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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, 1998
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) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
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Common Stock, par value $3.00 per share
as of May 12, 1998 120,457,674 shares
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
DEFINITIONS
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ALJ................... Administrative Law Judge
Bcf................... Billion cubic feet
Bcf/d................. Billion cubic feet per day
Board................. Board of directors of El Paso Natural Gas Company
Company............... El Paso Natural Gas Company and its subsidiaries
Court of Appeals...... United States Court of Appeals for the District of Columbia Circuit
EBIT.................. Earnings before interest expense and income taxes, excluding affiliated
interest income
Edison................ Southern California Edison Company
EPA................... United States Environmental Protection Agency
EPFS.................. El Paso Field Services Company, a wholly owned subsidiary of El Paso
Natural Gas Company
EPG................... El Paso Natural Gas Company, unless the context otherwise requires
EPTPC................. El Paso Tennessee Pipeline Co., an indirect subsidiary of El Paso Natural
Gas Company
FERC.................. The Federal Energy Regulatory Commission
GSR................... Gas supply realignment
MW(s)................. Megawatt(s)
NGC................... NGC Corporation
PCB(s)................ Polychlorinated biphenyl(s)
PLN................... Perusahaan Listrik Negara, the Indonesian government-owned electric
utility
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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
FIRST QUARTER
ENDED MARCH 31,
-------------------
1998 1997
------- -------
Operating revenues.......................................... $ 1,619 $ 1,831
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Operating expenses
Cost of gas and other products............................ 1,209 1,441
Operation and maintenance................................. 180 156
Depreciation, depletion, and amortization................. 65 67
Taxes, other than income taxes............................ 24 28
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1,478 1,692
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Operating income............................................ 141 139
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Other (income) and expense
Interest and debt expense................................. 64 61
Other -- net.............................................. (22) (9)
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42 52
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Income before income taxes and minority interest............ 99 87
Income tax expense.......................................... 35 34
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Income before minority interest............................. 64 53
Minority interest
Preferred stock dividend requirement of subsidiary........ 6 6
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Net income.................................................. $ 58 $ 47
======= =======
Comprehensive income........................................ $ 57 $ 47
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Basic earnings per common share............................. $ 0.50 $ 0.43
======= =======
Diluted earnings per common share........................... $ 0.48 $ 0.42
======= =======
Basic average common shares outstanding..................... 115.9 111.2
======= =======
Diluted average common shares outstanding................... 121.7 113.2
======= =======
Dividends declared per common share......................... $ 0.19 $ 0.18
======= =======
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
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Current assets
Cash and temporary investments............................ $ 73 $ 116
Accounts and notes receivable, net........................ 895 989
Inventories............................................... 52 68
Deferred income tax benefit............................... 130 168
Other..................................................... 312 288
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Total current assets.............................. 1,462 1,629
Property, plant, and equipment, net......................... 7,067 7,116
Other....................................................... 1,062 787
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Total assets...................................... $9,591 $9,532
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 752 $ 886
Short-term borrowings (including current maturities of
long-term debt)........................................ 751 885
Other..................................................... 667 693
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Total current liabilities......................... 2,170 2,464
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Long-term debt, less current maturities..................... 2,115 2,119
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Deferred income taxes....................................... 1,531 1,550
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Other....................................................... 1,068 1,075
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Commitments and contingencies (See Note 3)
Company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital Trust I.... 325 --
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Minority interest
Preferred stock of subsidiary............................. 300 300
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Other minority interest................................... 65 65
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Stockholders' equity
Common stock, par value $3 per share; authorized
275,000,000 shares; issued 123,575,278 and 122,581,816
shares................................................. 371 368
Additional paid-in capital................................ 1,412 1,389
Retained earnings......................................... 362 327
Less: Accumulated other comprehensive income.............. 8 7
Treasury stock (at cost) 3,046,444 and 2,946,832
shares.......................................... 50 47
Deferred compensation............................... 70 71
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Total stockholders' equity........................ 2,017 1,959
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Total liabilities and stockholders' equity........ $9,591 $9,532
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The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
FIRST QUARTER
ENDED
MARCH 31,
----------------
1998 1997
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Cash flows from operating activities
Net income................................................ $ 58 $ 47
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 65 67
Deferred income taxes.................................. 24 44
Other.................................................. (6) 5
Working capital changes................................... (56) (21)
Other..................................................... 25 (10)
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Net cash provided by operating activities......... 110 132
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Cash flows from investing activities
Capital expenditures...................................... (52) (30)
Investment in joint ventures and equity investees......... (273) (71)
Collection of note receivable from partnership............ -- 53
Other..................................................... 7 11
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Net cash used in investing activities............. (318) (37)
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Cash flows from financing activities
Net commercial paper repayments........................... (72) --
Revolving credit repayments............................... (45) (1,100)
Long-term debt retirements................................ (21) (104)
Net proceeds from preferred securities of El
Paso Energy Capital Trust I issuance................... 317 --
Net proceeds from long-term debt issuance................. -- 883
Net proceeds from equity offering......................... -- 152
Dividends paid on common stock............................ (22) (13)
Other..................................................... 8 12
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Net cash provided by (used in) financing
activities....................................... 165 (170)
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Decrease in cash and temporary investments.................. (43) (75)
Cash and temporary investments
Beginning of period............................... 116 200
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End of period..................................... $ 73 $ 125
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The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1997 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 financial statements
at March 31, 1998, and for the quarters ended March 31, 1998, and 1997, are
unaudited. The condensed balance sheet at December 31, 1997, is derived from
audited financial statements. 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 seasonal 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.
Stock Split
On January 21, 1998, the Board approved a two-for-one stock split of EPG's
common stock (the "Stock Split"), subject to stockholder approval of an
amendment to EPG's Restated Certificate of Incorporation to increase the number
of authorized shares of EPG's common stock to 275,000,000 shares (the
"Amendment"). EPG's stockholders approved the Amendment on March 2, 1998. In
connection with the Amendment, the Board increased the number of shares of EPG's
preferred stock designated as Series A Junior Participating Preferred Stock
("Series A Preferred Stock") to 1,375,000 shares. The Stock Split was effected
in the form of a stock dividend of an aggregate of 60,944,417 shares of EPG's
common stock, which was paid on April 1, 1998, to stockholders of record on
March 13, 1998. All common shares and per common share amounts have been
adjusted to give retroactive effect to the Stock Split.
After giving effect to the Stock Split in accordance with the adjustment
provisions of the Amended and Restated Shareholder Rights Agreement, dated as of
July 23, 1997, between EPG and The First National Bank of Boston as Rights
Agent, the number of rights to purchase one one-hundredth of a share of the
Series A Preferred Stock (the "Rights") associated with each share of common
stock has been adjusted to become one-half of a Right.
Comprehensive Income
In compliance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Consolidated
Statements of Income. The only component of comprehensive income is the
cumulative translation adjustment which results from differences in the
translation of foreign currencies. This amount is reflected as accumulated other
comprehensive income in the Condensed Consolidated Balance Sheets.
2. SEGMENTS
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer different products and services. They are managed separately as each
business requires different technology and marketing strategies.
The El Paso Natural Gas segment includes the interstate pipeline systems of
EPG and Mojave Pipeline Company. The segment transports natural gas primarily to
the California market. The Tennessee Gas Pipeline segment includes the
interstate pipeline systems of TGP, Midwestern Gas Transmission Company, and
East Tennessee Natural Gas Company. The segment transports natural gas to the
northeast section of the U.S. including the states of Tennessee, Virginia and
Georgia as well as the New
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York City, Chicago, and Boston metropolitan areas. The El Paso Field Services
segment provides natural gas gathering, products extraction, dehydration,
purification, compression and intrastate transmission services. The El Paso
Energy Marketing segment markets and trades natural gas, power, and petroleum
products and participates in the development and ownership of domestic power
generation projects. The El Paso Energy International segment develops and
operates energy infrastructure facilities worldwide.
The accounting policies of the individual segments are the same as those of
the Company, as a whole, as summarized in Note 1, Basis of Presentation. Certain
of the segment's earnings are largely derived from the earnings of equity
investments, accordingly the Company evaluates segment performance based on
EBIT. To the extent practicable, results of operations for the quarter ended
March 31, 1997 have been reclassified to conform to the current business segment
presentation, although such results are not necessarily indicative of the
results which would have been achieved had the revised business segment
structure been in effect during the period.
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
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EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- -------
Revenues from external customers....... $ 114 $ 203 $ 59 $1,227 $ 12 $ 1,615
Intersegment revenues.................. 1 9 9 4 -- 23
Operating income (loss)................ 52 94 20 -- (7) 159
EBIT................................... 52 98 24 -- 2 176
Segment assets......................... 1,760 5,294 916 766 676 9,412
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1997
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EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- -------
Revenues from external customers....... $ 128 $ 205 $122 $1,376 $ -- $ 1,831
Intersegment revenues.................. 1 10 2 5 -- 18
Operating income (loss)................ 62 80 27 (17) (4) 148
EBIT................................... 62 82 28 (16) (2) 154
Segment assets......................... 1,822 4,802 587 925 341 8,477
The reconciliations of EBIT to income before income taxes and minority
interest are presented below for the quarters ended March 31:
1998 1997
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(IN MILLIONS)
Total EBIT for reportable segments.......................... $176 $154
Corporate expenses, net..................................... (13) (6)
Interest and debt expense................................... (64) (61)
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Income before income taxes and minority interest............ $ 99 $ 87
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3. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at March 31, 1998 of
approximately $20 million. Current economic events in Indonesia have resulted in
the devaluation of the Indonesian Rupiah and delays or cancellations of certain
infrastructure power projects in that country. The Company has met with PLN and
the Indonesian Minister of Finance to discuss the terms of its power sales
agreement in light of the current Indonesian economic
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problems. While the Company cannot predict the ultimate outcome of Indonesia's
financial difficulties or the impact of such matters to the Company, it believes
PLN, with the backing of the Office of the Minister of Finance, will honor all
obligations on the Sengkang project in full. The Company believes the current
economic difficulties in Indonesia will not have a material adverse effect on
the Company's financial position, results of operations, or cash flows. As of
April 30, 1998, all amounts billed and due had been paid in full.
Rates and Regulatory Matters
TGP -- In February 1997, TGP filed with FERC a settlement of all issues
related to the recovery of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). In April 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 up to $770 million, of which approximately $701 million has been
collected as of March 31, 1998. TGP is entitled to recover additional transition
costs, up to the remaining $69 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 an escalating rate cap, indexed to
inflation, through October 2005, for certain of TGP's customers.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. Under
the settlement, 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,
a competitor of TGP, filed with the Court of Appeals a Petition for Review of
the FERC orders.
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 ALJ 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 with the Court of Appeals a Petition for
Review of the FERC orders on this issue. In December 1997, the ALJ issued his
decision on the proper allocation of the New England lateral costs. The decision
adopts a methodology that economically approximates TGP's current methodology.
The ALJ's decision is pending before FERC.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996. TGP previously filed cashout reports for the period
September 1993 through August 1995. TGP's October 1997 filing showed a
cumulative loss of $11 million that would be rolled forward to the next cashout
period pursuant to its tariff. FERC has requested additional information and
justification from TGP as to its cashout methodology and reports. TGP's cashout
methodology and reports are currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
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EPG -- In June 1995, EPG filed with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. In March 1996, EPG
filed a comprehensive offer of settlement to resolve that proceeding as well as
issues surrounding certain contract reductions and expirations that were to
occur from January 1, 1996 through December 31, 1997. In April 1997, FERC
approved EPG's settlement as filed and determined that only the contesting
party, Edison, should be severed for separate determination of the rate it
ultimately pays EPG. Hearings to determine Edison's rates should be completed in
May 1998. Pending the final outcome, Edison continues to pay the filed rates,
subject to refund, and EPG continues to provide a reserve for such potential
refunds. In July 1997, FERC issued an order denying the requests for rehearing
of the April 1997 order and the settlement was implemented effective July 1,
1997. Edison and GPM Corporation, a competitor of EPG, have filed with the Court
of Appeals separate petitions for review of FERC's April 1997 and July 1997
orders. Edison's petition challenges the propriety of FERC's approving the
settlement over Edison's objections to the settlement as a customer of Southern
California Gas Company.
The rate settlement establishes, among other things, base rates through
December 31, 2005. Such rates escalate annually beginning in 1998. In addition,
the settlement provides for settling customers to (i) pay $295 million
(including interest) as a risk sharing obligation, which approximates 35 percent
of anticipated revenue shortfalls over an 8 year period, resulting from the
contract reductions and expirations referred to above, (ii) receive 35 percent
of additional revenues received by EPG, above a threshold, for the same
eight-year period, and (iii) have the base rates increase or decrease if certain
changes in laws or regulations result in increased or decreased costs in excess
of $10 million a year. In accordance with the terms of the rate settlement,
EPG's refund obligation (including interest) was approximately $194 million. EPG
refunded $61 million to customers in August 1997, and in accordance with certain
customers elections, the remaining $133 million of refund obligation was applied
towards their $295 million risk sharing obligation. Through March 31, 1998, an
additional $83 million of the risk sharing obligation was paid and the $79
million balance, including interest, will be collected by the end of 2003. At
March 31, 1998 the remaining unearned balance of the risk sharing amount
collected was $181 million, which will be recognized in earnings ratably through
2003.
The contract reductions and expirations referred to above resulted in EPG's
having, as of March 31, 1998, approximately 1.6 Bcf/d (or 34 percent) of its
total capacity not committed under contracts requiring the payment of full
tariff reservation rates. Effective March 31, 1998, this capacity had an annual
value, at full tariff reservation rates, of approximately $172 million.
EPG has substantially offset the effects of these reductions in firm
capacity commitments referred to above by implementing cost control programs and
by actively seeking new markets and pursuing attractive opportunities to
increase traditional market share. The new markets EPG has targeted include
various natural gas users in California which were served indirectly through
Southern California Gas Company and Pacific Gas & Electric Company, as well as
new markets in northern Mexico and off the east end of its system. In addition
to other arrangements, in October 1997, EPG entered into three contracts with
NGC for the sale of substantially all of its turned back firm capacity available
as of January 1, 1998 to California (approximately 1.3 Bcf) for a two-year
period beginning January 1, 1998 at rates negotiated pursuant to EPG's tariff
provisions and FERC policies. EPG anticipates realizing at least $70 million in
revenues (which will be subject to the revenue sharing provisions of the rate
settlement) under these contracts over the two-year period. The contracts have a
transport-or-pay provision requiring NGC to pay a minimum charge equal to the
reservation component of the contractual charge on at least 50 percent of the
contracted volumes in each month in 1998 and on at least 72 percent of the
contracted volumes each month in 1999. In December 1997, EPG filed to implement
several negotiated rate contracts, including those with NGC. In a protest to
this filing made in January 1998, three shippers (producers/marketers) requested
FERC to require EPG to eliminate certain provisions from the NGC contracts, to
publicly disclose and repost the contracts for competitive bidding, and to
suspend their effectiveness. In an order issued in January 1998, FERC rejected
several of the arguments made in the protest and allowed the contracts to become
effective as of January 1, 1998 subject to refund and to the outcome of a
technical conference, which was held in March 1998. The technical conference
addressed the operation of certain of the contracts' provisions, including those
which provide for crediting, against amounts otherwise due under the contracts,
of certain interruptible revenues which might be received by EPG and the
protestors' claims that the contracts are anti-competitive. The
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parties filed written comments and the matter is currently pending before FERC.
Assuming FERC allows the contracts to remain in effect, it cannot be predicted
at this time whether EPG will be able to remarket this capacity after the
expiration of the NGC contract or the terms under which it may be remarketed.
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 an 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 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
challenging parties' 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, totaled
approximately $9 million, and were refunded to customers in February 1998. The
challenging parties, which claim that EPG should be required to refund up to an
additional $31 million, excluding interest, have filed a petition for review of
the FERC order in the Court of Appeals.
In an order issued in April 1997 in the proceeding involving the spin down
of EPG's gathering facilities to EPFS, FERC found that EPG acted appropriately
in not including its Chaco Compressor Station in the facilities to be
transferred to EPFS, and that the Chaco Compressor Station had been correctly
functionalized by EPG as a transmission facility. Requests for rehearing of this
order were filed by Williams Field Services and GPM Corporation. In a November
1997 order, FERC reversed its previous decision and found that the Chaco
Compressor Station is a gathering facility and should be transferred to EPFS.
EPG sought rehearing of this order, which was denied by FERC in March 1998. EPG
has filed a subsequent request for rehearing and has until May 30, 1998, to
determine whether to seek judicial review of FERC's March 1998 order. Other
parties have filed petitions for review of FERC's order.
Separately, in November 1996, GPM Corporation filed a complaint, as
amended, with FERC alleging that EPG's South Carlsbad compression facilities
were gathering facilities and were improperly functionalized by EPG as
transmission facilities. In a November 1997 order, FERC concluded that the South
Carlsbad Compressor facilities performed a gathering function and directed EPG
to transfer the facility to EPFS. EPG and others sought rehearing of this order
which FERC denied in March 1998. EPG has until May 30, 1998, to determine
whether to seek judicial review of FERC's March 1998 order. In FERC's March 1998
rehearing orders related to the Chaco and South Carlsbad matters, FERC
reaffirmed that the base settlement rates provided for under the 1996 rate
settlement would not be impacted and further determined that effective May 1,
1998, the fuel consumed by these facilities would cease to be included in the
data used for calculating the fuel charges effective for transmission customers
pursuant to the fuel settlement approved by FERC in 1997 (which settlement has
been challenged in the Court of Appeals by GPM Corporation). In accordance with
the FERC orders, the Chaco and South Carlsbad facilities were transferred to
EPFS in April 1998.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
Environmental Matters
As of March 31, 1998, the Company had a reserve of approximately $276
million to cover environmental assessments and remediation activities discussed
below.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline
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systems. While conducting this project, TGP has been in frequent contact with
federal and state regulatory agencies, both through informal negotiation and
formal entry of consent orders, to assure that its efforts meet regulatory
requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes 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. The
Environmental Stipulation was effective July 1, 1995. As of March 31, 1998, a
balance of $20 million remains to be collected under this stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they may be designated, or have been asked for information
to determine whether they could be designated as a PRP with respect to 33 sites
under the Comprehensive Environmental Response, Compensation and Liability Act
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through indemnification by third parties and/or
settlements which provide for 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, and because in some cases the Company has asserted a defense to any
liability, 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. 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. The Company
presently believes that the costs associated with the current status of such
entities as PRPs at the sites referenced above will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company 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, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. 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 the recorded 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, negligent
misrepresentation, 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 E. 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 filed
a Motion for Summary Judgment in the TransAmerican case arguing that plaintiff's
claims are barred by a prior release executed by TransAmerican,
9
12
by statutes of limitations, and by the final court judgment ending the original
litigation in 1990. Following a hearing in January 1998, the court granted
summary judgment in EPG's favor on TransAmerican's claims based on economic
duress and negligent misrepresentation, but denied the motion as to the
remaining claims. In February 1998, EPG filed a Motion for Summary Judgment in
the Stone litigation arguing that all claims are baseless, barred by statutes of
limitations, subject to executed releases, or have been assigned to
TransAmerican. Oral argument on the motion occurred in March 1998 and a decision
is pending. The trials in TransAmerican and Stone are set to commence in March
1999 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 material adverse effect on the Company's financial position, results
of operations, or cash flows.
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al against fourteen companies including the following
affiliates of EPG: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site, and seeks to recover that
amount plus interest. Other companies named as defendants include Atlantic
Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical
Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas
Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed
their answers and third-party complaints have been filed seeking contribution
from twelve other entities believed to be PRPs at Sikes. Although factual
investigation relating to Sikes is in very preliminary stages, the Company
believes that the amount of material disposed at Sikes from the Tenneco
Chemicals, Inc. or Petro-Tex Chemical Corporation facilities, if any, was small,
possibly de minimis. However, the government plaintiffs have alleged that the
defendants are each jointly and severally liable for the entire remediation
costs and have also sought a declaration of liability for future response costs
such as groundwater monitoring. While the outcome of this matter cannot be
predicted with certainty, management does not expect this matter to have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
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, 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. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent
10
13
order with the EPA. Management believes that the resolution of this issue will
not have a material adverse effect on the Company's financial position, results
of operations, or cash flows.
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 material adverse effect on the Company's financial position,
results of operations, or cash flows.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the assessment, remediation, testing and implementation of
the necessary modifications to its key computer applications (which consist of
internally developed computer applications, third party software, hardware and
embedded chip systems) to assure that such systems and related processes will
remain functional.
The assessment phase related to internally developed computer applications
has been completed and the cost estimate for making the necessary changes to
such systems, including implementation and testing efforts, is approximately $8
million to be spent in 1998 and 1999. These estimates were based on various
factors including availability of internal and external resources and complexity
of the software applications. The recent upgrade of various systems,
particularly the financial systems, to a Year 2000 compliant client/server
platform has greatly reduced or eliminated concerns in those areas.
The assessment phase for the third party software, hardware, and embedded
chip systems impacts is continuing, with completion of that phase and an
estimate of costs necessary to modify or replace those systems to be available
in the second quarter of 1998. Included in this phase of the project is the
effort to obtain representations and assurances from third party vendors that
their software, hardware products, and embedded chip systems being used by the
Company are or will be Year 2000 compliant. Implementation and testing phases
are expected to be completed by mid 1999.
It is the Company's goal to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems may be interrelated with systems outside the control of the
Company, there can be no assurance that all implementations will be successful.
Management does not expect the costs to modify its systems or to correct any
unsuccessful system implementations to have a material adverse impact on the
Company's financial position, results of operations, or cash flows.
4. TRUST PREFERRED SECURITIES
In March 1998, El Paso Energy Capital Trust I (the "Trust"), issued 6.5
million of 4 3/4% trust convertible preferred securities (the "Trust Preferred
Securities") for $325 million ($317 million, net of issuance costs). The Trust,
a Delaware business trust, is a wholly owned consolidated subsidiary of EPG.
Concurrent with the issuance of the Trust Preferred Securities, the Trust issued
trust convertible common securities in the amount of $10 million to EPG. The
Trust exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds from the issuance thereof in 4 3/4% convertible
subordinated debentures due 2028 (the "Trust Debentures") of EPG, the Trust's
sole asset. The results of the Trust are consolidated with those of the Company
and, therefore, the Trust Debentures are eliminated and the Trust Preferred
Securities are reflected as company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital Trust I in the Condensed
Consolidated Balance Sheets. Distributions on the Trust Preferred Securities are
included in interest and debt expense in the Condensed Consolidated Statements
of Income. The net proceeds to EPG were used to pay down commercial paper.
The Trust Preferred Securities are non-voting (except in limited
circumstances), pay quarterly distributions at an annual rate of 4 3/4%
commencing on June 30, 1998, carry a liquidation value of $50 per share plus
accrued and unpaid distributions and are convertible into the Company's common
shares at any time prior to the close of business on March 31, 2028, at the
option of the holder. The Trust Preferred Securities are convertible into the
Company's common stock at the rate of 1.2022 common shares for each
11
14
preferred security (equivalent to a conversion price of $41.59 per common
share), subject to adjustment in certain circumstances. The Company has executed
a guarantee with regard to the Trust Preferred Securities. The guarantee, when
taken together with the Company's obligations under the Trust Debentures, the
indenture pursuant to which the Trust Debentures were issued, and the applicable
trust document, provides a full and unconditional guarantee of the Trust's
obligations under the Trust Preferred Securities.
5. FINANCING TRANSACTIONS
The Company had short-term borrowings, including current maturities of long
term debt, at March 31, 1998 and December 31, 1997, as follows:
1998 1997
----- -----
(IN MILLIONS)
EPG Revolving Credit Facility............................... $ -- $ 45
EPG Revolving Credit Facility with TGP designated as
borrower.................................................. 417 417
Commercial paper............................................ 244 326
Other credit facilities..................................... 35 25
Current maturities of long-term debt........................ 55 72
---- ----
$751 $885
==== ====
In March 1998, EPG retired its outstanding 8 5/8% debentures due 2012 in
the amount of $17 million.
After issuing the Trust Debentures, EPG has approximately $565 million of
capacity remaining under its shelf registrations to issue public securities
registered thereunder. In addition, TGP has approximately $100 million remaining
under its February 1997 shelf registration.
6. ACQUISITIONS
As previously reported, in March 1998, the Company and DeepTech
International, Inc. ("DeepTech") entered into a definitive agreement whereby the
Company will acquire DeepTech as well as DeepTech's combined ownership interest
in Leviathan Gas Pipeline Partners, L.P. The Company expects to complete the
transaction by July 1998, although completion of the transaction is subject to
various conditions including the receipt of required regulatory and stockholder
approvals and other customary conditions. The Federal Trade Commission has
granted early termination of its review of the transaction, and a review by the
Securities and Exchange Commission is pending. The acquisition will be accounted
for as a purchase with a total purchase price of approximately $462 million,
exclusive of acquisition costs.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1998, and December 31, 1997,
consisted of the following:
1998 1997
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost..................... $6,059 $6,004
Less accumulated depreciation and depletion................. 1,492 1,395
------ ------
4,567 4,609
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,500 2,507
------ ------
Total property, plant, and equipment, net......... $7,067 $7,116
====== ======
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8. INVENTORIES
Inventories at March 31, 1998, and December 31, 1997, consisted of the
following:
1998 1997
---- ----
(IN MILLIONS)
Materials and supplies...................................... $43 $42
Gas in storage.............................................. 9 26
--- ---
$52 $68
=== ===
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
9. EARNINGS PER SHARE
Basic and diluted earnings per share amounts are presented below for the
quarters ended March 31:
1998 1997
----------------------------------- -----------------------------------
NET AVERAGE SHARES EARNINGS NET AVERAGE SHARES EARNINGS
INCOME OUTSTANDING PER SHARE INCOME OUTSTANDING PER SHARE
------ -------------- --------- ------ -------------- ---------
(IN MILLIONS, EXCEPT PER COMMON
SHARE AMOUNTS)
Basic.............................. $58 115.9 $0.50 $47 111.2 $0.43
===== =====
Effect of dilutive securities:
Stock options.................... 2.5 2.0
Trust preferred securities....... 1.2 --
Restricted stock................. 2.1 --
--- ----- --- -----
Dilutive........................... $58 121.7 $0.48 $47 113.2 $0.42
=== ===== ===== === ===== =====
10. RECENT PRONOUNCEMENTS
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of obligations under
those plans. The standard is effective for fiscal years beginning after December
15, 1997. The Company is currently evaluating the effects of this pronouncement.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance for
accounting of such costs, and also defines internal-use computer software. It is
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the effects of this pronouncement.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. It is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
effects of this pronouncement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
GENERAL
Basic earnings per share for the quarter ended March 31, 1998 rose 17
percent to $0.50 from $0.43 in the first quarter of 1997. On a diluted earnings
per share basis, 1998 earnings increased 14 percent to $0.48 from $0.42 in 1997.
Basic and diluted average common shares outstanding for the quarter ended March
31, 1998 were 115,930,626 and 121,711,863, respectively.
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer different products and services. They are managed separately as each
business requires different technology and marketing strategies. To the extent
practicable, results of operations for 1997 have been reclassified to conform to
the current business segment presentation, although such results are not
necessarily indicative of the results which would have been achieved had the
revised business segment structure been in effect during the period. Operating
revenues by segment include intersegment sales which are eliminated in
consolidation. For a further discussion of the individual segments, See Note 2
of Item 1, Financial Statements.
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
SEGMENT RESULTS
FIRST QUARTER
ENDED
MARCH 31,
--------------
1998 1997
----- -----
(IN MILLIONS)
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
El Paso Natural Gas......................................... $ 52 $ 62
Tennessee Gas Pipeline...................................... 98 82
---- ----
Regulated segments........................................ 150 144
El Paso Field Services...................................... 24 28
El Paso Energy Marketing.................................... -- (16)
El Paso Energy International................................ 2 (2)
---- ----
Non-regulated segments.................................... 26 10
Corporate expenses, net..................................... (13) (6)
---- ----
Total EBIT................................................ $163 $148
==== ====
Consolidated EBIT for the quarter ended March 31, 1998, was $15 million
higher than for the same period of 1997 as discussed below.
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El Paso Natural Gas
FIRST QUARTER
ENDED
MARCH 31,
-------------
1998 1997
---- ----
(IN MILLIONS)
Operating revenues.......................................... $115 $129
Operating expenses.......................................... (63) (67)
Other -- net................................................ -- --
---- ----
EBIT...................................................... $ 52 $ 62
==== ====
Operating revenues for the quarter ended March 31, 1998 were $14 million
lower than for the same period of 1997 primarily due to lower revenues resulting
from the Pacific Gas & Electric Company contract expiration which was effective
December 31, 1997. The decrease was partially offset by risk sharing revenue and
revenue from the sale of excess capacity to NGC, see Part I, Financial
Information, Note 3.
Operating expenses for the quarter ended March 31, 1998 were $4 million
lower than for the same period of 1997 primarily due to certain benefit costs
accounted for in accordance with EPG's March 1996 settlement.
Tennessee Gas Pipeline
FIRST QUARTER
ENDED
MARCH 31,
-------------
1998 1997
---- ----
(IN MILLIONS)
Operating revenues.......................................... $212 $215
Operating expenses.......................................... (118) (135)
Other -- net................................................ 4 2
---- ----
EBIT...................................................... $ 98 $ 82
==== ====
Operating revenues for the quarter ended March 31, 1998 were $3 million
lower than for the same period of 1997 primarily because of lower transportation
volumes resulting from warmer average temperatures in the northeastern and
midwestern markets.
Operating expenses for the quarter ended March 31, 1998 were $17 million
lower than for the same period of 1997 primarily due to lower fuel costs
associated with the change in throughput attributable to warmer average
temperatures in the northeast and midwest in the first quarter of 1998. Also
contributing to the decrease in operating expenses were lower labor costs,
benefit costs, and payroll taxes which resulted from the reduction in staffing
levels which occurred during the first quarter of 1997. Depreciation expense was
also lower in the first quarter of 1998 due to the finalization of the
adjustments to the purchase price amount allocated to property, plant and
equipment based on the completion of an independent asset appraisal in the
fourth quarter of 1997.
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El Paso Field Services
FIRST QUARTER
ENDED
MARCH 31,
-------------
1998 1997
---- ----
(IN MILLIONS)
Gathering and treating margin............................... $ 39 $ 35
Processing margin........................................... 14 19
Other margin................................................ 2 1
---- ----
Total gross margin................................ 55 55
Operating expenses.......................................... (35) (28)
Other -- net................................................ 4 1
---- ----
EBIT...................................................... $ 24 $ 28
==== ====
Total gross margin (revenue less cost of sales) for the quarter ended March
31, 1998 was the same as for the comparable 1997 period. The increase in the
gathering and treating margin was primarily due to an increase in gathering and
treating volumes largely attributable to the acquisition of Pacificorp's Texas
Gulf Coast gathering and processing subsidiaries ("TPC") in December 1997
partially offset by lower average San Juan Basin gas index prices in the first
quarter of 1998. The decrease in the processing margin was largely due to lower
liquids prices during the first quarter of 1998 compared to the same period of
1997. Offsetting the decrease in the processing margin was the additional
contribution from the acquisition of TPC. Natural gas and liquids prices, which
directly impact a substantial portion of gathering and processing revenues, were
at record high levels during the first quarter of 1997.
Operating expenses for the quarter ended March 31, 1998 were $7 million
higher than for the same period of 1997 primarily related to additional expense
associated with TPC and Gulf States Gas Pipeline Company and higher
administrative costs in the first quarter of 1998.
Other -- net for the quarter ended March 31, 1998 was $3 million higher
than for the same period of 1997 primarily from additional earnings from equity
investments.
El Paso Energy Marketing
FIRST QUARTER
ENDED
MARCH 31,
-------------
1998 1997
---- ----
(IN MILLIONS)
Natural gas margin.......................................... $ 6 $ (4)
Power margin................................................ 7 --
Petroleum products margin................................... -- (1)
---- ----
Total gross margin................................ 13 (5)
Operating expenses.......................................... (13) (12)
Other -- net................................................ -- 1
---- ----
EBIT...................................................... $ -- $(16)
==== ====
Total gross margin (revenue less cost of sales) for the quarter ended March
31, 1998 was $18 million higher than for the same period of 1997. The increase
in margin was primarily due to the income recognition from long-term natural gas
and electric power contracts closed during the quarter. The Company's energy
marketing operations have been negatively impacted by low natural gas and power
trading margins, which are expected to continue.
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El Paso Energy International
FIRST QUARTER
ENDED MARCH 31,
----------------
1998 1997
----- -----
(IN MILLIONS)
Operating revenues.......................................... $11 $--
Operating expenses.......................................... (18) (4)
Other -- net................................................ 9 2
--- ---
EBIT...................................................... $ 2 $(2)
=== ===
Operating revenues for the quarter ended March 31, 1998 were $11 million
higher than for the same period of 1997 due to the acquisition of a controlling
interest in the EMA Power project in June 1997.
Operating expenses for the quarter ended March 31, 1998 were $14 million
higher than for the same period of 1997 primarily due to costs related to the
EMA Power project and higher project development costs in the first quarter of
1998.
Other -- net for the first quarter ended March 31, 1998 was $7 million
higher than for the same period of 1997 primarily from increased equity earnings
and gains related to equity investments.
Corporate expenses, net
The loss before interest expense and income taxes for the quarter ended
March 31, 1998 was $7 million higher than for the same period of 1997 primarily
due to increased amortization cost related to the Company's employee incentive
plans.
INTEREST AND DEBT EXPENSE
Interest and debt expense for the quarter ended March 31, 1998 was $3
million higher than for the same period of 1997 because of a higher average
effective interest rate during the first quarter of 1998 primarily resulting
from the higher rates associated with the March 1997 issuance of TGP long-term
debt of approximately $883 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $22 million lower for the
quarter ended March 31, 1998, compared to the same period of 1997. The decrease
was primarily attributable to lower GSR collections in 1998, a take-or-pay
refund to EPG customers in February 1998, and a net income tax refund in 1997.
The decrease was partially offset by a rate refund to TGP's customers in 1997.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $281 million higher for the
quarter ended March 31, 1998, compared to the same period of 1997. The increase
was primarily due to higher expenditures for joint ventures, equity investments,
and capital expenditures in the first quarter of 1998 compared to the first
quarter of 1997. Expenditures related to joint ventures and equity investments
were primarily attributable to the international segment. Internally generated
funds, supplemented by other financing activities, were used to fund these
expenditures. Additionally, the first quarter 1997 included the collection of a
$53 million note receivable from the Company's partnership in a 103 MW
cogeneration plant in Florida.
Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds,
commercial paper issuances, available capacity under existing credit facilities,
and/or the issuance of other long-term debt, trust securities, or equity.
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20
CASH FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $165 million in the quarter
ended March 31, 1998 compared to net cash used in financing activities of $170
million in the same period of 1997. In March 1998, the Trust issued Trust
Preferred Securities for net proceeds of $317 million which were used to pay
down commercial paper. Short-term borrowings, supplemented by internally
generated funds, were used for
long-term debt retirements, dividend payments, and other corporate purposes. The
first quarter 1997 use of cash was due in large part to the Company's efforts to
realign its debt and capital structure following the EPTPC acquisition.
In March 1998, EPG retired its outstanding 8 5/8% debentures due 2012 in
the amount of $17 million.
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 22, 1997....................... $0.18250 January 2, 1998 $ 22
January 22, 1998....................... $0.19125 April 1, 1998 $ 23
In April 1998, the Board declared a quarterly dividend of $0.19125 per
share on EPG's common stock, payable on July 1, 1998, to stockholders of record
on June 5, 1998. Also during the first quarter of 1998, quarterly dividends of
$6 million were paid on EPTPC's Series A Preferred Stock.
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 capacity under existing credit
facilities, and/or the issuance of other long-term debt, trust securities, or
equity.
At March 31, 1998, the Company had approximately $1 billion available under
its revolving credit facilities established in October 1997. The availability of
borrowings under the Company's credit agreements is subject to certain specified
conditions, which management believes it currently meets.
After issuing the Trust Debentures described in Part I, Financial
Information, Note 4, EPG has approximately $565 million of capacity remaining
under its shelf registrations to issue public securities registered thereunder.
In addition, TGP has approximately $100 million remaining on its February 1997
shelf registration.
COMMITMENTS AND CONTINGENCIES
INDONESIAN ECONOMIC DIFFICULTIES
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
RATES AND REGULATORY MATTERS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
ENVIRONMENTAL MATTERS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
YEAR 2000
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
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21
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.
DEEPTECH ACQUISITION
As previously reported, in March 1998, the Company and DeepTech entered
into a definitive agreement whereby the Company will acquire DeepTech as well as
DeepTech's combined ownership interest in Leviathan Gas Pipeline Partners, L.P.
The Company expects to complete the transaction by July 1998, although
completion of the transaction is subject to various conditions including the
receipt of required regulatory and stockholder approvals and other customary
conditions. The Federal Trade Commission has granted early termination of its
review of the transaction, and a review by the Securities and Exchange
Commission is pending. The acquisition will be accounted for as a purchase with
a total purchase price of approximately $462 million, exclusive of acquisition
costs.
ONGOING AND FUTURE INVESTMENT AND CAPITAL PROJECTS
Significant events impacting the Company's development projects are
discussed below.
Latin America
In April 1998, the Company purchased the remaining 50 percent interest in
the 250 MW power project in Manaus, Brazil from CAPEX, a publicly traded company
on the Argentine and Luxembourg stock exchanges. The contract for the project
provides for delay damages to be paid to the power purchaser in the event of a
failure to meet the specified construction schedule, except for delays caused by
events of force majeure. The completion of the project has been delayed beyond
the dates provided in the contract and such delays have resulted in a claim for
delay damages from the power purchaser. The Company has a right to assert claims
against the construction contractor for such delay damages, and in any event
does not believe that any such damages will have a material adverse affect on
the Company.
Portland
The Company increased its ownership interest in the Portland Natural Gas
Transmission ("Portland") system from 17.8 percent to approximately 19 percent
in April 1998. Portland is developing a 292-mile interstate natural gas pipeline
with a projected capacity of 178 million cubic feet per day extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. Also in
April 1998, Portland secured $256 million in non-recourse project financing.
Targeted completion for the project is November 1998.
STOCK SPLIT
On January 21, 1998, the Board approved the Stock Split, subject to
stockholder approval of the Amendment. The stockholders approved the Amendment
on March 2, 1998. The Stock Split was effected in the form of a stock dividend
of an aggregate of 60,944,417 shares of EPG's common stock, which was paid on
April 1, 1998, to stockholders of record on March 13, 1998.
RECENT PRONOUNCEMENTS
See Part I, Financial Information, Note 10, 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 and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to the Company's acquisitions, including
EPTPC, 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, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Stock Split, EPG's stockholders approved an
amendment to EPG's Restated Certificate of Incorporation. See Part 1, Financial
Information, Note 1, which is incorporated herein by reference.
In March 1998, the Trust issued the Trust Preferred Securities, which are
convertible into EPG common stock. See Part I, Financial Information, Note 4,
which is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
EPG held a special meeting of stockholders on March 2, 1998. The proposal
presented for a stockholder vote was to amend EPG's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of common
stock from 100,000,000 shares, par value $3.00 per share, to 275,000,000 shares,
par value $3.00 per share. The amendment was approved with the following voting
results on a pre-split basis:
FOR AGAINST ABSTAIN
---------- ------- -------
Approval of Amendment...................................... 46,377,317 948,592 134,929
There were no broker non-votes on the proposal.
ITEM 5. OTHER INFORMATION
None.
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ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below not designated by an asterisk is incorporated
by reference to a prior filing as indicated.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.A -- Restated Certificate of Incorporation of EPG dated
January 22, 1992. Certificate of Designation, Preferences
and Rights of Series A Junior Participating Preferred
Stock of EPG dated July 7, 1992; Certificate of Amendment
to Restated Certificate of Incorporation of EPG, dated
March 2, 1998; Certificate of Increase of Authorized
Number of Shares of Series A Junior Participating
Preferred Stock of EPG, dated April 29, 1998.
*+10.C.1 -- Amendment No. 1 to the EPG Omnibus Compensation Plan,
effective April 1, 1998.
*+10.D.1 -- Amendment No. 3 to the EPG 1995 Incentive Compensation
Plan, effective April 1, 1998.
*+10.E.1 -- Amendment No. 1 to the El Paso Energy Corporation 1995
Compensation Plan for Non-Employee Directors, effective
April 1, 1998.
*+10.F.1 -- Amendment No. 1 to the El Paso Energy Corporation Stock
Option Plan for Non-Employee Directors, effective April
1, 1998.
*+10.G.1 -- Amendment No. 2 to the EPG 1995 Omnibus Compensation
Plan, effective April 1, 1998.
*+10.R -- Promissory Note dated May 30, 1997, made by William A.
Wise to El Paso Energy Corporation; Amendment to
Promissory Note dated November 20, 1997.
+10.S -- El Paso Energy Corporation Strategic Stock Plan,
effective as of June 19, 1996, (Exhibit 10.AC to EPG's
Form 10-Q filed August 14, 1996).
*+10.S.1 -- Amendment No. 1 to the El Paso Energy Corporation
Strategic Stock Plan, effective April 1, 1998.
10.T -- Agreement and Plan of Merger, dated as of February 27,
1998, among El Paso Natural Gas Company, El Paso
Acquisition Company and DeepTech International Inc.
(Exhibit 2.1 to EPG's Form S-4 filed April 10, 1998);
Contribution and Distribution Agreement, dated as of
February 27, 1998, among DeepTech International Inc.,
DeepFlex Production Services, Inc., El Paso Natural Gas
Company and Tatham Offshore, Inc. (Exhibit 2.2 to EPG's
Form S-4 filed April 10, 1998).
*27 -- Financial Data Schedule.
- ---------------
* Indicates documents filed as part of this report.
+ Indicates management contract or compensatory plan or arrangement.
Undertaking
The undersigned 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.
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b. Reports on Form 8-K
On March 17, 1998, EPG filed a report under Item 5 and Item 7 on Form
8-K, dated March 17, 1998, with respect to the El Paso Energy Capital Trust
I offering of 6.5 million of 4 3/4% Trust Convertible Preferred Securities
with an aggregate liquidation value of $325 million.
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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 15, 1998 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 15, 1998 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.A -- Restated Certificate of Incorporation of EPG dated
January 22, 1992. Certificate of Designation, Preferences
and Rights of Series A Junior Participating Preferred
Stock of EPG dated July 7, 1992; Certificate of Amendment
to Restated Certificate of Incorporation of EPG, dated
March 2, 1998; Certificate of Increase of Authorized
Number of Shares of Series A Junior Participating
Preferred Stock of EPG, dated April 29, 1998.
*+10.C.1 -- Amendment No. 1 to the EPG Omnibus Compensation Plan,
effective April 1, 1998.
*+10.D.1 -- Amendment No. 3 to the EPG 1995 Incentive Compensation
Plan, effective April 1, 1998.
*+10.E.1 -- Amendment No. 1 to the El Paso Energy Corporation 1995
Compensation Plan for Non-Employee Directors, effective
April 1, 1998.
*+10.F.1 -- Amendment No. 1 to the El Paso Energy Corporation Stock
Option Plan for Non-Employee Directors, effective April
1, 1998.
*+10.G.1 -- Amendment No. 2 to the EPG 1995 Omnibus Compensation
Plan, effective April 1, 1998.
*+10.R -- Promissory Note dated May 30, 1997, made by William A.
Wise to El Paso Energy Corporation; Amendment to
Promissory Note dated November 20, 1997.
*+10.S.1 -- Amendment No. 1 to the El Paso Energy Corporation
Strategic Stock Plan, effective April 1, 1998.
*27 -- Financial Data Schedule.
- ---------------
* Indicates documents filed as part of this report.
+ Indicates management contract or compensatory plan or arrangement.
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