1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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 JUNE 30, 1994
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
EL PASO NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction 74-0608280
of Incorporation or Organization) (I.R.S. Employer Identification No.)
ONE PAUL KAYSER CENTER,
100 NORTH STANTON STREET, EL PASO, TEXAS 79901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (915) 541-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
---------------------------------------------------------------------------------------
Common Stock, par value $3.00 per share,
as of July 31, 1994 36,719,723 shares
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
SECOND QUARTER SIX MONTHS
--------------------- ---------------------
1994 1993 1994 1993
-------- -------- -------- --------
Operating revenues............................... $210,805 $220,611 $432,750 $431,523
-------- -------- -------- --------
Operating charges
Operation and maintenance...................... 75,243 78,131 145,083 151,869
Natural gas and liquids........................ 50,411 60,950 113,371 111,494
Depreciation and amortization.................. 16,156 15,154 32,385 29,411
Litigation special charge...................... -- -- 15,062 --
Taxes, other than income taxes................. 9,397 8,979 19,454 18,168
-------- -------- -------- --------
151,207 163,214 325,355 310,942
-------- -------- -------- --------
Operating income................................. 59,598 57,397 107,395 120,581
-------- -------- -------- --------
Other (income) and income deductions
Interest and debt expense...................... 19,407 18,621 39,122 35,290
Other -- net................................... (31) 5,367 (6,655) 2,044
-------- -------- -------- --------
19,376 23,988 32,467 37,334
-------- -------- -------- --------
Income before income taxes....................... 40,222 33,409 74,928 83,247
Income taxes..................................... 16,211 12,726 29,802 31,724
-------- -------- -------- --------
Net income....................................... $ 24,011 $ 20,683 $ 45,126 $ 51,523
======== ======== ======== ========
Earnings per common share........................ $ 0.65 $ 0.55 $ 1.22 $ 1.38
======== ======== ======== ========
Average common shares outstanding................ 36,835 37,325 36,864 37,252
======== ======== ======== ========
Dividends declared per common share.............. $ 0.3025 $ 0.2750 $ 0.6050 $ 0.5500
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
1
3
EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
Current assets
Cash and temporary cash investments.............................. $ 24,138 $ --
Accounts and notes receivable, net............................... 108,922 133,437
Materials and supplies inventory................................. 35,063 34,665
Take-or-pay buy-outs, buy-downs and prepayments, net............. 35,983 34,019
Other regulatory assets.......................................... 12,000 12,000
Deferred income tax benefit...................................... 51,675 44,141
Costs recoverable through insurance.............................. 13,101 23,260
Other............................................................ 16,778 22,490
---------- ------------
Total current assets..................................... 297,660 304,012
---------- ------------
Property, plant and equipment, net................................. 1,762,762 1,765,486
Take-or-pay buy-outs, buy-downs and prepayments, net............... 27,455 48,106
Other regulatory assets............................................ 65,314 62,249
Other.............................................................. 86,854 89,810
---------- ------------
1,942,385 1,965,651
---------- ------------
Total assets............................................. $2,240,045 $2,269,663
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................. $ 187,837 $ 199,883
Commercial paper................................................. -- 1,300
Take-or-pay financing liability.................................. 41,377 40,125
Accrual for regulatory issues.................................... 38,889 47,263
Current maturities of long-term debt............................. 6,495 6,184
Other............................................................ 60,033 61,709
---------- ------------
Total current liabilities................................ 334,631 356,464
---------- ------------
Long-term debt, less current maturities............................ 792,527 795,783
Deferred income taxes, less current portion........................ 302,691 298,080
Take-or-pay financing liability, less current portion.............. 17,223 40,383
Deferred credits................................................... 34,091 25,540
Other liabilities.................................................. 32,678 45,865
---------- ------------
1,179,210 1,205,651
---------- ------------
Commitments and contingent liabilities (See Notes 3, 4 and 5)
Stockholders' equity
Common stock, par value $3 per share; authorized 100,000 shares;
issued 37,350 shares.......................................... 112,051 112,051
Additional paid-in capital....................................... 454,681 455,496
Retained earnings................................................ 179,988 157,506
Less: Treasury stock (at cost) 587 shares and 486 shares......... 20,516 17,505
---------- ------------
Total stockholders' equity............................... 726,204 707,548
---------- ------------
Total liabilities and stockholders' equity............... $2,240,045 $2,269,663
========= ==========
See accompanying Notes to Consolidated Financial Statements.
2
4
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
--------------------------
1994 1993
--------- --------
Cash flows from operating activities
Net income...................................................... $ 45,126 $ 51,523
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization................................ 32,385 29,411
Deferred income taxes........................................ 16,094 19,552
Net take-or-pay recoveries................................... 15,983 26,051
Net costs recovered (recoverable) through insurance.......... 10,159 (5,500)
Other working capital changes
Accounts and notes receivable.............................. 23,590 37,776
Materials and supplies inventory........................... (398) 5,429
Other current assets....................................... (3,901) 11,642
Accounts payable........................................... (6,320) (58,828)
Accrual for regulatory issues.............................. (429) 25,860
Other current liabilities.................................. (934) 1,178
Other........................................................ (12,297) 6,297
--------- --------
Net cash provided by operating activities............... 119,058 150,391
--------- --------
Cash flows from investing activities
Capital expenditures............................................ (40,572) (54,197)
Mojave acquisition.............................................. -- (35,695)
Proceeds from property dispositions............................. 2,004 664
Other........................................................... (5,301) (954)
--------- --------
Net cash used in investing activities................... (43,869) (90,182)
--------- --------
Cash flows from financing activities
Proceeds from reissuance of treasury stock...................... 1,152 3,583
Long-term debt retirements...................................... (3,010) --
Commercial paper repayments..................................... (1,300) --
Repayment of volumetric take-or-pay receivable.................. (21,908) (19,614)
Acquisition of treasury stock................................... (4,738) --
Dividends paid.................................................. (21,299) (19,396)
Other........................................................... 52 6,916
--------- --------
Net cash used in financing activities................... (51,051) (28,511)
--------- --------
Increase in cash and temporary cash investments................... 24,138 31,698
Cash and temporary cash investments
Beginning of period..................................... -- 48,638
--------- --------
End of period........................................... $ 24,138 $ 80,336
========= ========
See accompanying Notes to Consolidated Financial Statements.
3
5
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1993 Annual Report on Form 10-K for El Paso Natural Gas Company and
subsidiaries includes a summary of significant accounting policies and should be
read in conjunction with this Form 10-Q. As used herein, "Company" refers to El
Paso Natural Gas Company and its subsidiaries and "EPG" refers to El Paso
Natural Gas Company, unless the context otherwise requires. The financial
statements for the periods presented are unaudited, condensed and do not contain
all of the information required by generally accepted accounting principles to
be included in a full set of financial statements. 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.
Financial statements for 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.
2. ACQUISITION
On June 1, 1993, the Company acquired from a wholly owned subsidiary of
Enron Corp., that subsidiary's 50 percent interest in Mojave Pipeline Company
("MPC"), a general partnership, for approximately $40 million in cash,
representing the approximate book value of the investment. The acquisition,
which was funded by internally generated cash flow, gives the Company 100
percent ownership of MPC. The acquisition was accounted for using the purchase
method.
The operating results of MPC for the six months ended June 30, 1994 and the
two months ended June 30, 1993, are included in the Consolidated Statement of
Income. The income effect of the Company's previously owned 50 percent equity
interest in MPC for the first four months of 1993 is included in other-net in
the Consolidated Statement of Income.
The following pro forma summary presents the consolidated results of
operations of the Company as if the acquisition had occurred as of January 1,
1993. This pro forma has been prepared for comparative purposes only and does
not purport to be indicative of what may have resulted had the acquisition
occurred as of that date or of results which may occur in the future.
SECOND QUARTER 1993 SIX MONTHS 1993
------------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues.................................. $ 224,341 $ 445,188
Net income.......................................... $ 21,406 $ 52,532
Earnings per common share........................... $ 0.56 $ 1.41
3. RATES AND REGULATORY MATTERS
On January 14, 1994, EPG filed an application with the Federal Energy
Regulatory Commission ("FERC") seeking an order which would terminate, effective
January 1, 1996, certificates applicable to certain gathering and production
area facilities owned by EPG on the basis that such facilities are not subject
to FERC jurisdiction. EPG intends, effective January 1, 1996, to transfer all of
its nonjurisdictional gathering and production area facilities to a wholly owned
subsidiary of EPG, El Paso Field Services Company. The facilities to be
transferred consist of approximately 6,700 miles of various sized pipelines,
compressors with a combined horsepower of 40,600 and various treating and
processing plants.
Several producers and other shippers filed protests and requests for a
formal hearing of the January 14, 1994 application. The primary issues raised in
the protests focus on the extent of competition in EPG's producing basins and
the proper functionalization of its facilities. In response to the producer and
shipper
4
6
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
protests, EPG made a filing on March 15, 1994 asserting that the protests raise
issues already settled under EPG's 1993 settlement agreement.
On May 25, 1994, FERC issued a series of orders which clarified their
policy regarding the regulation of gathering facilities. These orders approved
the requests of various pipelines to terminate certificates applicable to
certain of their respective gathering facilities. Although FERC has stated it
will evaluate all applications on a case by case basis, management believes
EPG's January 14, 1994 application will be approved.
EPG's 1993 settlement agreement provided, in part, for the accelerated
recovery of a substantial portion of EPG's investment in its underground storage
facility. The amount to be recovered was approximately $56.7 million plus
interest accruing beginning February 1, 1993 at the FERC allowed rate, which
approximates the prime rate. On March 25, 1994, EPG received a final FERC letter
order approving the recovery of $56.7 million of underground storage facility
costs. This is being recovered by a demand charge mechanism over the period from
October 1, 1993 through December 31, 1996. The amount recovered through June 30,
1994 was $26 million. The outstanding balance at June 30, 1994 and December 31,
1993 was $30 million and $37 million, respectively, of which $12 million is
reflected in the current portion of other regulatory assets for both periods and
$18 million and $25 million, respectively, is included in other regulatory
assets in the Consolidated Balance Sheet.
MPC filed a service and rate design restructuring plan on November 3, 1992,
in compliance with FERC's industry-wide restructuring directives. On March 2,
1993, FERC issued an order essentially approving MPC's compliance filing,
subject to changes, which were made in an amended restructuring plan on March
29, 1993.
Several of MPC's customers filed protests and requests for rehearing of the
March 2, 1993 FERC order. The rehearing requests were denied, and FERC approved
the amended restructuring plan on July 9, 1993, with an effective date of August
1, 1993. On October 15, 1993, FERC issued an order which denied requests for
rehearing of the July 9, 1993 order. Several of MPC's customers have filed
petitions with the United States Court of Appeals for the District of Columbia
Circuit ("Court of Appeals") for review of the March 2, 1993, July 9, 1993 and
October 15, 1993 orders. These petitions are currently pending. The primary
issues on appeal pertain to FERC's requirement that MPC's rates for firm
transportation service be based upon Straight Fixed Variable ("SFV") rate design
rather than Modified Fixed Variable ("MFV") rate design. The application of SFV
rates requires MPC's existing firm shippers to pay a higher proportion of their
total transportation rate in the reservation component of the rate. Such
shippers have contended that FERC's application of SFV rate design to MPC
unlawfully abrogates the rate provisions of MPC's service agreements and
constitutes an unlawful rate increase. Management believes the Court of Appeals
will uphold SFV rates as applied to MPC.
EPG has made buy-out and buy-down payments and recoupable prepayments to
resolve past and future take-or-pay exposure, to terminate and reform gas
purchase contracts, to amend pricing and take provisions of gas purchase
contracts and to settle related litigation. EPG is collecting its buy-out and
buy-down costs under FERC cost recovery procedures. Under FERC procedures,
take-or-pay cost recovery filings may be challenged by pipeline customers on
prudence and certain other grounds.
Several customers claimed that EPG sought to recover an excessive amount
for the value of certain production properties which were transferred to a
producer as part of a 1989 take-or-pay settlement. On March 8, 1993, an initial
decision from the presiding Administrative Law Judge ("ALJ") was rendered which
required EPG to refund to its customers the costs found to be ineligible for
take-or-pay recovery. On June 16, 1994, FERC affirmed the ALJ's initial
decision. As a result, EPG will be required to refund approximately $40 million,
inclusive of interest, to its customers during the third quarter of 1994. EPG
has established reserves for this refund. On July 18, 1994, EPG filed for
rehearing of the June 16, 1994 order.
5
7
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LEGAL PROCEEDINGS
In El Paso Natural Gas Company and Meridian Oil Gathering Inc. v. Amoco
Production Company, filed in Delaware Chancery Court on May 8, 1991, Amoco
Production Company ("Amoco") alleged breaches by EPG and a then affiliated
company, Meridian Oil Gathering Inc. ("MOGI"), of certain gas purchase,
gathering and transportation agreements pertaining to natural gas produced by
Amoco in the San Juan Basin. Amoco alleged breach of "favored nations"
contractual provisions regarding services to be performed by EPG, including
those relating to transportation capacity and rates and sought a court order
requiring specific performance by EPG and MOGI with respect to future
transportation services and an award of monetary damages of an undetermined
amount for alleged past breaches of contract. On March 4, 1992, the Court issued
a Memorandum Opinion which, among other things, denied Amoco's motion for
partial summary judgment and concluded that the Amoco contracts at issue do not
contain the general "favored nations" rights claimed by Amoco. The Court further
concluded that EPG's and MOGI's motions for summary judgment, seeking dismissal
of Amoco's counterclaim against MOGI, should be granted. Conoco Inc. ("Conoco")
asserted claims similar to Amoco's original claims, involving lesser quantities
of gas, in a separate Delaware Chancery Court proceeding filed on December 30,
1991, Conoco Inc. v. El Paso Natural Gas Company. In August 1992, the Amoco and
Conoco cases were consolidated, MOGI was dismissed as a party, and Amoco and
Conoco filed amended pleadings to restate their claims in light of the court's
March 4, 1992 ruling. EPG and Conoco concluded a settlement agreement which
resulted in dismissal of the Conoco claims. Trial of the Amoco claims concluded
on July 15, 1993, and post-trial briefing and oral arguments concluded in early
November, 1993. On March 29, 1994, the Court rendered a decision in favor of
Amoco. As a result of the Court's decision, EPG will be required to refund to
Amoco amounts which at June 30, 1994 were approximately $15 million, plus
interest of $4 million. In connection with the Amoco decision, EPG recorded a
litigation special charge of approximately $19 million in the first quarter of
1994. Additional briefs have been submitted to the court on the issue of
damages, and EPG is awaiting a final order from the trial court. EPG intends to
appeal the Court's decision.
TransAmerican Natural Gas Corporation ("TransAmerican") has filed a
complaint in a Texas state court against various parties, including EPG,
alleging fraud, tortious interference with contractual relationships, economic
duress, civil conspiracy and violation of state antitrust laws. The complaint,
as amended, seeks unspecified actual and exemplary damages. EPG is actively
defending the matter and has initiated collateral proceedings challenging both
the validity of TransAmerican's claims and the jurisdiction of the forum in
which they were filed. No discovery has been commenced pending resolution of
these threshold issues. Based on information available at this time, management
believes that the claims made by TransAmerican have no factual or legal basis
and that the ultimate resolution of this matter will not have a materially
adverse effect on the Company's financial condition.
EPG and FERC Enforcement Section, Office of the General Counsel
("Enforcement"), entered into a settlement agreement resolving all issues in
Enforcement's investigation of EPG's installation of certain delivery taps.
Enforcement asserted that EPG commenced installation of the delivery taps prior
to receiving clearances from the appropriate State Historic Preservation Office
and the United States Fish and Wildlife Service. FERC approved the settlement
agreement on May 13, 1994. In accordance with the agreement, EPG paid total
civil penalties of $160,000 in the second quarter of 1994.
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 does not expect these matters to
have a materially adverse effect on the Company's financial condition.
6
8
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ENVIRONMENTAL
Accruals for environmental compliance costs are established when
environmental assessments and/or remediation are probable and when costs can be
reasonably estimated. As of June 30, 1994, EPG had a reserve of $38 million for
the following environmental contingencies with income statement impact:
1 -- EPG has been conducting remediation of polychlorinated biphenyl
("PCB") contamination at certain of its facilities. The majority of the
required PCB remediation has been completed. Future PCB remediation costs
are estimated to range between $8 million and $15 million over the next
four years.
2 -- EPG executed an Administrative Order on Consent with the United States
Environmental Protection Agency ("EPA") on June 25, 1993 to conduct a
Remedial Investigation/Feasibility Study ("RI/FS") for a Burlington
Industries, Inc. ("BI") site located in Statesville, North Carolina, that
has been identified for cleanup. BI and EPG have entered into an agreement
to jointly fund the RI/FS for the site. EPG's share of the potential
remediation costs is estimated to be between $17 million and $20 million
over a 30 year period.
3 -- On November 2, 1993, in accordance with an EPA order, EPG and Atlantic
Richfield Company ("ARCO") submitted work plans for remediation of the
subsurface at the Prewitt Refinery in McKinley County, New Mexico. EPG and
ARCO have a cost sharing agreement to each pay one-half of any remediation
costs at this site. EPG's share of the remediation costs is estimated to be
between $10 million and $20 million over a 30 year period.
4 -- On December 21, 1993, EPA issued EPG a Notice of Liability for the
Colorado School of Mines Research Institute ("CSMRI") site in Golden,
Colorado. EPA has determined that the volume of hazardous substances sent
to the site by EPG represent approximately 2.4% of the total volumes sent
by all the potentially responsible parties. Based on this percentage, EPG's
share of the potential remediation costs is estimated to be less than
$500,000.
5 -- EPG is involved in other environmental assessment and remediation
activities which include two Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") sites (Fountain Inn,
South Carolina and Odessa, Texas) and one state Superfund site (Etowah,
Tennessee). EPG has entered into a de minimis administrative order on
consent with EPA for EPG's share of the environmental remediation costs
associated with the CERCLA site in Odessa, Texas. In accordance with the
order, EPG will pay total costs of approximately $32,000. Management
believes the amount reserved as of June 30, 1994 is sufficient to cover
these and other small environmental assessments and remediation activities.
EPG also has potential expenditures of a capital nature for the following
environmental projects:
1 -- EPG has analyzed the Clean Air Act Amendments of 1990 ("CAAA"), and
believes that these rules will impact the Company's operations primarily in
the following areas: (i) potential required reductions in the emissions of
nitrogen oxides ("NOx") in non-attainment areas; (ii) the requirement for
air emissions permitting of existing facilities; and (iii) enhanced
monitoring of air emissions. The Company anticipates capitalizing the
equipment costs associated with complying with CAAA and estimates that
approximately $5 million to $27 million will be spent during the 1995
through 1997 time frame. However, EPA's proposed enhanced monitoring rules,
when finalized, could potentially impose greater costs to the Company.
2 -- EPG has been conducting remediation of mercury contamination at
certain facilities and is replacing mercury containing meters with dry flow
devices. The remaining remediation costs are estimated to be between $8
million and $13 million. The mercury remediation project is expected to be
completed by January 1, 1996. EPG will close and retire about 2,500 earthen
siphon/dehydration pits in the San Juan Basin as recently required by
certain environmental regulations. EPG estimates costs of approximately
7
9
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$4 million to $10 million to retire these pits. The project is expected to
be completed by January 1, 1996. The mercury remediation and pit closure
costs, which are associated with the retirement of equipment, will be
recorded as adjustments to accumulated depreciation, as permitted by
regulatory accounting.
The State of Tennessee has asserted a claim that EPG is a liable party
under state environmental laws for clean up costs associated with a site in
Elizabethton, Tennessee. The State and EPA are in the preliminary stages of
investigating the nature and extent of contamination, as well as identifying
other potentially responsible parties. Since testing is in the initial stages,
EPG is unable to estimate its potential share of any remediation costs.
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 or developments occur, related accrual amounts will be
adjusted accordingly.
6. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, which requires companies to account for
benefits to former or inactive employees after employment but before retirement
(referred to in SFAS No. 112 as "postemployment benefits"). As of June 30, 1994,
the Company's liability for postemployment benefit costs was approximately $8
million. Management expects to seek recovery of these costs through rates and
has recorded a regulatory asset equal to the liability.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1994 and December 31, 1993
consisted of the following:
1994 1993
---------- ----------
(IN THOUSANDS)
Property, plant and equipment, at cost...................... $2,888,234 $2,873,301
Less accumulated depreciation............................... 1,227,184 1,212,233
---------- ----------
1,661,050 1,661,068
Additional acquisition cost assigned to utility plant,
net of accumulated amortization........................... 101,712 104,418
---------- ----------
Property, plant and equipment, net................ $1,762,762 $1,765,486
========= =========
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
SIX MONTHS
----------------------
1994 1993
------- -------
(IN THOUSANDS)
Cash Payments
Interest.................................................... $34,717 $32,106
Income taxes................................................ 35,343 11,607
8
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities was $119 million for the six
months ended June 30, 1994 compared with $150 million for the same period of
1993. The decrease from the previous period was primarily due to higher tax
payments and lower accruals for regulatory issues offset by net insurance claims
received, collections of EPG's investment in its underground storage facility
and timing of working capital receipts and disbursements.
Acquisition
On June 1, 1993, the Company acquired from a wholly owned subsidiary of
Enron Corp., that subsidiary's 50 percent interest in MPC, a general
partnership, for approximately $40 million in cash, representing the approximate
book value of the investment. The acquisition, which was funded by internally
generated cash flow, gives the Company 100 percent ownership of MPC. The
acquisition was accounted for using the purchase method.
The operating results of MPC for the six months ended June 30, 1994, and
the two months ended June 30, 1993, are included in the Consolidated Statement
of Income. The income effect of the Company's previously owned 50 percent equity
interest in MPC for the first four months of 1993 is included in other-net in
the Consolidated Statement of Income.
The following pro forma summary presents the consolidated results of
operations of the Company as if the acquisition had occurred as of January 1,
1993. This pro forma has been prepared for comparative purposes only and does
not purport to be indicative of what may have resulted had the acquisition
occurred as of that date or of results which may occur in the future.
SECOND QUARTER 1993 SIX MONTHS 1993
------------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues.................................. $ 224,341 $ 445,188
Net income.......................................... $ 21,406 $ 52,532
Earnings per common share........................... $ 0.56 $ 1.41
Rates and Regulatory Matters
On January 14, 1994, EPG filed an application with FERC seeking an order
which would terminate, effective January 1, 1996, certificates applicable to
certain gathering and production area facilities owned by EPG on the basis that
such facilities are not subject to FERC jurisdiction. EPG intends, effective
January 1, 1996, to transfer all of its nonjurisdictional gathering and
production area facilities to a wholly owned subsidiary of EPG, El Paso Field
Services Company. The facilities to be transferred consist of approximately
6,700 miles of various sized pipelines, compressors with a combined horsepower
of 40,600 and various treating and processing plants.
Several producers and other shippers filed protests and requests for a
formal hearing of the January 14, 1994 application. The primary issues raised in
the protests focus on the extent of competition in EPG's producing basins and
the proper functionalization of its facilities. In response to the producer and
shipper protests, EPG made a filing on March 15, 1994 asserting that the
protests raise issues already settled under EPG's 1993 settlement agreement.
On May 25, 1994, FERC issued a series of orders which clarified their
policy regarding the regulation of gathering facilities. These orders approved
the requests of various pipelines to terminate certificates applicable to
certain of their respective gathering facilities. Although FERC has stated it
will evaluate all applications on a case by case basis, management believes
EPG's January 14, 1994 application will be approved.
EPG's 1993 settlement agreement provided, in part, for the accelerated
recovery of a substantial portion of EPG's investment in its underground storage
facility. The amount to be recovered was approximately $56.7 million plus
interest accruing beginning February 1, 1993 at the FERC allowed rate, which
approximates the prime rate. On March 25, 1994, EPG received a final FERC letter
order approving the recovery of $56.7 million of underground storage facility
costs. This is being recovered by a demand charge mechanism
9
11
over the period from October 1, 1993 through December 31, 1996. The amount
recovered through June 30, 1994 was $26 million. The outstanding balance at June
30, 1994 and December 31, 1993 was $30 million and $37 million, respectively, of
which $12 million is reflected in the current portion of other regulatory assets
for both periods and $18 million and $25 million, respectively, is included in
other regulatory assets in the Consolidated Balance Sheet.
MPC filed a service and rate design restructuring plan on November 3, 1992,
in compliance with FERC's industry-wide restructuring directives. On March 2,
1993, FERC issued an order essentially approving MPC's compliance filing,
subject to changes, which were made in an amended restructuring plan on March
29, 1993.
Several of MPC's customers filed protests and requests for rehearing of the
March 2, 1993 FERC order. The rehearing requests were denied, and FERC approved
the amended restructuring plan on July 9, 1993, with an effective date of August
1, 1993. On October 15, 1993, FERC issued an order which denied requests for
rehearing of the July 9, 1993 order. Several of MPC's customers have filed
petitions with the Court of Appeals for review of the March 2, 1993, July 9,
1993 and October 15, 1993 orders. These petitions are currently pending. The
primary issues on appeal pertain to FERC's requirement that MPC's rates for firm
transportation service be based upon SFV rate design rather than MFV rate
design. The application of SFV rates requires MPC's existing firm shippers to
pay a higher proportion of their total transportation rate in the reservation
component of the rate. Such shippers have contended that FERC's application of
SFV rate design to MPC unlawfully abrogates the rate provisions of MPC's service
agreements and constitutes an unlawful rate increase. Management believes the
Court of Appeals will uphold SFV rates as applied to MPC.
EPG has made buy-out and buy-down payments and recoupable prepayments to
resolve past and future take-or-pay exposure, to terminate and reform gas
purchase contracts, to amend pricing and take provisions of gas purchase
contracts and to settle related litigation. EPG is collecting its buy-out and
buy-down costs under FERC cost recovery procedures. Under FERC procedures,
take-or-pay cost recovery filings may be challenged by pipeline customers on
prudence and certain other grounds.
Several customers claimed that EPG sought to recover an excessive amount
for the value of certain production properties which were transferred to a
producer as part of a 1989 take-or-pay settlement. On March 8, 1993, an initial
decision from the presiding ALJ was rendered which required EPG to refund to its
customers the costs found to be ineligible for take-or-pay recovery. On June 16,
1994, FERC affirmed the ALJ's initial decision. As a result, EPG will be
required to refund approximately $40 million, inclusive of interest, to its
customers during the third quarter of 1994. EPG has established reserves for
this refund. On July 18, 1994, EPG filed for rehearing of the June 16, 1994
order.
Gathering and Processing Agreement
On June 27, 1994, EPG and Meridian Oil Production Inc. ("Meridian") entered
into an agreement concerning production from Meridian conventional gas wells
located on 1.5 million acres in the San Juan Basin. Under the terms of the
agreement, which is retroactive to January 1, 1994, Meridian's gas is committed
to flow exclusively through EPG's gathering and processing facilities through
February 29, 2000.
Environmental
Accruals for environmental compliance costs are established when
environmental assessments and/or remediation are probable, and when costs can be
reasonably estimated. As of June 30, 1994, EPG had a reserve of $38 million for
the following environmental contingencies with income statement impact:
1 -- EPG has been conducting remediation of PCB contamination at certain of
its facilities. The majority of the required PCB remediation has been
completed. Future PCB remediation costs are estimated to range between $8
million and $15 million over the next four years.
2 -- EPG executed an Administrative Order on Consent with EPA on June 25,
1993 to conduct a RI/FS for a BI site located in Statesville, North
Carolina, that has been identified for cleanup. BI and EPG have entered
into an agreement to jointly fund the RI/FS for the site. EPG's share of
the potential remediation costs is estimated to be between $17 million and
$20 million over a 30 year period.
10
12
3 -- On November 2, 1993, in accordance with an EPA order, EPG and ARCO
submitted work plans for remediation of the subsurface at the Prewitt
Refinery in McKinley County, New Mexico. EPG and ARCO have a cost sharing
agreement to each pay one-half of any remediation costs at this site. EPG's
share of the remediation costs is estimated to be between $10 million and
$20 million over a 30 year period.
4 -- On December 21, 1993, EPA issued EPG a Notice of Liability for the
CSMRI site in Golden, Colorado. EPA has determined that the volume of
hazardous substances sent to the site by EPG represent approximately 2.4%
of the total volumes sent by all the potentially responsible parties. Based
on this percentage, EPG's share of the potential remediation costs is
estimated to be less than $500,000.
5 -- EPG is involved in other environmental assessment and remediation
activities which include two CERCLA sites (Fountain Inn, South Carolina and
Odessa, Texas) and one state Superfund site (Etowah, Tennessee). EPG has
entered into a de minimis administrative order on consent with EPA for
EPG's share of the environmental remediation costs associated with the
CERCLA site in Odessa, Texas. In accordance with the order, EPG will pay
total costs of approximately $32,000. Management believes the amount
reserved as of June 30, 1994 is sufficient to cover these and other small
environmental assessments and remediation activities.
EPG also has potential expenditures, of a capital nature, for the following
environmental projects:
1 -- EPG has analyzed CAAA, and believes that these rules will impact the
Company's operations primarily in the following areas: (i) potential
required reductions in the emissions of NOx in non-attainment areas; (ii)
the requirement for air emissions permitting of existing facilities; and
(iii) enhanced monitoring of air emissions. The Company anticipates
capitalizing the equipment costs associated with complying with CAAA and
estimates that approximately $5 million to $27 million will be spent during
the 1995 through 1997 time frame. However, EPA's proposed enhanced
monitoring rules, when finalized, could potentially impose greater costs to
the Company.
2 -- EPG has been conducting remediation of mercury contamination at
certain facilities and is replacing mercury containing meters with dry flow
devices. The remaining remediation costs are estimated to be between $8
million and $13 million. The mercury remediation project is expected to be
completed by January 1, 1996. EPG will close and retire about 2,500 earthen
siphon/dehydration pits in the San Juan Basin as recently required by
certain environmental regulations. EPG estimates costs of approximately $4
million to $10 million to retire these pits. The project is expected to be
completed by January 1, 1996. The mercury remediation and pit closure
costs, which are associated with the retirement of equipment, will be
recorded as adjustments to accumulated depreciation, as permitted by
regulatory accounting.
The State of Tennessee has asserted a claim that EPG is a liable party
under state environmental laws for clean up costs associated with a site in
Elizabethton, Tennessee. The State and EPA are in the preliminary stages of
investigating the nature and extent of contamination, as well as identifying
other potentially responsible parties. Since testing is in the initial stages,
EPG is unable to estimate its potential share of any remediation costs.
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 or developments occur, related accrual amounts will be
adjusted accordingly.
Other
On August 10, 1994, EPG established with a group of banks a revolving
credit facility of $400 million which expires in five years. This credit
facility replaced an existing $300 million revolving credit facility.
In January 1993, EPG experienced flood damage to its pipeline system in the
Gila, Arizona area due to heavy rain. Since that time, EPG has been incurring
costs for repairs and expects these costs to be reimbursed through its property
insurance policies. As of June 30, 1994, EPG has received approximately $10
million of insurance reimbursements and expects to be reimbursed for the
remaining costs once all repairs have been completed.
11
13
EPG's largest single contract for interstate capacity to California is its
1,450 million cubic feet per day ("MMcf/d")contract with Southern California Gas
Company ("SoCal"), which has a primary term ending August 31, 2006. Pursuant to
this contract, SoCal has exercised its option to relinquish 300 MMcf/d of
capacity during the first quarter of 1996. EPG is working to offset this future
reduction in capacity commitments through new contracts with various natural gas
users.
DIVIDENDS
The following table reflects quarterly dividends declared and paid on EPG's
common stock:
DECLARATION DATE AMOUNT PER SHARE PAYMENT DATE TOTAL AMOUNT
- - ----------------- ---------------- ---------------- ------------
(IN MILLIONS)
October 12, 1993 $ 0.2750 January 4, 1994 $ 10
January 14, 1994 $ 0.3025 April 4, 1994 $ 11
April 15, 1994 $ 0.3025 July 1, 1994 $ 11
On July 15, 1994, the Board of Directors declared a quarterly dividend of
$0.3025 per share on EPG's common stock, payable on October 3, 1994, to
shareholders of record on September 9, 1994.
CAPITAL EXPENDITURES
The Company's planned capital expenditures for 1994 of $210 million are
primarily for maintenance of business, system expansion and system enhancement.
Capital expenditures for the six months ended June 30, 1994 were $41 million
compared to $54 million for the same period of 1993.
On July 7, 1992, EPG filed an application with FERC, which was amended on
November 27, 1992, to expand the delivery capacity of its system in the vicinity
of Yuma, Arizona and, through an extension of its system south to San Luis Rio
Colorado, Sonora, Mexico. The proposed expansion would provide shippers the
opportunity to deliver natural gas to Mexican markets in northern Baja
California via new pipeline capacity of 348 MMcf/d. The project cost was
approximately $71 million. On June 22, 1994, EPG withdrew the July 7, 1992
application, citing delays in the conversion to natural gas and expansion of the
existing Benito Juarez Power Plant in Rosarito, Baja California Norte, Mexico.
In withdrawing the pending application, EPG emphasized that it is not abandoning
the project. At such time as the Comision Federal de Electricidad, the Mexican
government-owned utility, proceeds with its plans for the Benito Juarez Power
Plant, EPG may refile its application.
EPG is a member of a five-company consortium that plans to build the
proposed Samalayuca II Power Plant near Ciudad Juarez, Mexico. On December 17,
1992, an award for construction was granted to the consortium by the Comision
Federal de Electricidad. On March 16, 1993, EPG filed an application with FERC
to expand its system in order to provide natural gas service to the proposed
Samalayuca II Power Plant and to an existing power plant in the same location.
The proposed expansion would provide an additional 300 MMcf/d of capacity at a
cost of approximately $57 million. On November 29, 1993, FERC issued an order
which approved the proposed border crossing facility south of Clint, Texas that
would connect EPG's facilities with facilities in Mexico. FERC deferred action
on the remainder of the March 16, 1993 filing until EPG demonstrates that it has
long-term executed contracts or binding precedent agreements for a substantial
amount of the firm capacity of the proposed facilities.
On December 29, 1993, Pacific Gas & Electric Company ("PG&E"), the
California Public Utilities Commission ("CPUC") and SoCal jointly filed a motion
with FERC seeking clarification or rehearing of the November 29, 1993 FERC order
on the Samalayuca II Power Plant project discussed above.
On April 1, 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to build a 98 mile pipeline to parallel and
loop its existing Havasu Crossover Line. The proposed pipeline would allow for
the transfer of 468 MMcf/d of San Juan Basin gas to EPG's south system and would
enhance EPG's overall system flexibility to meet market demands. The project is
expected to cost approximately $62 million. At the request of several of EPG's
customers, FERC held a technical conference on August 11, 1994 with respect to
the April 1, 1994 application.
12
14
On June 1, 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to expand its existing system in the San Juan
Basin by approximately 300 MMcf/d at a cost of about $26 million. The proposed
expansion would accommodate increased volumes and provide markets with enhanced
access to San Juan Basin gas supplies. FERC held a technical conference to
address the June 1, 1994 application on August 11, 1994.
The Company plans to construct a new cryogenic natural gas liquids
extraction plant in the San Juan Basin. The plant will process 400 MMcf/d and
will increase the Company's processing capability in the San Juan Basin to 950
MMcf/d. The project is expected to cost approximately $75 million and is
anticipated to be in service by the second quarter of 1996.
On March 17, 1993, MPC filed an application, which was amended on November
8, 1993 and April 18, 1994, for a certificate of public convenience and
necessity to build and operate a 475 MMcf/d expansion of its existing system.
The proposed expansion will extend from MPC's existing east lateral, located
near Bakersfield, California, approximately 352 miles northward to the vicinity
of Sacramento and the Bay Area near San Francisco. The expansion will also
include 56 miles of looping of the existing pipeline along with 207 miles of
laterals. The estimated cost of the entire expansion is approximately $500
million. MPC expects to receive its FERC certificate in 1994. Receipt of an
acceptable FERC certificate within this time frame would allow the expansion to
be put into service by mid-1996.
On December 16, 1993, FERC held a public conference to examine a
jurisdictional question raised by CPUC and PG&E regarding MPC's proposed
expansion. The primary issue was whether FERC or CPUC should have jurisdiction
over the expansion. Written comments were filed by interested parties on January
10, 1994. On February 15, 1994, FERC issued an order determining that it has
exclusive jurisdiction over MPC and its proposed expansion. On March 17, 1994,
CPUC, PG&E and other parties filed for rehearing or clarification of FERC's
February 15, 1994 order.
The capital projects discussed above are expected to be financed through
internally generated funds and short-term and long-term borrowings.
RESULTS OF OPERATIONS
Second Quarter 1994 Compared to Second Quarter 1993
Operating revenues for the second quarter ended June 30, 1994 were $10
million lower than for the same period of 1993. New system rates that became
effective January 1, 1994 resulted in lower reservation and lower transportation
revenues which decreased operating revenues by $15 million and $5 million,
respectively. Lower gas sales volumes, gas sales rates and the 1993 sale of gas
in storage decreased operating revenues by $9 million, $4 million and $3
million, respectively. The decrease due to the 1993 sale of gas in storage was
offset in operating charges. Lower accruals for regulatory issues, higher
production area rates and the consolidation of MPC offset the decrease in
operating revenues by $15 million, $6 million and $5 million, respectively.
Operating charges were $12 million lower for the second quarter ended June
30, 1994 than for the same period of 1993. Lower gas sales volumes and the 1993
sale of gas in storage contributed $9 million and $3 million, respectively, to
the decrease in operating charges. The decrease due to the 1993 sale of gas in
storage was offset in operating revenues. Operation and maintenance expense
decreased $3 million due primarily to lower stock related costs and adjustments
to the take-or-pay undercollections accrual. Offsetting the decrease were
additional operation and maintenance costs due to the consolidation of MPC.
EPG's mainline throughput for the quarter ended June 30, 1994 was 313
billion cubic feet ("Bcf") compared to 290 Bcf for the same period of 1993.
Deliveries to the California market increased in the 1994 period due to an
increase in utility electric generation demand, which resulted from a decrease
in the availability of hydroelectric power. Field transportation volumes of 118
Bcf for the second quarter ended June 30, 1994 were relatively unchanged
compared to the second quarter ended June 30, 1993 volumes of 119 Bcf.
13
15
Other-net was $5 million higher for the quarter ended June 30, 1994 than
for the same period of 1993. Contributing to the 1994 increase were lower
accruals for environmental cleanup issues, a note receivable write-off in 1993
and a loss on the disposition of property in 1993. Lower allowance for funds
used during construction ("AFUDC") offset the increase in other-net by $2
million.
Six Months Ended 1994 Compared to Six Months Ended 1993
Operating revenues for the six months ended June 30, 1994 were $1 million
higher than for the same period of 1993. The consolidation of MPC, lower
accruals for regulatory issues and higher production area rates contributed $16
million, $25 million and $9 million, respectively, to the increase in operating
revenues. New system rates that became effective January 1, 1994 resulted in
lower reservation and lower transportation revenues that offset the increase in
operating revenues by $14 million and $18 million, respectively. Additionally,
lower gas sales volumes, lower transportation volumes and the 1993 sale of gas
in storage contributed $9 million, $2 million and $3 million, respectively, to
the decrease in operating revenues. The decrease due to the 1993 sale of gas in
storage was offset in operating charges.
Operating charges were $14 million higher for the six months ended June 30,
1994 than for the same period of 1993. The increase in operating charges was due
to a litigation special charge of $15 million in connection with the Amoco
decision. Higher average cost of gas contributed $17 million to the increase. In
addition, depreciation expense increased by $3 million, primarily due to the
consolidation of MPC. Lower gas sales volumes and the 1993 sale of gas in
storage offset the increase in operating charges by $8 million and $3 million,
respectively. The decrease due to the 1993 sale of gas in storage was offset in
operating revenues. Additionally, operation and maintenance expense decreased $7
million primarily due to lower stock related costs, lower take-or-pay absorption
expense, lower Gas Research Institute expense and adjustments to the take-or-pay
undercollections accrual. The consolidation of MPC partially offset the decrease
in operation and maintenance expense.
EPG's mainline throughput for the six months ended June 30, 1994 was 626
Bcf compared to 654 Bcf for the same period of 1993. Deliveries to the
California market decreased due to higher storage withdrawals and increased
competition partially offset by an increase in utility electric generation
demand, which resulted from a decrease in the availability of hydroelectric
power. The decrease was also offset by increased deliveries to off-system
markets. Field transportation volumes of 237 Bcf for the six months ended June
30, 1994 were relatively unchanged compared to 234 Bcf for the same period ended
June 30, 1993.
Interest and debt expense for the six months ended June 30, 1994 was $4
million higher than for the same period of 1993 due primarily to the
consolidation of MPC.
Other-net was $9 million higher for the six months ended June 30, 1994 than
for the same period of 1993. Contributing to the 1994 increase were $14 million
related to the recovery of EPG's investment in its underground storage facility
and lower accruals for environmental cleanup issues. The increase was offset by
interest expense related to the special charge for litigation in connection with
the Amoco decision of approximately $4 million and a reduction in partnership
earnings due to the consolidation of MPC. Additionally, a decrease in AFUDC
offset the increase in other-net by $3 million.
OTHER
Effective January 1, 1994, the Company adopted SFAS No. 112, which requires
companies to account for postemployment benefits. As of June 30, 1994, the
Company's liability for postemployment benefit costs was approximately $8
million. Management expects to seek recovery of these costs through rates and
has recorded a regulatory asset equal to the liability.
14
16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 3, 4 and 5 of Notes to Consolidated Financial Statements.
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
Continuous Odd-Lot Stock Sales Program
EPG has made available a Continuous Odd-Lot Stock Sales Program
("Program") in which shareholders of EPG owning beneficially fewer than
100 shares of EPG's common stock ("Odd-lot Holders") are offered a
convenient method of disposing of all their shares without incurring the
customary brokerage costs associated with the sale of an odd-lot. Only
Odd-lot Holders are eligible to participate in the Program. The Program
is strictly voluntary and no Odd-lot Holder is obligated to sell
pursuant to the Program. A brochure and related materials describing the
Program were sent to Odd-lot Holders in February 1994. The Program
currently does not have a termination date, but EPG may suspend the
Program at any time. Inquiries regarding the Program should be directed
to The First National Bank of Boston, the agent for the Program, at
1-800-736-3001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10-H -- Revolving Credit and Competitive Advance Facility Agreement dated as
of August 10, 1994 between EPG, Chemical Bank and certain other banks
(Form 10-Q, No. 1-2700, filed August 12, 1994).
11 -- Computation of Earnings Per Common Share
B. Reports on Form 8-K
None
15
17
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
---------------------------
(Registrant)
Date: August 12, 1994 /s/ H. BRENT AUSTIN
---------------------------
H. Brent Austin
Senior Vice President and
Chief Financial Officer
Date: August 12, 1994 /s/ THOMAS E. RICKS
---------------------------
Thomas E. Ricks
Vice President, Controller and
Chief Accounting Officer
18
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- - --------- ------- -----------
10-H -- Revolving Credit and Competitive Advance Facility Agreement dated
as of August 10, 1994 between EPG, Chemical Bank and certain other
banks (Form 10-Q, No. 1-2700, filed August 12, 1994).
11 -- Computation of Earnings Per Common Share