DC 20036-1564 1050 Thomas Jefferson St., NW, 7th Floor (202) 887-4526 Washington, DC 20007-3887 skelly@akingump.com (202) 29801830 pik@vnf.com agj@vnf.com Attorneys for Natural Gas Pipeline Company of America LLC Dated: January 30, 2017

CERTIFICATE OF SERVICE

I hereby certify that I have this 30th day of January, 2017, caused to be served, in

accordance with the provisions of Rule 2010 of the Commission’s Rules of Practice and

Procedure, a copy of the foregoing document upon all parties on the official service list compiled

by the Secretary of the Federal Energy Regulatory Commission in this proceeding.

/s/ C. Todd Piczak ____________________

C. Todd Piczak

DATED at Houston, Texas, this 30th day of January, 2017.

ATTACHMENT A

ATTACHMENT A

NATURAL GAS PIPELINE COMPANY OF AMERICA LLC

Estimated FERC Returns (2014 to 2015)

Line FERC Order FERC Adjusted Difference FERC Order FERC Adjusted Difference

Rate Base

Plant

1 Gas Plant in Service (101-106,114) $3,984,762,026 $3,984,762,026 $4,015,890,376 $4,015,890,376

2 Accumulated Depreciation ($2,556,491,097) ($2,556,491,097) ($2,595,000,737) ($2,595,000,737)

Underground Storage Gas

3 Gas Stored Underground (117.1) $148,705,690 $148,705,690 $185,497,856 $185,497,856

4 System Balancing Gas (117.2) $10,907,449 $10,907,449 $3,506,780 $3,506,780

Working Capital

5 Materials and Supplies Inventory (154) $19,175,027 $19,175,027 $17,445,643 $17,445,643

6 Prepayments (165) $562,223 $562,223 $528,600 $528,600

Accumulated Deferred Income Taxes

7 Account 190 $0 $0 $0 $0

8 Account 282 ($402,152,287) ($402,152,287) ($406,776,008) ($406,776,008)

9 Account 283 ($5,106,035) ($5,106,035) ($4,698,083) ($4,698,083)

Regulatory Assets and Liabilities

10 Regulatory Assets $14,635,281 $14,635,281 $13,288,063 $13,288,063

11 Regulatory Liabilities ($240,176) ($240,176) ($222,419) ($222,419)

12 Total Rate Base (Lines 1 to 11) $1,214,758,101 $1,214,758,101 $1,229,460,071 $1,229,460,071

Capital Costs

Capitalization (Hypothetical)

13 Debt 50.00% 50.00% 50.00% 50.00%

14 Equity 50.00% 50.00% 50.00% 50.00%

15 Cost of Debt (Hypothetical) 4.80% 4.80% 5.03% 5.03%

16 Weighted Cost of Debt (Line 13 x Line 15) 2.40% 2.40% 2.51% 2.51%

Operating Revenue

17 Other Revenues (Excludes Fuel Revenues) $649,823,330 $532,072,743 $117,750,587 $576,050,465 $511,024,380 $65,026,085

18 ACA Revenues $1,604,873 $1,604,873 $1,889,121 $1,889,121

19 (Less) Sales for Resales (Act. 480-484) ($17,220,397) ($17,220,397) ($10,379,378) ($10,379,378)

20 (Less) Gas Sales & Oth Adj. from Acct 495 $0 $0 $0 $0

21 Total Adjusted Revenues (Lines 17 to 20) $634,207,806 $516,457,219 $567,560,208 $502,534,123

Cost of Service (COS)

22 Interest on Debt $29,154,194 $29,154,194 $30,915,798 $30,915,798

23 Taxes Other Than Income Taxes $24,935,879 $24,935,879 $24,347,375 $24,347,375

24 Depreciation Expense $88,444,998 $88,444,998 $88,564,362 $88,564,362

Operation and Maintenance Expense

25 Production & Gathering $2,846 $2,846 $1,600 $1,600

26 Storage (Less Compressor Fuel) $28,660,786 $28,660,786 $24,335,098 $24,335,098

27 Transportation (Less Compressor Fuel) $145,442,577 $128,473,270 $16,969,307 $152,330,172 $134,396,405 $17,933,767

28 Administrative & General $40,746,825 $40,746,825 $41,839,074 $41,839,074

29 Total COS Excluding Return and Taxes (Lines 22 to 28) $357,388,105 $340,418,798 $362,333,479 $344,399,712

Income

30 Income Before Income Taxes (Line 21 - Line 29) $276,819,701 $176,038,421 $100,781,280 $205,226,669 $158,134,411 $47,092,258

31 Composite Tax Rate 39.00% 39.00% 39.00% 39.00%

32 Composite Income Tax (Line 30 x Line 31) $107,903,998 $68,654,984 $39,249,014 $79,997,117 $61,672,420 $18,324,697

33 Net Income (Line 30 - Line 32) $168,915,703 $107,383,437 $61,532,266 $125,229,552 $96,461,991 $28,767,561

34 Total Estimated Return on Equity

Line 33 ÷ (Line 12 x Line 14) 28.5% 17.7% 10.8% 20.8% 15.7% 5.1%

Notes:

Adjusted FERC amounts to:

- remove fuel from Other Revenues (Form 2 pg 305.1 line 19 column f + pg 307, line 6 column f)

- remove the electric costs reported on page 323, line 185 (Account 855) since Natural collects

fuel to cover its electric costs.

These revenues and costs are accounted for and tracked in NGPL's required periodic Fuel Transparency Report

- Fuel Transparency Report filed on Aug 1, 2016 shows an under-recovery

This workpaper does not reflect Natural’s position on or agreement to the other figures in the Appendix.

2014 2015

Natural - Correction of Error in FERC Return Calculation (Att. A Motion to Terminate) (Final).xlsx 1/30/2017

ATTACHMENT B

ISSUER COMMENT

INFRASTRUCTURE JANUARY 26, 2017

What is Moody’s Credit Outlook?

Published every Monday and Thursday morning, Moody's Credit Outlook informs our research clients of the credit implications of current events.

NGPL PipeCo’s FERC-Prompted Rate Review Is Credit Negative From Credit Outlook

Last Thursday, the US Federal Regulatory Energy Commission (FERC) issued a directive requiring NGPL PipeCo LLC (Ba3 positive) subsidiary National Gas Pipeline Company of America LLC (Natural, unrated) to file a full cost and revenue study because of the regulator’s concern that Natural is over-recovering its cost of service. The rate review is negative for NGPL, adding regulatory and future rate uncertainty and threatening to reduce the highly levered pipeline holding company’s revenue by around $70 million, down from about $590 million through the 12-months that ended 30 September 2016. Assuming a 16.5% return on equity and using the FERC’s cost and revenue figures, we estimate that NGPL’s revenue could be reduced to $521 million for transmission and storage services.

As part of ongoing regulatory monitoring of natural gas pipeline cost and revenue information, the FERC estimated Natural’s return on equity at 28.5% in 2014 and 20.8% in 2015. Although Natural is not bound by a regulatory-allowed return on equity, the FERC stated that these earnings levels may substantially exceed the pipeline’s actual cost of service and a reasonable return on equity. Consequently, the FERC directed Natural to file a cost and revenue study within 71 days. Legal hearings will follow the cost and revenue study, with an administrative law judge decision due after 47 weeks.

In response, NGPL filed a motion with the FERC to take notice of an error in the agency’s return-on-equity calculation, offering an alternative calculation that removes both the revenues associated with natural gas recoveries and natural gas fuel expenses. This alternative calculation would result in a return on equity of 17.7% in 2014 and 15.7% in 2015.

NGPL asserts that the FERC’s miscalculated returns are based on the regulator’s inconsistent recognition of fuel collections and associated fuel expenses, which overstated revenues for regulatory purposes. NGPL also notes that the FERC periodically reviews such items and that there had been no evidence to change rates as late as August 2016.

Analyst Contact:

NEW YORK +1.212.553.1653

Ryan Wobbrock +1.212.553.7104 Vice President - Senior Analyst ryan.wobbrock@moodys.com

INFRASTRUCTURE

2 JANUARY 26, 2017

ISSUER COMMENT: NGPL PIPECO’S FERC-PROMPTED RATE REVIEW IS CREDIT NEGATIVE

Report Number: 194161

Author Ryan Wobbrock

Production Associate Dinesh Kumar

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