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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-4874
COLORADO INTERSTATE GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 84-0173305
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two North Nevada Avenue
Colorado Springs, Colorado 80903-1727
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 473-2300
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
As of October 30, 1998, there were outstanding 10 shares of common stock of
the Registrant, $5.00 par value per share, its only class of common stock. None
of the voting stock of the Registrant is held by non-affiliates.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of Colorado Interstate Gas Company and its
subsidiaries (the "Company" or "Colorado") are presented herein and are
unaudited, except for balances as of December 31, 1997, and therefore are
subject to year-end adjustments; however, all adjustments which are, in the
opinion of management, necessary for a fair statement of the results of
operations for the periods covered have been made. The adjustments which have
been made are of a normal recurring nature. Such results are not necessarily
indicative of results to be expected for the year due to seasonal variations and
market conditions affecting natural gas sales and transportation services.
<TABLE>
COLORADO INTERSTATE GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash.................................................................... $ 226 $ 3,508
Notes receivable from affiliates........................................ 277,046 219,655
Accounts receivable..................................................... 22,763 63,319
Accounts receivable from affiliates..................................... 65,053 39,057
Materials and supplies.................................................. 8,536 8,841
Prepaid expenses........................................................ 963 93
Current portion of deferred income taxes................................ 32,556 38,626
--------------- --------------
407,143 373,099
--------------- --------------
Plant, Property and Equipment, at cost:
Gas pipeline............................................................ 1,223,952 1,162,907
Gas and oil properties, at full-cost.................................... 139,405 130,500
--------------- --------------
1,363,357 1,293,407
Accumulated depreciation, depletion and amortization.................... 715,101 689,690
--------------- --------------
648,256 603,717
--------------- --------------
Other Assets:
Investments in related parties.......................................... 47,871 44,217
Other deferred charges.................................................. 41,701 42,397
--------------- --------------
89,572 86,614
--------------- --------------
$ 1,144,971 $ 1,063,430
=============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
COLORADO INTERSTATE GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable to affiliates............................................. $ 5,067 $ -
Accounts payable and accrued expenses................................... 132,690 138,708
Accounts payable to affiliates.......................................... 57,695 26,460
Taxes on income......................................................... 2,225 5,429
------------- ------------
197,677 170,597
------------- ------------
Debt:
Long-term debt.......................................................... 279,502 279,447
------------- ------------
Deferred Credits:
Deferred income taxes................................................... 117,075 112,063
Other................................................................... 38,936 41,947
------------- ------------
156,011 154,010
------------- ------------
Common Stock and Other Stockholder's Equity:
Common stock, $5 par value, authorized 10,000 shares; issued and
outstanding 10 shares at stated value................................ 27,561 27,561
Additional paid-in capital.............................................. 19,037 19,037
Retained earnings....................................................... 465,183 412,778
------------- ------------
511,781 459,376
------------- ------------
$ 1,144,971 $ 1,063,430
============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
COLORADO INTERSTATE GAS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED EARNINGS
(Thousands of Dollars)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Operating revenues:
Nonaffiliates............................................. $ 51,048 $ 82,575 $ 222,806 $ 253,257
Affiliates................................................ 12,095 29,724 71,135 80,366
---------- ---------- --------- ---------
63,143 112,299 293,941 333,623
Other income - net........................................... 4,046 3,767 11,739 8,788
---------- ---------- --------- ---------
67,189 116,066 305,680 342,411
---------- ---------- --------- ---------
Costs and Expenses:
Cost of gas sold:
Nonaffiliates............................................. 1,898 24,345 55,373 67,998
Affiliates................................................ - 2,607 7,346 7,742
---------- ---------- --------- ---------
1,898 26,952 62,719 75,740
Operation and maintenance.................................... 37,651 40,471 119,020 126,206
Depreciation, depletion and amortization..................... 9,355 10,708 25,221 32,922
Interest expense............................................. 6,078 6,549 18,387 17,832
Taxes on income.............................................. 3,944 10,341 27,928 31,344
---------- ---------- --------- ---------
58,926 95,021 253,275 284,044
---------- ---------- --------- ---------
Net Earnings.................................................... $ 8,263 $ 21,045 $ 52,405 $ 58,367
========== ========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
COLORADO INTERSTATE GAS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
----------- ----------
(Unaudited)
<S> <C> <C>
Cash Flow From Operating Activities:
Net earnings .................................................................. $ 52,405 $ 58,367
Add (subtract) items not requiring (providing) cash:
Depreciation, depletion and amortization.................................... 25,221 32,922
Deferred income taxes....................................................... 10,910 7,122
Other....................................................................... (571) 1,764
Working capital and other changes, excluding changes relating to cash and
nonoperating activities:
Accounts receivable...................................................... 40,556 (3,760)
Accounts receivable from affiliates...................................... (25,996) 13,642
Materials and supplies................................................... 305 511
Prepaid expenses......................................................... (870) 245
Accounts payable and accrued expenses.................................... (6,018) 14,287
Accounts payable to affiliates........................................... 31,235 4,413
Taxes on income.......................................................... (3,204) (9,219)
----------- ----------
123,973 120,294
Cash Flow from Investing Activities:
Purchases of plant, property and equipment..................................... (72,658) (48,980)
Proceeds from sale of plant, property and equipment............................ 976 9,659
Gas stored..................................................................... 405 (4,857)
Investments in related parties................................................. (3,654) (3,657)
Net increase in notes receivable from affiliates............................... (57,391) (121,869)
----------- ----------
(132,322 ) (169,704)
----------- ----------
Cash Flow from Financing Activities:
Issuance of senior debentures.................................................. - 99,640
Repayment of notes payable - Bank.............................................. - (50,000)
Net increase in notes payable to affiliates.................................... 5,067 -
----------- ----------
5,067 49,640
----------- ----------
Net Increase (Decrease) in Cash................................................... (3,282) 230
Cash at Beginning of Period....................................................... 3,508 539
----------- ----------
Cash at End of Period............................................................. $ 226 $ 769
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
COLORADO INTERSTATE GAS COMPANY 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, 1997. 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. In 1997, the Company
reexamined the useful lives of its assets. Effective October 1997, the
depreciation rates for certain of the Company's assets were revised. For the
three and nine months ended September 30, 1998, this revision had the effect of
increasing net earnings by $1.1 million and $3.6 million, respectively.
Effective July 1, 1998, those gas purchases and sales formerly conducted
by the Merchant Division of the Company were assigned to an affiliate.
Therefore, revenues and cost of gas sold associated with such activities
subsequent to July 1, 1998 are not included in the Company's consolidated
financial statements.
Materials and supplies are carried principally at average cost.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in 1998. The application of the new standard
did not have a material effect on the Company's consolidated financial
statements as the Company currently does not have any material items of other
comprehensive income.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), in 1998. See Note 4 for additional information on FAS 131.
The Company adopted Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS
132"), in 1998. FAS 132, which revises employer disclosures regarding pension
plans and other postretirement plans, is not expected to have a material effect
on the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. 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.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants ("AICPA") has issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), to be effective for periods beginning after December
15, 1998. The Company adopted SOP 98-1 in 1998. SOP 98-1 establishes standards
for the treatment of costs associated with software developed or obtained for
internal use. SOP 98-1 is not expected to have a material effect on the
Company's consolidated financial statements.
The AICPA has issued Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities" ("SOP 98-5"), to be effective for periods beginning
after December 15, 1998. SOP 98-5 provides guidance on accounting for costs
incurred to open new facilities, conduct business in new territories or
otherwise commence some new operation. The application of SOP 98-5 is not
expected to have a material effect on the Company's consolidated financial
statements.
Supplemental information relative to the Statement of Consolidated Cash
Flows includes the following: cash payments the Company made for interest and
financing fees, net of amounts capitalized, were $12.2 million and $11.0 million
for the nine-month periods ended September 30, 1998 and September 30, 1997,
respectively. Cash payments for
- 5 -
<PAGE>
income taxes amounted to $28.9 million and $32.5 million for the nine-month
periods ended September 30, 1998 and September 30, 1997, respectively.
2. Income Taxes
Provisions for income taxes are composed of the following (thousands of
dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current Income Taxes:
Federal................................................... $ 455 $ 2,050 $ 15,432 $ 22,647
State..................................................... 43 37 1,586 1,575
---------- ---------- --------- ---------
498 2,087 17,018 24,222
---------- ---------- --------- ---------
Deferred Income Taxes
Federal................................................... 3,014 7,469 9,721 6,542
State..................................................... 432 785 1,189 580
---------- ---------- --------- ---------
3,446 8,254 10,910 7,122
---------- ---------- --------- ---------
Taxes on Income.............................................. $ 3,944 $ 10,341 $ 27,928 $ 31,344
========== ========== ========= =========
</TABLE>
Interim period provisions for income taxes are based on estimated
effective annual income tax rates.
3. Common Stock
All of the issued and outstanding common stock of the Company is owned by
Coastal Natural Gas Company, a wholly owned subsidiary of The Coastal
Corporation. Therefore, earnings and cash dividends per common share have no
significance and are not presented.
4. Segment Information
The Company adopted FAS 131 in 1998. FAS 131 establishes standards for the
way that public business enterprises report information about operating segments
and requires those companies to report selected information about the operating
segments. Data for 1997 has been reclassified to conform with current reporting
practices following the standards in FAS 131 (thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------------------- --------------------------------------
Exploration Exploration
Natural and Natural and
Gas Production Total Gas Production Total
----------- ----------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues from
External Customers............... $ 58,142 $ 5,001 $ 63,143 $ 286,371 $ 7,570 $ 293,941
Intersegment Revenues.............. - - - - 6,809 6,809
Earnings Before Interest
and Income Taxes................. 18,229 56 18,285 97,985 735 98,720
</TABLE>
- 6 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------------------------- --------------------------------------
Exploration Exploration
Natural and Natural and
Gas Production Total Gas Production Total
----------- ----------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues from
External Customers............... $ 110,743 $ 1,556 $ 112,299 $ 326,626 $ 6,997 $ 333,623
Intersegment Revenues.............. - 2,526 2,526 - 9,808 9,808
Earnings Before Interest
and Income Taxes................. 37,913 22 37,935 104,005 3,538 107,543
</TABLE>
5. Litigation, Environmental and Regulatory Matters
Litigation Matters
In December 1992, certain of Colorado's natural gas lessors in the West
Panhandle Field filed a complaint in the U.S. District Court for the Northern
District of Texas claiming underpayment, breach of fiduciary duty, fraud and
negligent misrepresentation. Management believes that Colorado 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 Colorado, holding that the four-year statute of limitations
had not been tolled, that 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 Colorado. On June 7, 1995, the Trial Court entered a judgment that
the lessors recover no monetary damages from Colorado and permanently estopping
the lessors from asserting any claim based on an interpretation of the contract
different than that asserted by Colorado in the litigation. The lessors' motion
for new trial was denied on July 18, 1997, and both parties have filed appeals.
On June 7, 1996, the same plaintiffs sued Colorado in state court in Amarillo,
Texas, for underpayment of royalties. Colorado removed the second lawsuit to
federal court which granted a stay of the second lawsuit pending the outcome of
the first lawsuit. Oral argument before the Fifth Circuit Court of Appeals has
been scheduled for December 4, 1998.
In 1996, Jack Grynberg filed a claim under the False Claims Act on behalf
of the U.S. government in the U.S. District Court, District of Columbia, against
70 defendants, including Colorado and another subsidiary of The Coastal
Corporation ("Coastal"). The suit sought damages for the alleged underpayment of
royalties due to the purported improper measurement of gas. The 1996 suit was
dismissed in March 1997 and the dismissal was affirmed by the D.C. Court of
Appeals in October 1998. In September 1997, Mr. Grynberg filed 77 separate,
similar False Claims Act suits against natural gas transmission companies and
producers, gatherers, and processors of natural gas, seeking unspecified
damages. Colorado, Coastal and several other Coastal subsidiaries have been
included in two of the September 1997 suits. The suits were filed in the U.S.
District Court, District of Colorado and the U.S. District Court, Eastern
District of Michigan.
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 which may affect such
operations and costs as a result of their effect on the construction, operation,
and
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<PAGE>
maintenance of its pipeline facilities. The Company anticipates annual
environmental capital expenditures of $1 to $2 million over the next several
years aimed at maintaining compliance with such laws and regulations.
Additionally, appropriate governmental authorities may enforce the laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties and remediation requirements.
Future information and developments will require the Company to
continually reassess the expected impact of all applicable environmental laws
and regulations. Compliance with all applicable environmental protection laws
and regulations is not expected to have a material adverse impact on the
Company's consolidated financial position or results of operations.
Regulatory Matters
On January 31, 1996, the Federal Energy Regulatory Commission ("FERC")
issued a "Statement of Policy and Request for Comments" ("Policy"). Under this
Policy, (i) a pipeline and a customer are allowed to negotiate a contract which
provides for rates and charges that exceed the pipeline's posted maximum tariff
rates, provided that the shipper agreeing to such negotiated rates has the
ability to elect to receive service at the pipeline's posted maximum rate (known
as a "recourse rate"), and (ii) a pipeline must also make subsequent tariff
filings each time the pipeline negotiates a rate for service which is outside of
the minimum and maximum range for the pipeline's cost-based recourse rates. To
implement this Policy, a pipeline must make an initial tariff filing with the
FERC to indicate that it intends to contract for services under this Policy.
On March 29, 1996, Colorado filed with the FERC to change its rates, and
as part of that filing, included tariff sheets that would allow Colorado to
implement "negotiated rate" transactions pursuant to the Policy. The rate change
aspects of that filing have been fully resolved, although certain parties have
appealed the FERC's acceptance of the "negotiated rate" tariff provisions. That
appeal was dismissed by the United States Court of Appeals for the D.C. Circuit
as being premature. Separately, Colorado has appealed the FERC's holding that
pipelines which have entered into "negotiated rate" contracts will not be
allowed discount adjustments in connection with such contracts. The FERC has
subsequently clarified that it does not prohibit such adjustments per se, but
requires the pipelines to set forth in their tariff filings the details of the
adjustment mechanism so the FERC is able to determine whether the adjustment
adversely affects other nonnegotiated rate shippers. The FERC has filed a motion
to dismiss the Colorado appeal on the grounds that it is premature, and Colorado
has filed a response to that motion requesting the court to hold its appeal in
abeyance. During 1997 and for the nine-month period ended September 30, 1998,
Colorado did not enter into any "negotiated rate" transactions.
On July 29, 1998, the FERC issued a "Notice of Proposed Rulemaking," in
which the FERC has proposed a number of further 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 service, 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. The due date for comments on both of these
matters has been rescheduled from November 9, 1998 to January 22, 1999.
Certain regulatory issues remain unresolved among the Company, its
customers, its 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.
- 8 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, includes certain forward-looking statements
reflecting the Company's expectations and objectives in the near future;
however, many factors which may affect the actual results, including natural gas
and liquids prices, market and economic conditions, industry competition and
changing regulations, are difficult to predict. Accordingly, there is no
assurance that the Company's expectations and objectives will be realized. The
forward-looking statements contained herein are intended to qualify for the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934.
The Notes to Consolidated Financial Statements contain information that is
pertinent to the following analysis.
Liquidity and Capital Resources
The Company uses the following consolidated ratios to measure liquidity
and its ability to meet future funding needs and debt service requirements.
<TABLE>
<CAPTION>
Twelve Months Ended
September 30, December 31,
---------------------------------
1998 1997
----------------- --------------
(Unaudited)
<S> <C> <C>
Cash flow from operating activities to capital expenditures
and debt service requirements........................................... 148.6% 193.2%
Total debt to total capitalization......................................... 35.3% 37.8%
Times interest earned (before tax)......................................... 5.6 6.1
</TABLE>
The decrease in the cash flow from operating activities to capital
expenditures and debt service requirements ratio is due mainly to increased
capital expenditures. The decrease in the total debt to total capitalization
ratio is due to increased retained earnings resulting from earnings through the
first nine months of 1998. The decrease in the times interest earned ratio can
be attributed to decreased earnings before tax.
The Company's primary needs for cash are capital expenditures and debt
service requirements. Capital expenditures, debt retirements and other cash
needs, as well as the sources of capital to finance these expenditures, are
summarized in the Statement of Consolidated Cash Flows. Management believes that
the Company's stable financial position and earnings ability will enable it to
continue to generate and obtain capital for financing needs in the foreseeable
future.
The Company is responding to the extensive changes in the natural gas
industry by continuing to take steps to operate its facilities at their maximum
efficient capacity, renegotiating the remaining gas purchase contracts which are
above market, pursuing innovative marketing strategies and applying strict
cost-cutting measures.
The Financial Accounting Standards Board has issued FAS 133, to be
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
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.
The AICPA has issued SOP 98-5, to be effective for periods beginning after
December 15, 1998. SOP 98-5 provides guidance on accounting for costs incurred
to open new facilities, conduct business in new territories or otherwise
commence some new operation. The application of SOP 98-5 is not expected to have
a material effect on the Company's consolidated financial statements.
Year 2000 Issue. The Company, like most other companies, is addressing the
Year 2000 issue. This issue is the result of computer programs written with two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software using two digits to define the applicable year may
recognize a date using "00" as the
- 9 -
<PAGE>
year 1900 instead of the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's Year 2000 compliance project relates to both information
technology and embedded systems throughout the Company and focuses on all
technology hardware and software, external interfaces with customers and
suppliers, operations process control, automation and instrumentation systems.
Systems are being reviewed in an order of priority that includes an assessment
of the potential adverse effects of noncompliance as well as an assessment of
the complexity of the system. Assessment has been completed for all material
systems and is expected to be completed for all systems by the end of 1998. It
will be necessary to modify or replace certain noncompliant software and
hardware so that they will properly utilize dates beyond December 31, 1999. The
Company believes that with such remediation, the Year 2000 issue can be
mitigated. Necessary remediation and testing activities have begun and are
planned to be completed for all material systems by mid 1999. Remaining systems
modifications, replacement and testing are planned to be completed before the
end of 1999.
The Company has also begun a formal communications process with outside
entities with which the Company conducts business to determine the extent to
which those companies are addressing their Year 2000 compliance. In connection
with this process, the Company has been sending letters and questionnaires to
these parties and is evaluating the responses as received and is following up
with those parties that have not responded. The Company does not expect any
single noncompliant third party to have a material effect on the Company as it
does not rely to a material extent on any single customer or supplier, including
telecommunications providers, utilities and banks. However, the Company does not
control these parties and there can be no assurance that third-party systems
will be timely converted, or that any failure to convert would not have an
adverse effect on the Company's systems. The Company will continue to cooperate
and communicate with these parties to mitigate potential adverse effects.
The Company is currently preparing and will periodically update a Year
2000 contingency plan. The primary goals of the plan are to maintain continuity
of operations, timely resume any operations that have been interrupted, preserve
Company assets and protect the environment. The Company's geographical
distribution and customer base diversity are expected to naturally reduce the
risk of major disruptions to operations due to any Year 2000-related occurrence.
Similarly, the Company's distributed information systems and wide scope of
relationships with financial institutions, suppliers and vendors will most
likely aid in limiting and localizing any individual Year 2000 failure to
specific operations or facilities. Also, in recent years, the Company has
replaced or updated a significant portion of its computer hardware and software.
The plan will include possible manual intervention to operate noncompliant
facilities or systems until they can be modified or replaced. Notwithstanding
the foregoing, due to the nature of contingency planning, there can be no
assurance that such plans will acceptably mitigate the risk of material impact
to the Company's operations due to any Year 2000-related incident.
The Company has been using both external and internal resources to
reprogram or replace its software and embedded systems for the Year 2000 issue.
While the Company has included the Year 2000 project in its overall information
systems planning process since 1996, certain systems were identified for
replacement prior to the organization of the Year 2000 project. These amounts
are not included in the Year 2000 project cost estimates, except where the
replacement date has been accelerated in order to address Year 2000 issues. To
date, the amounts incurred and expensed for developing and carrying out the plan
total approximately $1 million. The total remaining cost for addressing the Year
2000 issue, which will be funded through operating cash flows, is currently
estimated by management to be approximately $2 million.
It should be noted that the ultimate amount of Year 2000 costs is
difficult to estimate due to possible disruptions in business arising from Year
2000 noncompliance of vendors, suppliers, customers and other third parties over
whom the Company has no control. Notwithstanding the Company's efforts,
disruptions could occur in its business due to Year 2000 problems and such
disruptions could have an adverse effect.
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<PAGE>
Results of Operations
The change in the Company's earnings for the three- and nine-month periods
ended September 30, 1998, in comparison to the corresponding periods in 1997, is
a result of the following:
Operating Revenues. The operating revenues by segment were as follows
(thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas.................................................. $ 58,142 $ 110,743 $ 286,371 $ 326,626
Exploration and production................................... 5,001 4,082 14,379 16,805
Eliminations................................................. - (2,526) (6,809) (9,808)
---------- ---------- --------- ---------
$ 63,143 $ 112,299 $ 293,941 $ 333,623
========== ========== ========= =========
</TABLE>
Earnings Before Interest and Income Taxes. The earnings before interest
and income taxes by segment were as follows (thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas............................................. $ 18,229 $ 37,913 $ 97,985 $ 104,005
Exploration and production.............................. 56 22 735 3,538
---------- ---------- --------- ---------
$ 18,285 $ 37,935 $ 98,720 $ 107,543
========== ========== ========= =========
</TABLE>
Natural Gas. The decrease in operating revenues of $52.6 million for the
three months ended September 30, 1998 from the comparable 1997 period is due to
a $25.9 million decrease related to gas sales volumes caused primarily by the
assignment of the Company's Merchant Division activity to an affiliate as
discussed in Note 1 of the Notes to Consolidated Financial Statements, an $11.5
million decrease related to average gas transportation rates net of
reservations, a $3.7 million decrease in average gas sales prices, a $3.6
million decrease in extracted products revenue, a $3.1 million decrease related
to gas transportation volumes and other miscellaneous net decreases of $4.8
million. The decrease in operating revenues of $40.3 million for the nine months
ended September 30, 1998 from the comparable 1997 period is due to a decrease of
$11.5 million related to gas sales volumes partially caused by the assignment of
the Company's Merchant Division activity to an affiliate, a $9.3 million
decrease in average gas sales prices, a decrease of $8.7 million due to average
gas transportation rates net of reservations, a $7.6 million decrease in
extracted products revenues, a $3.4 million decrease related to gas stored for
others and other net decreases of $3.4 million partially offset by a $3.6
million increase related to gas transportation volumes.
Other income-net increased $.2 million for the three-month period and $2.6
million for the nine-month period ended September 30, 1998 from the respective
periods in 1997 due to increased interest income from affiliates.
Cost of gas sold decreased by $27.6 million from the three-month period
ended September 30, 1998 from the comparable period in 1997 primarily as a
result of a $37.9 million decrease due to gas purchase volumes caused by the
assignment of the Company's Merchant Division activity to an affiliate and other
net decreases of $.6 million partially offset by $7.1 million from increases in
average gas purchase rates and reduced net system balancing requirements of $3.8
million. Cost of gas sold decreased by $16.0 million for the nine-month period
ended September 30, 1998 from the comparable period in 1997 primarily as a
result of a $21.9 million decrease due to gas purchase volumes partially caused
by the assignment of the Company's Merchant Division activity to an affiliate, a
decrease of $4.9 million related to lower
- 11 -
<PAGE>
average gas purchase rates and $2.4 million in other net decreases offset by a
$13.2 million reduction in net system balancing requirements.
Operation and maintenance expenses decreased by $3.7 million for the three
months ended September 30, 1998 from the comparable period in 1997 due primarily
to a $1.8 million decrease in outside services, a $1.0 million decrease in gas
used in operations, a $.4 million decrease in materials and supplies expenses
and other miscellaneous decreases of $.5 million. Operation and maintenance
expenses decreased by $8.5 million for the nine months ended September 30, 1998
from the comparable period in 1997 due primarily to a $5.0 million decrease in
gas used in operations, a $2.5 million decrease in outside services and other
miscellaneous decreases of $1.0 million.
Depreciation, depletion and amortization decreased $1.4 million for the
three-month period and $7.2 million for the nine-month period ended September
30, 1998 from the comparable periods in 1997 due primarily to depreciation rate
adjustments pursuant to the Company's settlement of FERC Docket RP96-190 and the
revision of depreciation rates as discussed in Note 1 of the Notes to
Consolidated Financial Statements.
Exploration and Production. The increase in operating revenues of $.9
million for the three months ended September 30, 1998 from the comparable 1997
period is primarily due to higher average natural gas sales prices equating to
$.8 million and other net increases of $.1 million. The decrease in operating
revenues of $2.4 million for the nine months ended September 30, 1998, as
compared to the same period in 1997, is a result of a $1.0 million decrease
related to gas sales volumes, a $.8 million decrease related to condensate and
natural gas liquids sales volumes and a $.7 million decrease related to average
natural gas sales prices partially offset by other net increases of $.1 million.
Other income-net increased by $.1 million for the three-month period and
by $.4 million for the nine-month period ended September 30, 1998 from the
respective comparable 1997 periods as a result of increased interest income from
affiliates.
Operation and maintenance expenses increased by $.9 million for the
three-month period ended September 30, 1998 from the comparable 1997 period
primarily as a result of increased production costs. Operation and maintenance
expenses increased by $1.3 million for the nine-month period ended September 30,
1998 from the comparable 1997 period primarily as a result of increased
production costs of $1.0 million and other miscellaneous increases of $.3
million.
Depreciation, depletion and amortization decreased by $.5 million for the
nine-month period ended September 30, 1998 from the comparable 1997 period due
to lower production volumes partially offset by a higher depreciation rate.
Interest Expense. The decrease of $.5 million in the three months ended
September 30, 1998 compared to the same period in 1997 is due to a reduction in
interest on provision for rate refunds. The increase of $.5 million in the
nine-month period ended September 30, 1998 as compared to the same period in
1997 is primarily the result of interest on the $100 million, 6.85% senior
debentures issued in June 1997 used in part to retire a $50 million senior term
loan partially offset by a reduction in interest on provision for rate refunds.
Taxes on Income. The $6.4 million and $3.4 million income tax decreases
for the three-month and nine-month periods ended September 30, 1998 compared to
the same periods in 1997 respectively are due primarily to decreased earnings
before income taxes and lower effective federal income tax rates.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations which may affect such
operations and costs as a result of their effect on the construction, operation
and maintenance of its pipeline facilities. The Company anticipates annual
environmental capital expenditures of $1 to $2 million over the next several
years aimed at maintaining compliance with such laws and regulations.
Additionally, appropriate governmental authorities may enforce the laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties and remediation requirements.
- 12 -
<PAGE>
Future information and developments will require the Company to
continually reassess the expected impact of all applicable environmental laws
and regulations. Compliance with all applicable environmental protection laws
and regulations is not expected to have a material adverse impact on the
Company's consolidated financial position or results of operations.
- 13 -
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The information required hereunder is incorporated by reference into
Part II of this Report from Note 5 of the Notes to Consolidated Financial
Statements set forth in Part I of this Report and from Item 2., "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Environmental Matters," set forth in Part I of this Report.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLORADO INTERSTATE GAS COMPANY
(Registrant)
Date: November 12, 1998 By: DAN A. HOMEC
--------------------------------------
Dan A. Homec
Assistant Vice President
and Controller
(As Authorized Officer and
Chief Accounting Officer)
- 14 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- -----------------------------------------------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COLORADO INTERSTATE GAS COMPANY
FORM 10-Q QUARTERLY REPORT FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 226
<SECURITIES> 0
<RECEIVABLES> 364,862
<ALLOWANCES> 0
<INVENTORY> 8,536
<CURRENT-ASSETS> 407,143
<PP&E> 1,363,357
<DEPRECIATION> 715,101
<TOTAL-ASSETS> 1,144,971
<CURRENT-LIABILITIES> 197,677
<BONDS> 279,502
0
0
<COMMON> 27,561
<OTHER-SE> 484,220
<TOTAL-LIABILITY-AND-EQUITY> 1,144,971
<SALES> 293,941
<TOTAL-REVENUES> 305,680
<CGS> 62,719
<TOTAL-COSTS> 206,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,387
<INCOME-PRETAX> 80,333
<INCOME-TAX> 27,928
<INCOME-CONTINUING> 52,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,405
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
