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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 JUNE 30, 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 July 31, 1996 36,046,018 shares
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2
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, now doing business as
El Paso Energy Corporation, and its subsidiaries
Cornerstone .............. Cornerstone Natural Gas, Inc., a wholly owned
subsidiary of El Paso Field Services Company
Court of Appeals ......... United States Court of Appeals for the District of
Columbia Circuit
Edison ................... Southern California Edison Company
EPA ...................... United States Environmental Protection Agency
EPED SAM ................. EPED SAM Holdings Company, an indirect wholly owned
subsidiary of El Paso Energy International
EPEI...................... El Paso Energy International Company, a wholly
owned subsidiary of El Paso Natural Gas Company
EPEM ..................... El Paso Energy Marketing Company (formerly Eastex
Energy Inc.), a wholly owned subsidiary of El Paso
Natural Gas Company
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, an indirect wholly owned
subsidiary of El Paso Natural Gas 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
Program .................. Continuous Odd-Lot Stock Sales Program
PRP(s) ................... Potentially Responsible Party(ies)
RI/FS .................... Remedial Investigation/Feasibility Study
Sam II ................... Compania Samalayuca II
SEC ...................... Securities and Exchange Commission
SFAS ..................... Statement of Financial Accounting Standards
Tenneco .................. Tenneco Inc.
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)
SECOND QUARTER SIX MONTHS
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Operating revenues .................................... $ 587,284 $ 185,150 $ 1,192,919 $ 389,281
----------- ----------- ----------- -----------
Operating charges
Natural gas and liquids .......................... 419,997 30,629 854,194 73,854
Operation and maintenance ........................ 73,695 74,320 147,023 151,686
Employee separation and asset impairment charge .. -- -- 99,053 --
Depreciation, depletion, and amortization ........ 20,967 17,444 42,582 34,249
Taxes, other than income taxes ................... 11,002 9,900 21,393 20,422
----------- ----------- ----------- -----------
525,661 132,293 1,164,245 280,211
----------- ----------- ----------- -----------
Operating income ...................................... 61,623 52,857 28,674 109,070
----------- ----------- ----------- -----------
Other (income) and income deductions
Interest and debt expense ........................ 25,249 21,098 47,955 42,164
Other - net ...................................... (3,733) (1,430) (1,509) (2,808)
----------- ----------- ----------- -----------
21,516 19,668 46,446 39,356
----------- ----------- ----------- -----------
Income (loss) before income taxes ..................... 40,107 33,189 (17,772) 69,714
Income taxes (benefit) ................................ 15,682 12,989 (6,949) 27,544
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ 24,425 $ 20,200 $ (10,823) $ 42,170
=========== =========== =========== ===========
Earnings (loss) per common share ...................... $ 0.69 $ 0.58 $ (0.31) $ 1.21
=========== =========== =========== ===========
Average common shares outstanding ..................... 35,476 34,798 35,264 34,976
=========== =========== =========== ===========
Dividends declared per common share ................... $ 0.3475 $ 0.3300 $ 0.6950 $ 0.6600
=========== =========== =========== ===========
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
JUNE 30,
1996 DECEMBER 31,
(UNAUDITED) 1995
------------ ------------
Current assets
Cash and temporary investments ..................................... $ 50,144 $ 39,373
Accounts and notes receivable, net ................................. 366,823 214,796
Inventories ........................................................ 35,298 37,108
Take-or-pay buy-outs, buy-downs, and prepayments, net .............. 891 10,477
Deferred income tax benefit ........................................ 20,526 22,631
Other .............................................................. 21,298 44,207
------------ ------------
Total current assets ..................................... 494,980 368,592
------------ ------------
Property, plant, and equipment, net ................................... 1,989,134 1,977,624
Intangible assets, net ................................................ 109,300 47,878
Investments in and advances to affiliates ............................. 48,384 --
Other ................................................................. 122,164 140,462
------------ ------------
2,268,982 2,165,964
------------ ------------
Total assets .............................................. $ 2,763,962 $ 2,534,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 426,100 $ 275,674
Short-term borrowings .............................................. 312,600 278,200
Accrual for regulatory issues ...................................... 70,785 --
Current maturities on long-term debt ............................... 108,396 7,590
Other .............................................................. 102,458 81,178
------------ ------------
Total current liabilities .................................. 1,020,339 642,642
------------ ------------
Long-term debt, less current maturities ............................... 669,540 771,892
Deferred income taxes, less current portion ........................... 264,034 314,143
Deferred credits ...................................................... 26,039 39,514
Other ................................................................. 56,092 54,279
------------ ------------
1,015,705 1,179,828
------------ ------------
Minority interest ..................................................... 39,765 --
Commitments and contingent liabilities (See Note 4)
Stockholders' equity
Common stock, par value $3 per share; authorized 100,000 shares;
issued 37,368 and 37,351 shares .................................. 112,106 112,054
Additional paid-in capital ......................................... 461,592 454,713
Retained earnings .................................................. 203,693 240,101
Less: Deferred employee compensation .............................. 35,684 69
Treasury stock (at cost) 1,751 and 3,127 shares ............. 53,554 94,713
------------ ------------
Total stockholders' equity ................................. 688,153 712,086
------------ ------------
Total liabilities and stockholders' equity ................. $ 2,763,962 $ 2,534,556
============ ============
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)
SIX MONTHS
------------------------
1996 1995
---------- ----------
Cash flows from operating activities
Net income (loss) ................................................. $ (10,823) $ 42,170
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Depreciation, depletion, and amortization ....................... 42,582 34,249
Deferred income taxes (benefit) ................................. (24,435) 17,689
Net take-or-pay recoveries ...................................... 9,586 20,360
Net employee separation and asset impairment charge
($99,053 less cash payments of $20,280) .................... 78,773 --
Net (gain) loss on disposition of property ...................... (1,676) 23
Other working capital changes
Accounts and notes receivable ................................. (130,991) 37,911
Inventories ................................................... 2,236 (109)
Other current assets .......................................... 17,621 (5,009)
Accrual for regulatory issues ................................. 65,185 --
Accounts payable .............................................. 75,215 (69,124)
Other current liabilities ..................................... 20,629 (5,211)
Other ........................................................... (3,584) 8,367
---------- ----------
Net cash provided by operating activities ................... 140,318 81,316
---------- ----------
Cash flows from investing activities
Capital expenditures .............................................. (45,541) (51,738)
Net proceeds from disposal of property ............................ 4,281 2,184
Investments in and advances to affiliates ......................... (48,384) --
Net cash flow impact of Cornerstone acquisition ................... (98,961) --
Other ............................................................. 14,023 (3,693)
---------- ----------
Net cash used in investing activities ....................... (174,582) (53,247)
---------- ----------
Cash flows from financing activities
Net commercial paper borrowings (repayments) ...................... (65,600) 37,400
Revolving credit borrowings ....................................... 263,000 --
Revolving credit repayments ....................................... (163,000) --
Long-term debt retirements ........................................ (16,008) (3,667)
Repayment of volumetric take-or-pay receivable .................... -- (19,700)
Acquisition of treasury stock ..................................... -- (37,313)
Dividends paid .................................................... (23,550) (22,424)
Contribution from minority interest ............................... 39,765 --
Other ............................................................. 10,428 3,835
---------- ----------
Net cash provided by (used in) financing activities ......... 45,035 (41,869)
---------- ----------
Increase (decrease) in cash and temporary investments ................ 10,771 (13,800)
Cash and temporary investments
Beginning of period ......................................... 39,373 27,636
---------- ----------
End of period ............................................... $ 50,144 $ 13,836
========== ==========
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. In addition, investments in affiliates over which the Company has
influence but not a controlling interest are accounted for under the equity
method. The condensed consolidated financial statements at June 30, 1996, and
for the six months and quarters ended June 30, 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 material effect on reported net income or stockholders' equity.
2. ACQUISITIONS
In June 1996, the Company and Tenneco entered into a definitive merger
agreement which provides for the acquisition of Tenneco Energy by the Company.
Tenneco Energy consists of all of the pipeline and energy assets of Tenneco.
Tenneco Energy is engaged in the interstate and intrastate transportation and
marketing of natural gas, as well as the development of, and participation in,
international pipeline, power, and energy related projects. Pursuant to the
agreement, the Company will assume $2.4 billion of Tenneco debt, issue equity
securities valued at $750 million to Tenneco's existing common and preferred
shareholders, assume $250 million of new Tenneco preferred stock to be issued
prior to closing, and assume approximately $600 million of other liabilities.
The merger is conditioned upon several events including the receipt of
favorable tax rulings, completion of a debt realignment plan by Tenneco,
certain government approvals, and approval by Tenneco shareholders. It is
expected that these conditions will be satisfied by the end of 1996. The merger
agreement has been approved by the Company's and Tenneco's boards of directors.
The acquisition will be accounted for as a purchase with a total purchase price
of approximately $4 billion.
Effective June 1996, the Company acquired Cornerstone. The purchase price
of approximately $94 million, exclusive of acquisition costs, was financed
through internally generated funds and short-term borrowings. Acquisition costs
of approximately $5 million have been capitalized. The cost of the acquisition
has been allocated on the basis of the estimated fair value of the assets
acquired and the liabilities assumed, resulting in goodwill of approximately
$59 million which will be amortized over 40 years using the straight-line
method. The acquisition has been accounted for as a purchase utilizing the
"push down" method of accounting. Cornerstone's operating results for June 1996
are included in the Company's consolidated results of operations.
Effective September 1995, the Company acquired Eastex Energy Inc., and in
December 1995, the Company acquired all of the issued and outstanding capital
stock of Premier Gas Company. Effective July 1996, the name Eastex Energy Inc.
was changed to, and its subsidiaries were merged into, EPEM. The operating
results of EPEM for the quarter and six months ended June 30, 1996, are included
in the Company's consolidated results of operations.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. 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 business
activities into three business segments: (i) natural gas transmission, (ii)
field and merchant services, and (iii) corporate and other. For a further
discussion of the business segments, see Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Operating
Environment. Also during the first quarter of 1996, the Company adopted a
program to reduce operating costs through work force reductions and improved
work processes and 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. As of June 30, 1996, payments of approximately $20 million had been
recorded as a reduction of the provision for employee separation. The Company
anticipates that the remaining provision for employee separation will be
expended by the end of 1996.
In accordance with SFAS No. 121, the Company determined the fair value of
certain assets based on discounted future cash flows. The resultant non-cash
charge for asset impairments 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.
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. 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
filing 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 recovery of 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
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
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.
Beginning in April 1992, FERC issued Orders No. 636 and 636-A, commonly
known as the restructuring rules. These rules mandated significant changes to
the structure of the services provided by interstate natural gas pipelines and
were intended principally to assure "comparability" between pipeline and
non-pipeline gas merchants, to provide a mechanism for the allocation of
pipeline capacity, and to eliminate competitive distortions arising from rate
design differences between U. S. and Canadian pipelines. In July 1996, the
Court of Appeals issued its opinion on petitions for review of FERC's Order No.
636. The opinion upheld the "broad contours" and most "specifics" of Order No.
636, remanding only certain aspects to FERC for further explanation. Management
does not expect the opinion to have a significant impact on the Company's
financial condition or results of operations.
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 which was held
in May 1996 to investigate the issues. A FERC decision is expected in late 1996
or early 1997.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In compliance with FERC's restructuring rules, MPC filed a service and
rate design restructuring plan in November 1992 which was approved by FERC in
July 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. 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. Although the Court of Appeals
opinion on Order No. 636, as discussed above, generally upheld FERC's
requirement that pipelines use straight fixed variable rates, the petitioners
in the appeal of MPC's Order No. 636 restructuring proceeding, which is still
pending, have argued that straight fixed variable rates are inappropriate in
light of MPC's underlying certificate and contractual provisions relating to
transportation rates.
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 the subject of a
hearing before FERC in April 1996. A ruling by the assigned ALJ is expected in
late 1996.
The Company is accruing a provision for revenues collected subject to
refund, and the balance of this provision at June 30, 1996, was approximately
$71 million. Management believes the amount being reserved will be sufficient
to cover any anticipated refunds.
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 June 30, 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 June 30, 1996, 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 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 to obtain
permits for air emissions 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 on the Company.
7
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EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Guarantees
EPNC entered into an operating lease agreement for a NGL extraction plant
being constructed in the San Juan Basin. 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. EPG has unconditionally guaranteed
all obligations of EPNC under the lease.
EPG has also unconditionally guaranteed all obligations of EPED SAM, which
are not expected to exceed $51 million, in connection with its share of the
financing for the Samalayuca II Power Plant project. For a further discussion,
see Note 11. In addition, EPG has unconditionally guaranteed the obligations of
certain subsidiaries, which are not expected to exceed $16 million, in
connection with the TransColorado Pipeline Phase I project and the Coyote Gulch
Treating and Compression Facility project. For a further discussion of these
two projects, see Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Project Investments.
Legal Proceedings
In November 1993, TransAmerican filed a complaint in a Texas state court,
TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et. al.,
alleging fraud, tortious interference with contractual relationships, economic
duress, civil conspiracy, and violation of state antitrust laws arising from a
settlement agreement entered into by EPG, TransAmerican, and others in 1990 to
settle litigation then pending and other potential claims. The complaint, as
amended, seeks unspecified actual and exemplary damages. EPG is defending the
matter in the State District Court of Dallas County, Texas. In April 1996, a
former employee of TransAmerican filed a related case in Harris County, Texas,
Vickroy E. Stone v. Godwin & Carlton, P.C., et al. (including EPG), seeking
indemnification and other damages in unspecified amounts relating to litigation
consulting work allegedly performed for various entities, including EPG, in
cases involving TransAmerican. Based on information available at this time,
management believes that the claims asserted against it in both cases have no
factual or legal basis and that the ultimate resolution of these matters will
not have a materially adverse effect on the Company's financial 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 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.
5. FINANCING TRANSACTIONS
In January 1996, the Board authorized an increase in the Company's
short-term borrowing limits from $400 million to $500 million. In May 1996, EPG
established with a group of banks a revolving credit facility of $400 million
that expires May 2001 and a 364 day renewable $100 million revolving credit
facility with an initial expiration of May 1997. These facilities replaced EPG's
previous revolving credit facility of $400 million and were established
primarily to provide a liquidity facility for the Company's commercial paper
program. Revolving credit facility borrowings as of June 30, 1996, and December
31, 1995, were approximately $175 million and $75 million, respectively. As of
June 30, 1996, and December 31, 1995, approximately $138 million and $203
million, respectively, of commercial paper was outstanding. In addition, as of
June 30, 1996, and December 31, 1995, there were no borrowings outstanding under
EPG's $30 million line of credit facility established in October 1994.
In June 1996, EPG retired Cornerstone long-term debt in the amount of $16
million. In January 1997, EPG's 6.90 percent notes for $100 million will
mature.
8
11
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 June 30, 1996, EPG had not issued any securities
pursuant to the shelf registration statement.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 1996, and December 31, 1995,
consisted of the following:
1996 1995
---------- ----------
(IN THOUSANDS)
Property, plant, and equipment, at cost .......... $3,123,464 $3,042,516
Less accumulated depreciation and depletion ...... 1,225,218 1,158,486
---------- ----------
1,898,246 1,884,030
Additional acquisition cost assigned to utility
plant, net of accumulated amortization ......... 90,888 93,594
---------- ----------
Total property, plant, and equipment, net ...... $1,989,134 $1,977,624
========== ==========
7. INTANGIBLE ASSETS
Intangible assets at June 30, 1996, and December 31, 1995, consisted of
the following:
1996 1995
-------- --------
(IN THOUSANDS)
Goodwill ......................................... $104,633 $ 42,261
Other intangibles ................................ 15,004 14,890
-------- --------
119,637 57,151
Less accumulated amortization .................... 10,337 9,273
-------- --------
Total intangible assets, net ................... $109,300 $ 47,878
======== ========
8. INVENTORIES
Inventories at June 30, 1996, and December 31, 1995, consisted of the
following:
1996 1995
-------- --------
(IN THOUSANDS)
Materials and supplies ........................... $ 29,921 $ 30,354
Gas in storage ................................... 5,377 6,754
-------- --------
$ 35,298 $ 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.
9
12
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. DEFERRED EMPLOYEE COMPENSATION
The Company maintains restricted stock plans whereby awards, expressed as
shares of common stock of the Company, are issued to certain key salaried
employees. Employees earn a given percent of these shares as the Company meets
specific performance targets over a specific time period and vest in the earned
shares if certain service requirements are met. The Company has reserved
approximately 7 million shares of common stock in connection with the
restricted stock plans, and a total of 1.2 million shares have been issued as of
June 30, 1996. These shares carry voting and dividend rights; however, sale or
transfer of the shares is restricted in accordance with the vesting procedures.
Shares issued under the plans are recorded at their fair market value with a
corresponding charge to stockholders' equity as of June 30, 1996, and December
31, 1995.
The total award is amortized as compensation expense on a straight-line
basis based on the number of shares earned under the vesting provisions.
Compensation expense totaled $0.9 million and $1.8 million for the quarter and
six months ended June 30, 1996, respectively, and $0.1 million and $0.2 million
for the quarter and six months ended June 30, 1995, respectively.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
SIX MONTHS
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
Net cash payments
Interest ....................................... $ 36,426 $ 39,420
Income taxes ................................... 10,132 9,314
10
13
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. INVESTMENTS
EPED SAM formed a limited liability company with members of the consortium
building the Samalayuca II Power Plant, in which the Company has an economic
interest of approximately 30 percent. The limited liability company obtained a
$66 million loan, of which aproximately $40 million was used to purchase 99
percent of the Class B, non-voting, units of certain indirect subsidiaries of
the Company. The $40 million is reflected as a minority interest in the
indirect subsidiaries.
In May 1996, these indirect subsidiaries advanced $27 million to an
affiliated partnership and acquired an interest in Sam II for approximately $13
million. These amounts are reflected in Investments in and Advances to
Affiliates. These funds are being used to finance initial construction of the
power plant. Construction of the plant began in June 1996 and is expected to
take 35 months. The plant cost is estimated to be $660 million. The consortium
has received non-recourse senior debt construction financing of up to 80 percent
of the capital requirements from a syndicate of commercial banks, the
Inter-American Development Bank and the United States Export-Import Bank.
Construction phase loans are convertible to term loans which are repayable over
ten years beginning with the commencement of lease payments from CFE. After its
completion, the plant will be operated by CFE under a 20-year lease. Ownership
will be transferred to CFE after termination of the 20-year lease.
The Company is a member of the consortium building the $250 million
Aguaytia Energy Project, in which it has an economic interest of approximately
25 percent. The Company's total equity investment is estimated to be $40
million. In May 1996, the Company made an initial equity investment of
approximately $8 million. The remainder of its equity investment will be funded
during the construction period, which is approximately two years. The consortium
will sell electricity, propane, and natural gas to meet the growing demand for
energy in Peru. The project will be funded 60 percent with equity. The
consortium has received non-recourse debt financing for the project which is
repayable over 10 years following the completion of construction. In December
1995, the project received approval from the Overseas Private Investment
Corporation for political risk insurance coverage, to the extent available. The
project reached financial close in July 1996. Construction is expected to begin
in the second half of 1996, and operations are expected to commence in 1998.
12. RECENT PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 covers transactions that include:
securitizations, sales of partial interests in financial assets, repurchase
agreements, securities lending, pledges of collateral, loan syndications and
participations, sales of receivables with recourse, servicing of mortgages and
other loans, and in-substance defeasances. SFAS No. 125 uses a "financial
components" approach for financial asset transfers. Under that approach, after
financial assets are transferred, an entity would recognize on the balance
sheet all assets it controls and liabilities it has incurred. It would remove
from the balance sheet those assets it no longer controls and liabilities it
has satisfied. SFAS No. 125 becomes effective at the beginning of 1997. The
Company is evaluating the implications of SFAS No. 125.
11
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,
marketing, and trading of natural gas, NGL, and power, 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 10,000 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 7,200 miles
of gathering lines and 64,000 horsepower of compression in its gathering
operations located in the San Juan, Anadarko, and Permian Basins. Effective
June 1996, the Company acquired Cornerstone. Cornerstone's assets consist 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. For
a further discussion of the acquisition, see Part I, Financial Information,
Note 2. EPEM purchases, markets, and trades natural gas, NGL, power, and other
energy commodities and provides risk management activities associated with
those commodities. EPEM transports gas supplies for customers on 45 pipelines
serving 37 states in the U. S. and Canada and markets over 3,700 Mdth/d. EPGM
conducts all of EPG's gas marketing business.
Corporate and Other
Corporate and other includes EPEI and other corporate activities. The
Company conducts its international activities through EPEI.
12
15
RESULTS OF OPERATIONS
Operating Income (Loss) by Business Segment (1)
SECOND QUARTER SIX MONTHS
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Natural gas transmission ...... $ 49,639 $ 50,265 $ 97,149 $ 104,939
Field and merchant services ... 13,721 2,926 31,664 4,964
Corporate and other ........... (1,737) (334) (100,139) (833)
---------- ---------- ---------- ----------
Consolidated ................ $ 61,623 $ 52,857 $ 28,674 $ 109,070
========== ========== ========== ==========
(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.
Natural Gas Transmission Financial Results
SECOND QUARTER SIX MONTHS
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Reservation revenue ........... $113,097 $125,789 $231,455 $251,332
Transportation revenue ........ 6,159 3,100 11,245 7,230
Other revenue ................. 6,486 7,147 11,618 18,008
-------- -------- -------- --------
Total operating revenues .... 125,742 136,036 254,318 276,570
-------- -------- -------- --------
Operation and maintenance ..... 51,686 59,532 106,298 121,347
Depreciation and amortization . 14,794 12,968 29,550 25,355
Other operating expenses ...... 9,623 13,271 21,321 24,929
-------- -------- -------- --------
Total operating expenses .... 76,103 85,771 157,169 171,631
-------- -------- -------- --------
Operating income .............. $ 49,639 $ 50,265 $ 97,149 $104,939
======== ======== ======== ========
Second Quarter 1996 Compared to Second Quarter 1995
Operating revenues for the quarter ended June 30, 1996, were $10 million
lower than for the same period of 1995. The decrease was primarily due to an
accrual for revenues being collected that are subject to refund and the impact
of a January 1996 transportation contract reduction. This decrease in operating
revenues was partially offset by new system rates that became effective January
1, 1996.
Operating expenses for the quarter ended June 30, 1996, were $10 million
lower than for the same period of 1995 primarily due to lower operation and
maintenance expense resulting from lower headcount. This decrease was partially
offset by higher depreciation, depletion, and amortization expense.
Mainline throughput for the quarter ended June 30, 1996, averaged 3,876
Mdth/d compared to 3,853 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 increased availability of hydroelectric power
from the Pacific Northwest.
13
16
Six Months Ended 1996 Compared to Six Months Ended 1995
Operating revenues for the six months ended June 30, 1996, were $22
million lower than for the same period of 1995. The decrease was primarily due
to an accrual for revenues being collected that are subject to refund, 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 six months ended June 30, 1996, were $14
million lower than for the same period of 1995. The decrease was primarily due
to lower operation and maintenance expense resulting from lower headcount and
an adjustment to the take-or-pay undercollections accrual. These decreases were
partially offset by higher depreciation, depletion, and amortization expense.
Mainline throughput for the six months ended June 30, 1996, averaged 3,853
Mdth/d compared to 3,834 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 increased availability of hydroelectric power
from the Pacific Northwest and milder winter temperatures.
Field and Merchant Services Financial Results
SECOND QUARTER SIX MONTHS
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Gathering and treating revenue .............. $ 16,250 $ 13,252 $ 33,940 $ 28,921
Products extraction revenue ................. 3,391 2,217 8,157 4,340
Merchant services revenue ................... 428,161 28,027 879,621 66,914
Other revenue ............................... 14,081 6,237 17,369 13,632
-------- -------- -------- --------
Total operating revenues .................. 461,883 49,733 939,087 113,807
-------- -------- -------- --------
Operation and maintenance ................... 20,275 14,764 39,646 30,172
Gas purchases ............................... 409,160 26,200 832,422 66,581
Depreciation, depletion, and amortization ... 6,173 4,488 13,032 8,894
Other operating expenses .................... 12,554 1,355 22,323 3,196
-------- -------- -------- --------
Total operating expenses .................. 448,162 46,807 907,423 108,843
-------- -------- -------- --------
Operating income ............................ $ 13,721 $ 2,926 $ 31,664 $ 4,964
======== ======== ======== ========
Second Quarter 1996 Compared to Second Quarter 1995
Operating revenues for the quarter ended June 30, 1996, were $412 million
higher than for the same period of 1995. The increase was due primarily to the
acquisition of EPEM and Cornerstone, an increase in liquid revenues due to the
new cryogenic extraction plant becoming operational, and an increase in natural
gas gathered volumes. 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 June 30, 1996, were $401 million
higher than for the same period of 1995. The increase was due to the
acquisition of EPEM and Cornerstone.
Natural gas marketed for the quarter ended June 30, 1996, averaged 3,725
Mdth/d compared to 234 Mdth/d for the same period of 1995. This increase was
primarily due to the acquisition of EPEM and Cornerstone. Natural gas gathered
for the quarter ended June 30, 1996, averaged 1,545 Mdth/d compared to 1,283
Mdth/d for the same period of 1995. This increase was largely due to the
acquisition of gathering and processing facilities, pressure reduction
projects, and the removal of mainline capacity constraints. NGL marketed for
the quarter ended June 30, 1996, increased to 50 million gallons primarily due
to the new cryogenic extraction plant becoming operational.
14
17
Six Months Ended 1996 Compared to Six Months Ended 1995
Operating revenues for the six months ended June 30, 1996, were $825
million higher than for the same period of 1995. The increase was due to the
acquisition of EPEM and Cornerstone, an increase in liquid revenues due to the
new cryogenic extraction plant becoming operational, and an increase in natural
gas gathered volumes. 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 six months ended June 30, 1996, were $799
million higher than for the same period of 1995. The increase was due to the
acquisition of EPEM and Cornerstone.
Natural gas marketed for the six months ended June 30, 1996, averaged
3,712 Mdth/d compared to 267 Mdth/d for the same period of 1995. This increase
was primarily due to the acquisition of EPEM and Cornerstone. Natural gas
gathered for the six months ended June 30, 1996, averaged 1,537 Mdth/d compared
to 1,303 Mdth/d for the same period of 1995. This increase was largely due to
the acquisition of gathering and processing facilities, pressure reduction
projects, and the removal of mainline capacity constraints. NGL marketed for
the six months ended June 30, 1996, increased to 50 million gallons primarily
due to the new cryogenic extraction plant becoming operational.
Corporate and Other Financial Results
The operating loss for the six months ended June 30, 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 3.
Non-Operating Income and Expense
Second Quarter 1996 Compared to Second Quarter 1995
Interest and debt expense for the quarter ended June 30, 1996, was $4
million higher than for the same period of 1995 due primarily to interest
accruals for a provision for revenues collected subject to refund.
Other-net for the quarter ended June 30, 1996, was $2 million higher than
for the same period of 1995 due primarily to a 1996 gain recorded on the
disposition of property.
Six Months Ended 1996 Compared to Six Months Ended 1995
Interest and debt expense for the six months ended June 30, 1996, was $6
million higher than for the same period of 1995 due primarily to higher
interest on short-term debt and interest accruals for a provision for revenues
collected subject to refund.
Other-net for the six months ended June 30, 1996, was $1 million lower
than for the same period of 1995 due primarily to a charge for losses on
donations which is partially offset by a gain on the disposition of property.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
Net cash provided by operating activities was $140 million for the six
months ended June 30, 1996, compared with $81 million for the same period of
1995. The increase from the previous year was primarily due to the collection
of revenues subject to refund and the Amoco Production Company litigation
payment made in the first quarter of 1995. These increases were partially
offset by higher severance payments, lower take-or-pay collections, and timing
differences in other working capital accounts.
15
18
Acquisitions
In June 1996, the Company and Tenneco entered into a definitive merger
agreement which provides for the acquisition of Tenneco Energy by the Company.
Effective June 1996, the Company acquired Cornerstone. For a further
discussion of the Tenneco Energy and Cornerstone acquisitions, see Part I,
Financial Information, Note 2.
Effective September 1995, the Company acquired Eastex Energy Inc., and
in December 1995, the Company acquired all of the issued and outstanding
capital stock of Premier Gas Company. Effective July 1996, the name Eastex
Energy Inc. was changed to, and its subsidiaries were merged into, EPEM. The
operating results of EPEM for the quarter and six months ended June 30, 1996,
are included in the Company's consolidated results of operations.
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 business
activities into three business segments 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 3.
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
filing 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 4.
In July 1996, the Court of Appeals issued its opinion on petitions for
review of FERC's Order No. 636. For a further discussion of the July 1996
opinion, see Part I, Financial Information, Note 4.
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. For a further
discussion of EPG's take-or-pay matters, see Part I, Financial Information,
Note 4.
MPC filed a service and rate design restructuring plan in November 1992
which was approved by FERC in July 1993. 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. For a further discussion of MPC's rates and
regulatory matters, see Part I, Financial Information, Note 4.
Legal Proceedings
See Part I, Financial Information, Note 4.
16
19
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 June 30, 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 June 30, 1996, 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 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 to obtain
permits for air emissions 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 on
the Company.
Financing Facilities
In January 1996, the Board authorized an increase in the Company's
short-term borrowing limits from $400 million to $500 million. In May 1996, EPG
established with a group of banks a revolving credit facility of $400 million
that expires May 2001 and a 364 day renewable $100 million revolving credit
facility with an initial expiration of May 1997. These facilities replaced EPG's
previous revolving credit facility of $400 million and were established
primarily to provide a liquidity facility for the Company's commercial paper
program. Revolving credit facility borrowings as of June 30, 1996, and December
31, 1995, were approximately $175 million and $75 million, respectively. As of
June 30, 1996, and December 31, 1995, approximately $138 million and $203
million, respectively, of commercial paper was outstanding. In addition, as of
June 30, 1996, and December 31, 1995, there were no borrowings outstanding under
EPG's $30 million line of credit facility established in October 1994.
In June 1996, EPG retired Cornerstone long-term debt in the amount of $16
million. 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 June 30, 1996, EPG had not issued any securities
pursuant to the shelf registration statement.
17
20
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)
January 19,1996 $0.3475 April 1, 1996 $12,258
April 12, 1996 $0.3475 July 1, 1996 $12,278
On July 12, 1996, the Board declared a quarterly dividend of $0.3475 per
share on EPG's common stock, payable on October 7, 1996, to shareholders of
record on September 13, 1996.
The Company maintains restricted stock plans whereby awards, expressed as
shares of common stock of the Company, are issued to certain key salaried
employees. For additional information, see Part I, Financial Information, Note
9.
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 June 30, 1996.
Project Investments
International Projects
The Company is a member of a consortium that is building the $660 million
Samalayuca II Power Plant near Ciudad Juarez, Chihuahua, Mexico For additional
information, see Part I, Financial Information, Note 4 and 11. In addition, the
Company is 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. For additional information see Part I, Financial
Information, Note 11.
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. TransColorado, which received FERC authorization in November 1994, is
a 311 mile pipeline project that is expected to provide an alternative outlet
for natural gas produced in the northern San Juan Basin and the Rocky Mountain
region. 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 April 1996, TransColorado filed with FERC for an application for an
amendment to the existing FERC authorization in order 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. TransColorado
anticipates FERC approval of the amended authorization by the fourth quarter of
1996. The Phase I facilities are expected to be in service during the fourth
quarter of 1996. The plant cost is estimated to be $15 million, of which the
Company's share is estimated to be approximately $8 million since Questar
Pipeline Company has elected not to participate in the Phase I facilities at
this time. Phase II will consist of the remainder of the project up to
northwest Colorado.
18
21
Coyote Gulch Treating and Compression Facility
The Company and KN Gas Gathering, Inc. have entered into an agreement to
construct, own, and operate Coyote Gulch Treating and Compression Facility, a
110 Mdth/d facility in La Plata County, Colorado. Construction of the facility
began in May 1996 and is expected to be completed by December 31, 1996. The
plant cost is estimated to be $16 million, of which the Company's share is
estimated to be approximately $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 $125
million are primarily for maintenance of business, system expansion, and system
enhancement. Capital expenditures, exclusive of acquisitions, for the six
months ended June 30, 1996, were $45 million compared to $52 million for the
same period of 1995. Data for the six months ended June 30, 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 six months ended June 30, 1996, were
$11 million, compared to $34 million for the same period of 1995. Capital
expenditures were lower during the first six months of 1996 primarily due to
lower maintenance capital requirements in 1996 and a system expansion in the
San Juan Basin completed in 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.
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. FERC has 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. EPG is also preparing to file an
application with the new regulatory agency in Mexico, the Comision Reguladora
de Energia, to build a lateral pipeline which would connect EPG's facilities to
the Samalayuca II Power Plant.
Field and Merchant Services
The segment's planned capital expenditures for 1996 of $65 million
(excluding the Cornerstone acquisition) are primarily for system enhancement,
facility purchases, joint ventures, and maintenance of business. Capital
expenditures for the six months ended June 30, 1996, were $34 million compared
to $17 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.
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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. In addition, in the first quarter of 1996,
EPFS installed new compression 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
Recent Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. For a further discussion of
SFAS No. 125, see Part I, Financial Information, Note 12.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company 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.
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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, Canada, 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.
7--Factors affecting the availability or cost of capital such as changes
in interest rates, market perceptions of the natural gas industry,
the Company, or security ratings.
8--Authoritative generally accepted accounting principle or policy
changes from such standard setting bodies as the Financial Accounting
Standards Board and the SEC.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its annual meeting of stockholders on April 30, 1996.
Proposals presented for a stockholders vote included the election of seven
directors and the ratification of the appointment of the Company's independent
certified public accountants for the fiscal year 1996.
Each of the seven incumbent directors nominated by the Company were
elected with the following voting results:
FOR WITHHELD
----------- ----------
Byron Allumbaugh 31,073,598 281,890
Eugenio Garza Laguera 28,087,460 3,268,028
James F. Gibbons 31,071,721 283,767
Ben F. Love 31,048,841 306,647
Kenneth L. Smalley 31,060,376 295,112
Malcolm Wallop 30,924,481 431,007
William A. Wise 31,046,187 309,301
The appointment of Coopers & Lybrand L.L.P. as the Company's independent
certified public accountants for the fiscal year 1996 was ratified with the
following voting results:
FOR AGAINST ABSTAIN
---------- ------- -------
Ratification of the appointment
Coopers & Lybrand L.L.P. 31,078,950 102,107 174,521
There were no broker non-votes for the election of directors or for the
ratification of Coopers & Lybrand.
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.
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ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.H - $400,000,000 and $100,000,000 Revolving Credit and Competitive
Advance Facility agreements, each dated as of May 31, 1996,
between EPG, Chemical Bank and certain other banks.
10.V.1- Third Amendment to Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC, dated May 10, 1996.
10.AB - Reimbursement and Loan Agreement dated as of April 30, 1996,
between Sam II Equity Funding, LLC and NationsBank of Texas, N.A.
Relating to the Samalayuca Project; EPG Guaranty dated as of
April 30, 1996.
10.AC - El Paso Energy Corporation Strategic Stock Plan, effective as of
June 19, 1996.
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
On May 2, 1996, the Company filed a report under Item 5 on Form 8-K, dated
May 2, 1996, with respect to the definitive merger agreement with Cornerstone.
On June 28, 1996, the Company filed a report under Item 5 on Form 8-K,
dated June 28, 1996, with respect to the definitive merger agreement with
Tenneco.
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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: August 14, 1996 /s/ H. BRENT AUSTIN
-----------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: August 14, 1996 /s/ JEFFREY I. BEASON
-----------------------------------
Jeffrey I. Beason
Vice President, Controller, and
Treasurer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.H - $400,000,000 and $100,000,000 Revolving Credit and Competitive
Advance Facility agreements, each dated as of May 31, 1996,
between EPG, Chemical Bank and certain other banks.
10.V.1- Third Amendment to Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC, dated May 10, 1996.
10.AB - Reimbursement and Loan Agreement dated as of April 30, 1996,
between Sam II Equity Funding, LLC and NationsBank of Texas, N.A.
Relating to the Samalayuca Project; EPG Guaranty dated as of
April 30, 1996.
10.AC - El Paso Energy Corporation Strategic Stock Plan, effective as of
June 19, 1996.
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule