<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: August 24, 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
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<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
June 30, 1999, and to include historical financial statements of Sonat for the
quarterly period ended June 30, 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>
June 30, December 31,
1999 1998
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,467 $ 7,104
Notes receivable from affiliates 46,732 50,359
Accounts receivable 356,039 388,075
Inventories 59,863 69,093
Income tax refund receivable 77,933 1,714
Gas imbalance receivables 8,050 7,673
Assets from trading activities 164,423 229,801
Other 15,324 46,690
---------- ----------
Total Current Assets 729,831 800,509
---------- ----------
Investments in Unconsolidated Affiliates and Other 690,390 671,263
---------- ----------
Plant, Property and Equipment 8,382,646 8,425,679
Less accumulated depreciation, depletion
and amortization 5,884,243 5,703,767
---------- ----------
2,498,403 2,721,912
---------- ----------
Deferred Charges and Other:
Assets from trading activities 58,472 25,694
Other 171,396 141,716
---------- ----------
229,868 167,410
---------- ----------
Total Assets $4,148,492 $4,361,094
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 104,839 $ 109,835
Unsecured notes 899,432 720,361
Accounts payable 320,143 401,357
Accrued income taxes 12,080 21,700
Accrued interest 51,348 47,864
Gas imbalance payables 11,046 11,497
Liabilities from trading activities 141,596 223,628
Other 49,705 40,357
---------- ----------
Total Current Liabilities 1,590,189 1,576,599
---------- ----------
Long-Term Debt 1,094,338 1,099,484
---------- ----------
Deferred Credits and Other:
Deferred income taxes 138,841 163,964
Liabilities from trading activities 46,502 12,564
Other 187,137 179,232
---------- ----------
372,480 355,760
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 179,048 180,192
Retained earnings 971,519 1,209,527
---------- ----------
1,150,567 1,389,719
Less treasury stock 59,082 60,468
---------- ----------
Total Stockholders' Equity 1,091,485 1,329,251
---------- ----------
Total Liabilities and Stockholders' Equity $4,148,492 $4,361,094
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998* 1999 1998*
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $849,421 $ 925,132 $1,623,161 $2,034,275
-------- ---------- ---------- ----------
Costs and Expenses:
Natural gas cost 518,760 551,734 1,006,675 1,315,217
Electric power cost 103,888 115,421 179,890 180,612
Operating and maintenance 34,932 39,246 74,614 79,730
General and administrative 41,528 28,506 78,772 58,652
Depreciation, depletion
and amortization 66,872 95,806 142,197 192,875
Ceiling test charges - 540,459 351,500 580,151
Restructuring costs - 15,017 - 15,017
Taxes, other than income 11,798 13,831 23,764 27,435
-------- ---------- ---------- ----------
777,778 1,400,020 1,857,412 2,449,689
-------- ---------- ---------- ----------
Operating Income (Loss) 71,643 (474,888) (234,251) (415,414)
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 7,809 17,527 15,528 27,180
Minority interest 244 (1,089) (1,100) (1,631)
Other income, net 1,944 1,251 4,100 1,964
-------- ---------- ---------- ----------
9,997 17,689 18,528 27,513
-------- ---------- ---------- ----------
Earnings (Loss) Before Interest
and Taxes 81,640 (457,199) (215,723) (387,901)
-------- ---------- ---------- ----------
Interest:
Interest income 1,652 1,063 3,591 3,263
Interest expense (35,846) (34,792) (71,153) (66,922)
Interest capitalized 3,825 1,448 7,245 2,872
-------- ---------- ---------- ----------
(30,369) (32,281) (60,317) (60,787)
-------- ---------- ---------- ----------
Income (Loss) Before Income Taxes 51,271 (489,480) (276,040) (448,688)
Income Tax Expense (Benefit) 17,631 (174,184) (97,464) (161,342)
-------- ---------- ---------- ----------
Net Income (Loss) $ 33,640 $ (315,296) $ (178,576) $ (287,346)
======== ========== ========== ==========
Earnings (Loss) Per Share of
Common Stock $ .31 $ (2.87) $ (1.62) $ (2.61)
======== ========== ========== ==========
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ .30 $ (2.87) $ (1.62) $ (2.61)
======== ========== ========== ==========
Weighted Average Shares Outstanding 110,062 110,049 110,054 110,008
======== ========== ========== ==========
Weighted Average Shares Outstanding-
Assuming Dilution 110,960 110,049 110,054 110,008
======== ========== ========== ==========
Cash Dividends Paid Per Share $ .27 $ .27 $ .54 $ .54
======== ========== ========== ==========
</TABLE>
*Restated, see Note 1
See accompanying notes.
4
<PAGE> 5
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998*
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $(178,576) $(287,346)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation, depletion and amortization,
including ceiling test charges 493,697 773,026
Deferred income taxes (25,123) (138,507)
Equity in earnings of unconsolidated
affiliates, less distributions (7,719) (20,663)
Change in:
Accounts receivable 32,036 188,074
Inventories 9,230 2,140
Accounts payable (81,214) (133,913)
Accrued interest and income taxes, net (82,355) (26,027)
Accrued long-term compensation - (73,799)
Other current assets and liabilities 39,886 (29,283)
Net change from trading activities (15,494) (3,458)
Net change in restricted cash - 115,956
Other, net (15,739) 12,435
--------- ---------
Net cash provided by operating activities 168,629 378,635
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (293,435) (493,033)
Net proceeds from disposal of assets 19,323 14,479
Investments in unconsolidated affiliates and other (9,984) (88,518)
--------- ---------
Net cash used in investing activities (284,096) (567,072)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt - 400,000
Payments of long-term debt (10,360) (540,834)
Changes in short-term borrowings 179,071 370,188
--------- ---------
Net changes in debt 168,711 229,354
Dividends paid (59,429) (59,408)
Treasury stock purchases - (1,289)
Other equity 548 3,641
--------- ---------
Net cash provided by financing activities 109,830 172,298
--------- ---------
Net Decrease in Cash and Cash Equivalents (5,637) (16,139)
Cash and Cash Equivalents at Beginning of Period 7,104 27,278
--------- ---------
Cash and Cash Equivalents at End of Period $ 1,467 $ 11,139
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 57,598 $ 58,270
Income taxes paid, net 11,616 7,395
</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 periods have 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, which has
been approved by the Company's and El Paso's stockholders, is subject to certain
customary conditions, including, among others, receipt of certain required
government approvals.
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.
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<PAGE> 7
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 June 30, 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 a fixed price and receipt of a variable NYMEX or
index price; or 2) payment of a variable NYMEX or index price and receipt of a
variable index price. The absolute notional volumes and terms are:
Notional Volume Maximum
Commodity Buy Sell Term
- ---------- --- ---- -------
Natural Gas (Thousands of Btu) 1,245 1,436 60 months
Crude Oil (Thousands of Barrels) 5,640 4,086 60 months
Electricity (Thousands of MWh) 10 10 2 months
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.
Fair Value Average Fair Value
(Carrying Amount) for the Three Months
as of 6/30/99 Ended 6/30/99
(In Thousands)
Assets $222,895 $231,729
Liabilities 188,098 197,903
Net trading gains for the three-month and six-month periods ending June
30, 1999 are $10.2 million and $24.8 million, respectively.
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 (Sonat Exploration) hedges a portion of its
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.
7
<PAGE> 8
3. Trading Activities and Derivative Financial Instruments (Cont'd)
At June 30, 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 a fixed price and receipt of a variable
NYMEX or index price; or 2) payment of a variable NYMEX or index price and
receipt of a variable index price. The absolute notional volumes and terms are:
Notional Volume Maximum
Commodity Buy Sell Term
- ---------- --- ---- -------
Natural Gas (Thousands of Btu) 47 255 18 months
Crude Oil (Thousands of Barrels) - 3,698 18 months
The deals end in 2000.
The information in the following table represents the fair value, as of
June 30, 1999, of outstanding financial derivative positions held for purposes
other than trading. Not included are the related physical positions that these
derivative positions hedge.
Fair Value
(In Thousands)
Natural Gas:
Futures $ 1,601
Swaps (28,983)
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 June 30, 1999, the market value of
the Company's in-the-money swaps and options was $19.4 million, and one
counterparty posted collateral in the amount of $2.5 million. Reserves for
credit risk are established as necessary.
8
<PAGE> 9
4. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Company's Share of Reported Earnings (Losses):
Exploration and Production $ 125 $ 177 $ 226 $ 321
------ ------- ------- -------
Natural Gas Transmission:
Citrus Corp. 5,357 10,482 11,619 14,993
Amortization of Citrus basis
difference 346 346 692 692
Bear Creek Storage 2,802 2,446 5,565 4,535
Destin Pipeline (344) 3,074 (721) 5,134
Other (33) 91 6 67
------ ------- ------- -------
8,128 16,439 17,161 25,421
------ ------- ------- -------
Energy Services (910) 556 (2,745) 781
------ ------- ------- -------
Other 466 355 886 657
------ ------- ------- -------
$7,809 $17,527 $15,528 $27,180
====== ======= ======= =======
</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).
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<PAGE> 10
4. Unconsolidated Affiliates (Cont'd)
The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $184,291 $161,981 $331,747 $295,562
Expenses:
Natural gas cost 104,644 70,989 174,268 129,603
Operating expenses 26,802 20,900 50,332 44,887
Depreciation and amortization 13,218 13,009 26,030 25,731
Interest and other 22,088 23,070 43,118 46,490
Income taxes 6,824 13,049 14,762 18,865
-------- -------- -------- --------
Income Reported $ 10,715 $ 20,964 $ 23,237 $ 29,986
======== ======== ======== ========
</TABLE>
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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,940 $8,821 $18,023 $17,850
Expenses:
Operating expenses 1,050 1,452 2,261 3,753
Depreciation 1,362 1,360 2,724 2,719
Other expenses, net 923 1,116 1,908 2,308
------ ------ ------- -------
Income Reported $5,605 $4,893 $11,130 $ 9,070
====== ====== ======= =======
</TABLE>
10
<PAGE> 11
4. Unconsolidated Affiliates (Cont'd)
The following are 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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $ 6,093 $ 2,921 $ 9,926 $ 4,793
Expenses:
Operating expenses 1,754 - 3,379 -
Depreciation 3,229 - 4,815 -
Interest and other 2,141 (6,301) 3,896 (10,608)
------- ------- ------- --------
Income (Loss) Reported $(1,031) $ 9,222 $(2,164) $ 15,401
======= ======= ======= ========
</TABLE>
5. Debt and Lines of Credit
Unsecured Notes - Loans under all short-term credit facilities are for a
duration of less than three months.
At June 30, 1999, Sonat had short-term lines of credit of $900.0 million
available through April 13, 2000. Southern had short-term lines of credit of
$42.0 million available through May 29, 2000. 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 June 30, 1999, Sonat had $11.9
million outstanding under its agreement at a rate of 5.75 percent. No amounts
were outstanding under Southern's agreement.
Sonat had $587.5 million in commercial paper outstanding at an average
rate of 5.23 percent at June 30, 1999. In addition, Sonat had $300 million of
short-term notes borrowed from a bank at an average rate of 5.39 percent at June
30, 1999.
Long-Term Debt - In July, Sonat issued $600 million of its 7 5/8 percent
Notes due July 15, 2011, at 98.949 percent to yield 7.761 percent. The net
proceeds from the offering were used to repay short-term indebtedness.
11
<PAGE> 12
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 June 30, 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.
7. Comprehensive Income
Comprehensive income (loss), net of related tax, is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $33,640 $(315,296) $(178,576) $(287,346)
Unrealized Gains (Loss)
on Securities (180) (411) (244) 863
Reclassification Adjustment 4 (27) (1,158) (37)
------- --------- --------- ---------
Comprehensive Income (Loss) $33,464 $(315,734) $(179,978) $(286,520)
======= ========= ========= =========
</TABLE>
Common Stock and Other Capital in the Condensed Consolidated Balance
Sheets includes $.2 million at June 30, 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
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 June 30, 1999
--------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- -------- --------
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $34,061 $87,934 $729,133 $(1,707) $849,421
Intersegment Revenues 84,135 7,253 150 15,501 107,039
Earnings (Loss) Before
Interest and Taxes 40,260 48,742 (1,898) (5,464) 81,640
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- -------- --------
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 42,138 $86,534 $800,164 $(3,704) $ 925,132
Intersegment Revenues 106,041 8,966 - 13,663 128,670
Earnings (Loss) Before
Interest and Taxes (523,358) 63,147 1,644 1,368 (457,199)
</TABLE>
13
<PAGE> 14
8. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
--------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- -------- --------
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 53,132 $181,957 $1,390,978 $(2,906) $1,623,161
Intersegment Revenues 156,755 13,933 150 30,055 200,893
Earnings (Loss) Before
Interest and Taxes (310,042) 104,924 (3,490) (7,115) (215,723)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
--------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
------------ ------------ -------- -------- --------
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 121,936 $182,138 $1,737,219 $(7,018) $2,034,275
Intersegment Revenues 188,105 18,863 - 29,352 236,320
Earnings (Loss) Before
Interest and Taxes (525,803) 132,062 2,480 3,360 (387,901)
</TABLE>
14
<PAGE> 15
8. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
Total Earnings (Loss) Before
Interest and Taxes for
<S> <C> <C> <C> <C>
Reportable Segments $ 87,104 $(458,567) $(208,608) $(391,261)
Other Earnings (Loss) Before
Interest and Taxes (5,464) 1,368 (7,115) 3,360
Interest Income 1,652 1,063 3,591 3,263
Interest Expense (35,846) (34,792) (71,153) (66,922)
Interest Capitalized 3,825 1,448 7,245 2,872
-------- --------- --------- ---------
Income (Loss) Before Income
Taxes $ 51,271 $(489,480) $(276,040) $(448,688)
======== ========= ========= =========
</TABLE>
Assets for the Company's three segments are as follows:
June 30,
1999
(In Thousands)
Assets by Segment
Exploration and Production $1,367,429
Natural Gas Transmission 2,018,529
Energy Services 755,490
15
<PAGE> 16
9. Earnings Per Share
The calculation of earnings per share assuming dilution differs from
that of earnings per share due to the denominator for the assuming dilution
calculation including common stock equivalents applicable to outstanding stock
options.
The following table presents the computation of earnings (loss) per
share of common stock and earnings (loss) per share-assuming dilution:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands, Except
Per-Share Amounts)
Numerator:
<S> <C> <C> <C> <C>
Net income (Loss) $ 33,640 $(315,296) $(178,576) $(287,346)
======== ========= ========= =========
Denominator:
Denominator for Earnings Per Share:
Weighted average number of
shares of common stock
outstanding 110,062 110,049 110,054 110,008
Effect of Dilutive Securities:
Common stock equivalents
applicable to outstanding
stock options 898 - - -
-------- --------- --------- ---------
Denominator for Earnings Per
Share-Assuming Dilution:
Adjusted weighted average
shares using treasury
stock method for assumed
conversions 110,960 110,049 110,054 110,008
======== ========= ========= =========
Earnings (Loss) Per Share of
Common Stock $ .31 $ (2.87) $ (1.62) $ (2.61)
======== ========= ========= =========
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ .30 $ (2.87) $ (1.62) $ (2.61)
======== ========= ========= =========
</TABLE>
16
<PAGE> 17
10. Subsequent Event
The Company has agreed with AGL Resources, Inc. (AGL) to purchase the 35
percent interest held by AGL in each of Sonat Marketing and Sonat Power
Marketing. The purchase price for both interests will be $65 million in total.
Completion of both transactions is subject to, among other things, termination
of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976. Additionally, completion of the purchase of AGL's interest in Sonat
Power Marketing is subject to approval of the FERC under Section 203 of the
Federal Power Act. The Company expects to close the purchase of AGL's interest
in Sonat Marketing sometime during the third quarter of 1999, while the purchase
of AGL's interest in Sonat Power Marketing is expected to close by the end of
1999.
17
<PAGE> 18
(b) Pro forma 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
June 30, 1999, assumes the merger had been completed on June 30, 1999. The
unaudited pro forma condensed combined income statements for the six months
ended June 30, 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 six months ended June 30, 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.
18
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1999
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets............................... $ 1,629 $ 730 $ -- $ 2,359
Property, plant and equipment, net................. 7,194 2,498 -- 9,692
Other.............................................. 2,212 920 -- 3,132
------- ------ ----- -------
Total assets............................. $11,035 $4,148 $ -- $15,183
======= ====== ===== =======
</TABLE>
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Total current liabilities.......................... $ 1,505 $1,590 $ 57(a) $ 3,130
(22)(c)
------- ------ ----- -------
Long-term debt, less current maturities............ 3,526 1,094 -- 4,620
------- ------ ----- -------
Deferred income taxes.............................. 1,596 139 -- 1,735
------- ------ ----- -------
Other.............................................. 1,154 225 -- 1,379
------- ------ ----- -------
Company-obligated mandatorily redeemable
convertible preferred securities of El Paso
Energy Capital Trust I........................... 325 -- -- 325
------- ------ ----- -------
Minority interest.................................. 865 9 -- 874
------- ------ ----- -------
Stockholders' equity
Common stock..................................... 380 111 219(b) 710
Additional paid-in capital....................... 1,501 75 (278)(b) 1,298
Retained earnings................................ 474 972 (57)(a) 1,411
22(c)
Other............................................ (291) (67) 59(b) (299)
------- ------ ----- -------
Total stockholders' equity............... 2,064 1,091 (35) 3,120
------- ------ ----- -------
Total liabilities and stockholders'
equity................................. $11,035 $4,148 $ -- $15,183
======= ====== ===== =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Balance
Sheet.
19
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Estimated costs associated with the merger of El Paso Energy and Sonat are
$192 million. 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.
During the second quarter, $135 million in merger-related costs were
incurred. Therefore as of June 30, 1999, estimated costs totaling $57
million remain.
(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 $59 million of Sonat treasury stock.
(c) Reflects the income tax consequences of the remaining $57 million of costs
associated with the merger assuming an effective income tax rate of 38%.
20
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 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................................. $3,262 $1,623 $-- $4,885
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 2,414 1,187 -- 3,601
Operation and maintenance........................ 346 144 -- 490
Depreciation, depletion and amortization......... 144 142 -- 286
Ceiling test charges............................. -- 352 -- 352
Merger-related costs............................. 126 9 -- 135
Other............................................ 51 23 -- 74
------ ------ --- ------
3,081 1,857 -- 4,938
------ ------ --- ------
Operating income (loss)............................ 181 (234) -- (53)
Interest and debt expense.......................... 155 71 -- 226
Other income, net.................................. (107) (30) -- (137)
------ ------ --- ------
Income (loss) before income taxes, minority
interest, and cumulative effect of accounting
change........................................... 133 (275) -- (142)
Income tax expense (benefit)....................... 45 (97) -- (52)
Minority interest.................................. 12 1 -- 13
------ ------ --- ------
Income (loss) before cumulative effect of
accounting change................................ 76 (179) -- (103)
Cumulative effect of accounting change, net of
income tax....................................... (13) -- -- (13)
------ ------ --- ------
Net income (loss).................................. $ 63 $ (179) $-- $ (116)
====== ====== === ======
Basic earnings per common share
Income (loss) before cumulative effect of
accounting change.............................. $ 0.65 $(0.45)
Cumulative effect of accounting change, net of
income tax..................................... (0.11) (0.06)
------ ------
Net income (loss)................................ $ 0.54 $(0.51)
====== ======
Diluted earnings per common share
Income (loss) before cumulative effect of
accounting change.............................. $ 0.64 $(0.45)(a)
Cumulative effect of accounting change, net of
income tax..................................... (0.11) (0.06)(a)
------ ------
Net income (loss)................................ $ 0.53 $(0.51)(a)
====== ======
Basic average common shares outstanding............ 116 110(b) 226
====== === ======
Diluted average common shares outstanding.......... 119 110(b) 229
====== === ======
</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, 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.
22
<PAGE> 23
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.
23
<PAGE> 24
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.
24
<PAGE> 25
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.
25
<PAGE> 26
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: August 24, 1999
