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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, 2002
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)
<Table>
DELAWARE 74-0608280
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</Table>
Telephone Number: (713) 420-2600
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,
2002: 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)
<Table>
<Caption>
QUARTER ENDED
MARCH 31,
--------------
2002 2001
----- -----
Operating revenues.......................................... $152 $141
---- ----
Operating expenses
Operation and maintenance................................. 50 41
Merger-related costs...................................... -- 8
Depreciation, depletion and amortization.................. 13 17
Taxes, other than income taxes............................ 8 8
---- ----
71 74
---- ----
Operating income............................................ 81 67
---- ----
Other income, net........................................... 1 --
---- ----
Income before interest and income taxes..................... 82 67
---- ----
Non-affiliated interest and debt expense.................... 16 23
Affiliated interest income.................................. (6) (19)
Income taxes................................................ 28 23
---- ----
38 27
---- ----
Net income.................................................. $ 44 $ 40
==== ====
</Table>
See accompanying notes.
1
EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ --
Accounts and notes receivable, net
Customer............................................... 71 97
Affiliates............................................. 1,239 1,298
Other.................................................. 1 6
Materials and supplies.................................... 41 39
Other..................................................... 12 16
------ ------
Total current assets.............................. 1,364 1,456
------ ------
Property, plant and equipment, at cost...................... 2,937 2,940
Less accumulated depreciation, depletion and
amortization........................................... 1,136 1,142
------ ------
Total property, plant and equipment, net.......... 1,801 1,798
------ ------
Other....................................................... 81 90
------ ------
Total assets...................................... $3,246 $3,344
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable
Trade.................................................. $ 16 $ 54
Affiliates............................................. 10 9
Other.................................................. 6 9
Short-term borrowings (including current maturities of
long-term debt)........................................ 560 654
Taxes payable............................................. 137 117
Other..................................................... 93 93
------ ------
Total current liabilities......................... 822 936
------ ------
Long-term debt, less current maturities..................... 659 659
------ ------
Other liabilities
Deferred income taxes..................................... 290 282
Other..................................................... 158 169
------ ------
448 451
------ ------
Commitments and contingencies
Stockholder's equity
Preferred stock, 8%, par value $0.01 per share; authorized
1,000,000 shares; issued 500,000 shares; stated at
liquidation value...................................... 350 350
Common stock, par value $1 per share; authorized and
issued 1,000 shares.................................... -- --
Additional paid-in capital................................ 714 714
Retained earnings......................................... 253 234
------ ------
Total stockholder's equity........................ 1,317 1,298
------ ------
Total liabilities and stockholder's equity........ $3,246 $3,344
====== ======
</Table>
See accompanying notes.
2
EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
------- ------
Cash flows from operating activities
Net income................................................ $ 44 $ 40
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion and amortization............... 13 17
Deferred income tax expense............................ 9 10
Net gain on the sale of assets......................... (1) --
Risk-sharing revenue................................... (8) (8)
Working capital changes................................... 6 9
Non-working capital changes and other..................... 9 --
----- ----
Net cash provided by operating activities......... 72 68
----- ----
Cash flows from investing activities
Additions to property, plant and equipment................ (37) (21)
Proceeds from the sale of assets.......................... 1 1
Net change in affiliated advances receivable.............. 58 --
----- ----
Net cash provided by (used in) investing
activities....................................... 22 (20)
----- ----
Cash flows from financing activities
Net borrowings (repayments) under commercial paper and
short-term credit facilities........................... 121 (48)
Payments to retire long-term debt......................... (215) --
----- ----
Net cash used in financing activities............. (94) (48)
----- ----
Change in cash and cash equivalents......................... -- --
Cash and cash equivalents
Beginning of period....................................... -- --
----- ----
End of period............................................. $ -- $ --
===== ====
</Table>
See accompanying notes.
3
EL PASO NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Our 2001 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 financial statements as of March
31, 2002, and for the quarters ended March 31, 2002 and 2001, are unaudited. The
balance sheet as of December 31, 2001, is derived from the audited balance sheet
filed in our Form 10-K. These financial statements have been prepared pursuant
to the rules and regulations of the U.S. Securities and Exchange Commission and
do not include all disclosures required by accounting principles generally
accepted in the United States. In our opinion, we have made all adjustments, all
of which are of a normal, recurring nature (except for merger-related costs
which are discussed below), to fairly present our interim period results.
Information for interim periods may not necessarily indicate the results of
operations for the entire year due to the seasonal nature of our businesses.
Our accounting policies are consistent with those discussed in our Form
10-K.
2. MERGER-RELATED COSTS
During the quarter ended March 31, 2001, we incurred merger-related costs
of $8 million associated with El Paso Corporation's merger with The Coastal
Corporation and the relocation of our headquarters to Colorado Springs,
Colorado. These costs consisted of employee severance, retention and transition
costs for severed employees that occurred as a result of El Paso's
merger-related workforce reduction and consolidation. Our merger-related costs
also included actual severance payments and costs for pension and
post-retirement benefits settled and curtailed under existing benefit plans.
These costs were expensed as incurred and were paid in the first and second
quarters of 2001.
3. DEBT AND OTHER CREDIT FACILITIES
At March 31, 2002, our weighted average interest rate on our commercial
paper was 2.7%, and at December 31, 2001, it was 3.3%. We had the following
short-term borrowings including current maturities of long-term debt:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(IN MILLIONS)
Commercial paper............................................ $560 $439
Current maturities of long-term debt........................ -- 215
---- ----
$560 $654
==== ====
</Table>
In January 2002, we retired $215 million aggregate principal amount of
7.75% notes due 2002.
4. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
El Paso and several of its subsidiaries were named defendants in eleven
purported class action, municipal or individual lawsuits, filed in the
California state courts (a list of the California cases is included in Part II,
Item 1, Legal Proceedings.) We are a defendant in ten of these lawsuits. The
eleven suits contend that El Paso entities acted improperly to limit the
construction of new pipeline capacity to California and/or to manipulate the
price of natural gas sold into the California marketplace. The lawsuits are at
the preliminary pleading stages with trial not anticipated until late 2003 at
the earliest.
4
In September 2001, we received a civil document subpoena from the
California Department of Justice, seeking information said to be relevant to the
Department's ongoing investigation into the high electricity prices in
California. We have produced and expect to continue to produce materials
pursuant to this subpoena.
In August 2000, a main transmission line owned and operated by us ruptured
at the crossing of the Pecos River near Carlsbad, New Mexico. Twelve individuals
at the site were fatally injured. On June 20, 2001, the U.S. Department of
Transportation's Office of Pipeline Safety issued a Notice of Proposed Violation
to us. The Notice alleged five probable violations of its regulations (a list of
the alleged five probable violations is included in Part II, Item 1, Legal
Proceedings), proposed fines totaling $2.5 million and proposed corrective
actions. In October 2001, we filed a detailed response with the Office of
Pipeline Safety disputing each of the alleged violations. We are cooperating
with the National Transportation Safety Board in an investigation into the facts
and circumstances concerning the possible causes of the rupture. If we are
required to pay the proposed fines, it will not have a material adverse effect
on our financial position, operating results or cash flows. In addition, a
number of personal injury and wrongful death lawsuits were filed against us in
connection with the rupture. Several of these suits have been settled, with
payments fully covered by insurance. Seven Carlsbad lawsuits remain, with one of
those seven having reached a contingent settlement within insurance coverage (a
list of the remaining Carlsbad lawsuits is included in Part II, Item 1, Legal
Proceedings).
In 1997, we and a number of our affiliates were named defendants 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 under
report the heating value as well as the volumes of the natural gas produced from
federal and Native American lands, which deprived the U.S. Government of
royalties. These matters have been consolidated for pretrial purposes (In re:
Natural Gas Royalties Qui Tam Litigation, U.S. District Court for the District
of Wyoming, filed June 1997). In May 2001, the court denied the defendants'
motions to dismiss.
We and a number of our affiliates were named defendants in Quinque
Operating Company, et al v. Gas Pipelines and Their Predecessors, et al, filed
in 1999 in the District Court of Stevens County, Kansas. This class action
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 and has now been sent back to Kansas State Court for further
proceedings. A motion to dismiss this case is pending.
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, based on information known to date, we do not expect the ultimate
resolution of these matters will have a material adverse effect on our financial
position, operating results or cash flows.
Environmental Matters
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, 2002, we had a reserve of approximately $28 million for
expected remediation costs. In addition, we expect to make capital expenditures
for environmental matters of approximately $4 million in the aggregate for the
years 2002 through 2007. These expenditures primarily relate to compliance with
clean air regulations.
We have been designated and have received notice that we could be
designated, or have been asked for information to determine whether we could be
designated, as a Potentially Responsible Party (PRP) with respect to 4 sites
under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) or state equivalents. We have sought to resolve our liability as a PRP
at these CERCLA sites, as appropriate, through indemnification by third parties
and settlements which provide for payment of our allocable share of remediation
costs. As of March 31, 2002, we have estimated our share of the remediation
costs at these sites to be between $15 million and $19 million and have provided
reserves that we believe are
5
adequate for such costs. Since the clean-up costs are estimates and are subject
to revision as more information becomes available about the extent of
remediation required, and because in some cases we have asserted a defense to
any liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in the
determination of our estimated liabilities. We presently believe that, based on
our existing reserves, and information known to date, the impact of the costs
associated with these CERCLA sites will not have a material adverse effect on
our financial position, operating results or cash flows.
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 past 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 on our evaluation and experience to date, we believe the recorded reserves
are adequate.
Rates and Regulatory Matters
In April 2000, the California Public Utilities Commission (CPUC) filed a
complaint with the Federal Energy Regulatory Commission (FERC) alleging that our
sale of approximately 1.2 billion cubic feet per day of California capacity to
our affiliate, El Paso Merchant Energy Company, was anticompetitive and an abuse
of the affiliate relationship under the FERC's policies. Other parties in the
proceeding requested that the original complaint be set for hearing and that
Merchant Energy pay back any profits it earned under the contract. In March
2001, the FERC established a hearing, before an administrative law judge, to
address the issue of whether we and/or Merchant Energy had market power and, if
so, had exercised it. In October 2001, a FERC administrative law judge issued a
proposed decision finding that El Paso did not exercise market power and that
the market power portion of the CPUC's complaint should be dismissed. The
decision further found that El Paso had violated FERC's marketing affiliate
regulations. In October 2001, the Market Oversight and Enforcement (MOE) section
of the FERC's Office of the General Counsel filed comments in this proceeding
stating that record development at the trial was inadequate to conclude that we
complied with FERC's regulations. We filed a motion to strike the MOE's
pleading, but in December 2001, the FERC denied our motion and remanded the
proceeding to the administrative law judge for a supplemental hearing on the
availability of capacity at El Paso's California delivery points. The hearing
commenced on March 21, 2002 and concluded on April 4, 2002. Oral argument was
held on April 10, 2002, and post-hearing briefing is to be completed by June 5,
2002.
In late 1999, several of our customers filed complaints requesting that the
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.
Several technical conferences and alternative dispute resolution meetings were
held during the summer of 2000 but they failed to produce a settlement. In
October 2000, the FERC ordered us to make a one time allocation of available
delivery point capacity at the Southern California Gas Company Topock delivery
point among affected firm shippers, but deferred action on east-end and
system-wide capacity allocation issues. In February 2001, the FERC issued an
order accepting our tariff filing affirming the results of the Topock delivery
point allocation process and directing us to formulate a system-wide capacity
allocation methodology to be addressed in our order No. 634 proceeding. In March
2001, we filed our proposed system-wide allocation methodology with the FERC. In
April 2001, the February 2001 order was appealed by a customer to the U.S. Court
of Appeals for the 9th Circuit and that appeal is pending a decision. In July
2001 and August 2001, technical conferences were conducted by the FERC on our
system-wide capacity allocation proposal, after which the parties have submitted
position papers to the FERC regarding the appropriate method for allocating
receipt point capacity on our system.
6
Two groups of our customers, those within California and those east of
California, have filed complaints against us with the FERC. In July 2001, twelve
parties composed of California customers, natural gas producers and natural gas
marketers, filed a complaint alleging that our full requirements contracts with
our east of California customers should be converted to contracts with specific
volumetric entitlements, that we should be required to expand our interstate
pipeline system and that firm shippers who experience reductions in their
nominated gas volumes should be awarded demand charge credits. Also, in July
2001, ten parties, most of which are east of California full-requirement
contract customers, filed a complaint against us with the FERC, alleging that we
violated the Natural Gas Act of 1938 and breached our contractual obligations by
failing to expand our system in order to serve the needs of the full-requirement
contract shippers. The complainants have requested that the FERC require us to
show cause why we should not be required to augment our system capacity. In
September 2001, the July 2001 complainants filed a motion for partial summary
disposition of their complaint, to which we responded. In addition, in November
2001, one of the complainants submitted a type of settlement proposal that we
and most other parties have opposed. At its March 13, 2002 public meeting, the
FERC Staff made a presentation to the FERC Commissioners recommending that the
FERC address the capacity allocation issues raised in these and our other
proceedings by, among other things, eliminating the full requirements provisions
from all of our contracts except those in a small customer category and
converting them to contracts with specific volumetric entitlements. The Staff
also recommended scheduling a technical conference. A technical conference
attended by the Commissioners was held on April 16, 2002, at which we, state
commissions and customer groups presented comments. Responses to the
presentations were filed by us and others on April 30, 2002.
Our current 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 our 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 participate in risk sharing provisions
under our rate case settlement. Under these provisions, we receive cash payments
totaling $295 million for a portion of the risk we assumed from 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, 2002, we had unearned risk sharing revenues of
approximately $56 million and had $23 million remaining to be collected from
customers under this provision. Amounts received for relinquished capacity to
customers above certain dollar levels specified in the rate settlement obligate
us to refund a portion of the excess to customers. Under this provision, we
refunded $46 million of 2001 revenues to customers during 2001 and through March
31, 2002. During 2002, we established an additional refund obligation of $11
million. Both the risk and revenue sharing provisions of the rate settlement
extend through 2003. Our unresolved matter in our current rate settlement
involves the application of one existing fuel recovery mechanism as it relates
to compression facilities that were abandoned. An appeal was filed in the Fifth
Circuit Court of Appeals and was transferred to the D.C. Circuit Court of
Appeals. On April 3, 2002, the court dismissed the appeal in its entirety.
In September 2001, the FERC issued a Notice of Proposed Rulemaking (NOPR).
The NOPR proposes to apply the standards of conduct governing the relationship
between interstate pipelines and marketing affiliates to all energy affiliates.
The proposed regulations, if adopted by the FERC, would dictate how all our
energy affiliates conduct business and interact with our interstate pipelines.
In December 2001, we filed comments with the FERC addressing our concerns with
the proposed rules. In April 2002, the FERC Staff issued a notice of a public
conference to be held on May 21, 2002, at which interested parties will be given
an opportunity to comment further on the NOPR. We cannot predict the outcome of
the NOPR, but adoption of the regulations in substantially the form proposed
would, at a minimum, place additional administrative and operational burdens on
us.
In January 2002, we were selected for an industry-wide audit by the FERC's
Office of the Executive Director, Division of Regulatory Audits. The audit will
focus on FERC Form 2 and affiliated transactions for the period January 1, 2000
through December 31, 2001.
7
While we cannot predict with certainty the final outcome or timing of the
resolution of all of our rates and regulatory matters, we believe the ultimate
resolution of these issues, based on information known to date, will not have a
material adverse effect on our financial position, results of operations or cash
flows.
Other Matters
In December 2001, Enron Corp. and a number of its subsidiaries, including
Enron North America Corp. and Enron Power Marketing, Inc., filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the Southern
District of New York. Affiliates of Enron have contracts for both short-term and
long-term transportation on our pipeline system. As of December 31, 2001, we
established reserves for potential losses related to receivables from these
contracts and have continued to do so on a monthly basis. Enron rejected the
contracts on May 3, 2002, by failing to assume them on that date in its
bankruptcy proceeding. Now that we have this capacity back, we will seek to
maximize its value. We cannot at this time predict the value we will obtain for
the rejected capacity.
5. RELATED PARTY TRANSACTIONS
We participate in El Paso's cash management program which matches
short-term cash surpluses and need requirements of its participating affiliates,
thus minimizing total borrowing from outside sources. We had advanced $1,236
million at March 31, 2002, at a market rate of interest which was 1.9%. At
December 31, 2001, we had advanced $1,294 million, at a market rate of interest
which was 2.1%.
At March 31, 2002 and December 31, 2001, we had other accounts receivable
from related parties of $3 million and $4 million. Accounts payable to related
parties was $10 million at March 31, 2002, versus $9 million at December 31,
2001, and other current liabilities include dividends payable to our parent of
$9 million and $2 million at March 31, 2002 and December 31, 2001. These
balances arose in the normal course of business.
In January 2002, we distributed assets through a dividend to our parent
with a net book value of $19 million. We also accrued $7 million in dividends
associated with our preferred stock during the first quarter 2002.
6. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations. This Statement requires companies to record a liability relating to
the retirement and removal costs of assets used in their business. The liability
is discounted to its present value, and the related asset value is increased by
the amount of the resulting liability. Over the life of the asset, the liability
will be accreted to its future value and eventually extinguished when the asset
is taken out of service. Capitalized retirement and removal costs will be
depreciated over the useful life of the related asset. The provisions of this
Statement are effective for the fiscal years beginning after June 15, 2002. We
are currently evaluating the effects of this pronouncement.
8
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 our Annual Report on Form 10-K filed
March 20, 2002, in addition to the financial statements and notes presented in
Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Below are the operating results and an analysis of these results for the
quarters ended March 31:
<Table>
<Caption>
2002 2001
------- -------
(IN MILLIONS, EXCEPT
VOLUME AMOUNTS)
Operating revenues.......................................... $ 152 $ 141
Operating expenses.......................................... (71) (74)
Other income................................................ 1 --
------ ------
Earnings before interest and income taxes................. $ 82 $ 67
====== ======
Throughput volumes (BBtu/d)(1).............................. 4,203 4,826
====== ======
</Table>
- ---------------
(1) BBtu/d means billion British thermal units per day.
Operating revenues for the quarter ended March 31, 2002, were $11 million
higher than the same period in 2001 primarily due to a larger portion of our
capacity earning maximum tariff rates compared to the same period in 2001.
Partially offsetting the increase were lower prices on fuel recoveries from
customers and lower throughput to California and other western states due to
milder weather in the first quarter of 2002, as well as the impact of lower
rates on the Mojave Pipeline system as a result of a rate case settlement
effective October 2001.
Operating expenses for the quarter ended March 31, 2002, were $3 million
lower than the same period in 2001. The decrease was primarily due to
merger-related costs incurred in the first quarter of 2001 related to the
relocation of our headquarters from El Paso, Texas to Colorado Springs, Colorado
as part of El Paso's merger with Coastal and lower compressor fuel costs
resulting from lower natural gas prices. The decrease was partially offset by
increases to our reserve for bad debts related to the bankruptcy of Enron Corp.
INTEREST AND DEBT EXPENSE
Non-affiliated Interest and Debt Expense
Non-affiliated interest and debt expense for the quarter ended March 31,
2002, was $7 million lower than the same period in 2001 primarily due to
long-term debt reductions and lower interest rates on commercial paper
borrowings.
Affiliated Interest Income
Affiliated interest income for the quarter ended March 31, 2002, was $13
million lower than the same period in 2001 due primarily to lower short-term
interest rates in 2002 on advances to El Paso under our cash management program.
INCOME TAXES
The income tax expense for the quarters ended March 31, 2002 and 2001, was
$28 million and $23 million, resulting in effective tax rates of 38 percent and
37 percent. Our effective tax rates were different than the statutory rate of 35
percent primarily due to state income taxes.
9
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.
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, 2001, 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 our quantitative and qualitative
disclosures about market risks from those reported in our Annual Report on Form
10-K for the year ended December 31, 2001.
10
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
The California cases are: five filed in the Superior Court of Los Angeles
County (Continental Forge Company, et al v. Southern California Gas Company, et
al, filed on September 25, 2000; Berg v. Southern California Gas Company, et al,
filed December 18, 2000; County of Los Angeles v. Southern California Gas
Company, et al filed January 8, 2002; The City of Los Angeles, et al v. Southern
California Gas Company, et al and The City of Long Beach, et al v. Southern
California Gas Company, et al, both filed on March 20, 2001); two filed in the
Superior Court of San Diego County (John W.H.K. Phillip v. El Paso Merchant
Energy; and John Phillip v. El Paso Merchant Energy, both filed December 13,
2000); three filed in the Superior Court of San Francisco County (Sweetie's et
al v. El Paso Corporation, et al, filed on March 22, 2001; and California
Dairies, Inc., et al v. El Paso Corporation, et al, filed May 21, 2001); and one
filed in the Superior Court of the State of California, County of Alameda (Dry
Creek Corporation v. El Paso Natural Gas Company, et al filed December 10,
2001).
The alleged five probable violations of the regulations of the Department
of Transportation's Office of Pipeline Safety are: 1) failure to perform
appropriate tasks to prevent corrosion, with an associated proposed fine of
$500,000; 2) failure to investigate and minimize internal corrosion, with an
associated proposed fine of $1,000,000; 3) failure to consider unusual operating
and maintenance conditions and respond appropriately, with an associated
proposed fine of $500,000; 4) failure to follow company procedure, with an
associated proposed fine of $500,000; and 5) failure to maintain topographical
diagrams, with an associated proposed fine of $25,000.
The six remaining Carlsbad lawsuits are as follows: one filed in district
court in Harris County, Texas (Geneva Smith, et al v. EPEC and EPNG, filed
October 23, 2000), and five filed in state district court in Carlsbad, New
Mexico (Chapman, as Personal Representative of the Estate of Amy Smith Heady, v.
EPEC, EPNG and John Cole, filed February 9, 2001; Chapman, as Personal
Representative of the Estate of Dustin Wayne Smith, v. EPEC, EPNG and John Cole;
Chapman, as Personal Representative of the Estate of Terry Wayne Smith, v. EPNG,
EPEC and John Cole; Rackley, as Personal Representative of the Estate of Glenda
Gail Sumler, v. EPEC, EPNG and John Cole; and Rackley, as Personal
Representative of the Estate of Amanda Sumler Smith, v. EPEC, EPNG and John
Cole, all filed March 16, 2001). We have reached a contingent settlement in an
additional case (Dawson, as Personal Representative of Kirsten Janay Sumler, v.
EPEC and EPNG, filed November 8, 2000).
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None.
Undertaking
We hereby undertake, 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 our long-term debt not filed herewith for the reason that the
total amount of securities authorized under any of such instruments does
not exceed 10 percent of our total consolidated assets.
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 10, 2002 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 10, 2002 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
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