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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 SEPTEMBER 30, 1997
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, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 757-2131
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.
CLASS OUTSTANDING
----- -----------
Common Stock, par value $3.00 per share
as of November 11, 1997 59,798,452 shares
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
CAPSA................. Companias Asociadas Petroleras SA, a privately held integrated energy
company in Argentina
Company............... El Paso Natural Gas Company and its subsidiaries
Cornerstone........... Cornerstone Natural Gas, Inc.
Court of Appeals...... United States Court of Appeals for the District of Columbia Circuit
Distributions......... Various intercompany transfers and distributions which restructured,
divided and separated the businesses, assets and liabilities of Old
Tenneco and its subsidiaries so that all the assets, liabilities and
operations related to the automotive parts, packaging and administrative
services businesses and the shipbuilding business were spun-off to Old
Tenneco's then existing common stockholders
EPG................... El Paso Natural Gas Company, unless the context otherwise requires
EPTPC................. El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an indirect
subsidiary of El Paso Natural Gas Company
FERC.................. The Federal Energy Regulatory Commission
GSR................... Gas supply realignment
Merger................ The acquisition of El Paso Tennessee Pipeline Co. by El Paso Natural Gas
Company in December 1996
MMcf/d................ Million cubic feet per day
MW(s)................. Megawatt(s)
NGL(s)................ Natural gas liquid(s)
New Tenneco........... Tenneco Inc., subsequent to the Merger and Distributions, consisting of
the automotive parts, packaging and administrative services businesses
Old Tenneco........... Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior to its
acquisition by the Company
PCB(s)................ Polychlorinated biphenyl(s)
Pemex................. Pemex Gas Petroquimica Basica, the Mexican state-owned energy company
PRP(s)................ Potentially responsible party(ies)
SFAS.................. Statement of Financial Accounting Standards
TGP................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of El Paso
Tennessee Pipeline Co.
TransAmerican......... TransAmerican Natural Gas Corporation
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
Operating revenues.................................... $1,251 $ 745 $ 4,061 $ 1,938
------ ------ ------- -------
Operating expenses
Cost of gas and other products...................... 876 576 2,934 1,430
Operation and maintenance........................... 174 71 489 218
Employee separation and asset impairment charge..... -- -- -- 99
Depreciation, depletion, and amortization........... 58 23 182 66
Taxes, other than income taxes...................... 23 9 72 31
------ ------ ------- -------
1,131 679 3,677 1,844
------ ------ ------- -------
Operating income...................................... 120 66 384 94
------ ------ ------- -------
Other (income) and expense
Interest and debt expense........................... 58 25 178 72
Other -- net........................................ (20) -- (44) (1)
------ ------ ------- -------
38 25 134 71
------ ------ ------- -------
Income before income taxes and minority interest...... 82 41 250 23
Income tax expense.................................... 31 16 96 9
------ ------ ------- -------
Income before minority interest....................... 51 25 154 14
Minority interest
Preferred stock dividend requirement of
subsidiary....................................... 7 -- 19 --
------ ------ ------- -------
Net income............................................ $ 44 $ 25 $ 135 $ 14
====== ====== ======= =======
Earnings per common share............................. $ .77 $ .70 $ 2.37 $ .40
====== ====== ======= =======
Average common shares outstanding..................... 57.4 35.3 56.8 35.0
====== ====== ======= =======
Dividends declared per common share................... $.3650 $.3475 $1.0950 $1.0425
====== ====== ======= =======
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
Current assets
Cash and temporary investments............................ $ 99 $ 200
Accounts and notes receivable, net........................ 956 1,273
Inventories............................................... 74 87
Deferred income tax benefit............................... 104 141
Other..................................................... 344 395
------ ------
Total current assets.............................. 1,577 2,096
Property, plant, and equipment, net......................... 6,700 5,938
Other....................................................... 824 809
------ ------
Total assets...................................... $9,101 $8,843
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 791 $1,089
Short-term borrowings (including current maturities of
long-term debt)........................................ 600 841
Accrual for regulatory issues............................. 22 309
Other..................................................... 705 604
------ ------
Total current liabilities......................... 2,118 2,843
------ ------
Long-term debt, less current maturities..................... 2,137 2,215
------ ------
Deferred income taxes....................................... 1,497 1,092
------ ------
Other....................................................... 1,091 720
------ ------
Commitments and contingencies (See Note 2)
Minority interest
Preferred stock of subsidiary............................. 300 296
------ ------
Other minority interest................................... 65 39
------ ------
Stockholders' equity
Common stock, par value $3 per share; authorized
100,000,000 shares; issued 60,891,492 and 56,726,734
shares................................................. 182 170
Additional paid-in capital................................ 1,540 1,355
Retained earnings......................................... 294 227
Less: Treasury stock (at cost) 1,474,076 and 1,451,922
shares........................................... 46 45
Deferred compensation.............................. 77 69
------ ------
Total stockholders' equity......................... 1,893 1,638
------ ------
Total liabilities and stockholders' equity......... $9,101 $8,843
====== ======
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1997 1996
--------- -------
Cash flows from operating activities
Net income................................................ $ 135 $ 14
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 182 66
Deferred income tax expense (benefit).................. 215 (32)
Net employee separation and asset impairment charge.... -- 77
Working capital changes................................ (110) 83
Other.................................................. (14) --
------- -----
Net cash provided by operating activities......... 408 208
------- -----
Cash flows from investing activities
Capital expenditures...................................... (138) (75)
Investment in joint ventures and equity investees......... (196) (49)
Net cash flow impact of acquisitions...................... -- (99)
Collection of note receivable from partnership............ 53 --
Investment in annuity..................................... (42) --
Other..................................................... 12 13
------- -----
Net cash used in investing activities............. (311) (210)
------- -----
Cash flows from financing activities
Net commercial paper proceeds/(payments).................. 113 (74)
Revolving credit borrowings............................... -- 400
Revolving credit repayments............................... (1,200) (315)
Retirement of long-term debt.............................. (110) (23)
Net proceeds from long-term debt issuance................. 883 --
Net proceeds from equity offering......................... 152 --
Dividends paid on common stock............................ (56) (36)
Other..................................................... 20 63
------- -----
Net cash provided by (used in) financing
activities....................................... (198) 15
------- -----
Increase (decrease) in cash and temporary investments....... (101) 13
Cash and temporary investments
Beginning of period............................... 200 39
------- -----
End of period..................................... $ 99 $ 52
======= =====
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The 1996 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated balance sheet at
December 31, 1996, is derived from audited financial statements. The condensed
consolidated financial statements at September 30, 1997, and for the nine months
and quarters ended September 30, 1997, and 1996, are unaudited. These financial
statements do not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all material adjustments
necessary to present fairly the results of operations for such periods have been
included. All such adjustments are of a normal recurring nature. Results of
operations for any interim period are not necessarily indicative of the results
of operations for the entire year due to the cyclical nature of the Company's
businesses. Financial statements for the previous periods include certain
reclassifications which were made to conform to current presentation. Such
reclassifications have no effect on reported net income or stockholders' equity.
Accounting for the Acquisition of EPTPC
On December 12, 1996, the Company acquired EPTPC through a business
combination accounted for as a purchase. To effect the purchase, a preliminary
allocation of the purchase price was assigned to the assets and liabilities
acquired pending the Company's analysis and assessment of its exposure to
contingencies assumed in the acquisition, as well as other components of the
purchase price allocation. As of September 30, 1997, the Company had
substantially completed its analysis and, accordingly, had made adjustments for
certain contingencies including, among other things, litigation, environmental,
and regulatory issues. In addition, an independent appraisal of the fair value
of the physical properties acquired, which supports the allocation to the
property, plant and equipment of EPTPC's interstate pipeline systems, was
completed in September 1997. The Company plans to finalize all adjustments in
the fourth quarter of 1997.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to manage price risks
associated with certain energy commodities and interest and foreign currency
exchange rates. In its price risk management activities, the Company engages in
both trading and non-trading activities. The financial instruments used include
swap agreements, futures, options and hedge contracts.
Activities for trading purposes consist of services provided to the energy
sector and are accounted for using the mark-to-market method of accounting. Such
trading activities are conducted through a variety of financial instruments,
including forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipts from)
counterparties based on the differential between a fixed and variable price for
the commodity, options, and other contractual arrangements.
Under mark-to-market accounting, financial instruments with third parties
are reflected at estimated market value, with resulting unrealized gains and
losses recorded in operating income in the Consolidated Statements of Income.
The net gains or losses recognized in the current period result primarily from
transactions originating within the period and the impact of price movements on
transactions originating in previous periods. The assets and liabilities
resulting from mark-to-market accounting are presented as other current assets
and other current liabilities in the Consolidated Balance Sheets. Terms
regarding cash settlement of the contracts vary with respect to the actual
timing of cash receipts and payments. Receivables and payables resulting from
these timing differences are presented in accounts receivable, and accounts
payable in the Consolidated Balance Sheets. Cash inflows and outflows associated
with these price risk management activities are recognized in operating cash
flow as the settlements of transactions occur.
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The market value of these financial instruments reflects management's best
estimate considering various factors including exchange and over-the-counter
quotations, time value and volatility factors underlying the commitments. The
values are adjusted to reflect the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under present
market conditions.
Activities for non-trading purposes consist of transactions entered into by
the Company to hedge the impact of market fluctuations on assets, liabilities,
production, or other contractual commitments. In order to meet the requirements
of a hedge, the transactions must be designated as such, meet certain
correlation criteria, and reduce price risk. The Company uses forwards, swaps,
and other contracts to hedge the impact of market fluctuations. Changes in the
market value of these financial instruments are deferred until the gains or
losses on the hedged item are recognized. When the underlying asset being hedged
is sold, deferred gains or losses are recognized at the time of such sale.
Deferred gains or losses are also recognized at the time it becomes probable
that an anticipated hedged transaction or a portion thereof will not occur. Cash
inflows and outflows are recognized in operating cash flow as the settlement of
transactions occurs.
2. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
TGP -- In February 1997, TGP filed with FERC a settlement of all issues
related to the recovery by TGP of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). On April 16, 1997, FERC
approved the settlement and TGP implemented the settlement on May 1, 1997. Under
the terms of the GSR Stipulation and Agreement, TGP is entitled to collect from
customers a total of up to $770 million, of which approximately $665 million has
been collected as of September 30, 1997. TGP is entitled to recover additional
transition costs, up to the remaining $105 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provide for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and provides an escalating
rate cap, indexed to inflation, through October 2005, for certain of TGP's
customers.
In April 1996, TGP filed with FERC a settlement that resolves the rates
that are the subject of TGP's December 1994 rate case. The settlement included a
structural rate design change that results in a larger portion of TGP's
transportation revenues being dependent upon throughput. In October 1996, FERC
approved the stipulation with certain modifications and clarifications which are
not material. In January 1997, FERC issued an order denying requests for
rehearing of the October 1996 order. Under the stipulation, TGP's refund
obligation was approximately $185 million, inclusive of interest, of which $161
million was refunded to customers in March 1997 and June 1997 with the remaining
$24 million refund obligation offset against GSR recoveries in accordance with
particular customer elections. TGP had provided a reserve for these rate refunds
as revenues were collected. One party to the rate proceeding, a competitor of
TGP, filed with the Court of Appeals a Petition for Review of the FERC orders
approving the stipulation. The Company believes the FERC orders will be upheld.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding Administrative Law Judge the issue of proper allocation of TGP's
New England lateral costs. In the July 1997 order on rehearing, FERC clarified,
among other things, that although the ultimate resolution as to the proper
allocation of costs will be applied retroactively to July 1, 1995, the cost of
service settlement does not allow TGP to recover from other customers amounts
that TGP may ultimately be required to refund. TGP has filed a Petition for
Review with the Court of Appeals and a request for rehearing of the FERC order
on this issue. Management believes that the resolution of this issue will not
have a material impact on the financial position or results of operations of the
Company.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996, showing a cumulative loss of $11 million that would be
rolled forward to the next cashout period pursuant to
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its tariff. In October 1997, FERC issued an order requesting additional
information and justification from TGP as to its cashout methodology and
reports. Management believes that the resolution of this issue will not have a
material impact on the financial position or the results of operations of the
Company.
EPG -- In January 1997, the Chief Administrative Law Judge certified EPG's
March 1996 settlement to FERC and severed contesting parties. In April 1997,
FERC approved EPG's settlement as filed and determined that only Southern
California Edison Company should be severed for separate determination of the
rates it pays EPG. Hearings to determine Southern California Edison Company's
rates are scheduled to begin in January 1998. In July 1997, FERC issued an order
denying the requests for rehearing of the April 1997 order. Southern California
Edison Company and GPM Corporation have filed with the Court of Appeals a
petition for review of FERC's April 1997 and July 1997 orders. Under the
provisions of the settlement, EPG's refund obligation was approximately $194
million, including interest. The settlement also provides for the collection of
risk-sharing revenues from customers related to contract reductions and
expirations. The amount of risk-sharing revenues due from customers, excluding
Southern California Edison Company, totaled $294 million. In August 1997, EPG
made rate refunds of $61 million to customers. The remaining $133 million of the
rate refund obligation was offset against the amount of risk-sharing revenues
due from customers in accordance with particular customer elections. EPG
continues to provide a reserve for rate refunds for non-settled parties. In
accordance with the settlement, certain customers elected to pay $75 million in
the third quarter of 1997 which amount represented a prepayment of their portion
of the risk-sharing revenues. The remaining risk-sharing revenue balance of $85
million will be collected over future service periods totaling six years or
less. As of September 30, 1997, $189 million was recorded as unearned revenue
and is included in other liabilities on the Consolidated Balance Sheets. The
unearned revenue will be recognized over the settlement period through 2003 in
accordance with the occurrence of the contract reductions and expirations.
On November 6, 1997, EPG executed contracts with Natural Gas Clearinghouse
Corporation for approximately 1.3 billion cubic feet per day of firm capacity to
California on EPG's System. The contracts will take effect January 1, 1998, and
run for a two year term. These contracts will be subject to the revenue sharing
mechanism with EPG's customers in its current rate case settlement.
Under FERC procedures, take-or-pay cost recovery filings may be challenged
by pipeline customers on prudence and certain other grounds. Certain parties
sought review in the Court of Appeals of FERC's determination in the October
1992 order that certain buy-down/buy-out costs were eligible for recovery. In
January 1996, the Court of Appeals remanded the order to FERC with direction to
clarify the basis for its decision that the take-or-pay buy-down/buy-out costs
were eligible for recovery. In March 1996, FERC issued an order to the effect
that categories of costs which had been determined to be eligible for recovery
might in fact be ineligible for recovery and established a technical conference
which was held in May 1996. In March 1997, following a technical conference and
the submission of statements of position and replies, FERC issued an order
determining that the costs related to all but one of EPG's disputed contracts
were eligible for recovery. The costs ruled ineligible for recovery totaled
approximately $3 million, including interest, and were refunded to customers in
the second quarter of 1997. In October 1997, FERC issued an order denying the
request for rehearing of the March 1997 order in most respects, but determined
that the costs incurred pursuant to two additional EPG contracts were ineligible
for recovery. These costs, including interest, total about $10 million, and EPG
anticipates refunding this amount to its customers in the fourth quarter of
1997. EPG had previously provided reserves for this refund. EPG intends to seek
rehearing of this aspect of the FERC order.
Environmental Matters
In connection with the Company's assessment of its exposure to
contingencies assumed in the acquisition of EPTPC, the reserve for certain
environmental assessments and remediation activities has been increased by
approximately $40 million in the third quarter of 1997 to $276 million as of
September 30, 1997 (see Note 1).
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances on the United States
Environmental Protection Agency List of Hazardous Substances, at
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compressor stations and other facilities operated by both its interstate and
intrastate natural gas pipeline systems.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
established a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. This
shipper filed a Petition of Review in April 1996 in the Court of Appeals; TGP
believes the FERC order approving the Environmental Stipulation will be upheld
on appeal. The Environmental Stipulation was effective July 1, 1995. As of
September 30, 1997, a balance of $32 million remains to be collected under this
agreement.
The Company and certain of its subsidiaries have been designated, have
received notice that they should be designated, or have been asked for
information to determine whether they could be designated as a PRP with respect
to 32 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for the
payment of the Company's allocable share of remediation costs. Because the
clean-up costs are estimates and are subject to revision as more information
becomes available about the extent of remediation required, the Company's
estimate of its share of remediation costs could change. Moreover, liability
under the federal Superfund statute is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of remediation
costs if other parties are unable to pay. The Company's understanding of the
financial strength of other PRPs has been considered, where appropriate, in its
determination of its estimated liability as described herein.
In addition, the Company has identified a number of formerly owned or
leased sites, and certain other sites associated with its discontinued
operations, where environmental remediation may be required.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
As such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. While there are still uncertainties
relating to the ultimate costs which may be incurred, based upon the Company's
evaluation and experience to date, the Company believes that the recorded
estimate for the reserve is adequate.
Legal Proceedings
In November 1993, TransAmerican filed a complaint in a Texas state court,
TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et al.,
alleging fraud, tortious interference with contractual relationships, economic
duress, civil conspiracy, and violation of state antitrust laws arising from a
settlement agreement entered into by EPG, TransAmerican, and others in 1990 to
settle litigation then pending and other potential claims. The complaint, as
amended, seeks unspecified actual and exemplary damages. EPG is defending the
matter in the State District Court of Dallas County, Texas. In April 1996, a
former employee of TransAmerican filed a related case in Harris County, Texas,
Vickroy Stone v. Godwin & Carlton, P.C., et al. (including EPG), seeking
indemnification and other damages in unspecified amounts relating to litigation
consulting work allegedly performed for various entities, including EPG, in
cases involving TransAmerican. EPG has filed a Motion for Summary Judgment
arguing that all claims are barred by the release executed by TransAmerican, by
previous court ruling, and by statute of limitation. A hearing on this motion is
scheduled for December 1997. The trials in TransAmerican and Stone are set to
commence in May 1998 and September 1998, respectively. Based on information
available at this time, management believes that the claims asserted against it
in both cases have no factual or legal basis and that the ultimate resolution of
these matters will not have a materially adverse effect on the Company's
financial position or results of operations.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges,
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sought an order to remediate or remove PCBs, and sought a civil penalty. TGP has
entered into agreed orders with the agency to resolve many of the issues raised
in the original allegations, has received water discharge permits for its
Kentucky stations from the agency, and continues to work to resolve the
remaining issues. Management believes that the resolution of this issue will not
have a materially adverse effect on the Company's financial position or results
of operations.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial position
or results of operations.
3. FINANCING TRANSACTIONS
The Company had short-term borrowings, including current maturities of long
term debt, at September 30, 1997 and December 31, 1996, as follows:
1997 1996
---- ----
EPG Revolving Credit Facility............................... $ -- $ 17
EPTPC Revolving Credit Facility............................. 417 700
Commercial paper............................................ 113 --
Current maturities of long term debt........................ 70 124
---- ----
$600 $841
==== ====
At December 31, 1996, EPTPC had an additional $900 million outstanding
under its credit facility which was reflected as long-term debt because it was
expected to be refinanced with long-term debt during the first quarter of 1997.
In January 1997, EPG's 6.90% notes, which had an aggregate principal amount
of $100 million, matured and were retired.
In February 1997, EPG issued an additional 3 million shares of common
stock. Proceeds of approximately $152 million, net of issuance costs, were used
to repay a portion of EPTPC's credit facility and for general corporate
purposes.
In March 1997, TGP closed the sale of $300 million aggregate principal of
7 1/2% debentures due 2017, $300 million aggregate principal of 7% debentures
due 2027, and $300 million aggregate principal of 7 5/8% debentures due 2037.
Proceeds of approximately $883 million, net of issuance costs, were used to
repay a portion of EPTPC's credit facility and for general corporate purposes.
In October 1997, EPG established a new $750 million 5-year revolving credit
and competitive advance facility and a new $750 million 364-day renewable
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). Initially, the interest rate on amounts outstanding under the
Revolving Credit Facility will be a 32.5 basis point spread over LIBOR and the
spread will vary based on EPG's long-term debt credit rating. This facility
replaced EPG's $750 million five-year revolving credit facility and $250 million
364-day revolving credit facility which were established in November 1996. In
connection with the establishment of the Revolving Credit Facility, EPTPC's
revolving credit facility was also terminated, and the outstanding balance of
$417 million was refinanced under the 5-year portion of the new Revolving Credit
Facility with TGP designated as the borrower. The remainder of the availability
under the Revolving Credit Facility is expected to be used for general corporate
purposes including, but not limited to, backstopping EPG's $1 billion commercial
paper program.
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4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1997, and December 31,
1996, consisted of the following:
1997 1996
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost..................... $5,580 $5,474
Less accumulated depreciation and depletion................. 1,351 1,207
------ ------
4,229 4,267
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,471 1,671
------ ------
Total property, plant, and equipment, net......... $6,700 $5,938
====== ======
The increase in additional acquisition cost assigned to plant is a result
of the Company's continuing efforts to evaluate the fair market value of the
assets and liabilities acquired in conjunction with the Merger (see Note 1).
5. INVENTORIES
Inventories at September 30, 1997, and December 31, 1996, consisted of the
following:
1997 1996
---- ----
(IN MILLIONS)
Materials and supplies...................................... $48 $51
Gas in storage.............................................. 26 36
--- ---
$74 $87
=== ===
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
6. MINORITY INTEREST
At the end of the second quarter, the Company acquired for $26 million a 50
percent legal interest and controlling voting interest in a company that owns
and operates a 70 MW power plant located in Dunaujvaros, Hungary. During the
third quarter the Company began consolidating this investment. Accordingly, the
assets and liabilities of the acquired company are reflected in the Consolidated
Balance Sheets, while the equity not owned by the Company is included in other
minority interest in the Consolidated Balance Sheets. Revenues and expenses of
the acquired company are reflected in the Consolidated Statement of Income.
Contractually, the Company is entitled to receive 100 percent of the income of
the acquired company, and the other equity owners are income participants only
to the extent they receive reduced electricity rates; therefore, no minority
interest is presented in the Consolidated Statements of Income.
7. ACCOUNTING FOR REGULATED OPERATIONS
The Company's businesses that are subject to the regulations and accounting
requirements of FERC have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, which may differ from
those accounting methods used by non-regulated entities. Changes in the
regulatory and economic environment may, at some point in the future, create
circumstances in which the application of regulatory accounting principles would
no longer be appropriate. During 1997, FERC approved TGP's GSR Stipulation and
Agreement and EPG's settlement (discussed previously in Rates and Regulatory
Matters of Note 2). The Company is currently evaluating the impact the FERC
approvals and the current economic environment may have on the continued
application of regulatory accounting principles. If the Company's regulated
businesses fail to qualify under these accounting principles, an amount would be
charged
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to earnings as an extraordinary item in accordance with SFAS No. 101, Regulated
Enterprises -- Accounting for Discontinuation of Application of SFAS No. 71. At
September 30, 1997, this amount was estimated to be approximately $58 million,
net of income taxes. Any potential charge would be non-cash and would not
directly effect the regulated companies' ability to seek recovery of the
underlying deferred costs in their future rate proceedings or their ability to
collect the rates set thereby.
8. RECENT PRONOUNCEMENTS
Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which establishes new guidelines for calculating
earnings per share. The pronouncement is effective for reporting periods ending
after December 15, 1997, with earlier application not permitted. SFAS No. 128
will require companies to present both a basic and diluted earnings per share
amount on the face of the statement of income and to restate prior period
earnings per share amounts. Pro forma basic and diluted earnings per share
amounts calculated in accordance with SFAS No. 128 are presented below for the
nine months and quarters ended September 30, 1997 and 1996.
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- ------- ----- -------
(In millions, except per common
share amounts)
Net income......................... $ 44 $ 44 $ 25 $ 25 $ 135 $ 135 $ 14 $ 14
===== ===== ===== ===== ===== ===== ===== =====
Average common shares
outstanding...................... 57.4 57.4 35.3 35.3 56.8 56.8 35.0 35.0
Effect of dilutive securities
Restricted stock......... -- .5 -- 1.0 -- .5 -- .7
Stock options............ -- 1.0 -- -- -- 1.0 -- --
----- ----- ----- ----- ----- ----- ----- -----
Adjusted average common shares
outstanding...................... 57.4 58.9 35.3 36.3 56.8 58.3 35.0 35.7
===== ===== ===== ===== ===== ===== ===== =====
Earnings per common share.......... $ .77 $ .75 $ .70 $ .68 $2.37 $2.31 $ .40 $ .39
===== ===== ===== ===== ===== ===== ===== =====
Capital Structure
In March 1997, the Financial Accounting Standards Board issued SFAS No.
129, Disclosure of Information about Capital Structure, which consolidates
capital structure reporting requirements previously required by other accounting
standards. This pronouncement, which will become effective for reporting periods
ending after December 15, 1997, will have no impact on the Company's disclosure
of capital structure information.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of this pronouncement.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
10
13
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This pronouncement
is effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the impact of this pronouncement.
Derivative Disclosure
In February 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, Disclosure of Derivative and Other Financial
Instruments, which requires enhanced disclosure related to accounting policies
for derivatives and quantitative and qualitative disclosure concerning market
risk inherent in derivatives and other financial instruments.
The effective date for the enhanced accounting policy disclosure
requirements is for fiscal periods ending after June 15, 1997 (see Note 1).
Requirements for quantitative and qualitative disclosures about market risks are
effective for the Company for December 31, 1997. The Company is currently
evaluating the impact of this pronouncement.
Other
The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, and
Statement of Position No. 96-1, Environmental Remediation Liabilities, effective
January 1, 1997. The adoption of these pronouncements did not have a material
impact on the Company's financial position or results of operations.
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14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
NATURAL GAS TRANSMISSION
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
Operating revenues................................. $316 $130 $975 $384
Operating expenses................................. 185 73 560 230
---- ---- ---- ----
Operating income................................... $131 $ 57 $415 $154
==== ==== ==== ====
Third Quarter 1997 Compared to Third Quarter 1996
Operating revenues for the quarter ended September 30, 1997, were $186
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC.
Operating expenses for the quarter ended September 30, 1997, were $112
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC. This increase in operating expenses was partially offset by lower
labor costs, benefit costs, and payroll taxes in 1997 which resulted from a
reduction in staffing levels during 1996.
Nine Months Ended 1997 Compared with Nine Months Ended 1996
Operating revenues for the nine months ended September 30, 1997, were $591
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC.
Operating expenses for the nine months ended September 30, 1997, were $330
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC. This increase in operating expenses was partially offset by lower
labor costs, benefit costs, and payroll taxes in 1997 which resulted from a
reduction in staffing levels during 1996.
FIELD AND MERCHANT SERVICES
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
Gathering and treating margin....................... $29 $18 $ 89 $ 55
Processing margin................................... 10 13 42 30
Marketing margin.................................... 14 12 6 42
Other............................................... 2 (2) 5 1
--- --- ---- ----
Total gross margin........................ 55 41 142 128
Operating expenses.................................. 42 30 124 85
--- --- ---- ----
Operating income.................................... $13 $11 $ 18 $ 43
=== === ==== ====
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15
Third Quarter 1997 Compared to Third Quarter 1996
Total gross margin (revenue less cost of sales) for the quarter ended
September 30, 1997, was $14 million higher than for the same period of 1996. The
increase was primarily the result of higher San Juan Basin gathering and
treating volumes and rates as well as the EPTPC acquisition.
Operating expenses for the quarter ended September 30, 1997, were $12
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC.
Nine Months Ended 1997 Compared with Nine Months Ended 1996
Total gross margin for the nine months ended September 30, 1997, was $14
million higher than for the same period of 1996. The increases experienced in
the gathering and treating margin and the processing margin were primarily the
result of higher natural gas prices in the San Juan Basin, slightly higher NGL
prices, an increase in gathering and treating volumes due to the acquisitions of
Cornerstone and EPTPC, and an increase in NGLs attributable to the Chaco
cryogenic plant, which began processing in the second quarter of 1996. Partially
offsetting the increase in total gross margin was a decrease in the marketing
margin resulting from generally lower industry-wide gas marketing margins in the
second quarter of 1997, as well as extreme market volatility which negatively
impacted natural gas marketing activities and trading positions during the first
quarter of 1997.
Operating expenses for the nine months ended September 30, 1997, were $39
million higher than for the same period of 1996 primarily due to the
acquisitions of Cornerstone and EPTPC.
CORPORATE AND OTHER
The operating loss for the quarter ended September 30, 1997, was $21
million higher than for the same period of 1996 due to costs related to
discontinued operations assumed as part of the EPTPC acquisition, additional
development expenses related to the Company's expanding international
operations, severance and relocation costs, and the cost of certain employee
equity incentive plans.
The operating loss for the nine months ended September 30, 1997, was $54
million less than for the same period in 1996. The decrease was primarily the
result of the $99 million employee separation and asset impairment charge
recorded in March 1996. The decrease was partially offset by additional costs
related to the discontinued operations assumed as part of the EPTPC acquisition,
development expenses related to the Company's expanding international
operations, severance and relocation costs, and the cost of certain employee
equity incentive plans.
OTHER INCOME AND EXPENSE
Third Quarter 1997 Compared to Third Quarter 1996
Interest and debt expense for the quarter ended September 30, 1997, was $33
million higher than for the same period of 1996 due primarily to the debt
assumed in connection with the acquisition of EPTPC and the Company's debt and
capital realignment efforts.
Other income for the quarter ended September 30, 1997, was $20 million
higher than for the same period of 1996 primarily due to an increase in equity
and other income resulting from the acquisition of EPTPC and the Company's
expanding international activities.
Nine Months Ended 1997 Compared to Nine Months Ended 1996
Interest and debt expense for the nine months ended September 30, 1997, was
$106 million higher than for the same period of 1996 due primarily to the debt
assumed in connection with the acquisition of EPTPC and the Company's debt and
capital realignment efforts.
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16
Other income for the nine months ended September 30, 1997, was $43 million
higher than for the same period of 1996 primarily due to an increase in equity
and other income resulting from the acquisition of EPTPC and the Company's
expanding international activities.
LIQUIDITY AND CAPITAL RESOURCES
Cash From Operating Activities
Net cash provided by operating activities was $200 million higher for the
nine months ended September 30, 1997, compared to the same period of 1996. This
increase was primarily a result of the acquisition of EPTPC, an income tax
refund in 1997, and prepayments from EPG's customers for risk-sharing revenues.
The increase was partially offset by higher interest payments resulting from
debt assumed in the acquisition of EPTPC, dividends on EPTPC's Series A
Preferred Stock, a rate refund to TGP's customers paid in March 1997, and a rate
refund to EPG's customers paid in August 1997.
Cash From Investing Activities
Net cash used in investing activities was $101 million higher for the nine
months ended September 30, 1997, compared to the same period of 1996. The
increase was attributable to higher expenditures for joint ventures and equity
investments, capital expenditures, and the purchase of an annuity in the third
quarter of 1997 to be used to fund the monthly demand requirement of a long-term
gas supply contract. Expenditures related to joint ventures and equity
investments were primarily attributed to the Company's international operations.
The increase in capital expenditures was related to construction activities on
EPTPC's pipeline systems. Offsetting the increase was the June 1996 acquisition
of Cornerstone and the collection of a $53 million note receivable for the
Company's partnership in a 103 MW cogeneration plant near Bartow, Florida.
Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds, available
capacity under existing credit facilities, and/or the issuance of other
long-term debt or equity.
Cash From Financing Activities
Net cash used in financing activities was $213 million higher for the nine
months ended September 30, 1997, compared to the same period of 1996 due in
large part to the Company's efforts to realign its debt and capital structure
following the EPTPC acquisition, specifically, increased credit facility
repayments. Funds used to repay the credit facility were provided by internally
generated cash flows, the net proceeds of $883 million received from the sale of
long-term debt, and the net proceeds of $152 million from the sale of an
additional 3 million shares of common stock. Also contributing to the change
were the retirement of EPG's 6.90% notes in January 1997, increased common stock
dividends, a reduction in revolving credit borrowings, and an increase in
commercial paper proceeds.
During the third quarter of 1997, the Company issued additional commercial
paper for general corporate purposes of $42 million, with $113 million
outstanding at September 30, 1997.
The following table reflects quarterly dividends declared and paid on EPG's
common stock:
AMOUNT PER
DECLARATION DATE COMMON SHARE PAYMENT DATE TOTAL AMOUNT
---------------- ------------ ------------ -------------
(IN MILLIONS)
October 11, 1996....................... 0$.3475 January 2, 1997 $ 13
January 22, 1997....................... 0$.3650 April 1, 1997 $ 22
April 23, 1997......................... 0$.3650 July 1, 1997 $ 22
July 18, 1997.......................... 0$.3650 October 1, 1997 $ 22
On October 22, 1997, the Board declared a quarterly dividend of $.3650 per
share on EPG's common stock, payable on January 2, 1998, to stockholders of
record on December 5, 1997.
14
17
At September 30, 1997, the Company had $1 billion available under its then
existing revolving credit facilities. In October 1997, EPG established a new
$750 million 5-year revolving credit and competitive advance facility and a new
$750 million 364-day renewable revolving credit and competitive advance facility
(collectively, the "Revolving Credit Facility"). Initially, the interest rate
will be a 32.5 basis point spread over LIBOR and the spread will vary based on
EPG's long-term credit rating. This facility replaced EPG's $750 million
five-year revolving credit facility and $250 million 364-day revolving credit
facility which were established in November 1996. In connection with the
establishment of the Revolving Credit Facility, EPTPC's revolving credit
facility was also terminated, and the outstanding balance of $417 million was
financed under the 5-year portion of the new Revolving Credit Facility with TGP
designated as the borrower. The remainder of the availability under the
Revolving Credit Facility is expected to be used for general corporate purposes
including, but not limited to, backstopping EPG's $1 billion commercial paper
program. The availability of borrowings under the Company's credit facilities is
subject to certain specified conditions, which management believes it currently
meets.
Future funding for long-term debt retirements, dividends, and other
financing expenditures are expected to be provided by internally generated
funds, commercial paper issuances, available credit facilities, and/or the
issuance of other long-term debt or equity.
COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Legal Proceedings
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Environmental Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
OTHER
The Company intends to continue pursuing strategic acquisition and
investment opportunities. The timing, size, or success of any acquisition
effort, and the associated potential capital commitments, cannot be predicted.
The Company may fund future acquisitions and investments with internally
generated funds, available capacity under existing credit facilities, and/or the
issuance of other long-term debt or equity.
Acquisitions
PacifiCorp. In October 1997, the Company announced a significant expansion
of its offshore Gulf of Mexico gathering and processing activities through the
acquisition of 100 percent of the stock of PacifiCorp's Texas Gulf Coast
gathering and processing subsidiaries at a cash price of $195 million. These
systems include gathering facilities consisting of 360 miles of pipeline and a
cryogenic gas processing plant with current throughput of 550 and 250 MMcf/d,
respectively. The transaction is expected to close in late November 1997.
Gulf States Gas Pipeline Company. In October 1997, the Company completed
the acquisition of Gulf States Gas Pipeline Company. The assets purchased
include a 175-mile gathering and intrastate transmission system in Northwest
Louisiana with a capacity of 250 MMcf/d and a 10-mile interstate pipeline in
Texas with the ability to transport up to 75 MMcf/d from a processing plant in
East Texas to the Louisiana intrastate pipeline. Current transported volumes
through the systems are 105 MMcf/d. The purchase price was approximately $39
million which included the issuance of $21 million of common stock.
15
18
Ongoing and Future Investment and Capital Projects
Significant events during the first nine months of 1997 impacting the
Company's development projects are discussed below.
International Operations
Australia Project. The Company's 30 percent owned Australian joint venture
was selected to construct the 270 mile expansion project on the Dampier to
Bunburry natural gas pipeline in Western Australia at an estimated cost of $250
million. The joint venture is evaluating project financing options and
anticipates completion of financing in early 1998. The expansion project is
expected to be operational in the third quarter of 1999.
Czech Republic Project. As of June 1997, the Company acquired a 31.2
percent interest in a $401 million project to expand to 343 MW, an existing gas
and coal-fired power plant located in Kladno, Czech Republic. Project financing
was finalized in June 1997 for approximately $300 million of the $401 million
expansion cost.
Mexico Project. During the second quarter, both FERC and the Comision
Reguladora de Energia of Mexico issued permits allowing construction, operation
and maintenance of the 45 mile pipeline expansion which connects EPG's existing
pipeline system in west Texas to Pemex's pipeline system in northern Mexico.
Construction began in the third quarter of 1997 with completion expected by
December 1997.
Hungary Project. The Company's $26 million acquisition of a 50 percent
interest in an operating 70 MW power plant located in Dunaujvaros, Hungary,
closed in the second quarter of 1997. The acquisition did not involve any
financing.
CAPSA. In August 1997, the Company exercised an option to acquire an
additional 4 percent interest bringing its total ownership and investment up to
33 percent and $179 million, respectively. The assets of CAPSA include an
interest in CAPEX, a company publicly traded on the Argentine and Luxembourg
stock exchanges which owns certain power plants and gas and oil reserves in
Argentina.
Aguaytia Project. During the first quarter of 1997, the Aguaytia project
consortium completed loan negotiations with the Inter-American Development Bank
which reduced the project equity requirements from 60 percent to approximately
40 percent. The Company's current interest in the $272 million project is
approximately 23 percent.
Manaus Project. In August 1997, the Company was selected to construct three
power generation plants totalling 240 MW of capacity in the City of Manaus, the
capital city of the State of Amazonas, Brazil. The projects will supply electric
power to the City of Manaus under a four year contract. Project costs are
anticipated to total $100 million, and the Company plans to finance the project
in early 1998. The Company and CAPEX of Argentina are equal partners in the
project.
Sulawesi Project. The Sengkang Power Plant began single cycle commercial
operations in September 1997, making it the first independent power plant to
operate in Indonesia. The plant has passed all performance and commissioning
tests and is dispatching at a 100 percent load factor. Combined cycle completion
is expected in the third quarter of 1998.
Natural Gas Transmission Operations
Portland. TGP owns a 17.8 percent interest in Portland Natural Gas
Transmission System ("Portland"), a partnership formed to construct and own a
292-mile interstate natural gas pipeline that will extend from the Canadian
border in the town of Pittsburg, New Hampshire to Westbrook, Maine and then to
Haverhill and Dracut, Massachusetts. Portland will link the growing gas markets
of the northeastern United States to the abundant gas supplies of western
Canada. Portland received its FERC certificate in September 1997, and is now
awaiting the approval of Canada's National Energy Board, expected in February
1998, for the extension of the TransQuebec & Maritimes Pipeline, which will
connect Portland with the TransCanada system. Targeted completion date for
Portland is November 1998, at an estimated total cost
16
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of $366 million. Portland is in the process of securing non-recourse debt
financing, with an expected February 1998 financial closing.
Eastern Express Project. TGP has announced that it is pursuing various
market and expansion opportunities in the northeast and mid-Atlantic regions of
the United States. TGP held an open season, which concluded in June 1997, to
gauge interest in the TGP Eastern Express Project designed to provide service to
these markets in 1999. TGP is pursuing discussions with customers that
participated in the open season to determine if their needs can be met by TGP.
The Company also announced a second phase of the Eastern Express Project to meet
the needs of shippers that expressed interest in alternate markets and/or
service commencing in the year 2000.
Express 500 Expansion Project. The Express 500 project is designed to meet
the growing needs of the Gulf of Mexico producers caused by significant
increases in deepwater production, and will provide a firm transportation
solution to existing and projected bottlenecks in the Gulf of Mexico supply
basin. TGP is soliciting shipper interest in an open season that will end
December 31, 1997. Service under Express 500 is scheduled to commence as early
as November 1999.
DOMAC Lateral Project. TGP proposes to construct a meter station and
pipeline extension from DOMAC's liquefied natural gas plant in Everett,
Massachusetts to a point on TGP's existing Revere Lateral in Saugus,
Massachusetts. TGP will transport up to 90,000 decatherms per day from the
liquefied natural gas plant to customers on the TGP system. The estimated total
cost of the proposed facilities is $26 million.
TransColorado. In late June 1997, EPG and its partners in the TransColorado
Pipeline Project ("TransColorado") announced a restructured partnership
arrangement for the project. Formerly, TransColorado was an equal one-third
partnership among affiliates of EPG, Questar Corporation and KN Energy, Inc.
Under the new arrangement, the affiliates of Questar Corporation and KN Energy,
Inc. will each retain a 50 percent interest in TransColorado, and EPG, while no
longer a partner, will continue as the operator and a revenue participant in the
constructed facilities of Phase I which includes 25 miles of pipe from the
discharge of Coyote Gulch Gas Plant to EPG's pipeline at Blanco, New Mexico.
EPG's participation in the project under the new arrangement will cease upon the
completion of the additional Phase II facilities.
Field and Merchant Services Operations
San Juan Global Compression Project. In June 1997, the Company entered into
contracts with three of its major natural gas producers in the San Juan Basin,
providing for new global compression services to reduce field delivery pressures
and increase production by an estimated 130 MMcf/d. The project will cost
approximately $50 million and includes the installation of approximately 36,000
horsepower of new field compression and construction of an additional 56 miles
of pipeline system. The project is expected to be in service by October 1998.
Viosca Knoll. During the second quarter of 1997, Viosca Knoll Gathering
Company, the Company's fifty-fifty joint venture with a subsidiary of Leviathan
Gas Pipeline Partners, L.P., announced its intent to construct, at an estimated
cost of $25 million, additional facilities to accommodate incremental capacity
requirements on its system, including a new 25-mile, 20-inch diameter pipeline
from Main Pass Block 261 to Viosca Knoll Block 817. Construction is expected to
be completed by the fourth quarter of 1997.
Berkshire Power Company, LLC. The Company entered into a joint development
agreement with Power Development, Inc. to develop a natural gas-fired combined
cycle electric generation facility in Agawam, Massachusetts. The facility will
have a nominal capacity of approximately 272 MWs. Construction of the $200
million facility is expected to begin in December 1997 and the facility is
scheduled to be operational in October 1999. The Company may invest up to $50
million representing a 100 percent equity interest in the project. The Company
will be responsible for the procurement and transportation of supplies of
natural gas to fuel the project and the marketing of electric power produced by
the project.
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Purchase Price Allocation
The Company has substantially completed its evaluation and allocation, and
believes that the final adjustments to the purchase price allocation will not
have a material impact on the Company's financial position or results of
operations. For a further discussion, see Part I, Financial Information, Note 1,
Note 2, and Note 4, which are incorporated herein by reference.
Accounting for Regulated Operations
The Company's interstate pipelines are subject to the regulations and
accounting procedures of FERC. The Company follows the reporting and accounting
requirements of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation for its interstate pipeline operations. For a further discussion, see
Part I, Financial Information, Note 7, which is incorporated herein by
reference.
Recent Pronouncements
See Part I, Financial Information, Note 8, which is incorporated herein by
reference.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are 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, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas, uncertainties associated with acquisitions and joint
ventures, potential environmental liabilities, potential contingent liabilities
and tax liabilities related to the Merger, political and economic risks
associated with current and future operations in foreign countries, conditions
of the equity and other capital markets during the periods covered by the
forward-looking statements, and other risks, uncertainties and factors discussed
more completely in the Company's other filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 1996.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 22, 1997, Eugenio Garza Laguera, 73, retired as a member of the
board of directors. Mr. Laguera had served since 1993 as a board member and as a
member of the audit committee. Also, on October 22, 1997, Juan Carlos Braniff
was elected to replace Mr. Laguera as a board member and a member of the audit
committee.
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 DESCRIPTION
------- -----------
3.B -- By-laws of EPG, as amended October 22, 1997.
10.E -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
10.F -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
11 -- Computation of Earnings per Common Share.
27 -- Financial Data Schedule.
Undertaking
The undersigned, EPG, hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of EPG 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 EPG and its consolidated subsidiaries.
b. Reports on Form 8-K
On August 29, 1997, EPG filed a report under Item 5 and Item 7 on Form 8-K,
dated August 29, 1997, with respect to the Merger Agreement among the Company,
Gulf States Acquisition Company, Gulf States Gas Pipeline Company, and certain
shareholders of Gulf States Gas Pipeline Company.
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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: November 13, 1997 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 13, 1997 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.B -- By-laws of EPG, as amended October 22, 1997.
10.E -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
10.F -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
11 -- Computation of Earnings per Common Share.
27 -- Financial Data Schedule.