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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-2700
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EL PASO NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-0608280
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share. Shares outstanding on May 10,
2000: 1,000
EL PASO NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
FIRST QUARTER
ENDED
MARCH 31,
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2000 1999
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Operating revenues.......................................... $117 $118
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Operating expenses
Operation and maintenance................................. 37 38
Depreciation, depletion, and amortization................. 16 16
Taxes, other than income taxes............................ 8 8
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61 62
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Operating income............................................ 56 56
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Non-affiliated interest and debt expense.................... 28 26
Affiliated interest income, net............................. (21) (12)
Income tax expense.......................................... 19 16
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26 30
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Net income.................................................. $ 30 $ 26
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See accompanying notes.
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ --
Accounts and notes receivable, net........................ 889 1,414
Materials and supplies.................................... 31 28
Other..................................................... 3 9
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Total current assets.............................. 923 1,451
Property, plant, and equipment, net......................... 1,656 1,532
Other....................................................... 120 117
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Total assets...................................... $2,699 $3,100
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 60 $ 65
Short-term borrowings (including current maturities of
long-term debt)........................................ 127 567
Taxes payable............................................. 87 77
Other..................................................... 85 67
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Total current liabilities......................... 359 776
Long-term debt, less current maturities..................... 873 873
Deferred income taxes....................................... 175 172
Other....................................................... 143 153
Commitments and contingencies
Stockholder's equity
Preferred stock, 1,000,000 shares authorized; 8% par value
$0.01 per share; 500,000 shares issued; stated at
liquidation value...................................... 350 350
Common stock, par value $1 per share; authorized and
issued
1,000 shares........................................... -- --
Additional paid-in capital................................ 700 700
Retained earnings......................................... 99 76
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Total stockholder's equity........................ 1,149 1,126
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Total liabilities and stockholder's equity........ $2,699 $3,100
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See accompanying notes.
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
FIRST QUARTER
ENDED
MARCH 31,
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2000 1999
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Cash flows from operating activities
Net income................................................ $ 30 $ 26
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 16 16
Deferred income tax expense (benefit).................. 11 (1)
Risk-sharing revenue................................... (8) (8)
Working capital changes, net of non-cash transactions..... 11 115
Other..................................................... (2) (7)
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Net cash provided by operating activities......... 58 141
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Cash flows from investing activities
Purchases of property, plant, and equipment............... (137) (5)
Net change in other affiliated advances................... 518 (219)
Other..................................................... 2 --
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Net cash provided by (used in) investing
activities....................................... 383 (224)
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Cash flows from financing activities
Net borrowings (repayments) from commercial paper......... (441) 20
Revolving credit borrowings............................... 85 165
Revolving credit repayments............................... (85) (95)
Payments to retire long-term debt......................... -- (5)
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Net cash provided by (used in) financing
activities....................................... (441) 85
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Increase in cash and cash equivalents....................... -- 2
Cash and cash equivalents
Beginning of period............................... -- 9
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End of period..................................... $ -- $ 11
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See accompanying notes.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Our 1999 Annual Report on Form 10-K includes a summary of our significant
accounting policies and other disclosures. You should read it in conjunction
with this Quarterly Report on Form 10-Q. The condensed consolidated financial
statements at March 31, 2000, and for the quarters ended March 31, 2000 and
1999, are unaudited. The condensed consolidated balance sheet at December 31,
1999, is derived from the audited financial statements. These financial
statements do not include all disclosures required by generally accepted
accounting principles, but have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. In our opinion, all
material adjustments, all of which are of a normal, recurring nature, have been
made to fairly present our results of operations. Information for any interim
period may not necessarily indicate the results of operations for the entire
year due to the seasonal nature of our businesses. The prior period information
includes reclassifications which were made to conform to the current
presentation. These reclassifications have no effect on reported net income or
stockholder's equity.
2. ACQUISITIONS
In March 2000, we purchased the All American Pipeline, a crude oil
transportation system, for $129 million. The system consists of 1,088 miles of
pipeline which runs from McCamey, Texas to Emidio Station near Bakersfield,
California. We intend to convert a portion of the oil pipeline to a natural gas
pipeline, pending FERC approval.
3. PROPERTY, PLANT, AND EQUIPMENT
Our property, plant, and equipment consisted of the following at March 31,
2000 and December 31, 1999:
2000 1999
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(IN MILLIONS)
Property, plant, and equipment, at cost..................... $2,580 $2,448
Less accumulated depreciation and depletion................. 1,002 994
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1,578 1,454
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 78 78
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Total property, plant, and equipment, net......... $1,656 $1,532
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4. DEBT AND OTHER CREDIT FACILITIES
At March 31, 2000, our weighted average interest rate on short-term
borrowings was 6.4% and at December 31, 1999, it was 6.6%. We had short-term
borrowings at March 31, 2000 and December 31, 1999, as follows:
2000 1999
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(IN MILLIONS)
Commercial paper............................................ $127 $567
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For the three month period ended March 31, 2000, we accrued $9 million in
dividends payable on our 8% preferred stock.
5. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In June 1995, we filed new system rates for our mainline transportation
with the Federal Energy Regulatory Commission (FERC). In April 1997, FERC
approved our settlement to resolve this proceeding as
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well as issues surrounding certain contract reductions and expirations that
occurred from January 1, 1996 through December 31, 1997. FERC also determined
that Southern California Edison Company (Edison) should have its rates
separately determined. The settlement was effective as of January 1, 1996.
In November 1999, FERC approved the joint settlement between us and Edison
and reapproved our rate settlement conditioned upon the immediate adjustment of
our fuel charges for several facilities refunctionalized as gathering (see
discussion below). Following FERC's action, we filed for rehearing of FERC's
fuel adjustment requirement. FERC denied the request for rehearing and required
that the fuel adjustment be implemented effective February 1, 2000. See
discussion related to the Chaco Station below.
Our rate settlement establishes, among other things, base rates through
December 31, 2005. According to the settlement, our base rates began escalating
annually in 1998 as a result of inflationary factors. We have the right to
increase or decrease base rates if changes in laws or regulations result in
increased or decreased costs in excess of $10 million a year. In addition, all
of our settling customers, except Edison, participate in risk sharing provisions
under our rate case settlement. Under these provisions, we received and continue
to receive cash payments totaling $295 million for a portion of the risk we
assumed from certain capacity relinquishments by our customers at the end of
1997. The cash received is deferred, and we recognize this deferral in revenues
ratably over the risk sharing period. As of March 31, 2000, we had unearned risk
sharing revenues of approximately $119 million and had $50 million remaining to
be collected from customers under this provision. If the revenues from
remarketing our relinquished capacity to customers exceeds certain dollar levels
specified in the rate settlement, we may be obligated to refund a portion of the
excess to customers. Through March 31, 2000, we have refunded $15 million for
1999 revenues to customers and have reserved $3 million against 2000 revenues
under this revenue sharing provision. Both risk and revenue sharing provisions
of the rate settlement extend through 2003.
In 1998, we transferred our Chaco Station to El Paso Field Services to
comply with a FERC ruling that this asset should be functionalized as a
gathering rather than a transmission facility. In October 1999, the Court of
Appeals sustained FERC's determination, but remanded to FERC issues relating to
the appropriate fuel and rate treatment resulting from its refunctionalization.
In August 1999, a complaint was filed seeking a determination that our Blanco
Compressor Station is a non-jurisdictional gathering facility rather than a
jurisdictional transmission facility. In a November 1999 order, FERC ruled that
two of the three Blanco compressor facilities were nonjurisdictional gathering
facilities, and that an immediate adjustment of our fuel charges to eliminate
the effects of the refunctionalized facilities was appropriate, but that no
change should be made to our base rates as a result of refunctionalization. In
April 2000, FERC denied our request for the rehearing and ordered us to adjust
our fuel charges effective February 1, 2000. We have implemented this order and
the impact will not have a material adverse effect on our financial position,
results of operations, or cash flows.
Several of our customers have filed complaints requesting that FERC order
us to cease and desist from selling primary firm delivery point capacity at the
Southern California Gas Company Topock Delivery point in excess of the
downstream capacity available at that point and to cease and desist from
overselling firm mainline capacity on the east-end of our mainline system.
Various technical conferences have been held regarding these matters. In May,
the parties agreed to use FERC's alternative dispute resolution services to
resolve these matters. The first meeting will be in May 2000.
In January 2000, Northwest Pipeline Corporation filed a complaint alleging
that our scheduling procedures applicable to the Ignacio, Colorado interconnect
are inconsistent with applicable general industry standards and have resulted in
excessive imbalances on Northwest's system. In March 2000, FERC granted the
complaint and required imbalances incurred by Northwest, as a result of our
scheduling practice to be transferred to our system. As of March 31, 2000, we
adjusted these accounts and our scheduling procedures as a result of this order.
In April 2000, the California Public Utilities Commission filed a complaint
alleging that our sale of capacity to El Paso Merchant Energy Company, an
affiliated company, was anticompetitive and an abuse of the affiliate
relationship under FERC's policies. We have answered the complaint and the
matter is pending at FERC.
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As an interstate pipeline system, we are subject to FERC audits of our
books and records. We currently have an open audit covering the years 1990
through 1995. FERC is expected to issue its final audit report in 2000. Also,
from time to time, the FERC audit staff requests supporting documentation from
us as evidence of our compliance.
As our rate and regulatory matters are fully and unconditionally resolved,
we may either recognize an additional refund obligation or a non-cash benefit to
finalize previously estimated liabilities. While we cannot predict with
certainty the final outcome or timing of the resolution of our rates and
regulatory matters, the outcome of our current re-contracting and capacity
subscription efforts, or the outcome of ongoing industry trends and initiatives,
we believe the ultimate resolution of these issues will not have a material
adverse effect on our financial position, results of operations, or cash flows.
Legal Proceedings
In November 1993, TransAmerican Natural Gas Corporation filed a complaint
in a Texas state court against us which sought approximately $7.5 billion in
actual and punitive damages related to our 1990 settlement agreement with
TransAmerican and others. TransAmerican's complaint advanced ten causes of
action. Some of the causes of action were previously dismissed. Trial on the
remaining claims began on
May 1, 2000. During the trial commencement, all claims against all defendants
were settled. This settlement will have no material adverse effect on our
financial position, results of operations, or cash flows.
In April 1996, a former employee of TransAmerican filed a related case in
Harris County, Texas, Vickroy E. Stone v. Godwin & Carlton, P.C., et al.,
seeking other damages in unspecified amounts related to litigation consulting
work allegedly performed for various entities, including us, in cases involving
TransAmerican. In June 1998, the court granted our motion for summary judgment
and dismissed all claims in the Stone litigation. Stone has appealed the court's
ruling to the Texas Court of Appeals in Houston, Texas. Based on information
available at this time, we believe that the claims asserted against us in this
case have no factual or legal basis. Further, because of the settlement reached
in the related TransAmerican case, the claims in this case are not material.
We are a named defendant in actions brought by Jack Grynberg on behalf of
the U.S. Government under the False Claims Act. Generally, these complaints
allege an industry-wide conspiracy to underreport the heating value as well as
the volumes of the natural gas produced from federal and Indian lands, which
deprived the U.S. Government of royalties. We have also been named as a
defendant in a similar class action suit, Quinque Operating Company v. Gas
Pipelines. This complaint alleges that the defendants mismeasured natural gas
volumes and heating content of natural gas on non-federal and non-Native
American lands. The Quinque complaint was transferred to the same court handling
the Grynberg complaint. We believe both complaints are without merit.
We are also a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of our
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, 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.
Environmental
We are subject to extensive federal, state, and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations require us to remove or remedy the effect on the environment of the
disposal or release of specified substances at current and former operating
sites. As of March 31, 2000, we had reserved $21 million for expected
environmental costs.
In addition, we expect to make capital expenditures of approximately $9
million for the years 2001 through 2007 for environmental matters primarily
relating to compliance with air regulations and control of water discharges.
Some of our subsidiaries have been designated, have received notice that they
could be designated, or have been asked for information to determine whether
they could be designated as a potentially responsible party (PRP) with respect
to 4 sites under CERCLA.
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It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws and regulations, and claims for
damages to property, employees, other persons and the environment resulting from
our current or discontinued operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will adjust our accrual amounts accordingly.
While there are still uncertainties relating to the ultimate costs we may incur,
based upon our evaluation and experience to date, we believe the recorded
reserves are adequate.
6. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, to establish accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. This pronouncement requires us to
classify derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. If certain conditions are met, we may
specifically designate a derivative as a hedge of:
- the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment,
- the exposure to variable cash flows of a forecasted transaction, or
- the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
The accounting for the changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. Statement of
Financial Accounting Standards No. 137 amended the standard in June 1999. The
amendment defers the effective date to fiscal years beginning after June 15,
2000. We are currently evaluating the effects of this pronouncement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in Part II, Items 7, 7A, and 8, in our
Annual Report on Form 10-K for the year ended December 31, 1999, in addition to
the interim financial statements and notes presented in Item 1 of this Quarterly
Report on Form 10-Q.
RESULTS OF OPERATIONS
FIRST QUARTER
ENDED
MARCH 31,
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2000 1999
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(IN MILLIONS, EXCEPT
VOLUME AMOUNTS)
Operating revenues.......................................... $ 117 $ 118
Operating expenses.......................................... (61) (62)
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EBIT...................................................... $ 56 $ 56
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Throughput volumes (BBtu/d)(1).............................. 3,934 3,936
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(1) BBtu/d means billion British thermal units per day
Operating revenues for the quarter ended March 31, 2000, were $1 million
lower than 1999. The decrease was due to lower revenues from relinquished
capacity, partially offset by higher transportation revenues.
Operating expenses for the quarter ended March 31, 2000, were $1 million
lower than 1999. The decrease was due to lower shared services allocations,
partially offset by higher favorable fuel settlements with a producer in 1999.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the quarter ended March 31,
2000, was $2 million higher than 1999 due to an average increase in commercial
paper borrowings and other credit facilities in 2000, partially offset by lower
long term debt.
AFFILIATED INTEREST INCOME, NET
Affiliated interest income, net for the quarter ended March 31, 2000, was
$9 million higher than 1999 due to increased interest rates and average advances
with El Paso in 2000.
INCOME TAX EXPENSE
Our income tax expense for the quarters ended March 31, 2000 and 1999, was
$19 million and $16 million, respectively, resulting in an effective tax rate of
39 percent and 38 percent respectively. The effective tax rates are higher than
the statutory rate of 35 percent due to state income taxes.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this document that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations. These statements may relate to information or
assumptions about:
- capital and other expenditures;
- dividends;
- financing plans;
- capital structure;
- cash flow;
- pending legal proceedings and claims, including environmental matters;
- future economic performance;
- operating income;
- cost savings;
- management's plans; and
- goals and objectives for future operations.
Important factors that could cause actual results to differ materially from
estimates or projections contained in forward-looking statements include, among
others, the following:
- the increasing competition within our industry;
- the timing and extent of changes in commodity prices for natural gas and
power;
- the uncertainties associated with customer contract expirations on our
pipeline systems;
- the potential contingent liabilities and tax liabilities related to our
acquisitions; and
- the conditions of equity and other capital markets.
These risk factors are more fully described in our other filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 1999, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.
There are no material changes in market risks from those reported in our
Annual Report on Form 10-K for the year ended December 31, 1999.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 5, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
EXHIBIT
NUMBER
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27 -- Financial Data Schedule
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of El Paso Natural Gas Company and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not
exceed 10 percent of the total consolidated assets of El Paso Natural Gas
Company and its consolidated subsidiaries.
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO NATURAL GAS COMPANY
Date: May 11, 2000 /s/ H. BRENT AUSTIN
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H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 11, 2000 /s/ JEFFREY I. BEASON
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Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER
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27 -- Financial Data Schedule