<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 2, 1999
(Date of earliest event reported: March 13, 1999)
EL PASO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-14365 76-0568816
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 420-2131
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
El Paso Energy Corporation entered into the Second Amended and
Restated Agreement and Plan of Merger, dated as of March 13, 1999, (the "Merger
Agreement") with Sonat Inc. pursuant to which Sonat will merge into El Paso
Energy, and El Paso Energy will issue to Sonat stockholders one share of El Paso
Energy common stock for each share of Sonat common stock owned by them, and El
Paso Energy will amend its certificate of incorporation to authorize El Paso
Energy to issue up to 750 million shares of common stock and up to 50 million
shares of preferred stock. On June 10, 1999, both El Paso Energy and Sonat
stockholders approved the Merger Agreement. El Paso Energy and Sonat will
complete the merger only if a number of conditions are satisfied or waived
including:
o no law or court order prohibits the transaction;
o all waiting periods under federal antitrust laws applicable to the
merger expire or terminate;
o all other regulatory approvals are received without conditions that
would have a materially adverse effect on the financial condition,
results of operations, or cash flows of El Paso Energy's and Sonat's
combined businesses; and
o attorneys for El Paso Energy and Sonat issue opinions that the merger
is expected to be tax free.
However, there can be no assurance that El Paso Energy and Sonat will complete
the merger even if such conditions are satisfied.
Since El Paso Energy and Sonat stockholders both approved the Merger
Agreement, El Paso Energy and Sonat will complete the merger on an all common
stock basis and account for the merger using the pooling of interests method of
accounting in accordance with United States generally accepted accounting
principles. Accordingly, the unaudited pro forma condensed combined financial
statements provided under Item 7 reflect the all common stock merger using this
method of accounting.
This Current Report on Form 8-K is being filed to update the pro forma
condensed combined financial statements to include information in the El Paso
Energy Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999, and to include historical financial statements of Sonat for the quarterly
period ended March 31, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
2
<PAGE> 3
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,337 $ 7,104
Notes receivable from affiliates 49,980 50,359
Accounts receivable 317,555 388,075
Inventories 45,386 69,093
Income tax refund receivable 42,027 1,714
Gas imbalance receivables 10,534 7,673
Assets from trading activities 148,405 229,801
Other 20,054 46,690
---------- ----------
Total Current Assets 639,278 800,509
---------- ----------
Investments in Unconsolidated Affiliates and Other 686,648 671,263
---------- ----------
Plant, Property and Equipment 8,348,647 8,425,679
Less accumulated depreciation, depletion
and amortization 5,884,407 5,703,767
---------- ----------
2,464,240 2,721,912
---------- ----------
Deferred Charges and Other:
Assets from trading activities 17,495 25,694
Other 158,581 141,716
---------- ----------
176,076 167,410
---------- ----------
Total Assets $3,966,242 $4,361,094
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 104,835 $ 109,835
Unsecured notes 847,938 720,361
Accounts payable 320,082 401,357
Accrued income taxes 12,975 21,700
Accrued interest 49,047 47,864
Gas imbalance payables 11,023 11,497
Liabilities from trading activities 124,335 223,628
Other 39,627 40,357
---------- ----------
Total Current Liabilities 1,509,862 1,576,599
---------- ----------
Long-Term Debt 1,098,420 1,099,484
---------- ----------
Deferred Credits and Other:
Deferred income taxes 90,126 163,964
Liabilities from trading activities 7,660 12,564
Other 173,353 179,232
---------- ----------
271,139 355,760
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 179,157 180,192
Retained earnings 967,599 1,209,527
---------- ----------
1,146,756 1,389,719
Less treasury stock 59,935 60,468
---------- ----------
Total Stockholders' Equity 1,086,821 1,329,251
---------- ----------
Total Liabilities and Stockholders' Equity $3,966,242 $4,361,094
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
1999 1998*
----------- -----------
(In Thousands, Except
Per-Share Amounts)
<S> <C> <C>
Revenues $ 773,740 $ 1,109,143
----------- -----------
Costs and Expenses:
Natural gas cost 487,915 763,483
Electric power cost 76,002 65,191
Operating and maintenance 39,682 40,484
General and administrative 37,244 30,146
Depreciation, depletion and amortization 75,325 97,069
Ceiling test charges 351,500 39,692
Taxes, other than income 11,966 13,604
----------- -----------
1,079,634 1,049,669
----------- -----------
Operating Income (Loss) (305,894) 59,474
----------- -----------
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 7,719 9,653
Minority interest (1,344) (542)
Other income, net 2,156 713
----------- -----------
8,531 9,824
----------- -----------
Earnings (Loss) Before Interest and Taxes .. (297,363) 69,298
----------- -----------
Interest:
Interest income 1,939 2,200
Interest expense (35,307) (32,130)
Interest capitalized 3,420 1,424
----------- -----------
(29,948) (28,506)
----------- -----------
Income (Loss) Before Income Taxes (327,311) 40,792
Income Tax Expense (Benefit) (115,095) 12,842
----------- -----------
Net Income (Loss) $ (212,216) $ 27,950
=========== ===========
Earnings (Loss) Per Share of Common Stock .. $ (1.93) $ .25
=========== ===========
Earnings (Loss) Per Share of Common Stock-
Assuming Dilution $ (1.93) $ .25
=========== ===========
Weighted Average Shares Outstanding 110,046 109,966
=========== ===========
Weighted Average Shares Outstanding-
Assuming Dilution 110,046 111,134
=========== ===========
Cash Dividends Paid Per Share $ .27 $ .27
=========== ===========
</TABLE>
*Restated, see Note 1
See accompanying notes.
4
<PAGE> 5
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
1999 1998*
--------- ----------
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(212,216) $ 27,950
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization,
including ceiling test charges 426,825 136,761
Deferred income taxes (73,838) 78,003
Equity in earnings of unconsolidated
affiliates, less distributions (6,861) (7,406)
Reserves for regulatory matters 194 (4,046)
Gas supply realignment costs (1,832) 353
Change in:
Accounts receivable 70,487 127,656
Inventories 23,707 20,132
Accounts payable (81,281) (100,200)
Accrued interest and income taxes, net (47,856) (63,247)
Accrued long-term compensation -- (73,799)
Other current assets and liabilities 22,611 (26,314)
Net change from trading activities (14,603) (2,052)
Net change in restricted cash -- 115,956
Other, net (29,563) 8,918
--------- ---------
Net cash provided by operating activities 75,774 238,665
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (139,628) (299,971)
Disposal of assets (23,086) 1,109
Investments in unconsolidated affiliates and
other (6,822) (7,575)
--------- ---------
Net cash used in investing activities (169,536) (306,437)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt -- 400,000
Payments of long-term debt (6,064) (535,851)
Changes in short-term borrowings 127,577 216,997
--------- ---------
Net changes in debt 121,513 81,146
Dividends paid (29,712) (29,689)
Treasury stock purchases -- (100)
Other equity 194 2,530
--------- ---------
Net cash provided by financing activities 91,995 53,887
--------- ---------
Net Decrease in Cash and Cash Equivalents (1,767) (13,885)
Cash and Cash Equivalents at Beginning of Year 7,104 27,278
--------- ---------
Cash and Cash Equivalents at End of Period $ 5,337 $ 13,393
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 26,405 $ 25,187
Income taxes paid, net 7,106 2,129
</TABLE>
*Restated, see Note 1
See accompanying notes.
5
<PAGE> 6
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Sonat
Inc. (Sonat) and its subsidiaries (the Company) have been prepared in accordance
with the instructions to Form 10-Q and include the information and footnotes
required by such instructions. In the opinion of management, all adjustments
including those of a normal recurring nature have been made that are necessary
for a fair presentation of the results of operations for the interim periods
presented herein.
The 1998 period has been restated for a change to the full cost method
of accounting for the Company's oil and gas operations. Certain other amounts in
the 1998 condensed consolidated financial statements and notes have been
reclassified to conform with the 1999 presentation.
2. PROPOSED MERGER
On March 13, 1999, Sonat and El Paso Energy Corporation (El Paso)
entered into an Agreement and Plan of Merger, as amended (the Merger Agreement),
providing for, among other things, the merger of El Paso and the Company. Under
the terms of the Merger Agreement, the Company's stockholders will receive one
share of El Paso common stock (El Paso Common Stock), for each share of common
stock of the Company (Company Common Stock), they own. The merger is subject to
certain customary conditions, including, among others, approval by the
stockholders of the Company and receipt of certain required government
approvals. In the event El Paso stockholder approval for the issuance of El Paso
Common Stock in the merger is not obtained, El Paso has agreed to issue an
amount of El Paso Common Stock not to exceed, in the aggregate, 19.9 percent of
the outstanding El Paso Common Stock, with the balance of the merger
consideration to be paid in the form of depositary shares representing interests
in shares of a new series of non-convertible long-term preferred stock (the
Preferred Stock). The Preferred Stock will bear a dividend rate designed to
cause the Preferred Stock to have an initial trading value, when fully
distributed, equal to the greater of $32 or the value of the El Paso Common
Stock as of the time of the Company's shareholder vote, subject to a cap of
$44.50. The Preferred Stock will be redeemable in 21 years and will not be
convertible.
In connection with the Merger Agreement, on March 13, 1999, the Company
and El Paso also entered into cross option agreements, pursuant to which, among
other things, (i) El Paso has been granted an option to purchase up to 19.9
percent of the Company's Common Stock, exercisable if the Merger Agreement is
terminated under certain circumstances as set forth therein and (ii) the Company
has been granted an option to purchase up to 19.9 percent of the El Paso Common
Stock, exercisable if the Merger Agreement is terminated under certain
circumstances as set forth therein.
6
<PAGE> 7
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. TRADING ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE COMMODITY INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
The Company maintains active trading positions in energy commodity
futures, swap and option contracts. The Company manages its trading positions
with strict policies and procedures and limits its risk to changes in the value
of its outstanding positions through the use of policy limits on portfolio
Value-at-Risk, the establishment of offsetting positions, and other methods. The
trading operation also enters into natural gas and electricity commodity
purchase and sale commitments. These activities constitute its trading business
and are essential to provide customers with market products at competitive
prices.
At March 31, 1999, the Company's trading portfolio had outstanding
energy commodity futures, swaps and options. In the table below, buys of swaps
represent either 1) payment of fixed price and receipt of NYMEX or index; or 2)
payment of NYMEX or index and receipt of index. The absolute notional volumes
and terms are:
<TABLE>
<CAPTION>
Notional Volume
-------------------- Maximum
Commodity Buy Sell Term
- --------- --- ---- -------
<S> <C> <C> <C>
Natural Gas (TBtu) 1,180 1,236 60 months
Crude Oil (Thousands of Barrels) 5,640 2,310 60 months
Electricity (Thousands of MWh) 240 135 2 months
</TABLE>
The 60-month term deals begin in 2002 and end in 2006.
The amounts disclosed in the following table represent the
end-of-period fair value and the average fair value of the trading portfolio.
<TABLE>
<CAPTION>
Fair Value Average Fair Value
(Carrying Amount) for the Three Months
as of 3/31/99 Ended 3/31/99
----------------- --------------------
(In Thousands)
<S> <C> <C>
Assets $165,900 $229,525
Liabilities 131,995 198,452
</TABLE>
Net trading gains for the first quarter of 1999 are $14.8 million.
DERIVATIVE COMMODITY INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
In certain cases, derivative positions are taken specifically to
mitigate market price risk associated with significant physical transactions and
are accounted for using hedge accounting provided they meet hedge accounting
criteria. Sonat Exploration Company hedges a portion of its
7
<PAGE> 8
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. TRADING ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS (CONT'D)
production by entering into intercompany swaps with Sonat Marketing Company L.P.
(Sonat Marketing). The exposure that Sonat Marketing assumes from Sonat
Exploration is then hedged by entering into derivative instruments with third
parties. Sonat Marketing also hedges third-party purchases and sales by entering
into commodity futures, swaps and options.
At March 31, 1999, the Company had outstanding energy commodity
futures, swaps and options for purposes other than trading. In the table below,
buys of swaps represent either 1) payment of fixed price and receipt of NYMEX or
index; or 2) payment of NYMEX or index and receipt of index. The absolute
notional volumes and terms are:
<TABLE>
<CAPTION>
Notional Volume
-------------------- Maximum
Commodity Buy Sell Term
--- ---- -------
<S> <C> <C> <C>
Natural Gas (TBtu) 41 88 21 months
</TABLE>
The deals end in 2000.
The information in the following table represents the fair value, as of
March 31, 1999, of outstanding financial derivative positions held for purposes
other than trading. Not included are the related physical positions that these
derivative positions hedge.
<TABLE>
<CAPTION>
Fair Value
--------------
(In Thousands)
<S> <C>
Natural Gas:
Futures $ 183
Swaps (11,525)
</TABLE>
Deferred amounts on open futures positions will mature through 2000.
CREDIT RISK FROM DERIVATIVE ACTIVITIES
NYMEX traded futures are guaranteed by the NYMEX and have nominal
credit risk. On all other transactions described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. The Company
has established policies and procedures to evaluate potential counterparties for
creditworthiness before entering into over-the-counter swap and option
agreements. The credit risk resulting from in-the-money swaps is monitored on a
regular basis against established collateralization limits and credit limits
established by the Company. Due to changes in market conditions, the market
value of swaps and options and the associated credit exposure with the
counterparties can change significantly. At March 31, 1999, the market value of
the Company's in-the-money swaps and options was $19.3 million, and one
counterparty posted collateral in the amount of $.2 million. Reserves for credit
risk are established as necessary.
8
<PAGE> 9
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. UNCONSOLIDATED AFFILIATES
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Company's Share of Reported Earnings (Losses):
Exploration and Production $ 102 $ 144
------- -------
Natural Gas Transmission:
Citrus Corp. 6,261 4,511
Amortization of Citrus basis difference 346 346
Bear Creek Storage 2,763 2,089
Destin Pipeline (377) 2,060
Other 39 (24)
------- -------
9,032 8,982
------- -------
Energy Services (1,835) 225
------- -------
Other 420 302
------- -------
$ 7,719 $9,653
======= ======
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp. (Citrus), the parent company of Florida Gas Transmission Company. Southern
Natural Gas Company (Southern) owns a one-third interest in Destin Pipeline
Company, L.L.C. (Destin) and a subsidiary of Southern owns 50 percent of Bear
Creek Storage Company (Bear Creek).
The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Revenues $147,456 $133,581
Expenses:
Natural gas cost 69,624 58,614
Operating expenses 23,530 23,987
Depreciation and amortization 12,812 12,722
Interest and other 21,030 23,420
Income taxes 7,938 5,816
-------- --------
Income Reported $ 12,522 $ 9,022
======== ========
</TABLE>
9
<PAGE> 10
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. UNCONSOLIDATED AFFILIATES (CONT'D)
The following is summarized income statement information for Bear
Creek. No provision for income taxes has been included since its income taxes
are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Revenues $9,083 $9,029
Expenses:
Operating expenses 1,211 2,301
Depreciation 1,362 1,359
Other expenses, net 985 1,192
------ ------
Income Reported $5,525 $4,177
====== ======
</TABLE>
The following is summarized results of operations for Destin. No
provision for income taxes has been included since its income taxes are paid
directly by joint venture participants.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Revenues $ 3,833 $ 1,872
Expenses:
Operating expenses 1,625 --
Depreciation and amortization 1,586 --
Interest and other 1,755 (4,307)
------- -------
Income (Loss) Reported $(1,133) $ 6,179
======= =======
</TABLE>
5. DEBT AND LINES OF CREDIT
Long-Term Debt and Lines of Credit - At March 31, 1999, Sonat had a
bank revolving credit agreement that provided for periodic borrowings and
repayments of up to $500.0 million through June 30, 2001. Borrowings are
supported by unsecured promissory notes that, at the option of the Company, will
bear interest at the banks' prevailing prime or international lending rate, or
such rates as the banks may competitively bid. During the first quarter of 1999,
there were no borrowings or repayments under the revolving credit agreement,
resulting in no balance outstanding at March 31, 1999.
10
<PAGE> 11
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. DEBT AND LINES OF CREDIT (CONT'D)
Unsecured Notes - Loans under all short-term credit facilities are for
a duration of less than three months.
At March 31, 1999, Sonat had short-term lines of credit of $400.0
million available through January 18, 2000. Southern had short-term lines of
credit of $50.0 million available through May 31, 1999. Borrowings are available
for a period of not more than 364 days and are in the form of unsecured
promissory notes that bear interest at rates based on the banks' prevailing
prime, international or money-market lending rates. At March 31, 1999, Sonat had
$24.1 million outstanding under its agreement at a rate of 5.25 percent. No
amounts were outstanding under Southern's agreement.
In mid April 1999, Sonat completed a new 364-day $900.0 million
revolving credit facility with 13 banks. In connection with this new credit
facility, the Company terminated its $500.0 million revolving credit agreement
and its $400.0 million lines of credit.
Sonat had $588.9 million in commercial paper outstanding at an average
rate of 5.10 percent at March 31, 1999. In addition, Sonat had $235 million of
short-term notes borrowed from a bank at an average rate of 5.29 percent at
March 31, 1999.
6. RATE MATTERS AND CONTINGENCIES
Periodically, Southern makes general rate filings with the FERC to
provide for the recovery of cost of service and a return on equity. The FERC
normally allows the filed rates to become effective, subject to refund, until it
rules on the approved level of rates. Southern provides reserves relating to
such amounts collected subject to refund, as appropriate, and makes refunds upon
establishment of the final rates. At March 31, 1999, Southern's rates are
established by a settlement that was approved by FERC orders issued in 1995 and
1996. All of its customers are parties to the settlement, and all revenue is
based on the final settlement rates and therefore is not being collected subject
to refund.
11
<PAGE> 12
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), net of related tax, is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------------
1999 1998
(In Thousands)
<S> <C> <C>
Net Income (Loss) $(212,216) $27,950
Unrealized Gains (Loss) on Securities (64) 1,274
Reclassification Adjustment (1,162) (9)
--------- -------
Comprehensive Income (Loss) $(213,442) $29,215
========= =======
</TABLE>
Common Stock and Other Capital in the Condensed Consolidated Balance
Sheets includes $.4 million at March 31, 1999, and $1.6 million at December 31,
1998, related to other comprehensive income, which is comprised of unrealized
gains on securities.
12
<PAGE> 13
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. SEGMENT INFORMATION
The Company's consolidated financial statements reflect operations in
three segments: Exploration and Production, Natural Gas Transmission and Energy
Services. The Company's revenues and earnings before interest and taxes (EBIT)
by business segment are shown in the following tables.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
----------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Revenues from
External Customers $ 19,071 $94,023 $661,845 $(1,199) $773,740
Intersegment Revenues 72,620 6,680 - 14,554 93,854
Earnings (Loss) Before
Interest and Taxes (350,302) 56,182 (1,592) (1,651) (297,363)
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Revenues from
External Customers $79,798 $95,604 $937,055 $(3,314) $1,109,143
Intersegment Revenues 82,064 9,897 - 15,689 107,650
Earnings (Loss) Before
Interest and Taxes (2,445) 68,915 836 1,992 69,298
==================================================================================
</TABLE>
13
<PAGE> 14
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. SEGMENT INFORMATION (CONT'D)
The following table reconciles the total of the Company's reportable
segments' EBIT to the Company's consolidated income before income taxes.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
--------- --------
(In Thousands)
<S> <C> <C>
Total Earnings (Loss) Before Interest and
Taxes for Reportable Segments $(295,712) $ 67,306
Other Earnings (Loss) Before Interest and Taxes (1,651) 1,992
Interest Income 1,939 2,200
Interest Expense (35,307) (32,130)
Interest Capitalized 3,420 1,424
--------- --------
Income (Loss) Before Income Taxes $(327,311) $ 40,792
========= ========
</TABLE>
Assets for the Company's three segments are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
(In Thousands)
<S> <C> <C>
Assets by Segment
Exploration and Production $1,388,912 $1,635,597
Natural Gas Transmission 1,990,821 1,961,994
Energy Services 618,610 762,547
</TABLE>
14
<PAGE> 15
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. EARNINGS PER SHARE
The calculation of diluted earnings per share differs from that of
basic earnings per share due to the denominator for the diluted calculation
including common stock equivalents applicable to outstanding stock options.
The following table presents the computation of basic and diluted
earnings (loss) per share of common stock:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 1998
---------- --------
In Thousands, Except
Per-Share Amounts)
<S> <C> <C>
Numerator:
Net income (loss) $ (212,216) $ 27,950
========== ========
Denominator:
Denominator for Basic Earnings Per Share:
Weighted average number of shares of common
stock outstanding 110,046 109,966
Effect of Dilutive Securities:
Common stock equivalents applicable to
outstanding stock options (a) 1,168
Denominator for Diluted Earnings Per Share:
Adjusted weighted average shares using
treasury stock method for assumed conversions 110,046 111,134
========== ========
Earnings (Loss) Per Share of Common Stock $ (1.93) $ .25
========== ========
Earnings (Loss) Per Share of Common Stock-
Assuming Dilution $ (1.93) $ .25
========== ========
</TABLE>
(a) The addition of 229,000 potential common shares for the three-month
period of 1999 would be antidilutive in the computation of diluted
earnings per share, and are therefore not included.
15
<PAGE> 16
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. SUBSEQUENT EVENT
AGL Resources, Inc. (AGL) has exercised its right under the agreement
governing the Sonat Marketing joint venture to put its 35 percent interest to
Sonat. Under the terms of the agreement, the Company is required to repurchase
AGL's interest at the greater of fair market value or a formula price. The
Company has exercised its right under the agreement governing the Sonat Power
Marketing joint venture to purchase the remaining 35 percent interest in Sonat
Power Marketing held by a subsidiary of AGL. The purchase price will be at fair
market value. The Company's ability to exercise its right arose when AGL
notified Sonat that AGL was exercising its right to sell its 35 percent interest
in the Sonat Marketing joint venture to Sonat.
16
<PAGE> 17
(b) Pro forma financial information
FINANCIAL INFORMATION
On June 10, 1999, El Paso Energy stockholders and Sonat stockholders
approved the Merger Agreement. Presented below are unaudited pro forma condensed
combined financial statements reflecting the merger using the pooling of
interests method of accounting in accordance with United States generally
accepted accounting principles. Under this accounting method, El Paso Energy's
and Sonat's balance sheets and income statements are treated as if they had
always been combined for accounting and financial reporting purposes. This
information is included to give you a better understanding of what the combined
results of operations and financial position of El Paso Energy and Sonat may
have looked like had the merger occurred on an earlier date.
The pro forma information reflecting the merger assumes (1) each share of
Sonat common stock will be converted into one share of El Paso Energy common
stock and (2) El Paso Energy will issue a total of approximately 110 million
shares in the merger.
The unaudited pro forma condensed combined balance sheet as of March 31,
1999, assumes the merger had been completed on March 31, 1999. The unaudited pro
forma condensed combined income statements for the three months ended March 31,
1999, and three years ended December 31, 1998, assume the merger had been
completed on January 1, 1996, the beginning of the earliest period presented.
Accounting policy differences and intercompany balances between El Paso
Energy and Sonat have been determined to be immaterial and, accordingly, the
pro forma condensed combined financial statements have not been adjusted for
these differences. The unaudited pro forma condensed combined financial
statements are presented for illustrative purposes only and are not necessarily
indicative of the operating results or financial position that would have been
achieved had the merger of El Paso Energy and Sonat been consummated as of the
beginning of the periods presented, nor are they necessarily indicative of the
future operating results or financial position of El Paso Energy. The unaudited
pro forma condensed combined financial statements do not give effect to any
operating efficiencies or cost savings that may result from the integration of
El Paso Energy's and Sonat's operations.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements and related notes
of El Paso Energy and Sonat included in their respective Annual Reports on Form
10-K for the year ended December 31, 1998, and Quarterly Reports on Form 10-Q
for the three months ended March 31, 1999. The historical financial information
presented for Sonat includes certain reclassifications to conform to El Paso
Energy's presentation. These reclassifications have no impact on results of
operations or total stockholders' equity.
17
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets............................... $ 1,223 $ 639 $ -- $ 1,862
Property, plant and equipment, net................. 7,191 2,464 -- 9,655
Other.............................................. 2,052 863 -- 2,915
------- ------ ----- -------
Total assets............................. $10,466 $3,966 $ -- $14,432
======= ====== ===== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities.......................... $ 1,935 $1,510 $ 133(a) $ 3,527
(51)(c)
------- ------ ----- -------
Long-term debt, less current maturities............ 3,082 1,098 -- 4,180
------- ------ ----- -------
Deferred income taxes.............................. 1,589 90 (22)(c) 1,657
------- ------ ----- -------
Other.............................................. 1,008 170 -- 1,178
------- ------ ----- -------
Company-obligated mandatorily redeemable
convertible preferred securities of El Paso
Energy Capital Trust I........................... 325 -- -- 325
------- ------ ----- -------
Minority interest.................................. 365 11 -- 376
------- ------ ----- -------
Stockholders' equity
Common stock..................................... 377 111 219(b) 707
Additional paid-in capital....................... 1,465 75 (279)(b) 1,261
Retained earnings................................ 494 968 (192)(a) 1,343
73(c)
Other............................................ (174) (67) 60(b) (122)
59(a)
------- ------ ----- -------
Total stockholders' equity............... 2,162 1,087 (60) 3,189
------- ------ ----- -------
Total liabilities and stockholders'
equity................................. $10,466 $3,966 $ -- $14,432
======= ====== ===== =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Balance
Sheet.
18
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Reflects estimated costs of $192 million associated with the merger of El
Paso Energy and Sonat. These costs consist of (1) $142 million of costs for
compensation related programs under which certain benefits of El Paso
Energy and Sonat personnel accelerate and vest as a result of the change in
control associated with the merger and (2) $50 million of transaction
costs, which include legal, accounting, and financial advisory services.
(b) Reflects the exchange of one share of El Paso Energy common stock for each
share of outstanding Sonat common stock, as provided in the merger
agreement and the cancellation of $60 million of Sonat treasury stock.
(c) Reflects the income tax consequences of the $192 million of costs
associated with the merger assuming an effective income tax rate of 38%.
19
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $1,494 $ 774 $-- $2,268
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 1,068 564 -- 1,632
Operation and maintenance........................ 183 77 -- 260
Depreciation, depletion and amortization......... 71 75 -- 146
Ceiling test charges............................. -- 352 -- 352
Other............................................ 27 12 -- 39
------ ------ --- ------
1,349 1,080 -- 2,429
------ ------ --- ------
Operating income (loss)............................ 145 (306) -- (161)
Interest and debt expense.......................... 73 35 -- 108
Other income, net.................................. (45) (15) -- (60)
------ ------ --- ------
Income (loss) before income taxes, minority
interest, and cumulative effect of accounting
change........................................... 117 (326) -- (209)
Income tax expense (benefit)....................... 40 (115) -- (75)
Minority interest.................................. 6 1 -- 7
------ ------ --- ------
Income (loss) before cumulative effect of
accounting change................................ 71 (212) -- (141)
Cumulative effect of accounting change, net of
income tax....................................... (13) -- -- (13)
------ ------ --- ------
Net income (loss).................................. $ 58 $ (212) $-- $ (154)
====== ====== === ======
Basic earnings per common share
Income (loss) before cumulative effect of
accounting change.............................. $ 0.62 $(0.62)
Cumulative effect of accounting change, net of
income tax..................................... (0.12) (0.06)
------ ------
Net income (loss)................................ $ 0.50 $(0.68)
====== ======
Diluted earnings per common share
Income (loss) before cumulative effect of
accounting change.............................. $ 0.58 $(0.62)(a)
Cumulative effect of accounting change, net of
income tax..................................... (0.10) (0.06)(a)
------ ------
Net income (loss)................................ $ 0.48 $(0.68)(a)
====== ======
Basic average common shares outstanding............ 116 110(b) 226
====== === ======
Diluted average common shares outstanding.......... 128 111(b) 239
====== === ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statements
of Income.
20
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,782 $3,710 $-- $9,492
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 4,212 2,745 -- 6,957
Operation and maintenance........................ 707 281 -- 988
Depreciation, depletion and amortization......... 269 349 -- 618
Ceiling test charges............................. -- 1,035 -- 1,035
Other............................................ 88 63 -- 151
------ ------ --- ------
5,276 4,473 -- 9,749
------ ------ --- ------
Operating income (loss)............................ 506 (763) -- (257)
Interest and debt expense.......................... 267 137 -- 404
Other income, net.................................. (138) (67) -- (205)
------ ------ --- ------
Income (loss) before income taxes and minority
interest......................................... 377 (833) -- (456)
Income tax expense (benefit)....................... 127 (299) -- (172)
------ ------ --- ------
Income (loss) before minority interest............. 250 (534) -- (284)
Minority interest.................................. 25 (3) -- 22
------ ------ --- ------
Net income (loss).................................. $ 225 $ (531) $-- $ (306)
====== ====== === ======
Basic earnings (loss) per common share............ $ 1.94 $(1.35)
====== ======
Diluted earnings (loss) per common share.......... $ 1.85 $(1.35)(a)
====== ======
Basic average common shares outstanding............ 116 110(b) 226
====== === ======
Diluted average common shares outstanding.......... 126 111(b) 237
====== === ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statements
of Income.
21
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,638 $4,372 $-- $10,010
------ ------ --- -------
Operating expenses
Cost of gas and other products................... 4,125 3,174 -- 7,299
Operation and maintenance........................ 664 385 -- 1,049
Depreciation, depletion and amortization......... 236 398 -- 634
Other............................................ 92 43 -- 135
------ ------ --- -------
5,117 4,000 -- 9,117
------ ------ --- -------
Operating income................................... 521 372 -- 893
Interest and debt expense.......................... 238 110 -- 348
Other income, net.................................. (57) (66) -- (123)
------ ------ --- -------
Income before income taxes and minority interest... 340 328 -- 668
Income tax expense................................. 129 107 -- 236
------ ------ --- -------
Income before minority interest.................... 211 221 -- 432
Minority interest.................................. 25 3 -- 28
------ ------ --- -------
Net income......................................... $ 186 $ 218 $-- $ 404
====== ====== === =======
Basic earnings per common share.................... $ 1.64 $ 1.80
====== =======
Diluted earnings per common share.................. $ 1.59 $ 1.76
====== =======
Basic average common shares outstanding............ 114 110(b) 224
====== === =======
Diluted average common shares outstanding.......... 117 112(b) 229
====== === =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statements
of Income.
22
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $3,012 $3,204 $-- $6,216
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 2,277 2,039 -- 4,316
Operation and maintenance........................ 322 301 -- 623
Depreciation, depletion and amortization......... 101 384 -- 485
Employee separation and asset impairment
charge........................................ 99 -- -- 99
Other............................................ 43 48 -- 91
------ ------ --- ------
2,842 2,772 -- 5,614
------ ------ --- ------
Operating income................................... 170 432 -- 602
Interest and debt expense.......................... 110 101 -- 211
Other income, net.................................. (5) (53) -- (58)
------ ------ --- ------
Income before income taxes and minority interest... 65 384 -- 449
Income tax expense................................. 25 125 -- 150
------ ------ --- ------
Income before minority interest.................... 40 259 -- 299
Minority interest.................................. 2 3 -- 5
------ ------ --- ------
Net income......................................... $ 38 $ 256 $-- $ 294
====== ====== === ======
Basic earnings per common share.................... $ 0.53 $ 1.62
====== ======
Diluted earnings per common share.................. $ 0.52 $ 1.59
====== ======
Basic average common shares outstanding............ 72 110(b) 182
====== === ======
Diluted average common shares outstanding.......... 73 112(b) 185
====== === ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statements
of Income.
23
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(a) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per
common share. If we had included those securities, we would have shown less
of a loss per common share.
(b) The basic and diluted common shares adjustments reflect the exchange of one
share of El Paso Energy common stock for each share of Sonat common stock
contemplated by the merger agreement.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
EL PASO ENERGY CORPORATION
By: /s/ JEFFREY I. BEASON
----------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
Date: July 2, 1999
