<PAGE> 1
================================================================================
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: May 19, 2000
(Date of earliest event reported: January 17, 2000)
EL PASO ENERGY CORPORATION
(Exact name of registrant as specified in the charter)
DELAWARE 1-14365 76-0568816
(State or other jurisdiction (Commission File Number) (I.R.S. 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
In January 2000, we entered into a definitive agreement to merge with
The Coastal Corporation. In the merger, we will convert each share of Coastal
common stock and Class A common stock on a tax-free basis into 1.23 shares of
our common stock. We will exchange Coastal's outstanding convertible preferred
stock for our common stock on the same basis as if we had converted the
preferred stock into Coastal common stock immediately prior to the merger. The
total value of the transaction is approximately $16 billion, including $6
billion of assumed debt and preferred equity. We will account for the
transaction as a pooling of interests, and expect it to close in the fourth
quarter of 2000. On May 5, 2000, Coastal stockholders approved and adopted the
merger agreement and our stockholders approved the issuance of shares of common
stock in connection with the merger. The merger will be completed only if a
number of conditions are met or waived, including:
o no law or court order prohibits the transaction;
o all relevant waiting periods under federal antitrust laws
applicable to the merger expire or terminate;
o all other regulatory approvals, including the approval of the
Federal Energy Regulatory Commission (FERC), are received
without conditions that would have a material adverse effect
on the financial condition, results of operations, or cash
flow of the post-merger combined business;
o the independent public accountants of both companies concur
that the merger will qualify for pooling of interests
accounting treatment; and
o attorneys for both companies issue opinions that the merger
is expected to be tax-free.
However, we cannot assure you that we will complete the merger even if
all those conditions are satisfied or waived.
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,
2000, and to include Coastal's historical financial statements for the
quarterly period ended March 31, 2000.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
1
<PAGE> 3
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................ $ 58.6 $ 44.4
Receivables, less allowance for doubtful accounts of $17.3 million
(2000) and $17.4 million (1999) ............................... 1,594.6 1,932.5
Inventories ...................................................... 809.7 732.7
Prepaid expenses and other ....................................... 222.2 213.9
------------ ------------
Total Current Assets .......................................... 2,685.1 2,923.5
------------ ------------
Property, Plant and Equipment - at cost:
Natural gas systems .............................................. 6,362.8 6,328.7
Refining, crude oil and chemical facilities ...................... 2,582.0 2,555.0
Gas and oil properties - at full-cost ............................ 4,250.0 3,832.0
Other ............................................................ 606.8 581.5
------------ ------------
13,801.6 13,297.2
Accumulated depreciation, depletion and amortization ............. 4,067.0 3,959.8
------------ ------------
9,734.6 9,337.4
------------ ------------
Other Assets:
Goodwill ......................................................... 447.0 451.8
Investments - equity method ...................................... 1,491.7 1,434.9
Other ............................................................ 1,007.2 975.4
------------ ------------
2,945.9 2,862.1
------------ ------------
$ 15,365.6 $ 15,123.0
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable ........................................ $ 117.7 $ 105.9
Accounts payable ..................................... 2,059.1 2,350.1
Accrued expenses ..................................... 470.6 420.0
Current maturities on long-term debt ................. 132.0 161.6
------------ ------------
Total Current Liabilities ......................... 2,779.4 3,037.6
------------ ------------
Debt:
Long-term debt, excluding current maturities ......... 5,129.4 4,798.2
------------ ------------
Deferred Credits and Other:
Deferred income taxes ................................ 1,829.1 1,814.2
Other deferred credits ............................... 778.2 785.2
------------ ------------
2,607.3 2,599.4
------------ ------------
Securities of Subsidiaries:
Company-obligated mandatory redemption
preferred securities of a consolidated trust ...... 300.0 300.0
Preferred stock issued by subsidiaries ............... 165.0 165.0
Consolidated joint venture ........................... 285.9 285.9
------------ ------------
750.9 750.9
------------ ------------
Common Stock and Other Stockholders' Equity:
Cumulative preferred stock (with aggregate liquidation
preference of $7.3 million) ....................... -- --
Class A common stock ................................. .1 .1
Common stock ......................................... 72.6 72.5
Additional paid-in capital ........................... 1,033.1 1,031.7
Retained earnings .................................... 3,125.3 2,965.1
------------ ------------
4,231.1 4,069.4
Less common stock in treasury - at cost .............. 132.5 132.5
------------ ------------
4,098.6 3,936.9
------------ ------------
$ 15,365.6 $ 15,123.0
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Millions of Dollars, Except Per Share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Operating Revenues ................................. $ 2,927.6 $ 1,709.6
------------ ------------
Operating Costs and Expenses:
Purchases ....................................... 2,004.1 945.9
Operating and general expenses .................. 474.0 411.4
Depreciation, depletion and amortization ........ 142.5 108.6
------------ ------------
2,620.6 1,465.9
------------ ------------
Other Income - net ................................. 31.6 25.3
------------ ------------
Earnings Before Interest and Income Taxes .......... 338.6 269.0
------------ ------------
Interest and debt expense, less $12.6 million (2000)
and $7.4 million (1999) capitalized ............. 90.2 77.0
Taxes on income .................................... 74.8 57.5
------------ ------------
Net Earnings ....................................... 173.6 134.5
Dividends on Preferred Stock ....................... .1 .1
------------ ------------
Net Earnings Available
to Common Stockholders .......................... $ 173.5 $ 134.4
============ ============
Basic Earnings Per Share ........................... $ .81 $ .63
============ ============
Diluted Earnings Per Share ......................... $ .80 $ .62
============ ============
Cash Dividends Per Common Share .................... $ .0625 $ .0625
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 6
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousand of Shares and Millions of Dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Preferred stock, par value
33 1/3(cents) per share, authorized 50,000,000 shares:
Cumulative convertible preferred:
$1.19, Series A, redemption or liquidation
amount of $33 per share:
Beginning balance ............................ 53 $ -- 56 $ --
Converted to common .......................... -- -- (2) --
-------- -------- -------- --------
Ending balance ............................... 53 -- 54 --
======== -------- ======== --------
$1.83, Series B, redemption or liquidation
amount of $50 per share:
Beginning balance ............................ 58 -- 61 --
Converted to common .......................... (1) -- -- --
-------- -------- -------- --------
Ending balance ............................... 57 -- 61 --
======== -------- ======== --------
$5.00, Series C, redemption or liquidation
amount of $100 per share:
Beginning balance ............................ 27 -- 28 --
Converted to common .......................... -- -- -- --
-------- -------- -------- --------
Ending balance ............................... 27 -- 28 --
======== -------- ======== --------
Class A common stock, par value 33 1/3(cents) per share,
authorized 2,700,000 shares:
Beginning balance ................................. 345 .1 354 .1
Converted to common ............................... (2) -- (3) --
-------- -------- -------- --------
Ending balance .................................... 343 .1 351 .1
======== -------- ======== --------
Common stock, par value 33 1/3(cents) per share, authorized
500,000,000 shares:
Beginning balance ................................. 217,705 72.5 216,765 72.2
Conversion of preferred stock ..................... 9 -- 26 --
Conversion of Class A common stock ................ 2 -- 3 --
Exercise of stock options ......................... 124 .1 175 .1
-------- -------- -------- --------
Ending balance .................................... 217,840 $ 72.6 216,969 $ 72.3
======== -------- ======== --------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 7
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Shares and Millions of Dollars)
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Additional paid-in capital:
Beginning balance .................. $1,031.7 $1,016.2
Exercise of stock options .......... 1.4 2.6
-------- --------
Ending balance ..................... 1,033.1 1,018.8
-------- --------
Retained earnings:
Beginning balance .................. 2,965.1 2,519.8
Net earnings for period ............ 173.6 134.5
Dividends on preferred stock........ (.1) (.1)
Dividends on common stock .......... (13.3) (13.3)
-------- --------
Ending balance ..................... 3,125.3 2,640.9
-------- --------
Less treasury stock - at cost ......... 4,398 132.5 4,396 132.5
======== -------- ======== --------
Total ................................. $4,098.6 $3,599.6
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 8
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Net Cash Flow From Operating Activities:
Net earnings ............................................................ $ 173.6 $ 134.5
Add (subtract) items not requiring (providing) cash:
Depreciation, depletion and amortization ............................. 143.0 109.6
Deferred income taxes ................................................ 42.2 47.7
Undistributed earnings from equity investments ....................... (17.2) (4.0)
Working capital and other changes, excluding changes relating to cash and
nonoperating activities:
Accounts receivable ............................................... 344.5 61.6
Inventories ....................................................... (63.1) (93.9)
Prepaid expenses and other ........................................ (27.4) (17.3)
Accounts payable .................................................. (321.4) (106.0)
Accrued expenses .................................................. 48.8 21.1
Other ............................................................. (49.1) (29.1)
-------- --------
273.9 124.2
-------- --------
Cash Flow From Investing Activities:
Purchases of property, plant and equipment .............................. (545.0) (304.6)
Proceeds from sale of property, plant and equipment ..................... 1.2 .9
Additions to investments ................................................ (103.1) (107.3)
Proceeds from investments ............................................... 99.7 12.4
Net from discontinued operations ........................................ .9 (29.3)
-------- --------
(546.3) (427.9)
-------- --------
Cash Flow From Financing Activities:
Increase in short-term notes ............................................ 211.8 104.0
Proceeds from issuing common stock ...................................... 1.5 2.7
Proceeds from long-term debt issues ..................................... 434.3 200.9
Payments to retire long-term debt ....................................... (347.6) (88.5)
Dividends paid .......................................................... (13.4) (13.4)
-------- --------
286.6 205.7
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ....................... 14.2 (98.0)
Cash and Cash Equivalents at Beginning of Period ........................... 44.4 106.9
-------- --------
Cash and Cash Equivalents at End of Period ................................. $ 58.6 $ 8.9
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 9
THE COASTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For additional information relative to operations and financial position,
reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. In addition, certain minor reclassifications of
prior period statements have been made to conform with current reporting
practices. The effect of the reclassifications was not material to the Company's
consolidated results of operations, financial position or cash flows.
Repair and maintenance costs incurred in connection with planned major
maintenance activities at certain refineries or plants are accrued as a
liability in a systematic and rational manner over the period of time until the
planned major maintenance activities occur. Any difference between the accrued
liability and the actual costs incurred in performing the accrual maintenance
activities are charged or credited to expense at the time the maintenance
occurs. At certain other refineries or plants, the cost of each major
maintenance activity is capitalized and amortized to expense in a systematic and
rational manner over the estimated period extending to the next planned major
maintenance activity.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), as amended by Statement of Financial
Accounting Standards No. 137, to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative will depend on the intended use of the
derivative and the resulting designation. The Company is currently evaluating
the impact of FAS 133.
Supplemental information relative to the Statement of Consolidated Cash
Flows includes the following: The Company made cash payments for interest and
financing fees, net of amounts capitalized, of $70.5 million and $60.4 million
for the three months ended March 31, 2000 and 1999, respectively. There were no
cash payments for income taxes for the three months ended March 31, 2000 and
March 31, 1999.
2. INVENTORIES
Inventories were as follows (millions of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Refined products, crude oil and chemicals........ $ 648.0 $ 576.2
Coal, materials and supplies .................... 161.7 156.5
------------ ------------
$ 809.7 $ 732.7
============ ============
</TABLE>
Elements included in inventory cost are material, labor and manufacturing
expense.
3. DEBT
At March 31, 2000, the Company had $792.7 million of outstanding
indebtedness under the Company's commercial paper program and indebtedness to
banks under short-term lines of credit. The Company's financial statements at
March 31, 2000 reflect $675 million of short-term borrowings which have been
reclassified as long-term, based on the availability of committed credit lines
with maturities in excess of one year and the Company's intent to maintain such
amounts as long-term borrowings. There was a similar reclassification of $475
million as of December 31, 1999.
8
<PAGE> 10
In March 2000, the Company issued $400 million of floating rate notes due
in 2002. The notes bear interest at a rate equal to the three-month London
Interbank Offered Rate plus 0.45%. The net proceeds from the sale of the notes
are being used for general corporate purposes, including the repayment of
indebtedness of Coastal and its subsidiaries.
4. COMMON STOCK
On March 31, 2000, 12,463,172 shares of Common Stock of the Company were
reserved for stock option plans, 1,190,381 shares were reserved for conversion
of the Series A, B, and C Preferred Stocks, 342,946 shares were reserved for
conversion of outstanding Class A Common Stock and 16,252 shares were reserved
for conversion of Class A Common Stock subject to future issuance. The Class A
Common Stock reserved for future issuance is for conversion of the Series A, B,
and C Preferred Stocks.
5. SEGMENT INFORMATION
The Company's operating revenues from external customers, intersegment
revenues and earnings (loss) before interest and income taxes for the three
months ended March 31, 2000 and 1999 are shown as follows (millions of dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Operating Revenues From External Customers:
Natural gas ............................ $ 395.4 $ 335.3
Refining, marketing and chemicals ...... 2,189.5 1,186.2
Exploration and production ............. 225.3 95.0
Power .................................. 46.1 26.1
Coal ................................... 69.5 64.8
Corporate and other .................... 1.8 2.2
-------- --------
$2,927.6 $1,709.6
======== ========
</TABLE>
Intersegment revenues were as follows: Natural gas - $3.5 million (2000),
$.6 million (1999); Refining, marketing and chemicals - $1.8 million (2000), $.5
million (1999); Exploration and production - $12.6 million (2000), $5.5 million
(1999); and Corporate and other - $2.0 million (2000), $2.1 million (1999).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Earnings (Loss) Before Interest and Income Taxes:
Natural gas .................................. $ 192.3 $ 186.9
Refining, marketing and chemicals ............ 39.3 69.6
Exploration and production ................... 101.1 11.4
Power ........................................ 42.5 18.9
Coal ......................................... 3.2 4.3
Corporate and other .......................... (39.8) (22.1)
-------- --------
$ 338.6 $ 269.0
======== ========
</TABLE>
9
<PAGE> 11
6. INCOME TAXES
Provisions for income taxes were as follows (millions of dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Current Income Taxes:
Federal ................ $ 25.0 $ 8.7
Foreign ................ 2.7 1.5
State .................. 4.9 (.4)
-------- --------
32.6 9.8
-------- --------
Deferred Income Taxes:
Federal ................ 42.5 43.3
Foreign ................ .9 .8
State .................. (1.2) 3.6
-------- --------
42.2 47.7
-------- --------
$ 74.8 $ 57.5
======== ========
</TABLE>
Interim period provisions for federal income taxes are based on estimated
effective annual income tax rates.
7. EARNINGS PER SHARE
Earnings per share are calculated following Statement of Financial
Accounting Standards No. 128. The following data shows the amounts used in
computing basic earnings per share and the effects on income and the weighted
average number of shares of dilutive securities.
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
------------------------------------------------
Income Shares
(Numerator) (Denominator) Per-Share
(Millions) (Thousands) Amount
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Net earnings .................................. $ 173.6
Less preferred stock dividends ................ .1
--------------
Basic earnings per share
Income available to common stockholders .... 173.5 213,685 $ .81
==============
Effect of dilutive securities
Options .................................... -- 2,545
Convertible preferred stock ................ .1 1,210
-------------- --------------
Diluted earnings per share
Income available to common stockholders plus
assumed conversions .................... $ 173.6 217,440 $ .80
============== ============== ==============
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
------------------------------------------------
Income Shares
(Numerator) (Denominator) Per-Share
(Millions) (Thousands) Amount
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Net earnings .................................. $ 134.5
Less preferred stock dividends ................ .1
--------------
Basic earnings per share
Income available to common stockholders .... 134.4 212,784 $ .63
==============
Effect of dilutive securities
Options .................................... -- 2,044
Convertible preferred stock ................ .1 1,272
-------------- --------------
Diluted earnings per share
Income available to common stockholders plus
assumed conversions .................... $ 134.5 216,100 $ .62
============== ============== ==============
</TABLE>
8. LITIGATION, ENVIRONMENTAL AND REGULATORY MATTERS
Litigation Matters
In December 1992, certain of Colorado Interstate Gas Company's ("Colorado"
or "CIG") natural gas lessors in the West Panhandle Field filed a complaint in
the U.S. District Court, Northern District of Texas, claiming underpayment of
royalties, breach of fiduciary duty, fraud and negligent misrepresentation.
Management believes that CIG has numerous defenses to the lessors' claims,
including (i) that the royalties were properly paid, (ii) that the majority of
the claims were released by written agreement and (iii) that the majority of the
claims are barred by the statute of limitations. In March of 1995, the trial
court granted a partial summary judgment in favor of CIG, holding that the
four-year statute of limitations had not been tolled and the releases are valid
and dismissing all tort claims and claims for breach of any duty of disclosure.
The remaining claim for underpayment of royalties was tried to a jury which, in
May 1995, made findings favorable to CIG. On June 7, 1995, the trial court
entered a judgment that the lessors recover no monetary damages from CIG and
permanently estopping the lessors from asserting any claim based on an
interpretation of the contract different than that asserted by CIG in the
litigation. The lessors' motion for a new trial was denied on July 18, 1997, and
both parties filed appeals. On June 7, 1996, the same plaintiffs sued CIG in
state court in Amarillo, Texas, for underpayment of royalties. CIG removed the
second lawsuit to federal court which granted a stay of the second suit pending
the outcome of the first lawsuit. Oral arguments were heard before the Fifth
Circuit Court of Appeals on December 4, 1998, and the parties are awaiting the
Court's decision.
In October 1996, the Company, along with several subsidiaries, was named
as a defendant in a suit filed by several former and current African American
employees in the U.S. District Court, Southern District of Texas ("Texas suit").
The Texas suit alleges racially discriminatory employment policies and
practices. Coastal vigorously denies these allegations and has filed responsive
pleadings. Plaintiffs' counsel are seeking to have the Texas suit certified as a
class action of all former and current African American employees and initially
claimed compensatory and punitive damages of $400 million. In February 1999, in
response to Coastal's motion to deny class certification, plaintiffs' counsel
obtained permission from the Court to delete all claims for compensatory and
punitive damages and to seek equitable relief only.
In January 1998, the plaintiffs in the Texas suit amended their suit to
exclude ANR Pipeline Company ("ANR Pipeline") employees from the potential
class. A new suit was then filed in state court in Wayne County, Michigan,
seeking to have the Michigan suit certified as a class action of African
American employees of ANR Pipeline and seeking unspecified damages as well as
attorneys and expert fees. ANR Pipeline has filed responsive pleadings denying
these allegations. In August 1999, the court denied plaintiffs' motion to have
the Michigan suit certified as a class action. Plaintiffs filed with the
Michigan Court of Appeals an application for leave to appeal the denial of the
class certification. On November 5, 1999, the Michigan Court of Appeals denied
the application for leave to appeal.
Two legal proceedings, one in federal court and the other in state court,
have been instituted against a number of gas pipeline companies and their
affiliates, including Coastal and several of its subsidiaries. The plaintiffs in
each suit
11
<PAGE> 13
seek damages for the alleged undermeasurement of the heating value and the
volume of natural gas. In the federal proceeding, Jack Grynberg filed 77
separate False Claim Act suits in September 1997 against natural gas
transmission companies and producers, gatherers, and processors of natural gas,
seeking unspecified damages which could include treble damages for the maximum
period permitted by law (potentially as much as ten years) and penalties of up
to $10,000 per false claim. In addition to the measurement claims, these suits
also allege that the defendants undervalued the gas in paying royalties. The
Coastal defendants were sued in the U.S. District Courts of Colorado and the
Eastern District of Michigan. In April 1999, the U.S. Department of Justice
notified the Company that the United States would not intervene in these cases
at that time. The MultiDistrict Litigation Panel has consolidated the Grynberg
suits with several other Grynberg cases for pre-trial proceedings in Wyoming.
The defendants filed a motion to dismiss which was argued in March 2000, and the
parties are awaiting the Court's decision.
In the state proceedings, the Quinque Operating Company, on behalf of
itself and subclasses of gas producers, royalty owners, overriding royalty
owners, and state taxing authorities, in May 1999 instituted a legal proceeding
in State Court in Stevens County, Kansas against over 200 gas companies,
including several Coastal subsidiaries. The Quinque suit seeks unspecified
actual, punitive and treble damages for the alleged undermeasurement of all
natural gas measured in the United States from non-federal and non-Indian lands
since 1974. The plaintiffs are seeking certification of a national class of all
similarly situated gas producers, royalty owners, overriding royalty owners, and
state taxing authorities. The suit was removed to the U.S. District Court for
the District of Kansas. The plaintiffs filed a motion to remand the case back to
the state court. The MultiDistrict Litigation Panel has transferred the Quinque
suit to Wyoming and consolidated it with the Grynberg proceedings as a result of
a motion filed by several of the defendants in the Quinque suit.
Numerous other lawsuits and other proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company or its
subsidiaries. Although no assurances can be given and no determination can be
made at this time as to the outcome of any particular lawsuit or proceeding, the
Company believes there are meritorious defenses to substantially all such claims
and that any liability which may finally be determined should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. Compliance with such laws
and regulations can be costly. Additionally, governmental authorities may
enforce the laws and regulations with a variety of civil and criminal
enforcement measures, including monetary penalties and remediation requirements.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as "Superfund," imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations. With the joint and several liability imposed under
Superfund, a potentially responsible party ("PRP") may be required to pay more
than its proportional share of such costs. Certain subsidiaries of the Company
and a company in which Coastal owns a 50% interest have been named as a PRP in
various "Superfund" waste disposal sites. At the ten sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$611 million, and the Company estimates its pro-rata exposure, to be paid over a
period of years, is approximately $8 million and has made appropriate
provisions. At nine other sites, the U.S. Environmental Protection Agency
("EPA") is currently unable to provide the Company with an estimate of total
cleanup costs and, accordingly, the Company is unable to calculate its share of
those costs.
Additionally, certain subsidiaries of the Company have been named as PRPs
in three state sites. At one site, the North Carolina Department of Health,
Environmental and Natural Resources has estimated the total cleanup costs to be
approximately $50 million, but the Company believes the subsidiary's activities
at this site were de minimis. At a second state site, the Florida Department of
Environmental Protection has demanded reimbursement of its costs, which total
approximately $300,000, and suitable remediation, with approximately $100,000
potentially attributable to the Coastal subsidiary's activities. At the third
site, the Texas Natural Resource Conservation Commission has estimated the total
cleanup costs to be approximately $2 million, but the Company believes the
subsidiary's activities at this site were de minimis. At a California site, the
Company settled the matter for a de minimis amount.
12
<PAGE> 14
Future information and developments, including legislative and enforcement
developments, will require the Company to continually reassess the expected
impact of these environmental matters. However, the Company has evaluated its
total environmental exposure based on currently available data, including its
potential joint and several liability, and believes that compliance with all
applicable laws and regulations will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Regulatory Matters
On July 29, 1998, the Federal Energy Regulatory Commission ("FERC") issued
a "Notice of Proposed Rulemaking," in which the FERC has proposed a number of
significant changes to the industry, including, among other things, removal of
price caps in the short-term market (less than one year), capacity auctions,
changed reporting obligations, the ability to negotiate terms and conditions of
all services, elimination of the requirement of a matching term cap on the
renewal of existing contracts, and a review of its policies for approving
capacity construction. On the same day, the FERC also issued a "Notice of
Inquiry" soliciting industry input on various matters affecting the pricing of
long-term service and certificate pricing in light of changing market
conditions. On February 9, 2000, the FERC issued a final rule implementing
certain of the changes that were discussed in these two proposals. Among other
things, the final rule: (a) removes the price ceilings for short-term secondary
market capacity releases for a trial period through September 30, 2002; (b)
permits pipelines to propose seasonally and term-differentiated rates; (c)
revises requirements relating to pipeline scheduling procedures, capacity
segmentation and penalties; (d) narrows the right-of-first-refusal granted to
long-term shippers to retain their capacity; and (e) expands pipeline reporting
requirements. Coastal's interstate pipeline subsidiaries and others have sought
clarification of certain aspects of the final rule.
On September 15, 1999, the FERC issued a Policy Statement addressing the
certification and pricing of new pipeline construction projects. Under the
Policy Statement, applicants must first satisfy a threshold pricing requirement
of demonstrating that their projects can be constructed without subsidies from
existing customers. Second, the applicants must show that any adverse impacts of
the project on identified interests (existing customers of the applicant, other
existing pipelines and their captive customers, landowners and the surrounding
communities) are outweighed by its benefits, i.e., balancing of adverse impacts
and benefits. On October 19, 1999, Coastal's interstate pipeline subsidiaries
sought clarification and/or rehearing of the Policy Statement insofar as it does
not apply directly to those projects filed for approval under the FERC's
"optional certificate" regulations. Other parties also sought rehearing of this
and other aspects of the Policy Statement. On February 9, 2000, the FERC issued
an order which, among other things, held that the Policy Statement balancing
criteria would apply to new optional certificate applications while it receives
comments on a companion FERC notice proposing to eliminate the current optional
certificate regulations.
On May 30, 1997, Wyoming Interstate Company, Ltd. ("WIC") filed with the
FERC to increase its rates by approximately $5.7 million annually. On June 27,
1997, the FERC accepted the filing effective as of December 1, 1997, subject to
refund. The FERC staff and certain participants in the proceeding raised a
number of issues relating to WIC's rates, revenue requirements and the treatment
of an "exit fee" which WIC had received in conjunction with the termination of a
transportation service agreement. WIC and most of the parties subsequently
reached a settlement resolving all issues in the case. That settlement was
ultimately approved by the FERC on June 21, 1999 (the "June 1999 Order"). Two
parties opposed the settlement and the FERC initially severed them from the
settlement and ordered a separate hearing on their issues. However, on October
13, 1999, the FERC determined that the settlement should also apply to those
parties as well, inasmuch as WIC had filed a new rate case (discussed below)
which would become effective before any decision could be reached and
implemented (the "October 1999 Order"). The FERC denied rehearing of the October
1999 Order on December 21, 1999 (the "December 1999 Order"). The two parties who
had objected to the settlement have sought judicial review of all of the 1999
orders. No briefing schedule has been established to date. In February 2000,
based on the June, October and December 1999 Orders, WIC issued customer
refunds, for which adequate reserves had been made.
On July 1, 1999, WIC filed with the FERC a new rate case to increase its
rates by approximately $8 million annually (based on the rates determined under
the June 1999 Order). On July 29, 1999, the FERC issued its order
accepting the rate filing and suspending it for five months to become effective
on January 1, 2000. The order also set the case for hearing, which is currently
scheduled to commence in the second half of 2000. WIC has filed to place its new
rates into effect on January 1, 2000, and is collecting those rates subject to
refund. In April 2000, WIC filed an offer
13
<PAGE> 15
of settlement to resolve all issues in the case for most, if not all, parties to
the proceeding. The comment period on the settlement offer ends on May 25, 2000.
Certain other regulatory issues remain unresolved among CIG, ANR Pipeline,
ANR Storage Company and WIC, their customers, their suppliers and the FERC. The
Company has made provisions which represent management's assessment of the
ultimate resolution of these issues. As a result, the Company anticipates that
these regulatory matters will not have a material adverse effect on its
consolidated financial position or results of operations. While the Company
estimates the provisions to be adequate to cover potential adverse rulings on
these and other issues, it cannot estimate when each of these issues will be
resolved.
9. MERGER
Coastal and El Paso Energy Corporation ("El Paso Energy") announced on
January 18, 2000 the execution of definitive agreements for the merger of
Coastal and El Paso Energy. On May 5, 2000, the merger was approved by the
shareholders of Coastal and El Paso Energy. Each share of Coastal common stock
and Class A common stock will be converted on a tax-free basis (except for cash
paid in lieu of fractional shares) into 1.23 shares of El Paso Energy common
stock. The outstanding convertible preferred stock of Coastal will be exchanged
tax free (except for cash paid in lieu of fractional shares) for El Paso Energy
common stock on the same basis as if the preferred stock had been converted into
Coastal common stock immediately prior to the merger. It is expected that the
merger will be completed during the fourth quarter of 2000 and be accounted for
as a pooling of interests. The merger is subject to various conditions,
particularly federal regulatory approval.
14
<PAGE> 16
(b) Pro forma financial information:
The following unaudited pro forma condensed combined financial information
gives effect to the merger using the pooling of interests method of accounting.
This information is presented to show the estimated impact of the merger as if
our companies had always been combined. This presentation assumes the issuance
of approximately 270 million shares of El Paso Energy common stock in connection
with the merger. The Unaudited Pro Forma Condensed Combined Statements of Income
are prepared as if we completed the merger as of January 1, 1997, and the
Unaudited Pro Forma Condensed Combined Balance Sheet was prepared as if we
completed the merger on March 31, 2000.
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements explain the assumptions used in preparing the financial information,
and do not reflect cost savings from operating efficiencies or other
improvements we may achieve by combining our companies. The historical financial
information for Coastal includes certain reclassifications to conform to El Paso
Energy's presentation. These reclassifications have no impact on income from
continuing operations or total stockholders' equity.
Accounting policy differences and intercompany balances between El Paso
Energy and Coastal are not expected to be material and, accordingly, adjustments
have not been included in these statements.
We are providing this financial information for illustrative purposes only.
It does not necessarily indicate what the operating results and financial
position of the combined company might have been had the merger been completed
at the beginning of the earliest period presented, nor does it necessarily
indicate what the combined company's operating results and financial position
will be following the merger.
The accompanying unaudited pro forma financial information should be read
in conjunction with:
- the audited consolidated financial statements and other financial
information included in El Paso Energy's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, including the notes to
those financial statements;
- the unaudited condensed consolidated financial statements and other
financial information included in El Paso Energy's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, including the notes to
those financial statements;
- the audited consolidated financial statements and other financial
information included in Coastal's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, including the notes to those
financial statements; and
- the unaudited condensed consolidated financial statements and other
financial information included in Coastal's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, including the notes to those
financial statements, included in Item 7(a) of this Form 8-K.
15
<PAGE> 17
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS
EL PASO
ENERGY COASTAL COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets............................... $ 2,555 $ 2,685 $ $ 5,240
Property, plant and equipment, net................. 10,372 9,734 20,106
Other.............................................. 3,727 2,946 6,673
------- ------- ----- -------
Total assets............................. $16,654 $15,365 $ $32,019
======= ======= ===== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities.......................... $ 3,213 $ 2,780 $ 70 (a) $ 6,036
(27)(b)
------- ------- ----- -------
Long-term debt, less current maturities............ 5,549 5,129 10,678
------- ------- ----- -------
Deferred income taxes.............................. 1,734 1,829 3,563
------- ------- ----- -------
Other.............................................. 1,281 778 2,059
------- ------- ----- -------
Company-obligated preferred securities of
consolidated trusts.............................. 325 300 625
------- ------- ----- -------
Minority interest.................................. 1,370 451 1,821
------- ------- ----- -------
Stockholders' equity
Cumulative preferred stock....................... -- -- (c)
Class A common stock............................. -- -- (c)
Common stock..................................... 719 73 737 (c) 1,529
Additional paid-in capital....................... 1,406 1,033 (870)(c) 1,569
Retained earnings................................ 1,413 3,125 (70)(a) 4,495
27 (b)
Other............................................ (356) (133) 133 (c) (356)
------- ------- ----- -------
Total stockholders' equity............... 3,182 4,098 (43) 7,237
------- ------- ----- -------
Total liabilities and stockholders'
equity................................. $16,654 $15,365 $ $32,019
======= ======= ===== =======
</TABLE>
See accompanying notes.
16
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
EL PASO
ENERGY COASTAL COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $ 3,106 $2,928 $ $ 6,034
------- ------ ---- -------
Operating expenses
Cost of gas and other products.................. 2,378 2,004 4,382
Operation and maintenance....................... 210 445 655
Depreciation, depletion, and amortization....... 145 143 288
Taxes, other than income taxes.................. 41 29 70
------- ------ ---- -------
2,774 2,621 5,395
------- ------ ---- -------
Operating income ................................. 332 307 639
Other income, net................................. 58 41 99
------- ------ ---- -------
Income before interest, income taxes, and minority
interest........................................ 390 348 738
------- ------ ---- -------
Interest and debt expense......................... 123 90 213
Minority interest................................. 22 6 28
Income tax expense ............................... 74 75 149
------- ------ ---- -------
219 171 390
------- ------ ---- -------
Income from continuing operations before
preferred dividends of subsidiaries............. 171 177 348
Preferred stock dividends of subsidiaries......... 6 3 9
------- ------ ---- -------
Income from continuing operations................. 165 174 339
Dividends on preferred stock...................... --
------- ------ ---- -------
Income from continuing operations available to
common stockholders............................ $ 165 $ 174 $ $ 339
======= ====== ==== =======
Basic earnings per share from continuing
operations available to common stockholders..... $ 0.72 $ 0.68
======= =======
Diluted earnings per share from continuing
operations available to common stockholders.... $ 0 .70 $ 0.67
======== =======
Basic average common shares outstanding........... 229 270(d) 499
======= ==== =======
Diluted average common shares outstanding......... 239 270(d) 509
======= ==== =======
</TABLE>
See accompanying notes.
17
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
EL PASO
ENERGY COASTAL COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $10,581 $8,197 $ $18,778
------- ------ ---- -------
Operating expenses
Cost of gas and other products.................. 7,974 5,149 13,123
Operation and maintenance....................... 979 1,587 2,566
Merger-related and asset impairment charges..... 557 557
Ceiling test charges............................ 352 352
Depreciation, depletion, and amortization....... 609 479 1,088
Taxes, other than income taxes.................. 146 100 246
------- ------ ---- -------
10,617 7,315 17,932
------- ------ ---- -------
Operating income (loss)........................... (36) 882 846
Other income, net................................. 227 146 373
------- ------ ---- -------
Income before interest, income taxes, and minority
interest........................................ 191 1,028 1,219
------- ------ ---- -------
Interest and debt expense......................... 453 323 776
Minority interest................................. 36 25 61
Income tax expense (benefit)...................... (81) 174 93
------- ------ ---- -------
408 522 930
------- ------ ---- -------
Income (loss) from continuing operations before
preferred dividends of subsidiaries............. (217) 506 289
Preferred stock dividends of subsidiaries......... 25 7 32
------- ------ ---- -------
Income (loss) from continuing operations.......... (242) 499 257
Dividends on preferred stock...................... --
------- ------ ---- -------
Income (loss) from continuing operations available
to common stockholders.......................... $ (242) $ 499 $ $ 257
======= ====== ==== =======
Basic earnings (loss) per share from continuing
operations available to common stockholders..... $ (1.06) $ 0.52
======= =======
Diluted earnings (loss) per share from continuing
operations available to common stockholders..... $ (1.06)(e) $ 0.51(e)
======= =======
Basic average common shares outstanding........... 228 269(d) 497
======= ==== =======
Diluted average common shares outstanding......... 239 (e) 269(d) 508(e)
======= ==== =======
</TABLE>
See accompanying notes.
18
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
EL PASO
ENERGY COASTAL COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $9,500 $7,368 $ $16,868
------ ------ --- -------
Operating expenses
Cost of gas and other products.................. 6,970 4,377 11,347
Operation and maintenance....................... 956 1,587 2,543
Merger-related and asset impairment charges..... 15 15
Ceiling test charges............................ 1,035 1,035
Depreciation, depletion and amortization........ 624 443 1,067
Taxes, other than income taxes.................. 138 88 226
------ ------ --- -------
9,738 6,495 16,233
------ ------ --- -------
Operating income (loss)........................... (238) 873 635
Other income, net................................. 186 94 280
------ ------ --- -------
Income (loss) before interest, income taxes, and
minority interest............................... (52) 967 915
------ ------ --- -------
Interest and debt expense......................... 387 295 682
Minority interest................................. 12 16 28
Income tax expense (benefit)...................... (170) 166 (4)
------ ------ --- -------
229 477 706
------ ------ --- -------
Income (loss) from continuing operations before
preferred dividends of subsidiaries............. (281) 490 209
Preferred stock dividends of subsidiaries......... 25 7 32
------ ------ --- -------
Income (loss) from continuing operations.......... (306) 483 177
Dividends on preferred stock...................... 6 6
------ ------ --- -------
Income (loss) from continuing operations available
to common stockholders.......................... $ (306) $ 477 $ $ 171
====== ====== === =======
Basic earnings (loss) per share from continuing
operations available to common stockholders..... $(1.35) $ 0.35
====== =======
Diluted earnings (loss) per share from continuing
operations available to common stockholders..... $(1.35)(e) $ 0.34(e)
====== =======
Basic average common shares outstanding........... 226 268(d) 494
====== === =======
Diluted average common shares outstanding......... 237 (e) 268(d) 505(e)
====== === =======
</TABLE>
See accompanying notes.
19
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
EL PASO
ENERGY COASTAL COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $10,015 $9,730 $ $19,745
------- ------ --- -------
Operating expenses
Cost of gas and other products.................. 7,308 6,864 14,172
Operation and maintenance....................... 966 1,610 2,576
Merger-related and asset impairment charges..... 50 50
Depreciation, depletion, and amortization....... 639 433 1,072
Taxes, other than income taxes.................. 138 90 228
------- ------ --- -------
9,101 8,997 18,098
------- ------ --- -------
Operating income.................................. 914 733 1,647
Other income, net................................. 94 119 213
------- ------ --- -------
Income before interest and income taxes........... 1,008 852 1,860
------- ------ --- -------
Interest and debt expense......................... 344 308 652
Income tax expense................................ 234 138 372
------- ------ --- -------
578 446 1,024
------- ------ --- -------
Income from continuing operations before preferred
dividends of subsidiaries....................... 430 406 836
Preferred stock dividends of subsidiaries......... 25 7 32
------- ------ --- -------
Income from continuing operations................. 405 399 804
Dividends on preferred stock...................... 17 17
------- ------ --- -------
Income from continuing operations available to
common stockholders............................. $ 405 $ 382 $ $ 787
======= ====== === =======
Basic earnings per share from continuing
operations available to common stockholders..... $ 1.81 $ 1.60
======= =======
Diluted earnings per share from continuing
operations available to common stockholders..... $ 1.77 $ 1.58
======= =======
Basic average common shares outstanding........... 224 268(d) 492
======= === =======
Diluted average common shares outstanding......... 229 268(d) 497
======= === =======
</TABLE>
See accompanying notes.
20
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) This amount reflects estimated transaction costs, including legal,
accounting, filing, printing and financial advisory services fees we
estimate we will incur in connection with the merger.
(b) This amount represents the income tax consequences of the estimated
transaction costs associated with the merger, and was calculated by
multiplying those costs by an assumed income tax rate of 38 percent.
(c) These numbers reflect the exchange in the merger of 1.23 shares of El Paso
Energy common stock for each outstanding share of Coastal's common stock and
each outstanding share of Coastal's Class A common stock, 9.133 shares of El
Paso Energy common stock for each outstanding share of Coastal's Series A
and Series B convertible preferred stock, 17.980 shares of El Paso Energy
common stock for each outstanding share of Coastal's Series C convertible
preferred stock, and the cancellation of $133 million of Coastal treasury
stock. These numbers also include the issuance of an estimated 5.3 million
shares of El Paso Energy common stock in exchange for Coastal stock options
and restricted stock.
(d) We determined these adjustment amounts by multiplying the average
outstanding shares of Coastal's common stock, Class A common stock, and
convertible preferred stock for each period by the applicable exchange ratio
contemplated by the merger agreement. Each period also includes the issuance
of an estimated 5.3 million shares of El Paso Energy common stock for
Coastal's stock options and restricted stock.
(e) As required by the accounting rules, we calculated diluted earnings (loss)
per common share for 1999 and 1998 by excluding from the number of common
shares outstanding, those securities which, if included, would have caused
us to show greater earnings or a lower loss per common share.
21
<PAGE> 23
SIGNATURE
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 hereunto duly authorized.
EL PASO ENERGY CORPORATION
By: /s/ JEFFREY I. BEASON
----------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
Date: May 19, 2000
22
