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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
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 Identification No.)
of Incorporation or Organization)
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 October 25, 1995 34,213,248 shares
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2
DEFINITIONS
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
ABBREVIATIONS,
ACRONYMNS OR DEFINED TERMS TERMS
- ----------------------------------- --------------------------------------------------------
AFUDC.............................. Allowance for Funds Used During Construction
ALJ................................ Administrative Law Judge
Amoco.............................. Amoco Production Company
ARCO............................... Atlantic Richfield Company
Bcf................................ Billion cubic feet
Board.............................. Board of directors of El Paso Natural Gas Company
CAAA............................... Clean Air Act Amendments of 1990
CFE................................ Comision Federal de Electricidad
Company............................ El Paso Natural Gas Company and its subsidiaries
Court.............................. Delaware Chancery Court
Court of Appeals................... United States Court of Appeals for the District of
Columbia Circuit
CPUC............................... California Public Utilities Commission
CSMRI.............................. Colorado School of Mines Research Institute
District Court..................... United States District Court for the District of
Columbia
Eastex............................. Eastex Energy Inc.
EIS/EIR............................ Environmental Impact Statement/Environmental Impact
Report
EMICA.............................. Empresas ICA Sociedad Controladora, S.A. de C.V.
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
EPNC............................... El Paso New Chaco Company, a wholly owned subsidiary of
El Paso Natural Gas Company
EXIM............................... Export-Import Bank
FERC............................... Federal Energy Regulatory Commission
IDB................................ Inter-American Development Bank
Justice Department................. United States Department of Justice
LIBOR.............................. London Interbank Offered Rate
MD&A............................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
MFV................................ Modified Fixed Variable
MMcf/d............................. Million cubic feet per day
MOGI............................... Meridian Oil Gathering Inc.
MPC................................ Mojave Pipeline Company
North/South Transfer Project....... 98 mile pipeline to parallel and loop El Paso Natural
Gas Company's existing Havasu Crossover Line
NOx................................ Nitrogen Oxides
Odd-Lot Holders.................... Shareholders of El Paso Natural Gas Company owning
beneficially fewer than 100 shares of El Paso Natural
Gas Company's common stock
PCB................................ Polychlorinated Biphenyl
PG&E............................... Pacific Gas & Electric Company
Plan............................... Dividend Reinvestment and Common Stock Purchase Plan
Program............................ Continuous Odd-Lot Stock Sales Program
PRP(s)............................. Potentially Responsible Party(ies)
(i)
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DEFINITIONS -- (CONTINUED)
ABBREVIATIONS,
ACRONYMNS OR DEFINED TERMS TERMS
- ----------------------------------- --------------------------------------------------------
RI/FS.............................. Remedial Investigation/Feasibility Study
ROD................................ Record of Decision
SEC................................ Securities and Exchange Commission
SFAS............................... Statement of Financial Accounting Standards
SFV................................ Straight Fixed Variable
SoCal.............................. Southern California Gas Company
TransAmerican...................... TransAmerican Natural Gas Corporation
(ii)
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
THIRD QUARTER NINE MONTHS
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
Operating revenues.............................. $240,191 $209,424 $629,472 $642,174
-------- -------- -------- --------
Operating charges
Operation and maintenance..................... 77,700 75,988 229,386 221,071
Gas purchases................................. 82,474 51,941 156,328 165,312
Depreciation, depletion, and amortization..... 17,908 16,277 52,157 48,662
Litigation special charge..................... -- -- -- 15,062
Taxes, other than income taxes................ 9,419 9,199 29,841 28,653
-------- -------- -------- --------
187,501 153,405 467,712 478,760
-------- -------- -------- --------
Operating income................................ 52,690 56,019 161,760 163,414
-------- -------- -------- --------
Other (income) and income deductions
Interest and debt expense..................... 21,986 19,280 64,150 58,402
Other, net.................................... (2,142) 1,816 (4,950) (4,839)
-------- -------- -------- --------
19,844 21,096 59,200 53,563
-------- -------- -------- --------
Income before income taxes...................... 32,846 34,923 102,560 109,851
Income taxes.................................... 12,557 13,827 40,101 43,629
-------- -------- -------- --------
Net income...................................... $ 20,289 $ 21,096 $ 62,459 $ 66,222
======== ======== ======== ========
Earnings per common share....................... $ .60 $ .58 $ 1.81 $ 1.80
======== ======== ======== ========
Average common shares outstanding............... 33,830 36,659 34,590 36,795
======== ======== ======== ========
Dividends declared per common share............. $ .3300 $ .3025 $ .9900 $ .9075
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
ASSETS
SEPTEMBER 30,
1995 DECEMBER 31,
(UNAUDITED) 1994
------------- ------------
Current assets
Cash and temporary investments................................... $ 24,534 $ 27,636
Accounts and notes receivable, net............................... 167,717 131,650
Inventories...................................................... 38,888 34,666
Take-or-pay buy-outs, buy-downs, and prepayments, net............ 19,571 33,356
Other regulatory assets.......................................... 12,000 12,000
Deferred income tax benefit...................................... 33,127 41,257
Other............................................................ 28,251 18,594
---------- ----------
Total current assets..................................... 324,088 299,159
---------- ----------
Property, plant, and equipment, net................................ 1,920,090 1,861,589
Intangible assets, net............................................. 28,764 4,308
Take-or-pay buy-outs, buy-downs, and prepayments, net.............. 1,016 14,502
Other regulatory assets............................................ 51,788 59,021
Other.............................................................. 87,678 93,192
---------- ----------
2,089,336 2,032,612
---------- ----------
Total assets............................................. $ 2,413,424 $2,331,771
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................. $ 235,665 $ 229,356
Short-term borrowings............................................ 222,600 106,800
Take-or-pay financing liability.................................. -- 36,700
Current maturities on long-term debt............................. 11,111 6,824
Other............................................................ 70,621 72,375
---------- ----------
Total current liabilities................................ 539,997 452,055
---------- ----------
Long-term debt, less current maturities............................ 768,367 779,097
Deferred income taxes, less current portion........................ 319,312 304,918
Deferred credits................................................... 39,753 40,325
Other.............................................................. 45,612 45,740
---------- ----------
1,173,044 1,170,080
---------- ----------
Commitments and contingent liabilities (See Note 4)
Stockholders' equity
Common stock, par value $3 per share; authorized 100,000 shares;
issued 37,351 shares.......................................... 112,054 112,053
Additional paid-in capital....................................... 454,713 454,705
Retained earnings................................................ 228,569 202,558
Less: Treasury stock (at cost) of 3,134 and 1,799 shares......... 94,953 59,680
---------- ----------
Total stockholders' equity............................... 700,383 709,636
---------- ----------
Total liabilities and stockholders' equity............... $ 2,413,424 $2,331,771
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
---------------------
1995 1994
-------- --------
Cash flows from operating activities
Net income........................................................... $ 62,459 $ 66,222
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation, depletion, and amortization......................... 52,157 48,662
Deferred income taxes............................................. 25,680 26,860
Net take-or-pay recoveries........................................ 27,518 23,722
Net costs recovered (recoverable) through insurance............... (1,163) 15,253
Other working capital changes
Accounts and notes receivable................................... 35,646 27,022
Inventories..................................................... (1,503) (1,812)
Other current assets............................................ (7,403) 10,482
Accrual for regulatory issues................................... -- (33,527)
Accounts payable................................................ (62,508) (4,485)
Other current liabilities....................................... (6,900) (5,506)
Other............................................................. 12,264 (6,741)
-------- --------
Net cash provided by operating activities.................... 136,247 166,152
-------- --------
Cash flows from investing activities
Capital expenditures................................................. (106,200) (79,068)
Proceeds from disposal of property................................... 4,023 4,060
Net cash flow impact of Eastex Acquisition........................... (2,864) --
Other................................................................ (12,464) (14,214)
-------- --------
Net cash used in investing activities........................ (117,505) (89,222)
-------- --------
Cash flows from financing activities
Net short-term borrowings............................................ 115,800 28,686
Long-term debt retirements........................................... (15,543) (16,174)
Repayment of volumetric take-or-pay receivable....................... (36,700) (33,908)
Acquisition of treasury stock........................................ (56,528) (12,634)
Dividends paid....................................................... (33,847) (32,420)
Other................................................................ 4,974 4,039
-------- --------
Net cash used in financing activities........................ (21,844) (62,411)
-------- --------
Increase (decrease) in cash and temporary investments.................. (3,102) 14,519
Cash and temporary investments
Beginning of period.......................................... 27,636 --
-------- --------
End of period................................................ $ 24,534 $ 14,519
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1994 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and should be read in conjunction with this Form
10-Q. The condensed consolidated financial statements at September 30, 1995, and
the quarter then ended are unaudited. The condensed balance sheet at December
31, 1994, 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. 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.
2. ACQUISITION
Effective September 1, 1995, Eastex was merged with and into El Paso
Acquisition Company, a wholly owned subsidiary of EPG. At the time of the
merger, the name of El Paso Acquisition Company was changed to Eastex. Eastex is
a natural gas merchant providing gas supplies and gas management services to its
customers through the following: (i) direct end user gas sales, (ii) merchant
trading, and (iii) gas inventory optimization services.
Pursuant to the merger, Eastex shareholders received either $4.50 in cash
or .1601 shares of EPG common stock for each share of Eastex common stock. The
purchase price of approximately $32 million, exclusive of acquisition costs, was
financed by the Company through approximately $13 million of available cash and
the issuance of approximately 659,000 shares of treasury stock at a market value
of approximately $19 million. Acquisition costs of approximately $2 million have
been capitalized. Total cash consideration paid, net of cash received, was
approximately $3 million. The cost of the acquisition has been allocated on the
basis of the estimated fair market value of the assets acquired and the
liabilities assumed. This allocation resulted in goodwill of approximately $17
million, which will be amortized over 40 years using the straight-line method.
Eastex had previous goodwill of approximately $5 million. The acquisition has
been accounted for as a purchase, and the Company has utilized the "push down"
basis of accounting.
Assets acquired, liabilities assumed, and consideration paid for the
acquisition are as follows:
(IN THOUSANDS)
--------------
Fair value of assets acquired, including goodwill................ $121,771
Cash acquired.................................................... (12,992)
Liabilities assumed.............................................. (86,957)
Issuance of treasury stock at market value....................... (18,958)
--------
Net cash consideration paid............................ $ 2,864
========
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following Eastex net assets are included in the Company's September 30,
1995, Consolidated Balance Sheet:
(IN THOUSANDS)
--------------
Cash..................................................... $ 12,225
Accounts receivable...................................... 76,967
Inventory................................................ 4,504
Property, plant, and equipment, net...................... 5,890
Intangible assets, net................................... 23,188
Other assets............................................. 2,177
Accounts payable......................................... (84,637)
Other liabilities........................................ (5,403)
--------------
Total net assets............................... $ 34,911
===========
Eastex's operating results for the month of September 1995 are included in
the Company's consolidated results of operations for the quarter and nine months
ended September 30, 1995.
3. ACCOUNTING FOR REGULATED OPERATIONS
EPG and MPC are subject to the regulations and accounting procedures of
FERC, and therefore, continue to follow the reporting and accounting
requirements of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. Accounting methods for companies subject to cost-of-service
regulation may differ from those used by non-regulated companies. However, when
the accounting method prescribed by the regulatory authority is used for
rate-making, such accounting conforms to the generally accepted accounting
principle of matching costs against the revenues to which they apply.
The Consolidated Balance Sheet contains assets and liabilities related to
operations which have been recorded pursuant to regulatory accounting
principles. If these accounting principles should no longer be applied, an
amount would be charged to earnings as an extraordinary item. At September 30,
1995, this amount was estimated to be approximately $52 million, net of income
taxes. While management believes that EPG and MPC remain "regulated" as the term
is used in the relevant accounting literature, changes in the regulatory and
economic environment may, at some point in the future, create circumstances in
which application of regulatory accounting principles is no longer appropriate.
Any potential charge would be non-cash and would have no direct effect on EPG's
and MPC's ability to seek recovery of the underlying deferred costs in their
future rate proceedings or on their ability to collect the rates set thereby.
In September 1995, FERC authorized EPG to abandon certificates applicable
to certain gathering and processing facilities, subject to certain conditions.
These facilities will be transferred to EPFS effective January 1, 1996. FERC has
determined that, upon the transfer to EPFS, the facilities will be exempt from
FERC jurisdiction. Accordingly, at January 1, 1996, the provisions of SFAS No.
71 will not apply to EPFS's transactions and balances. The Company does not
anticipate that the discontinuance of the application of SFAS No. 71 to EPFS
will have a significant impact on the Company's financial condition.
4. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In June 1995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. If the rates are
approved as filed, annual revenues would increase by approximately $137 million.
In July 1995, FERC accepted and suspended EPG's filing to be effective January
1, 1996, subject to refund and certain other conditions. FERC also set EPG's
rates for hearing,
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
suspended the hearing schedule until December 31, 1995, and appointed a
settlement judge to facilitate a resolution of the proceeding before December
31, 1995. Settlement discussions are currently in progress.
EPG allocated its cost-of-service to the customers served as of January 1,
1996. In addition, EPG included in its filing an alternative tariff exit fee
mechanism designed to mitigate cost shifts which may result from future capacity
relinquishments. The exit fee mechanism would be applicable to certain contract
reductions or terminations and would require certain payments to EPG, which
would be appropriately reflected in EPG's rates. In the July 1995 order, FERC
rejected EPG's proposed exit fee mechanism. In August 1995, EPG requested
rehearing of the July 1995 order. The request for rehearing is currently pending
before FERC. If FERC maintains its summary rejection of the Company's proposed
exit fee mechanism, and in the absence of other approved procedures, EPG will
allocate its total mainline transportation cost-of-service to the remaining
customers served following any future capacity relinquishments.
SoCal has exercised the right to reduce its current firm capacity of 1,450
MMcf/d on EPG's system by 300 MMcf/d, effective January 1, 1996. In addition,
PG&E has a contract for 1,140 MMcf/d of firm capacity rights on EPG's system
with a primary term ending December 31, 1997. EPG's reservation revenues from
PG&E during 1994 were approximately $129 million. In June 1995, PG&E notified
EPG that it intends to terminate the contract as of December 31, 1997.
EPG is seeking to offset any reduction in existing firm capacity
commitments and related revenues resulting from customer contract terminations,
reductions, or modifications through new contracts with various natural gas
users in the California, East-of-California, and northern Mexico markets. EPG's
efforts to seek new customers in California for such capacity at full tariff
rates are adversely impacted by the current excess interstate pipeline capacity
to California, which is currently estimated to continue into the next decade.
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. The collection period for
such costs extends through March 1996. EPG has established a reserve, based on
throughput projections, for that portion of the receivable balance which is
unlikely to be collected over the period through March 1996. The balances of
this reserve were $3 million and $9 million at September 30, 1995, and December
31, 1994, respectively.
Under FERC procedures, take-or-pay cost recovery filings may be challenged
by pipeline customers on prudence and certain other grounds. In October 1992,
FERC issued an order resolving all but one of the outstanding issues regarding
EPG's take-or-pay proceedings. Certain of EPG's customers sought review of
certain aspects of that order in the Court of Appeals. That appeal is currently
pending. The issue unresolved by FERC involved the claim by several customers
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. Following a hearing on this issue, in June 1994, FERC
affirmed a decision of an ALJ which found that the valuation proposed by EPG was
excessive and required EPG to refund to its customers the costs found to be
ineligible for take-or-pay recovery. In accordance with the FERC decision, EPG
refunded $34 million, inclusive of interest, to its customers in September 1994.
In December 1994, EPG filed a petition with the Court of Appeals for review of
the FERC decision, which petition is currently pending.
MPC filed a service and rate design restructuring plan in November 1992 in
compliance with the industry-wide restructuring directives of FERC. In March
1993, FERC issued an order essentially approving MPC's compliance filing,
subject to changes, which were made in an amended restructuring plan in March
1993.
Several of MPC's customers have filed petitions with the Court of Appeals
for review of the March 1993 order and certain other FERC orders. These
petitions are currently pending before the Court of Appeals. The
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates. In March 1995, FERC accepted the filing,
established hearing procedures to determine the justness and reasonableness of
the rates proposed by MPC, and allowed those rates to become effective as of
March 30, 1995, subject to refund. An evidentiary hearing on issues relating to
MPC's rate filing has been scheduled for February 1996. In September 1995, MPC
filed a settlement of its rate filing with the support of the FERC staff and a
majority of its firm transportation customers. The settlement would continue
MPC's rates at existing levels for a 5-year period. MPC anticipates FERC
certification and approval of the settlement as it relates to the supporting
parties, with a hearing on contested issues to be limited to the minority
customer group not supporting the settlement.
Legal Proceedings
In El Paso Natural Gas Company and Meridian Oil Gathering Inc. v. Amoco
Production Company, filed in the Court on May 8, 1991, Amoco alleged breaches by
EPG and a then affiliated company, MOGI, of certain gas purchase, gathering, and
transportation agreements pertaining to natural gas produced by Amoco in the San
Juan Basin. Trial of Amoco's claims concluded on July 15, 1993, and on March 29,
1994, the Court rendered a decision in favor of Amoco. As a result of the
Court's decision, EPG refunded to Amoco approximately $20 million in the first
quarter of 1995. Both EPG's and Amoco's appeals to the Delaware Supreme Court
have been dismissed as a result of a settlement between the parties.
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 defending the matter, and the parties have recently
stipulated to transfer this case to the State District Court of Dallas County,
Texas. 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.
The Justice Department terminated an investigation of EPG's natural gas
meter sales and installation practices in the San Juan Basin on January 6, 1995.
EPG and the Justice Department agreed to a consent decree, which was filed in
the District Court on January 12, 1995, and approved by the District Court on
August 4, 1995. The consent decree requires no material change to EPG's existing
business practices and imposes no fines or monetary penalties. The consent
decree stipulates that EPG may not require a well operator to purchase meter
facilities or meter installation equipment as a condition of access to its
gathering system in the San Juan Basin and requires EPG to inform well operators
that they have the legal right to provide their own meter installation services.
The consent decree further provides that any meter installation undertaken by
third parties must be done in accordance with environmental and safety standards
specified by EPG. Moreover, EPG has the right to inspect such installations to
ensure that they conform to standards that apply uniformly on EPG's gathering
system. Records of EPG's inspection activities will be maintained to document
compliance with EPG's standards and procedures. Pursuant to the terms of the
consent decree, EPG has designated an antitrust compliance officer and is
implementing required compliance activities.
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
7
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Environmental Matters
As of September 30, 1995, EPG had a reserve of approximately $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. For the nine months ended September 30, 1995, EPG has
incurred approximately $2 million in PCB remediation costs. Future PCB
remediation costs are estimated to be between $4 million and $7
million over the next 5 years.
2 -- In June 1993, EPG executed an Administrative Order on Consent with EPA
to conduct a RI/FS for a site located in Statesville, North Carolina
that has been identified for cleanup. EPG and other PRP have entered
into an agreement to jointly fund the RI/FS for the site. Total
remediation costs are estimated to be between $16 million and $29
million over a 30-year period. EPG and the other PRP are engaged in
negotiations over the appropriate allocation of the remediation costs.
3 -- In November 1993, in accordance with an EPA order, EPG and ARCO
submitted work plans for remediation of the Prewitt Refinery site 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 approximately
$10 million over a 30-year period. Remediation began in May 1995.
4 -- In December 1993, EPA issued a Notice of Potential Liability for the
CSMRI site in Golden, Colorado ordering EPG and eleven other PRPs to
clean up the site. EPA has determined that the volume of hazardous
substances sent to the site by EPG represents less than 2.5 percent of
the total volumes sent by all PRPs. Based on this percentage, EPG's
share of the potential remediation costs is estimated to be less than
$0.4 million.
5 -- EPG and other PRP have been notified about potential groundwater and
soil contamination at various sites in southeastern Utah. EPG and
other PRP have been conducting environmental assessments at certain of
these sites and are engaged in negotiations over the appropriate
allocation of the remediation costs. Based upon currently available
information, EPG estimates its costs for remediation will be
approximately $5 million. However, costs could be higher once the
environmental assessments have been completed.
6 -- In August 1992, EPG received a notice from the current owner of a site
in Etowah, Tennessee requesting compensation for remediation expenses
associated with the site. EPG negotiated a settlement agreement
effective August 10, 1995. In accordance with the agreement, EPG paid
approximately $0.6 million in the third quarter of 1995.
7 -- EPG and other PRPs entered into an agreement to conduct a RI/FS for a
site located in Fountain Inn, South Carolina. The RI/FS was completed
in October 1994, and EPA issued a ROD in September 1995. Based upon
EPA's ROD, the proposed remediation and EPA oversight costs are
estimated to be $1.6 million. The allocation of these costs between
EPG and the other PRPs is currently being negotiated. EPG's share of
the costs is estimated to be approximately $0.8 million over a 5-year
period.
Management believes the amount reserved as of September 30, 1995, is
sufficient to cover these and other small environmental assessments and
remediation activities.
8
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The State of Tennessee has asserted a claim that EPG is a liable party
under state environmental laws for cleanup costs associated with a site in
Elizabethton, Tennessee. The State of Tennessee and EPA are in the preliminary
stages of investigating the nature and extent of contamination, as well as
identifying other PRPs. Since investigation is in the initial stages, EPG is
unable to estimate its potential share of any remediation costs.
EPG also has potential expenditures, of a capital nature, for the following
environmental projects:
1 -- EPG has analyzed the CAAA, and believes that the impact to the
Company's operations will be 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) compliance assurance monitoring of air emissions.
EPG anticipates capitalizing the equipment costs associated with
complying with CAAA and estimates that approximately $10 million will be
spent from 1996 through 2005. When finalized, EPA's proposed compliance
assurance monitoring rules 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 other
measurement devices. As of September 30, 1995, approximately $13 million
has been capitalized. The total capitalized cost of the project is
estimated to be approximately $14 million. The project is expected to be
completed by the end of 1995. EPG will close and retire about 2,250
earthen siphon/dehydration pits in the San Juan Basin, as required by
certain environmental regulations. As of September 30, 1995,
approximately $7 million has been capitalized. Total project costs are
estimated to be approximately $10 million. The mercury remediation and
pit closure costs incurred through December 31, 1995, which are
associated with the retirement of equipment, will be recorded as
adjustments to accumulated depreciation, as permitted by regulatory
accounting principles. The earthen siphon/dehydration pits will be
transferred to EPFS effective January 1, 1996, as authorized by FERC. As
such, regulatory accounting principles will no longer be applicable, and
the costs associated with the remediation of the pits will no longer be
capitalized but will be expensed as incurred.
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.
Guarantees
In February 1995, EPNC entered into a 7.75-year lease for a plant which is
being constructed in the San Juan Basin. The lease is an unconditional "triple
net" lease with the trustee of a special purpose trust. The trust obtains
financing for construction of the plant from a consortium of financial
institutions. The total amount financed via the operating lease will not exceed
$80 million, and the annual lease obligation will be a function of the amount
financed, a variable interest rate, and commitment and other fees. EPNC has an
option at the end of the lease term, and has an obligation upon the occurrence
of certain events, to purchase the plant for a price sufficient to pay the
entire amount financed, interest, and certain expenses. If EPNC does not
purchase the plant at the end of the lease term, it has an obligation to pay a
residual guaranty amount equal to approximately 87 percent of the amount
financed, plus interest. EPG unconditionally guaranteed all obligations of EPNC
under the lease. Construction of the plant began in April 1995, and it is
expected to be in service by early 1996.
To moderate its exposure to interest rates, EPNC entered into an interest
rate swap arrangement effective July 31, 1995, whereby approximately 50 percent
of the current lease financing would be converted from a LIBOR-based floating
rate to a 5.9 percent fixed rate.
9
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective dates and notional amounts subject to the swap arrangement
are as follows:
(IN THOUSANDS)
--------------
July 31, 1995 -- October 31, 1995.............. $ 12,500
October 31, 1995 -- April 30, 1996............. $ 25,000
April 30, 1996 -- December 31, 1997............ $ 35,000
5. FINANCING TRANSACTIONS
As of September 30, 1995, and December 31, 1994, approximately $173 million
and $107 million, respectively, of commercial paper was outstanding. In August
1994, EPG established with a group of banks a revolving credit facility of $400
million that expires in August 1999. This facility was established primarily as
a liquidity facility for the Company's commercial paper program. As of September
30, 1995, there was $50 million outstanding under this facility. There were no
borrowings outstanding under this facility as of December 31, 1994. In October
1994, EPG established an additional $30 million line of credit facility. As of
September 30, 1995, and December 31, 1994, there were no borrowings outstanding
under this line of credit facility. By Board resolution, total short-term
borrowings by EPG shall not exceed the borrowing capacity under the currently
existing revolving credit facility.
Eastex has available a credit facility of approximately $20 million which
expires October 31, 1995. There were no borrowings outstanding under the credit
facility as of September 30, 1995. Eastex does not expect to renew or replace
the facility upon its termination date of October 31, 1995. Eastex had letters
of credit outstanding at September 30, 1995, of approximately $6 million, which
limited borrowing on the credit facility to $14 million.
On September 12, 1995, EPG retired $9 million of Eastex long-term debt.
In January 1992, EPG completed a sale of substantially all of its remaining
take-or-pay buy-out and buy-down receivables. During the third quarter of 1995,
EPG prepaid the $17 million take-or-pay financing liability outstanding.
EPG filed a shelf registration statement in August 1994, pursuant to which
EPG may offer up to $400 million of unsecured debt securities, preferred stock,
and common stock from time to time as determined by market conditions. On March
10, 1995, the registration statement was declared effective by the SEC. As of
September 30, 1995, EPG had not issued any securities pursuant to the shelf
registration statement.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1995, and December 31,
1994, consisted of the following:
1995 1994
---------- ----------
(IN THOUSANDS)
Property, plant, and equipment, at cost............. $3,029,846 $2,968,220
Less accumulated depreciation and depletion......... 1,204,703 1,205,637
---------- ----------
1,825,143 1,762,583
Additional acquisition cost assigned to utility
plant, net of accumulated amortization............ 94,947 99,006
---------- ----------
Property, plant, and equipment, net............ $1,920,090 $1,861,589
========== ==========
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets at September 30, 1995, and December 31, 1994, consisted
of the following:
1995 1994
---------- ----------
(IN THOUSANDS)
Goodwill............................................ $ 23,003 $ --
Other intangible assets............................. 14,563 11,148
---------- ----------
37,566 11,148
Less accumulated amortization....................... 8,802 6,840
---------- ----------
Intangible assets, net.............................. $ 28,764 $ 4,308
========== ==========
Goodwill is being amortized over a 40-year period using the straight-line
method. Other intangible assets are valued at cost and are being amortized over
a period ranging between 5 years and 25 years using the straight-line or
composite method.
8. INVENTORIES
Inventories at September 30, 1995, and December 31, 1994, consisted of the
following:
1995 1994
---------- ----------
(IN THOUSANDS)
Materials and supplies.............................. $ 34,383 $ 34,666
Gas in storage...................................... 4,505 --
---------- ----------
$ 38,888 $ 34,666
========== ==========
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. SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
NINE MONTHS
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Net cash payments
Interest.......................................... $ 73,895 $ 65,671
Income taxes, net of refunds...................... $ 8,913 $ 25,528
10. RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Certain long-lived assets
and certain identifiable intangibles to be disposed of must be reported at the
lower of carrying amount or fair value less cost to sell. SFAS No. 121 also
requires that a rate-regulated enterprise recognize an impairment for the amount
of costs that a regulator excludes from the enterprise's rate base. SFAS No. 121
must be adopted no later than the fiscal year beginning after December 15, 1995.
The Company is in the process of evaluating the implications of SFAS No. 121 and
the timing of its adoption.
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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 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
Net cash provided by operating activities was $136 million for the nine
months ended September 30, 1995, compared with $166 million for the same period
of 1994. The decrease from the previous year was primarily due to a payment
resulting from the Amoco decision, timing of insurance premium payments, 1994
net insurance reimbursements, lower tax refunds, lower net cash received on gas
imbalance settlements, higher interest payments, and timing differences in other
working capital disbursements. The decrease was partially offset by 1994
take-or-pay refunds to customers, lower tax payments, lower take-or-pay
payments, and timing differences in other working capital receipts.
Rates and Regulatory Matters
In June 1995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. If the rates are
approved as filed, annual revenues would increase by approximately $137 million.
In July 1995, FERC accepted and suspended EPG's filing to be effective January
1, 1996, subject to refund and certain other conditions. FERC also set EPG's
rates for hearing, suspended the hearing schedule until December 31, 1995, and
appointed a settlement judge to facilitate a resolution of the proceeding before
December 31, 1995. Settlement discussions are currently in progress.
EPG allocated its cost-of-service to the customers served as of January 1,
1996. In addition, EPG included in its filing an alternative tariff exit fee
mechanism designed to mitigate cost shifts which may result from future capacity
relinquishments. The exit fee mechanism would be applicable to certain contract
reductions or terminations and would require certain payments to EPG, which
would be appropriately reflected in EPG's rates. In the July 1995 order, FERC
rejected EPG's proposed exit fee mechanism. In August 1995, EPG requested
rehearing of the July 1995 order. The request for rehearing is currently pending
before FERC. If FERC maintains its summary rejection of the Company's proposed
exit fee mechanism, and in the absence of other approved procedures, EPG will
allocate its total mainline transportation cost-of-service to the remaining
customers served following any future capacity relinquishments.
SoCal has exercised the right to reduce its current firm capacity of 1,450
MMcf/d on EPG's system by 300 MMcf/d, effective January 1, 1996. In addition,
PG&E has a contract for 1,140 MMcf/d of firm capacity rights on EPG's system
with a primary term ending December 31, 1997. EPG's reservation revenues from
PG&E during 1994 were approximately $129 million. In June 1995, PG&E notified
EPG that it intends to terminate the contract as of December 31, 1997.
EPG is seeking to offset any reduction in existing firm capacity
commitments and related revenues resulting from customer contract terminations,
reductions, or modifications through new contracts with various natural gas
users in the California, East-of-California, and northern Mexico markets. EPG's
efforts to seek new customers in California for such capacity at full tariff
rates are adversely impacted by the current excess interstate pipeline capacity
to California, which is currently estimated to continue into the next decade.
In January 1994, EPG filed an application with FERC seeking an order which
would terminate, effective January 1, 1996, certificates applicable to certain
gathering and processing facilities owned by EPG on the basis that such
facilities are not subject to FERC jurisdiction.
Such facilities are used for gathering and other nonjurisdictional
functions and are an inherent part of EPG's current gathering and processing
operations. The facilities consist of approximately 6,700 miles of various sized
pipelines, compressors with an aggregate installed horsepower of 40,600, and
various treating and processing plants.
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16
In May 1995, EPG filed an application with FERC seeking an order which
would terminate, effective January 1, 1996, certificates applicable to certain
offshore gathering facilities owned by EPG on the basis that such facilities are
not subject to FERC jurisdiction.
In September 1995, FERC granted the abandonments requested in the January
1994 and May 1995 applications, subject to certain conditions. EPG will transfer
the facilities to EPFS effective January 1, 1996. As of September 30, 1995, the
net assets to be transferred to EPFS are estimated to be approximately $143
million. FERC has determined that, upon the transfer to EPFS, the facilities
will be exempt from FERC jurisdiction. Various parties have requested rehearing
of FERC's September 1995 orders.
Under FERC procedures, take-or-pay cost recovery filings may be challenged
by pipeline customers on prudence and certain other grounds. In October 1992,
FERC issued an order resolving all but one of the outstanding issues regarding
EPG's take-or-pay proceedings. Certain of EPG's customers sought review of
certain aspects of that order in the Court of Appeals. That appeal is currently
pending. The issue unresolved by FERC involved the claim by several customers
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. Following a hearing on this issue, in June 1994, FERC
affirmed a decision of an ALJ which found that the valuation proposed by EPG was
excessive and required EPG to refund to its customers the costs found to be
ineligible for take-or-pay recovery. In accordance with the FERC decision, EPG
refunded $34 million, inclusive of interest, to its customers in September 1994.
In December 1994, EPG filed a petition with the Court of Appeals for review of
the FERC decision, which petition is currently pending.
Legal Proceedings
In El Paso Natural Gas Company and Meridian Oil Gathering Inc. v. Amoco
Production Company, filed in the Court on May 8, 1991, Amoco alleged breaches by
EPG and a then affiliated company, MOGI, of certain gas purchase, gathering, and
transportation agreements pertaining to natural gas produced by Amoco in the San
Juan Basin. Trial of Amoco's claims concluded on July 15, 1993, and on March 29,
1994, the Court rendered a decision in favor of Amoco. As a result of the
Court's decision, EPG refunded to Amoco approximately $20 million in the first
quarter of 1995. Both EPG's and Amoco's appeals to the Delaware Supreme Court
have been dismissed as a result of a settlement between the parties.
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 defending the matter, and the parties have recently
stipulated to transfer this case to the State District Court of Dallas County,
Texas. 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.
The Justice Department terminated an investigation of EPG's natural gas
meter sales and installation practices in the San Juan Basin on January 6, 1995.
EPG and the Justice Department agreed to a consent decree, which was filed in
the District Court on January 12, 1995, and approved by the District Court on
August 4, 1995. The consent decree requires no material change to EPG's existing
business practices and imposes no fines or monetary penalties. The consent
decree stipulates that EPG may not require a well operator to purchase meter
facilities or meter installation equipment as a condition of access to its
gathering system in the San Juan Basin and requires EPG to inform well operators
that they have the legal right to provide their own meter installation services.
The consent decree further provides that any meter installation undertaken by
third parties must be done in accordance with environmental and safety standards
specified by EPG. Moreover, EPG has the right to inspect such installations to
ensure that they conform to standards that apply uniformly on EPG's gathering
system. Records of EPG's inspection activities will be maintained to document
compliance with EPG's standards and procedures. Pursuant to the terms of the
consent decree, EPG has designated an antitrust compliance officer and is
implementing required compliance activities.
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
13
17
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.
Environmental Matters
As of September 30, 1995, EPG had a reserve of approximately $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. For the nine months ended September 30, 1995, EPG has
incurred approximately $2 million in PCB remediation costs. Future
PCB remediation costs are estimated to be between $4 million and $7
million over the next 5 years.
2 -- In June 1993, EPG executed an Administrative Order on Consent with EPA
to conduct a RI/FS for a site located in Statesville, North Carolina
that has been identified for cleanup. EPG and other PRP have entered
into an agreement to jointly fund the RI/FS for the site. Total
remediation costs are estimated to be between $16 million and $29
million over a 30-year period. EPG and the other PRP are engaged in
negotiations over the appropriate allocation of the remediation costs.
3 -- In November 1993, in accordance with an EPA order, EPG and ARCO
submitted work plans for remediation of the Prewitt Refinery site 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 approximately
$10 million over a 30-year period. Remediation began in May 1995.
4 -- In December 1993, EPA issued EPG a Notice of Potential Liability for
the CSMRI site in Golden, Colorado ordering EPG and eleven other PRPs
to clean up the site. EPA has determined that the volume of hazardous
substances sent to the site by EPG represents less than 2.5 percent of
the total volumes sent by all PRPs. Based on this percentage, EPG's
share of the potential remediation costs is estimated to be less than
$0.4 million.
5 -- EPG and other PRP have been notified about potential groundwater and
soil contamination at various sites in southeastern Utah. EPG and
other PRP have been conducting environmental assessments at certain of
these sites and are engaged in negotiations over the appropriate
allocation of the remediation costs. Based upon currently available
information, EPG estimates its costs for remediation will be
approximately $5 million. However, costs could be higher once the
environmental assessment has been completed.
6 -- In August 1992, EPG received a notice from the current owner of a site
in Etowah, Tennessee requesting compensation for remediation expenses
associated with the site. EPG negotiated a settlement agreement
effective August 10, 1995. In accordance with the agreement, EPG paid
approximately $0.6 million in the third quarter of 1995.
7 -- EPG and other PRPs entered into an agreement to conduct a RI/FS for a
site located in Fountain Inn, South Carolina. The RI/FS was completed
in October 1994, and EPA issued a ROD in September 1995. Based upon
EPA's ROD, the proposed remediation and EPA oversight costs are
estimated to be $1.6 million. The allocation of these costs between
EPG and the other PRPs is currently being negotiated. EPG's share of
the costs is estimated to be approximately $0.8 million over a 5-year
period.
Management believes the amount reserved as of September 30, 1995, is
sufficient to cover these and other small environmental assessments and
remediation activities.
The State of Tennessee has asserted a claim that EPG is a liable party
under state environmental laws for cleanup costs associated with a site in
Elizabethton, Tennessee. The State of Tennessee and EPA are in the preliminary
stages of investigating the nature and extent of contamination, as well as
identifying other PRPs. Since investigation is in the initial stages, EPG is
unable to estimate its potential share of any remediation costs.
14
18
EPG also has potential expenditures, of a capital nature, for the following
environmental projects:
1 -- EPG has analyzed the CAAA, and believes that the impact to the
Company's operations will be 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) compliance assurance
monitoring of air emissions. EPG anticipates capitalizing the
equipment costs associated with complying with CAAA and estimates
that approximately $10 million will be spent from 1996 through
2005. When finalized, EPA's proposed compliance assurance
monitoring rules 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 other measurement devices. As of September 30, 1995,
approximately $13 million has been capitalized. The total
capitalized cost of the project is estimated to be approximately
$14 million. The project is expected to be completed by the end
of 1995. EPG will close and retire about 2,250 earthen
siphon/dehydration pits in the San Juan Basin, as required by
certain environmental regulations. As of September 30, 1995,
approximately $7 million has been capitalized. Total project
costs are estimated to be approximately $10 million. The mercury
remediation and pit closure costs incurred through December 31,
1995, which are associated with the retirement of equipment, will
be recorded as adjustments to accumulated depreciation, as
permitted by regulatory accounting principles. The earthen
siphon/dehydration pits will be transferred to EPFS effective
January 1, 1996, as authorized by FERC. As such, regulatory
accounting principles will no longer be applicable, and the costs
associated with the remediation of the pits will no longer be
capitalized but will be expensed as incurred.
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.
Acquisition
Effective September 1, 1995, Eastex was merged with and into El Paso
Acquisition Company, a wholly owned subsidiary of EPG. At the time of the
merger, the name of El Paso Acquisition Company was changed to Eastex. The
purchase price of approximately $32 million, exclusive of acquisition costs, was
financed by the Company through approximately $13 million of available cash and
the issuance of approximately 659,000 shares of treasury stock at a market value
of approximately $19 million. Acquisition costs of approximately $2 million have
been capitalized. Total cash consideration paid, net of cash received, was
approximately $3 million. The cost of the acquisition has been allocated on the
basis of the estimated fair market value of the assets acquired and the
liabilities assumed. This allocation resulted in goodwill of approximately $17
million, which will be amortized over 40 years using the straight-line method.
Eastex had previous goodwill of approximately $5 million. The acquisition has
been accounted for as a purchase, and the Company has utilized the "push down"
basis of accounting.
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19
The following Eastex net assets are included in the Company's September 30,
1995, Consolidated Balance Sheet:
(IN THOUSANDS)
--------------
Cash..................................................... $ 12,225
Accounts receivable...................................... 76,967
Inventory................................................ 4,504
Property, plant, and equipment, net...................... 5,890
Intangible assets, net................................... 23,188
Other assets............................................. 2,177
Accounts payable......................................... (84,637)
Other liabilities........................................ (5,403)
--------------
Total net assets............................... $ 34,911
==============
Eastex's operating results for the month of September 1995 are included in
the Company's consolidated results of operations for the quarter and nine months
ended September 30, 1995.
Capital Expenditures
The Company's planned capital expenditures for 1995 of $200 million are
primarily for maintenance of business, system expansion, and system enhancement.
Capital expenditures for the nine months ended September 30, 1995, were $106
million compared to $79 million for the same period of 1994. The increase is due
primarily to a system expansion in the San Juan Basin, various compression
projects, and the purchase of a cryogenic processing plant and related gathering
system.
In March 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
(see "Project Investments" of MD&A) 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 $12 million. In November 1993, FERC issued
an order that approved the proposed border crossing facility south of Clint,
Texas that would connect EPG's facilities with facilities in Mexico. In December
1993, PG&E, SoCal, and the CPUC jointly filed a motion with FERC seeking
clarification or rehearing of the November 1993 order on the Samalayuca II Power
Plant project. In November 1994, FERC required EPG to provide the executed
long-term contracts or binding agreements for a substantial amount of the firm
capacity of the proposed facilities by January 1995. EPG advised FERC that
although the contracts or agreements had not been obtained, EPG believes the
project remains viable and that the application should therefore not be
dismissed.
In June 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to expand its existing mainline 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
in August 1994 with respect to the June 1994 application. In August 1995, FERC
authorized the expansion project, conditioned on EPG's compliance with various
environmental conditions. In addition, FERC authorized the inclusion of the
project costs in EPG's rates. The project is expected to be completed in
December 1995.
In April 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to build the North/South Transfer Project. 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
in August 1994 with respect to the April 1994 application.
In April 1995, FERC issued a preliminary determination approving the
nonenvironmental aspects of the North/South Transfer project. EPG must
demonstrate that the project benefits EPG's customers or meets such other
standard as might be established by FERC in order for the project costs to be
included in EPG's rates. A final order approving the project is dependent on a
favorable environmental review. The CPUC,
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20
PG&E, and SoCal, jointly, have filed requests for rehearing of the preliminary
determination issued on the North/South Transfer Project. In May 1995, EPG
provided notice of an open season on the North/South Transfer Project. The open
season ended June 30, 1995, and EPG continues to review facility designs and
customer interest.
In March 1993, MPC filed an application, which was amended in November 1993
and April 1994, for a certificate of public convenience and necessity to build
and operate a 475 MMcf/d expansion of its existing system at an estimated cost
of approximately $500 million.
In December 1993, FERC held a public conference to examine the questions
raised by the CPUC and PG&E regarding MPC's proposed expansion. The primary
issue was whether FERC or the CPUC should have jurisdiction over the expansion.
In February 1994, FERC issued an order determining that it has exclusive
jurisdiction over MPC and its proposed expansion. In March 1994, the CPUC, PG&E,
and other parties filed for rehearing or clarification of FERC's February 1994
order. In November 1994, FERC issued an order which addressed all
nonenvironmental issues and, on that basis, granted MPC preliminary certificate
authorization for the proposed expansion, subject to certain conditions. In
addition, FERC requested certain further information from the parties to
determine whether PG&E, which is currently the principal gas supplier in the
region to be served by the expansion project, is entitled to any bypass
compensation from MPC and/or EPG as a result of MPC's proposed expansion. MPC
and EPG provided FERC the requested information and urged that any compensation
or other relief to PG&E would be inappropriate. (Similar information was later
requested by FERC and provided by MPC regarding the potential for bypass
compensation to SoCal.) In December 1994, MPC and other parties filed requests
for rehearing of certain aspects of FERC's November 1994 order. In February and
March 1995, FERC issued orders which granted in part, and denied in part,
rehearing and accordingly modified the November 1994 order.
In July 1995, a final EIS/EIR for the expansion was issued by FERC and the
California Lands Commission which concluded that the project could be built in
an environmentally acceptable manner with appropriate mitigation. In August
1995, FERC issued a final order which resolved all pending issues relating to
the EIS/EIR, reconfirmed its jurisdiction, and granted MPC a certificate to
construct and operate the expansion, subject to certain conditions. In addition,
FERC held that bypass compensation would be inappropriate. MPC and other parties
filed requests for rehearing and clarification of the August 1995 order, which
requests are currently pending. Other parties have filed for review of the
August 1995 order with the United States Court of Appeals for the 9th Circuit on
issues that were not subject to further rehearing. Whether MPC proceeds with the
expansion will depend on, among other things, the final actions taken by FERC
and whether there is a satisfactory market for the project.
Project Investments
Samalayuca II Power Plant (Mexico)
The Company is a member of a consortium that plans to build the proposed
Samalayuca II Power Plant near Ciudad Juarez, Chihuahua, Mexico. In December
1992, an award for construction was granted to the consortium by the CFE. The
consortium will construct the plant, which is projected to cost approximately
$645 million, and lease it to CFE for a term of 20 years. The Company has a 20
percent interest in the consortium and plant. The Company will make an initial
equity investment of approximately $26 million. CFE and the consortium are
negotiating a trust agreement, which is substantially complete. The consortium
has recently received approval for non-recourse senior debt funding of up to 80
percent of the capital requirements from the U.S. EXIM and IDB. The project is
expected to close in the fourth quarter of 1995.
TransColorado Pipeline Project
In the third quarter of 1995, the Company purchased a one-third interest in
TransColorado Gas Transmission Company from Public Service Company of Colorado
for approximately $4 million. The Company paid approximately $2 million cash.
The balance of approximately $2 million is due upon commencement of the pipeline
project. KN Energy, Inc. and Questar Pipeline Company also each own a one-third
interest in TransColorado Gas Transmission Company.
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In November 1994, TransColorado Gas Transmission Company received FERC
authorization to build a 292 mile pipeline with a capacity of 300 MMcf/d, from
northwest Colorado to the Blanco Hub area in the San Juan Basin. The project is
estimated to cost approximately $194 million. The proposed pipeline will provide
an alternative outlet for natural gas produced in the Rocky Mountain region and
will enhance the Company's overall flexibility to meet market demands.
Construction of the proposed pipeline has not yet begun.
Aguaytia Energy Project (Peru)
In August 1995, the Company became a member of a consortium that plans to
develop a $190 million integrated gas and power project in Peru, called the
Aguaytia Energy Project. The Company's investment in the project is estimated to
be between $35 million and $40 million. The consortium will sell electricity,
propane, and natural gasoline to meet the growing demand for energy in Peru.
Initially, the project will be funded 100 percent with equity. Negotiations are
currently underway with a major lender to provide non-recourse senior debt
financing. Construction is expected to begin in early 1996 and operations are
expected to commence in late 1997.
EMICA Agreement
In July 1995, the Company entered into an agreement with EMICA for the
joint development, construction, operation, and ownership of natural gas
pipelines and other infrastructure projects in Mexico and Central and South
America. Management believes that EMICA's international engineering and
construction experience, combined with the Company's energy, natural gas
marketing, and operating experience enables the two companies to offer Mexico a
uniquely qualified partnership between a major U.S. company and a major Mexican
company to build the energy infrastructure that Mexico needs to revitalize its
economy.
Financing Facilities
As of September 30, 1995, and December 31, 1994, approximately $173 million
and $107 million, respectively, of commercial paper was outstanding. In August
1994, EPG established with a group of banks a revolving credit facility of $400
million that expires in August 1999. This facility was established primarily as
a liquidity facility for the Company's commercial paper program. As of September
30, 1995, there was $50 million outstanding under this facility. There were no
borrowings outstanding under this facility as of December 31, 1994. In October
1994, EPG established an additional $30 million line of credit facility. As of
September 30, 1995, and December 31, 1994, there were no borrowings outstanding
under this line of credit facility. By Board resolution, total short-term
borrowings by EPG shall not exceed the borrowing capacity under the currently
existing revolving credit facility.
Eastex has available a credit facility of approximately $20 million which
expires October 31, 1995. There were no borrowings outstanding under the credit
facility as of September 30, 1995. Eastex does not expect to renew or replace
the facility upon its termination date of October 31, 1995. Eastex had letters
of credit outstanding at September 30, 1995, of approximately $6 million, which
limited borrowing on the credit facility to $14 million.
On September 12, 1995, EPG retired $9 million of Eastex long-term debt.
In January 1992, EPG completed a sale of substantially all of its remaining
take-or-pay buy-out and buy-down receivables. During the third quarter of 1995,
EPG prepaid the $17 million take-or-pay financing liability outstanding.
EPG filed a shelf registration statement in August 1994, pursuant to which
EPG may offer up to $400 million of unsecured debt securities, preferred stock,
and common stock from time to time as determined by market conditions. On March
10, 1995, the registration statement was declared effective by the SEC. As of
September 30, 1995, EPG had not issued any securities pursuant to the shelf
registration statement.
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Available shelf registration and lines of credit for EPG at September 30,
1995, as discussed above, are summarized as follows:
(IN THOUSANDS)
--------------
Short-term borrowings.......................... $177,000
Shelf registration............................. 400,000
--------------
Available financing facilities............ $577,000
===========
Common Stock and Other Stockholders' Equity
The following table reflects quarterly dividends declared and paid on EPG's
common stock:
DECLARATION DATE AMOUNT PER SHARE PAYMENT DATE TOTAL AMOUNT
---------------- ---------------- --------------- --------------
(IN THOUSANDS)
October 13, 1994 $ 0.3025 January 3, 1995 $ 10,824
January 13, 1995 $ 0.3300 April 3, 1995 $ 11,574
April 13, 1995 $ 0.3300 July 3, 1995 $ 11,423
July 21, 1995 $ 0.3300 October 2, 1995 $ 11,074
On October 20, 1995, the Board declared a quarterly dividend of $0.3300 per
share on EPG's common stock, payable on January 2, 1996, to shareholders of
record on December 8, 1995.
In November 1994, the Board authorized the repurchase of up to 3.5 million
shares of EPG's outstanding common stock from time to time in the open market.
This authorization is in addition to a two million share authorization received
in October 1992. Shares repurchased are held in EPG's treasury and are expected
to be used in connection with EPG stock option compensation plans and for other
corporate purposes. On September 20, 1995, EPG issued 659,436 shares of treasury
stock in connection with the Eastex acquisition (see Note 2 of Notes to
Consolidated Financial Statements). Pursuant to the foregoing authorizations,
the Company has purchased 4.7 million shares as of September 30, 1995.
Financing Requirements
Future funding for capital expenditures, acquisitions, long-term debt
retirements, dividends, and other expenditures will be provided by internally
generated funds, debt/equity issuances, and/or available credit facilities.
Company Restructuring
In response to changes in the natural gas industry, increased competition,
and future firm capacity contract step-downs and terminations, the Company has
initiated an extensive review of its business processes. The Company anticipates
adopting a program to restructure its businesses and reduce operating costs
through workforce reductions and improved work processes. This will position the
Company to more effectively address the changes occurring in the natural gas
industry.
RESULTS OF OPERATIONS
Third Quarter 1995 Compared to Third Quarter 1994
Operating revenues for the quarter ended September 30, 1995, were $31
million higher than for the same period of 1994. The consolidation of Eastex
contributed $51 million to the increase. Lower gas sales rates, lower gas sales
volumes, lower transportation rates, and lower transportation volumes partially
offset the increase in operating revenues by $9 million, $5 million, $3 million,
and $1 million, respectively.
Operating charges were $34 million higher for the quarter ended September
30, 1995, compared to the same period of 1994. The consolidation of Eastex
contributed $50 million to the increase. Lower average cost of gas and gas sales
volumes partially offset the increase in operating charges by $13 million and $5
million, respectively.
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Interest and debt expense for the quarter ended September 30, 1995, was $3
million higher than for the same period of 1994 primarily due to interest on
increased short-term borrowings.
Other-net was $4 million higher for the quarter ended September 30, 1995,
than for the same period of 1994, as a result of 1994 employee litigation costs.
EPG's mainline throughput for the quarter ended September 30, 1995, was 319
Bcf compared to 338 Bcf for the same period of 1994. The lower throughput was
primarily due to a decrease in deliveries to the California market, resulting
from an increase in the availability of hydroelectric power. The decrease in
California deliveries was partially offset by increased off-system deliveries, a
result of producers and marketers seeking alternative markets for their gas.
Nine Months Ended 1995 Compared to Nine Months Ended 1994
Operating revenues for the nine months ended September 30, 1995, were $13
million lower than for the same period of 1994. Lower gas sales rates, lower gas
sales volumes, lower transportation rates, lower transportation volumes, and
lower gathering and processing volumes contributed $32 million, $24 million, $8
million, $4 million, and $1 million, respectively, to the decrease. The
consolidation of Eastex partially offset the decrease by $51 million. Also
offsetting the decrease in operating revenues were higher gathering and
processing rates, higher return on take-or-pay receivables, higher liquid
revenues, and amounts related to the Amoco decision of $2 million, $2 million,
$1 million, and $6 million, respectively.
Operating charges for the nine months ended September 30, 1995, were $11
million lower than for the same period of 1994. Lower average cost of gas, lower
gas sales volumes, and a 1994 litigation special charge contributed $33 million,
$25 million, and $15 million, respectively, to the decrease in operating
charges. The consolidation of Eastex partially offset the decrease by $50
million. Increases in operation and maintenance expense and depreciation expense
also offset the decrease in operating charges. The increase in operation and
maintenance expense was due primarily to higher stock related benefits,
write-offs of dry hole costs, and higher severance accruals.
Interest and debt expense for the nine months ended September 30, 1995, was
$6 million higher than for the same period of 1994 primarily due to interest on
increased short-term borrowings.
Other-net was higher for the nine months ended September 30, 1995, than for
the same period of 1994. The 1994 results contain interest expense related to
the special charge for litigation, income related to the recovery of EPG's
investment in its underground storage facility, employee litigation costs, and
lower AFUDC revenue.
EPG's mainline throughput for the nine months ended September 30, 1995, was
953 Bcf compared to 965 Bcf for the same period of 1994. The lower throughput
was primarily due to a decrease in deliveries to the California market, a result
of an increase in the availability of hydroelectric power. The decrease in
California deliveries was partially offset by higher off-system deliveries, a
result of producers and marketers seeking alternative markets for their gas.
OTHER
Accounting for Regulated Operations
EPG and MPC are subject to the regulations and accounting procedures of
FERC, and therefore, continue to follow the reporting and accounting
requirements of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. Accounting methods for companies subject to cost-of-service
regulation may differ from those used by non-regulated companies. However, when
the accounting method prescribed by the regulatory authority is used for
rate-making, such accounting conforms to the generally accepted accounting
principle of matching costs against the revenues to which they apply.
The Consolidated Balance Sheet contains assets and liabilities related to
operations which have been recorded pursuant to regulatory accounting
principles. If these accounting principles should no longer be applied, an
amount would be charged to earnings as an extraordinary item. At September 30,
1995, this
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amount was estimated to be approximately $52 million, net of income taxes. While
management believes that EPG and MPC remain "regulated" as the term is used in
the relevant accounting literature, changes in the regulatory and economic
environment may, at some point in the future, create circumstances in which
application of regulatory accounting principles is no longer appropriate. Any
potential charge would be non-cash and would have no direct effect on EPG's and
MPC's ability to seek recovery of the underlying deferred costs in their future
rate proceedings or on their ability to collect the rates set thereby.
In September 1995, FERC authorized EPG to abandon certificates applicable
to certain gathering and processing facilities, subject to certain conditions.
These facilities will be transferred to EPFS effective January 1, 1996. FERC has
determined that, upon the transfer to EPFS, the facilities will be exempt from
FERC jurisdiction. Accordingly, at January 1, 1996, the provisions of SFAS No.
71 will not apply to EPFS's transactions and balances. The Company does not
anticipate that the discontinuance of the application of SFAS No. 71 to EPFS
will have a significant impact on the Company's financial condition.
Recent Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Certain long-lived assets
and certain identifiable intangibles to be disposed of must be reported at the
lower of carrying amount or fair value less cost to sell. SFAS No. 121 also
requires that a rate-regulated enterprise recognize an impairment for the amount
of costs that a regulator excludes from the enterprise's rate base. SFAS No. 121
must be adopted no later than the fiscal year beginning after December 15, 1995.
The Company is in the process of evaluating the implications of SFAS No. 121 and
the timing of its adoption.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 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 Program in which 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.
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The Program has been made available to Odd-lot Holders pursuant to
no-action letter relief granted by the SEC which expires on January 31, 1996.
EPG cannot currently determine whether the SEC will extend, modify, or terminate
such exemptive relief.
Dividend Reinvestment and Common Stock Purchase Plan
EPG has made available a Plan which provides all shareholders of record a
convenient and economical means of increasing their holdings in EPG's common
stock. A shareholder who owns shares of common stock in street name or broker
name and who wishes to participate in the Plan will need to have his or her
broker or nominee transfer the shares into the shareholder's name. The Plan is
strictly voluntary, and no shareholder of record is obligated to participate in
the Plan. A brochure and related materials describing the Plan were sent to
shareholders of record in November 1994. The Plan currently does not have a
termination date, but EPG may suspend the Plan at any time. Inquiries regarding
the Plan should be directed to The First National Bank of Boston.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
11 -- Computation of Earnings Per Common Share
27 -- Financial Data Schedule
B. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO NATURAL GAS COMPANY
--------------------------------------
(Registrant)
Date: October 26, 1995 /s/ H. BRENT AUSTIN
-----------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: October 26, 1995 /s/ THOMAS E. RICKS
-----------------------------------
Thomas E. Ricks
Vice President, Controller and
Chief Accounting Officer
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
11 -- Computation of Earnings Per Common Share
27 -- Financial Data Schedule