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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 MARCH 31, 1996
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 May 6, 1996 35,408,172 shares
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form 10-Q
are defined below:
ABBREVIATIONS,
ACRONYMS, OR DEFINED TERMS TERMS
- -------------------------- -----
ALJ . . . . . . . . . . . . . . . . . . . Administrative Law Judge
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
Cornerstone . . . . . . . . . . . . . . . Cornerstone Natural Gas, Inc.
Court of Appeals . . . . . . . . . . . . United States Court of Appeals for the District of Columbia Circuit
Eastex . . . . . . . . . . . . . . . . . Eastex Energy Inc., a wholly owned subsidiary of El Paso Natural Gas
Company
Edison . . . . . . . . . . . . . . . . . Southern California Edison Company
EPA . . . . . . . . . . . . . . . . . . United States Environmental Protection Agency
EPFS . . . . . . . . . . . . . . . . . . El Paso Field Services Company, a wholly owned subsidiary of El Paso
Natural Gas Company
EPG . . . . . . . . . . . . . . . . . . El Paso Natural Gas Company, now doing business as El Paso Energy
Corporation, unless the context otherwise requires
EPGM . . . . . . . . . . . . . . . . . . El Paso Gas Marketing, a wholly owned subsidiary of El Paso Natural Gas
Company
EPNC . . . . . . . . . . . . . . . . . . El Paso New Chaco Company, a wholly owned subsidiary of El Paso Natural Gas
Company
FERC . . . . . . . . . . . . . . . . . . Federal Energy Regulatory Commission
Mdth/d . . . . . . . . . . . . . . . . . Thousand dekatherms per day
MPC . . . . . . . . . . . . . . . . . . Mojave Pipeline Company
NGL . . . . . . . . . . . . . . . . . . . Natural gas liquids
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
Plan . . . . . . . . . . . . . . . . . . Dividend Reinvestment and Common Stock Purchase Plan
Premier . . . . . . . . . . . . . . . . . Premier Gas Company, a wholly owned subsidiary of Eastex Energy Inc.
Program . . . . . . . . . . . . . . . . Continuous Odd-Lot Stock Sales Program
PRP(s) . . . . . . . . . . . . . . . . . Potentially Responsible Party(ies)
RI/FS . . . . . . . . . . . . . . . . . Remedial Investigation/Feasibility Study
SEC . . . . . . . . . . . . . . . . . . Securities and Exchange Commission
SFAS . . . . . . . . . . . . . . . . . . Statement of Financial Accounting Standards
TransAmerican . . . . . . . . . . . . . . TransAmerican Natural Gas Corporation
TransColorado . . . . . . . . . . . . . . TransColorado Gas Transmission Company
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
FIRST QUARTER
----------------------
1996 1995
--------- ---------
Operating revenues ............................... $ 605,635 $ 204,131
--------- ---------
Operating charges
Natural gas and liquids ....................... 434,197 43,225
Operation and maintenance ..................... 73,328 77,366
Employee separation and asset impairment charge 99,053 --
Depreciation, depletion, and amortization ..... 21,615 16,805
Taxes, other than income taxes ................ 10,391 10,522
--------- ---------
638,584 147,918
--------- ---------
Operating income (loss) .......................... (32,949) 56,213
--------- ---------
Other (income) and income deductions
Interest and debt expense ..................... 22,706 21,066
Other - net ................................... 2,224 (1,378)
--------- ---------
24,930 19,688
--------- ---------
Income (loss) before income taxes ................ (57,879) 36,525
Income taxes (benefit) ........................... (22,631) 14,555
--------- ---------
Net income (loss) ................................ $ (35,248) $ 21,970
========= =========
Earnings (loss) per common share ................. $ (1.01) $ 0.62
========= =========
Average common shares outstanding ................ 35,052 35,156
========= =========
Dividends declared per common share .............. $ .3475 $ .3300
========= =========
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNT)
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED)
---------- ----------
Current assets
Cash and temporary investments .......................................... $ 41,083 $ 39,373
Accounts and notes receivable, net ...................................... 302,410 214,796
Inventories ............................................................. 36,933 37,108
Take-or-pay buy-outs, buy-downs, and prepayments, net ................... 1,001 10,477
Other regulatory assets ................................................. 8,871 11,740
Deferred income tax benefit ............................................. 22,035 22,631
Other ................................................................... 11,765 32,467
---------- ----------
Total current assets .............................................. 424,098 368,592
---------- ----------
Property, plant, and equipment, net ...................................... 1,929,621 1,977,624
Intangible assets, net ................................................... 47,701 47,878
Other regulatory assets .................................................. 41,197 51,878
Other .................................................................... 112,135 88,653
---------- ----------
2,130,654 2,166,033
---------- ----------
Total assets ....................................................... $2,554,752 $2,534,625
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................................ $ 382,108 $ 275,674
Short-term borrowings ................................................... 233,400 278,200
Accrual for regulatory issues ........................................... 29,926 --
Current maturities on long-term debt .................................... 107,950 7,590
Other ................................................................... 82,589 81,178
---------- ----------
Total current liabilities .......................................... 835,973 642,642
---------- ----------
Long-term debt, less current maturities .................................. 667,892 771,892
Deferred income taxes, less current portion .............................. 261,203 314,143
Deferred credits ......................................................... 32,990 39,514
Other .................................................................... 58,547 54,279
---------- ----------
1,020,632 1,179,828
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Commitments and contingent liabilities (See Note 5)
Stockholders' equity
Common stock, par value $3 per share; authorized 100,000 shares;
issued 37,351 shares .................................................. 112,054 112,054
Additional paid-in capital .............................................. 455,460 454,713
Retained earnings ....................................................... 191,475 240,101
Less: Treasury stock (at cost) 2,015 and 3,127 shares ................... 60,842 94,713
---------- ----------
Total stockholders' equity ......................................... 698,147 712,155
---------- ----------
Total liabilities and stockholders' equity ......................... $2,554,752 $2,534,625
========== ==========
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FIRST QUARTER
--------------------
1996 1995
-------- --------
Cash flows from operating activities
Net income (loss) ................................................. $(35,248) $ 21,970
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Depreciation, depletion, and amortization ....................... 21,615 16,805
Deferred income taxes (benefit) ................................. (23,151) 8,708
Net take-or-pay recoveries ...................................... 9,476 9,495
Net employee separation and asset impairment charge
($99,053 less cash payments of $1,142) ..................... 97,911 --
Other working capital changes
Accounts and notes receivable .................................. (88,539) 34,418
Inventories .................................................... 175 (425)
Other current assets ........................................... 20,702 (9,733)
Accrual for regulatory issues .................................. 29,926 --
Accounts payable ............................................... 41,413 (66,769)
Other current liabilities ...................................... 939 (9,162)
Other ........................................................... (2,026) 4,768
-------- --------
Net cash provided by operating activities ..................... 73,193 10,075
-------- --------
Cash flows from investing activities
Capital expenditures .............................................. (29,446) (23,259)
Proceeds from disposal of property ................................ 1,617 1,037
Other ............................................................. 8,348 (2,214)
-------- --------
Net cash used in investing activities ......................... (19,481) (24,436)
-------- --------
Cash flows from financing activities
Net commercial paper borrowings (repayments) ...................... (59,800) 61,100
Revolving credit borrowings ....................................... 75,000 --
Revolving credit repayments ....................................... (60,000) --
Long-term debt retirements ........................................ -- (3,667)
Repayment of volumetric take-or-pay receivable .................... -- (9,800)
Acquisition of treasury stock ..................................... -- (14,564)
Dividends paid .................................................... (11,291) (10,850)
Other ............................................................. 4,089 2,140
-------- --------
Net cash provided by (used in) financing activities ........... (52,002) 24,359
-------- --------
Increase in cash and temporary investments ......................... 1,710 9,998
Cash and temporary investments
Beginning of period ........................................... 39,373 27,636
-------- --------
End of period ................................................. $ 41,083 $ 37,634
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The accompanying Notes are an integral part of these
Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1995 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 March 31, 1996,
and the quarters ended March 31, 1996, and 1995, are unaudited. The condensed
balance sheet at December 31, 1995, 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. ACQUISITIONS
Effective September 1, 1995, Eastex was merged with a subsidiary of EPG.
In December 1995, Eastex acquired all of the issued and outstanding capital
stock of Premier. The consolidated operating results of Eastex for the three
months ended March 31, 1996, are included in the consolidated results of
operations.
In April 1996, the Company and Cornerstone entered into a definitive
merger agreement which provides for the acquisition by the Company of all of
the outstanding shares of Cornerstone common stock and the merger of
Cornerstone with a subsidiary of EPFS. Pursuant to the agreement, a cash tender
offer of $6.00 per share for all outstanding shares of Cornerstone common stock
commenced on April 26, 1996. The tender offer is conditioned upon, among other
things, the acquisition of at least a majority of the shares of Cornerstone
common stock on a fully diluted basis and the expiration of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act. The agreement provides
that shares of Cornerstone common stock not purchased in the tender offer will
be acquired in the subsequent merger at the same price as that paid in the
tender offer. The agreement also provides for specified fees and expenses to be
paid to the Company under certain circumstances. The holders of over 50 percent
of the fully diluted outstanding shares of Cornerstone have granted to the
Company options to purchase all shares of Cornerstone common stock and
Cornerstone stock options and warrants held by them. The merger is expected to
close in the second quarter of 1996. The net value of the transaction is
approximately $115 million.
3. BUSINESS SEGMENTS
In recognition of changes in the natural gas industry and the manner in
which the Company manages its businesses, and in order to facilitate a more
detailed understanding of its various activities, the Company has segregated
its business activities into three business segments. The natural gas
transmission segment is involved in the interstate transportation of natural
gas. The field and merchant services segment is involved in the purchasing,
gathering, processing, and marketing of natural gas and NGL, as well as the
storage of natural gas. The corporate and other segment includes El Paso Energy
International Company and other corporate activities. El Paso Energy
International Company is responsible for the Company's international
activities.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are those assets which
are not specifically identifiable with a segment.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reflects selected financial data for the Company's
segments. To the extent practicable, prior year amounts have been reclassified
to conform to the current business segment presentation, although such results
are not necessarily indicative of the results which would have been achieved
had the revised business segment structure been in effect during that period.
In general, transactions among business segments are recorded at market prices
and material affiliate transactions within business segments have been
eliminated.
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
----------- -------------
(IN THOUSANDS)
OPERATING REVENUES
Natural gas transmission ............. $ 128,572 $ 140,534
Field and merchant services .......... 477,207 65,321
Corporate and other .................. 3 12
Eliminations ......................... (147) (1,736)
----------- -----------
Consolidated total ................. $ 605,635 $ 204,131
=========== ===========
DEPRECIATION, DEPLETION, AND AMORTIZATION
Natural gas transmission ............. $ 14,756 $ 12,388
Field and merchant services .......... 6,859 4,405
Corporate and other .................. -- 12
----------- -----------
Consolidated total ................. $ 21,615 $ 16,805
=========== ===========
OPERATING INCOME (LOSS)
Natural gas transmission ............. $ 47,510 $ 54,674
Field and merchant services .......... 17,942 2,038
Corporate and other .................. (98,401) (499)
----------- -----------
Consolidated total ................. $ (32,949) $ 56,213
=========== ===========
IDENTIFIABLE ASSETS
Natural gas transmission ............. $ 1,802,911 $ 1,873,157
Field and merchant services .......... 625,357 309,698
Corporate and other .................. 163,696 122,080
Eliminations ......................... (37,212) (1,132)
----------- -----------
Consolidated total ................. $ 2,554,752 $ 2,303,803
=========== ===========
CAPITAL EXPENDITURES
Natural gas transmission ............. $ 4,135 $ 20,243
Field and merchant services .......... 25,311 3,016
Corporate and other .................. -- --
----------- -----------
Consolidated total ................. $ 29,446 $ 23,259
=========== ===========
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. EMPLOYEE SEPARATION AND ASSET IMPAIRMENT CHARGE
In response to changes in the natural gas industry, increased competition,
and recent and future firm capacity contract step-downs and terminations, the
Company initiated an extensive review of its business processes. In the first
quarter of 1996, the Company adopted a program to restructure its businesses
and reduce operating costs through work force reductions and improved work
processes. Also during the first quarter of 1996, the Company adopted SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. As a result of the workforce reduction program and
the adoption of SFAS No. 121, the Company recorded a special charge of $99
million ($47 million for employee separation costs and $52 million for asset
impairments).
The employee separation charge included approximately $26 million for
expected severance related costs and $21 million for additional pension
benefits. The majority of the 903 employee reductions were in the natural gas
transmission function. As of March 31, 1996, payments of approximately $1
million had been recorded as a reduction of the provision for employee
separation. The Company anticipates that the remaining provision will be
expended by the end of 1996.
The asset impairment charge included approximately $44 million for the
impairment of certain natural gas gathering, processing, and production
facilities, and $8 million for the write-off of a regulatory asset established
upon the adoption of SFAS No. 112, Employers' Accounting for Postemployment
Benefits, but not recoverable through the Company's rate settlement filed with
FERC in March 1996.
5. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In June l995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January l, 1996. 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.
In March 1996, EPG filed a comprehensive offer of settlement which, if
approved by FERC, would resolve issues related to the above mentioned rate case
and issues surrounding certain contract reductions and expirations scheduled to
occur from January 1, 1996, through December 31, 1997. The settlement provides
for, among other things: (i) a long term rate stability plan which establishes
base rates, for a 10-year period from January 1, 1996, through December 31,
2005, subject to annual escalation after 1997; (ii) payments within 8 years to
EPG by its customers totaling $255 million prior to interest, representing a
risk sharing mechanism that provides for approximately 35 percent of the
revenues (for the period 1996 to 2003) associated with the contract reductions
and expirations; (iii) the sharing between EPG (65 percent) and its customers
(35 percent) of revenues, in excess of a threshold, which are attributable to
unsubscribed capacity sales during the period 1996 through 2003; and (iv) a
mechanism to adjust the base rate for increases or decreases resulting from
laws or regulations to the extent that costs are impacted at a level in excess
of $10 million a year. The settlement contains a provision which permits any
party desiring not to be bound by the settlement to have its rates determined
pursuant to procedures established by FERC.
In March 1996, Edison, a firm shipper on EPG's system, filed its own offer
of settlement. While Edison's offer is similar in many respects to EPG's, it
contains provisions that EPG believes would be adverse to its interests if
Edison's offer was approved and EPG's offer was rejected. The ALJ has
established procedures to determine what discovery will be allowed in
connection with comments on the two offers of settlement to be filed by the
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
parties and in the meantime has suspended the schedule for filing comments. It
is EPG's position that discovery is inappropriate because, among other things, a
provision in EPG's offer of settlement affords Edison the opportunity to have
its rates determined separately. The ALJ will determine whether to certify EPG's
settlement to FERC and will make a similar determination concerning the Edison
offer. Even though the comment schedule has been suspended, comments supporting
EPG's settlement have been filed by FERC staff, the regulatory agencies of
California, Arizona, and Nevada, the state of New Mexico, and customers
representing 95 percent of the firm throughput on EPG's mainline transmission
system. Comments opposing Edison's offer have been filed by EPG, FERC staff, and
the customer coalition supporting EPG's settlement. EPG is accruing a provision
for refunds, and the balance of this provision at March 31, 1996, was
approximately $30 million. Management believes the amount being reserved will be
sufficient to cover any anticipated refunds.
Since 1987, 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 collected its buy-out
and buy-down costs under FERC cost recovery procedures. The collection period
for EPG's buy-out and buy-down costs ended March 1996.
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. 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.
In addition, certain of EPG's customers sought review in the Court of
Appeals of FERC's determination in the October 1992 order that certain
buy-down/buy-out costs were eligible for recovery. In January 1996, the Court
of Appeals remanded the order to FERC with direction to clarify the basis for
its decision that the take-or-pay buy-down/buy-out costs were eligible for
recovery. In March 1996, FERC issued an order to the effect that categories of
costs which had been determined to be eligible for recovery might in fact be
ineligible for recovery and established a technical conference for May 1996 to
investigate the issues. EPG has filed a request for rehearing of FERC's order
and requested that the technical conference be canceled. FERC has not yet ruled
on the request.
MPC filed a service and rate design restructuring plan in November 1992
which was essentially approved by FERC 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 primary issues on appeal pertain to
FERC's requirement that MPC's rates for firm transportation service be based
upon straight fixed variable rate design rather than modified fixed variable
rate design.
In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates. In March 1995, FERC accepted the filing and
allowed the rates to become effective as of March 30, 1995, subject to refund.
In September 1995, MPC filed a settlement agreement supported by FERC and the
majority of MPC's firm shippers which would continue rates at existing levels
for a 5-year period. In December 1995, FERC approved the settlement agreement
as it relates to the supporting parties. Contested issues applicable solely to
the minority customer group not supporting the settlement were presented in a
hearing before FERC in April 1996. A final ruling is expected in late 1996.
7
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Environmental Matters
As of March 31, 1996, the Company had a reserve of approximately $40
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 be $3
million over the next 4 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 . EPG and the other PRPs are jointly funding the RI/FS. The
RI/FS is to be submitted to EPA in July 1996. Once the RI/FS is
complete, EPG and the other PRPs will begin negotiating the
appropriate allocation of the remediation costs. Based on available
information, the remediation costs are estimated to be between $16
million and $29 million over a 30-year period.
3- In November 1993, in accordance with an EPA order, EPG and Atlantic
Richfield Company submitted work plans for remediation of the Prewitt
Refinery site in McKinley County, New Mexico. EPG and Atlantic
Richfield Company 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 $8 million over a 29-year
period. Remediation began in May 1995, and as of March 31, 1996, EPG
has incurred approximately $2 million in remediation costs.
4- In December 1993, EPA issued EPG a Notice of Potential Liability for
the Colorado School of Mines Research Institute 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. Remediation of the site is expected to be completed during
1996.
5- EPG and another PRP have been notified about potential groundwater
and soil contamination at various sites in southeastern Utah. EPG and
the 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 over a 5-year period.
6- 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 Record of Decision in September
1995, under which 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 has been negotiated. EPG's share of
the costs is estimated to be approximately $0.8 million over a 5-year
period.
7- EPFS is conducting remediation of 135 earthen siphon/dehydration pits
in the San Juan Basin. Based upon currently available information,
the costs for remediation are estimated to be approximately $3.1
million over a 5-year period.
Management believes the amount reserved as of March 31, 1996, is
sufficient to cover the remediation activities discussed above and other small
environmental assessments.
8
11
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 investigating the
nature and extent of contamination. Since the investigation is in the initial
stages, EPG is unable to estimate its potential share of any remediation costs.
The Company initially estimated the CAAA would require modification of
exhaust stacks at numerous locations. Based upon the latest analysis of CAAA
regulations and developments, the Company believes the modifications will not be
required, and the impact to the Company will be limited to the following: (i)
installation of emissions control equipment, (ii) the requirement for air
emissions permitting of existing facilities, and (iii) compliance assurance
monitoring of emissions. The Company anticipates capitalizing the equipment
costs associated with complying with CAAA and estimates that approximately $5
million will be spent from 1997 through 2005. When finalized, EPA's proposed
compliance assurance monitoring rules could potentially impose greater costs to
the Company.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental
matters. As such information becomes available, or developments occur, related
accrual amounts will be adjusted accordingly.
Guarantees
In February 1995, EPNC entered into a 7.75-year lease for a NGL extraction
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 total costs
expended through April 1996 were approximately $74 million. The start up and
check out phase for the first 412 Mdth/d of plant capacity will be completed in
May 1996. The remaining 206 Mdth/d of capacity is expected to be available in
the second quarter of 1996.
Legal Proceedings
In November 1993, TransAmerican 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 arising from a settlement agreement entered
into by EPG, TransAmerican and others in 1990 to settle litigation then pending
and other potential claims. The complaint, as amended, seeks unspecified actual
and exemplary damages. EPG is defending the matter, and the parties have
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 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
9
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
against the Company cannot be predicted with certainty, management currently
does not expect these matters to have a materially adverse effect on the
Company's financial condition.
6. FINANCING TRANSACTIONS
In August 1994, EPG established with a group of banks a revolving credit
facility of $400 million that expires August 1999. This facility was
established primarily to provide a liquidity facility for the Company's
commercial paper program, and as of March 31, 1996, and December 31, 1995,
approximately $90 million and $75 million, respectively, was outstanding. In
January 1996, the Board increased short-term borrowing limits from $400 million
to $500 million. As of March 31, 1996, and December 31, 1995, approximately
$143 million and $203 million, respectively, of commercial paper was
outstanding. In October 1994, EPG established an additional $30 million line of
credit facility. As of March 31, 1996, and December 31, 1995, there were no
borrowings outstanding under this line of credit facility.
In January 1997, EPG's 6.90 percent notes for $100 million will mature.
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 and
Company needs. On March 10, 1995, the registration statement was declared
effective by the SEC. As of March 31, 1996, EPG had not issued any securities
pursuant to the shelf registration statement.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1996, and December 31, 1995,
consisted of the following:
1996 1995
---------- ----------
(IN THOUSANDS)
Property, plant, and equipment, at cost ......... $3,051,026 $3,042,516
Less accumulated depreciation and depletion ..... 1,213,646 1,158,486
---------- ----------
1,837,380 1,884,030
Additional acquisition cost assigned to utility
plant, net of accumulated amortization ..... 92,241 93,594
---------- ----------
Total property, plant, and equipment, net... $1,929,621 $1,977,624
========== ==========
8. INTANGIBLE ASSETS
Intangible assets at March 31, 1996, and December 31, 1995, consisted of the
following:
1996 1995
------- -------
(IN THOUSANDS)
Goodwill .............................................. $42,344 $42,261
Other intangibles ..................................... 15,124 14,890
------- -------
57,468 57,151
Less accumulated amortization ......................... 9,767 9,273
------- -------
Total intangible assets, net ..................... $47,701 $47,878
======= =======
10
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INVENTORIES
Inventories at March 31, 1996, and December 31, 1995, consisted of the
following:
1996 1995
------- -------
(IN THOUSANDS)
Materials and supplies ................................ $29,259 $30,354
Gas in storage ........................................ 7,674 6,754
------- -------
$36,933 $37,108
======= =======
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
FIRST QUARTER
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
Net cash payments (refunds)
Interest ......................................... $ 33,102 $ 33,174
Income taxes ..................................... (2,723) (2,436)
11. 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. 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. The
Consolidated Balance Sheets contain 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 March 31,
1996, this amount was estimated to be approximately $35 million, net of income
taxes. 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.
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14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, in
addition to the interim consolidated financial statements and accompanying
notes presented in Item 1 of this Form 10-Q.
OPERATING ENVIRONMENT
In recognition of changes in the natural gas industry and the manner in
which the Company manages its businesses, and in order to facilitate a more
detailed understanding of the various activities in which it engages, the
Company began doing business under the name El Paso Energy Corporation
(effective April 22, 1996) and has segregated its business activities into
three business segments: (i) natural gas transmission, (ii) field and merchant
services, and (iii) corporate and other. The natural gas transmission segment
is involved in the interstate transportation of natural gas. The field and
merchant services segment is involved in the purchasing, gathering, processing,
and marketing of natural gas and NGL, as well as the storage of natural gas.
The corporate and other segment includes the Company's miscellaneous
subsidiaries.
Natural Gas Transmission
EPG owns and operates one of the nation's largest mainline natural gas
transmission systems, connecting natural gas supply regions in New Mexico,
Texas, Oklahoma, and Colorado to markets in California, Nevada, Arizona, New
Mexico, Texas, and northern Mexico. EPG's natural gas transmission system
consists of approximately 17,000 miles of pipeline and is connected to one of
the most prolific supply basins in the nation, the San Juan Basin of northern
New Mexico and southern Colorado. MPC serves the enhanced oil recovery
operations and associated cogeneration projects in the heavy oil fields in
central California. EPG's and MPC's pipeline facilities, services, and rates
are regulated by FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. The Company also has a one-third interest in
TransColorado. For a further discussion, see TransColorado Pipeline Project of
this section.
Field and Merchant Services
EPFS provides field services including gathering, products extraction,
dehydration, purification, and compression. EPFS has approximately 7,241 miles
of gathering lines and 64,179 horsepower of compression in its gathering
operations located in the San Juan, Anadarko, and Permian Basins. Eastex and
its subsidiaries provide direct end user sales, storage, and hub services for a
diverse customer base. Eastex and its subsidiaries transport gas supplies for
customers on 45 pipelines serving 37 states. EPGM conducts all of EPG's new gas
marketing business, while also acting as EPG's agent in winding down its
remaining role as a natural gas merchant predominately in the southwestern
region of the United States. In April 1996, the Company entered into a
definitive merger agreement with Cornerstone. For a further discussion, see
Acquisitions of this section.
Corporate and Other
Corporate and other includes El Paso Energy International and other
corporate activities. El Paso Energy International is responsible for the
Company's international activities.
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15
Operating Income (Loss) by Business Segment (1)
FIRST QUARTER
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
Natural gas transmission ........ $ 47,510 $ 54,674
Field and merchant services ..... 17,942 2,038
Corporate and other ............. (98,401) (499)
-------- --------
Consolidated ........... $(32,949) $ 56,213
======== ========
(1) To the extent practicable, prior year results of operations have been
reclassified to conform to the current business segment presentation,
although such results are not necessarily indicative of the results which
would have been achieved had the revised business segment structure been
in effect during that period. In general, transactions among business
segments are recorded at market prices and material affiliate transactions
within business segments have been eliminated.
First Quarter 1996 Compared to First Quarter 1995
Natural Gas Transmission Financial Results
FIRST QUARTER
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
Reservation revenue .................. $118,264 $125,543
Transportation revenue ............... 5,025 4,130
Other revenue ........................ 5,283 10,861
-------- --------
Total operating revenues .... 128,572 140,534
-------- --------
Operation and maintenance ............ 54,610 61,815
Depreciation and amortization ........ 14,756 12,388
Other operating expenses ............. 11,696 11,657
-------- --------
Total operating expenses .... 81,062 85,860
-------- --------
Operating income ..................... $ 47,510 $ 54,674
======== ========
Operating revenues for the quarter ended March 31, 1996, were $12 million
lower than for the same period of 1995. The decrease was primarily due to an
accrual for regulatory issues, the impact of a January 1996 transportation
contract reduction, and a decrease in return on take-or-pay receivables. The
decrease in operating revenues was partially offset by new system rates that
became effective January 1, 1996.
Operating expenses for the quarter ended March 31, 1996, were $5 million
lower than for the same period of 1995 primarily due to lower operation and
maintenance expense as a result of an adjustment to the take-or-pay
undercollections accrual.
Mainline throughput for the quarter ended March 31, 1996, averaged 3,829
Mdth/d compared to 3,815 Mdth/d for the same period of 1995. This increase was
primarily due to higher off-system deliveries, partially offset by lower
deliveries to California due to an increase in the availability of
hydroelectric power and milder winter temperatures.
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16
Field and Merchant Services Financial Results
FIRST QUARTER
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
Gathering and treating revenue ........ $ 17,690 $ 16,563
Products extraction revenue ........... 4,766 2,482
Merchant services revenue ............. 451,460 38,890
Other revenue ......................... 3,291 7,386
-------- --------
Total operating revenues ..... 477,207 65,321
-------- --------
Operation and maintenance ............. 19,371 15,408
Gas purchases ......................... 423,262 40,380
Depreciation and amortization ......... 6,859 4,405
Other operating expenses .............. 9,773 3,090
-------- --------
Total operating expenses ..... 459,265 63,283
-------- --------
Operating income ...................... $ 17,942 $ 2,038
======== ========
Operating revenues for the quarter ended March 31, 1996, were $412 million
higher than for the same period of 1995. The increase was due primarily to the
consolidation of Eastex, an increase in the average natural gas sales price, an
increase of 200 Mdth/d in natural gas gathered volumes, and higher products
extraction rates. The increase in operating revenues was partially offset by
the elimination of certain gathering revenues previously collected in mainline
rates prior to January 1, 1996.
Operating expenses for the quarter ended March 31, 1996, were $396 million
higher than for the same period of 1995. The increase was due to the
consolidation of Eastex and an increase in the average natural gas purchase
price.
Natural gas marketed for the quarter ended March 31, 1996, averaged 3,877
Mdth/d compared to 301 Mdth/d for the same period of 1995. This increase was
primarily due to the consolidation of Eastex. Natural gas gathered for the
quarter ended March 31, 1996, averaged 1,528 Mdth/d compared to 1,328 Mdth/d
for the same period of 1995. This increase was largely due to acquisitions of
gathering systems, pressure reduction projects, and the removal of mainline
capacity constraints.
Corporate and Other Financial Results
The operating loss for the quarter ended March 31, 1996, reflects a one
time special charge of $99 million for the employee separation and asset
impairment recorded in March 1996. For a further discussion of the special
charge, see Part I, Financial Information, Note 4.
Non-Operating Income and Expense
Interest and debt expense for the quarter ended March 31, 1996, was $2
million higher than for the same period of 1995 due primarily to higher
interest on short-term debt.
Other-net for the quarter ended March 31, 1996, reflects a charge for
losses on donations of property.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
Net cash provided by operating activities was $73 million for the quarter
ended March 31, 1996, compared with $10 million for the same period of 1995.
The increase from the previous year was primarily due to the
14
17
collection of revenues subject to refund, the Amoco Production Company
litigation payment made in the first quarter of 1995, and timing of insurance
premium payments. These increases were partially offset by higher net working
capital uses at Eastex and timing differences in other working capital
accounts.
Acquisitions
Effective September 1, 1995, Eastex was merged with a subsidiary of EPG.
In December 1995, Eastex acquired all of the issued and outstanding capital
stock of Premier. The consolidated operating results of Eastex for the three
months ended March 31, 1996, are included in the consolidated results of
operations.
In April 1996, the Company and Cornerstone entered into a definitive
merger agreement which provides for the acquisition by the Company of all of
the outstanding shares of Cornerstone common stock and the merger of
Cornerstone with a subsidiary of EPFS. Pursuant to the agreement, a cash tender
offer of $6.00 per share for all outstanding shares of Cornerstone common stock
commenced on April 26, 1996. The tender offer is conditioned upon, among other
things, the acquisition of at least a majority of the shares of Cornerstone
common stock on a fully diluted basis and the expiration of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act. The agreement provides
that shares of Cornerstone common stock not purchased in the tender offer will
be acquired in the subsequent merger at the same price as that paid in the
tender offer. The agreement also provides for specified fees and expenses to be
paid to the Company under certain circumstances. The holders of over 50 percent
of the fully diluted outstanding shares of Cornerstone have granted to the
Company options to purchase all shares of Cornerstone common stock and
Cornerstone stock options and warrants held by them. The merger is expected to
close in the second quarter of 1996. The net value of the transaction is
approximately $115 million.
Cornerstone is comprised of approximately 700 miles of gathering and
transportation systems and seven natural gas processing and treating facilities
principally located in East Texas and Louisiana. Additionally, Cornerstone
markets natural gas and NGL.
Employee Separation and Asset Impairment Charge
In response to changes in the natural gas industry, increased competition,
and recent and future firm capacity contract step-downs and terminations, the
Company initiated an extensive review of its business processes. In the first
quarter of 1996, the Company adopted a program to restructure its businesses and
reduce operating costs through work force reductions and improved work
processes. Also during the first quarter of 1996, the Company adopted SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. As a result of the workforce reduction program and
the adoption of SFAS No. 121, the Company recorded a special charge of
$99 million. For a further discussion, see Part I, Financial Information,
Note 4.
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. 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.
In March 1996, EPG filed a comprehensive offer of settlement which, if
approved by FERC, would resolve issues related to the above mentioned rate case
and issues surrounding certain contract reductions and expirations which are
scheduled to occur from January 1, 1996, through December 31, 1997. For a
further discussion of the March 1996 offer of settlement, see Part I, Financial
Information, Note 5.
Since 1987, 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 collected its buy-out
and buy-down costs under
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18
FERC cost recovery procedures. For a further discussion of EPG's take-or-pay
matters, see Part I, Financial Information, Note 5.
MPC filed a service and rate design restructuring plan in November 1992
which was essentially approved by FERC 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 primary issues on appeal pertain to
FERC's requirement that MPC's rates for firm transportation service be based
upon straight fixed variable rate design rather than modified fixed variable
rate design.
In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates. In March 1995, FERC accepted the filing and
allowed the rates to become effective as of March 30, 1995, subject to refund.
In September 1995, MPC filed a settlement agreement supported by FERC and the
majority of MPC's firm shippers which would continue rates at existing levels
for a 5-year period. In December 1995, FERC approved the settlement agreement
as it relates to the supporting parties. Contested issues applicable solely to
the minority customer group not supporting the settlement were presented in a
hearing before FERC in April 1996. A final ruling is expected in late 1996.
Legal Proceedings
See Part I, Financial Information, Note 5.
Environmental Matters
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at ongoing and
former operating sites. As of March 31, 1996, the Company had a reserve of
approximately $40 million for the following environmental contingencies: (i)
PCB remediation costs estimated to be $3 million over the next 4 years and (ii)
remediation of groundwater and soil contamination costs estimated to range
between $33 million and $46 million over a 30-year period. Management believes
the amount reserved as of March 31, 1996, is sufficient to cover these and
other small environmental assessments and remediation activities.
The Company initially estimated the CAAA would require modification of
exhaust stacks at numerous locations. Based upon the latest analysis of CAAA
regulations and developments, the Company believes the modifications will not
be required, and the impact to the Company will be limited to the following :
(i) installation of emissions control equipment, (ii) the requirement for air
emissions permitting of existing facilities, and (iii) compliance assurance
monitoring of emissions. The Company anticipates capitalizing the equipment
costs associated with complying with CAAA and estimates that approximately $5
million will be spent from 1997 through 2005. When finalized, EPA's proposed
compliance assurance monitoring rules could potentially impose greater costs to
the Company. For a further discussion of specific environmental matters see
Part I, Financial Information, Note 5.
Financing Facilities
In August 1994, EPG established with a group of banks a revolving credit
facility of $400 million that expires August 1999. This facility was
established primarily to provide a liquidity facility for the Company's
commercial paper program and as of March 31, 1996, and December 31, 1995,
approximately $90 million and $75 million, respectively, was outstanding. In
January 1996, the Board increased short-term borrowing limits from $400 million
to $500 million. As of March 31, 1996, and December 31, 1995, approximately
$143 million and $203 million, respectively, of commercial paper was
outstanding. In October 1994, EPG established an additional $30 million line of
credit facility. As of March 31, 1996, and December 31, 1995, there were no
borrowings outstanding under this line of credit facility.
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19
In January 1997, EPG's 6.90 percent notes for $100 million will mature.
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 and
Company needs. On March 10, 1995, the registration statement was declared
effective by the SEC. As of March 31, 1996, EPG had not issued any securities
pursuant to the shelf registration statement.
Common Stock and Other Stockholders' Equity
The following table reflects quarterly dividends declared and paid on EPG's
common stock:
AMOUNT PER
DECLARATION DATE COMMON SHARE PAYMENT DATE TOTAL AMOUNT
---------------- ------------ ------------ --------------
(IN THOUSANDS)
October 20, 1995 $0.3300 January 2, 1996 $11,292
January 19,1996 $0.3475 April 1, 1996 $12,258
On April 12, 1996, the Board declared a quarterly dividend of $0.3475 per
share on EPG's common stock, payable on July 1, 1996, to shareholders of record
on June 7, 1996.
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 was in addition to a 2 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. Pursuant to the foregoing authorizations, the Company has
purchased 4.7 million shares, cumulatively, as of March 31, 1996.
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 CFE. The
consortium will construct the plant, which is projected to cost approximately
$647 million, and lease it to CFE for a term of 20 years. The Company presently
has a 20 percent interest in the consortium and plant and will make an initial
equity investment of approximately $26 million. The Company is finalizing
negotiations which would increase its interest to 30 percent at financial close
and possibly 38 percent upon the completion of the project.
CFE and the consortium executed a trust agreement in May 1996 signifying
the completion of negotiations between the consortium and CFE. The consortium
has received approval for non-recourse senior debt financing of up to 80
percent of the capital requirements from the United States Export/Import Bank
and Inter-American Development Bank. The project is expected to reach financial
close and construction is expected to begin in the first half of 1996.
Aguaytia Energy Project (Peru)
In August 1995, the Company became a member of a consortium that is
developing a $250 million integrated gas and power project near Pucallpa, in
central Peru, called the Aguaytia Energy Project. The Company presently has a
24 percent interest in the project, and its equity investment is estimated to
be $40 million. The consortium will sell electricity, propane, and natural gas
to meet the growing demand for energy in Peru. Initially, the project will be
funded 60 percent with equity. Negotiations are nearing completion with two
major lenders to provide
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20
non-recourse debt financing for the project during construction and operation.
In December 1995, the project received approval from the Overseas Private
Investment Corporation for full political risk insurance coverage. Construction
is expected to begin in the first half of 1996, and operations are expected to
commence in late 1997.
TransColorado Pipeline Project
In the third quarter of 1995, the Company purchased a one-third interest
in TransColorado from Public Service Company of Colorado for approximately $4
million. The Company paid approximately $2 million in 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.
In November 1994, TransColorado received FERC authorization to build a 292
mile pipeline with a capacity of 309 Mdth/d, from northwest Colorado to the
Blanco Hub area in the San Juan Basin, at an estimated cost of approximately
$184 million. The pipeline is expected to provide an alternative outlet for
natural gas produced in the Rocky Mountain region. In April 1996, TransColorado
filed with FERC for authorization to phase the construction of the pipeline
system. Phase I will consist of 22.5 miles of pipeline beginning at the outlet
of the Coyote Gulch Treating and Compression Facility in La Plata County,
Colorado and extending to Blanco, New Mexico and is expected to cost
approximately $14 million. The Company's share is estimated to be approximately
$5 million. The proposed pipeline is expected to be in service during the fourth
quarter of 1996. Phase II will consist of the remainder of the project up to
northwest Colorado.
Coyote Gulch Treating and Compression Facility
EPFS and KN Gas Gathering, Inc. are negotiating an agreement to construct,
own, and operate Coyote Gulch Treating and Compression Facility, a 110,400
Mdth/d facility in La Plata County, Colorado. Construction of the facility is
expected to commence in the second quarter of 1996 and is expected to be
completed by December 31, 1996, at a total cost of $16 million. EPFS's share is
estimated to be $8 million. Upon completion, the facility will receive and
treat gas for Red Cedar Gathering Company.
Capital Expenditures
The Company's consolidated planned capital expenditures for 1996 of $175
million are primarily for maintenance of business, system expansion, and system
enhancement. Capital expenditures for the quarter ended March 31, 1996, were
$29 million compared to $23 million for the same period of 1995. Data for the
quarter ended March 31, 1995, has been restated in order to provide a
discussion of capital expenditures by business segment.
Natural Gas Transmission
The segment's planned capital expenditures for 1996 of $60 million are
primarily for maintenance of business, system expansion, and system
enhancement. Capital expenditures for the quarter ended March 31, 1996, were $4
million, compared to $20 million for the same period of 1995. Capital
expenditures were lower during the first quarter of 1996 primarily due to the
completion of the San Juan Basin expansion in December 1995.
In April 1996, EPG filed with FERC for authorization to add compression on
its Havasu Crossover Line. This project will permit an additional 185 Mdth/d to
move on the Havasu Crossover Line from the San Juan Basin in northern New
Mexico to points of delivery off EPG's southern system. EPG has executed
transportation service agreements with shippers to fully subscribe this
additional capacity. This $20 million expansion is expected to be in service by
the second quarter of 1997.
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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.
The proposed expansion, as filed, would provide an additional 309 Mdth/d of
capacity at a cost of approximately $57 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, Pacific Gas & Electric Company, Southern California Gas Company,
and the California Public Utilities Commission jointly filed a motion with FERC
seeking clarification or rehearing of the November 1993 order, which motion is
currently pending. 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
there were presently no such contracts or agreements. In March 1996, FERC
required EPG to provide a status of the negotiations for long-term contracts or
binding precedent agreements in validation of the market for the proposed new
capacity. EPG advised FERC that the project, although progressing more slowly
than expected, remains a viable natural gas project and that EPG continues to
actively pursue executed firm, long-term transportation arrangements. In
support, EPG is preparing to file an application for the Mexican portion of the
Samalayuca lateral as soon as financial close is reached for the new power
plant and the new regulatory agency, the Comision Reguladora de Energia, issues
its request for transportation services. The terms and conditions of providing
firm transportation will be determined by EPG when the Comision Reguladora de
Energia issues its final regulations.
Field and Merchant Services
The segment's planned capital expenditures for 1996 of $115 million
(excluding the Cornerstone acquisition) are primarily for system enhancement,
facility purchases, joint ventures, and maintenance of business. Capital
expenditures for the quarter ended March 31, 1996, were $25 million compared to
$3 million for the same period of 1995. The increase was primarily due to the
purchase of the Linc and Pandale gathering systems and the installation of
additional compression.
In February 1996, EPFS, through its wholly owned subsidiary El Paso
Intrastate Company, acquired the Linc gathering system and the Pandale
gathering system from Tejas Power Corporation for approximately $12 million.
The combined throughput of the two systems is expected to contribute 46 Mdth/d
on an annual basis to EPFS's total throughput. The Linc gathering system is
located in the Waha area of the Permian Basin and should increase EPFS's market
share in that area. The Pandale gathering system is located in the Texas
counties of Crockett and Val Verde, and should give EPFS a base from which to
grow in this active drilling area. (1) In addition, in the first quarter of
1996, EPFS installed new compression at five locations at a total cost of $8
million.
Financing Requirements
Future funding for capital expenditures, acquisitions, long-term debt
retirements, dividends, and other expenditures is expected to be provided by a
combination of internally generated funds, available credit facilities, and
debt/equity issuances.
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. For a further discussion of SFAS No. 71, see Part I, Financial
Information, Note 11.
__________________________________
(1) The previous statement(s) may be considered forward-looking. See page 20
for a description of the important factors that may affect actual results.
19
22
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
EPG is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company. Forward-looking statements are identified with a footnote on the page
in which they appear.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any forward-
looking statement, the Company, or its management, expresses an expectation or
belief as to future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
1-- The ability to increase transmission, gathering, processing, and
sales volumes can be subject to the impact of future weather
conditions, including those that favor hydroelectric generation;
price; drilling activity; and service competition, especially due to
excess pipeline capacity into California.
2-- Growth strategies through acquisitions and investments in joint
ventures may face legal and regulatory delays and other unforeseeable
obstacles beyond the Company's control.
3-- Future profitability will be affected by the Company's ability to
compete with the services offered by other energy enterprises which
may be larger, offer more services, and possess greater resources.
4-- Cost control efforts may be effected by the timing of related work
force reductions and might be further offset by unusual and
unexpected items resulting from such events as, but not limited to,
litigation settlements, adverse rulings or judgments, and unexpected
environmental remediation costs in excess of reserves.
5-- Rates for certain services are related to natural gas prices such
that variations in natural gas prices may result in corresponding
variances in operating revenues.
6-- Future operating results and success of business ventures in the
United States, Mexico, and Latin America may be subject to the
effects of, and changes in, United States and foreign trade and
monetary policies, laws and regulations, political and governmental
changes, inflation and exchange rates, taxes, and operating
conditions.
20
23
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 5.
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.
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.
21
24
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3(ii) - By-Laws of EPG, as amended April 1, 1996.
10.D.1 - Letter Agreement and revised Exhibits A and B to the Transportation Service Agreement, effective
January 1, 1996.
10.V.1 - First Amendment to Amended and Restated Limited Liability Company Agreement of Aguaytia Energy,
LLC, dated January 19, 1996, and Second Amendment to Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC, dated March 12, 1996.
10.AA - Omnibus Compensation Plan for Management Employees, Amended and Restated, effective as of April 12,
1996.
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
B. Reports on Form 8-K
None.
22
25
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: May , 1996 /s/ H. BRENT AUSTIN
--------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May , 1996 /s/ JEFFREY I. BEASON
--------------------------------
Jeffrey I. Beason
Vice President, Controller,
and Treasurer
23
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- -------------
3(ii) - By-Laws of EPG, as amended April 1, 1996.
10.D.1 - Letter Agreement and revised Exhibits A and B to the
Transportation Service Agreement, effective January 1, 1996.
10.V.1 - First Amendment to Amended and Restated Limited Liability
Company Agreement of Aguaytia Energy, LLC, dated January 19,
1996, and Second Amendment to Amended and Restated
Limited Liability Company Agreement of Aguaytia Energy, LLC,
dated March 12, 1996.
10.AA - Omnibus Compensation Plan for Management Employees, Amended
and Restated, effective as of April 12, 1996.
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule