================================================================================
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 1-7176
THE COASTAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1734212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Coastal Tower
Nine Greenway Plaza
Houston, Texas 77046-0995
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 877-1400
---------------------------
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 212,313,539 shares of Common
Stock, 33-1/3 cents par value per share, and 354,979 shares of Class A Common
Stock, 33-1/3 cents par value per share, of the Registrant.
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<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of The Coastal Corporation ("Coastal") and its
subsidiaries (collectively the "Company") 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 sales and deliveries of natural gas and petroleum
products.
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 20.6 $ 20.5
Receivables, less allowance for doubtful accounts of $18.0 million
(1998) and $16.6 million (1997)...................................... 1,230.8 1,570.8
Inventories............................................................. 594.7 684.7
Prepaid expenses and other.............................................. 243.0 252.7
----------- -----------
Total Current Assets................................................. 2,089.1 2,528.7
----------- -----------
Property, Plant and Equipment - at cost:
Natural gas systems..................................................... 6,001.7 5,859.0
Refining, crude oil and chemical facilities............................. 2,347.5 2,254.8
Gas and oil properties - at full-cost................................... 2,705.2 2,152.0
Other................................................................... 399.4 395.0
----------- -----------
11,453.8 10,660.8
Accumulated depreciation, depletion and amortization.................... 3,785.1 3,539.2
----------- -----------
7,668.7 7,121.6
----------- -----------
Other Assets:
Goodwill................................................................ 475.5 489.8
Investments - equity method............................................. 925.5 722.8
Other................................................................... 834.8 762.3
----------- -----------
2,235.8 1,974.9
----------- -----------
$ 11,993.6 $ 11,625.2
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable........................................................... $ 60.0 $ 114.0
Accounts payable........................................................ 1,630.3 2,074.0
Accrued expenses........................................................ 403.7 270.7
Current maturities on long-term debt.................................... 57.2 42.0
---------- -----------
Total Current Liabilities............................................ 2,151.2 2,500.7
---------- -----------
Debt:
Long-term debt, excluding current maturities............................ 3,804.5 3,663.2
---------- -----------
Deferred Credits and Other:
Deferred income taxes................................................... 1,622.0 1,564.9
Other deferred credits.................................................. 663.8 514.0
---------- -----------
2,285.8 2,078.9
---------- -----------
Preferred Stock:
Company-obligated mandatory redemption
preferred securities of a consolidated trust......................... 300.0 -
Issued by subsidiaries.................................................. 100.0 100.0
---------- -----------
400.0 100.0
---------- -----------
Common Stock and Other Stockholders' Equity:
Cumulative preferred stock (with aggregate liquidation
preference of $7.8 million).......................................... - 2.6
Class A common stock.................................................... .1 .1
Common stock............................................................ 72.2 36.7
Additional paid-in capital.............................................. 1,016.5 1,243.6
Retained earnings....................................................... 2,395.8 2,131.9
---------- -----------
3,484.6 3,414.9
Less common stock in treasury - at cost................................. 132.5 132.5
---------- -----------
3,352.1 3,282.4
---------- -----------
$ 11,993.6 $ 11,625.2
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Millions of Dollars, Except Per Share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues............................................ $ 1,661.6 $ 2,143.0 $ 5,542.5 $ 7,505.4
--------- ---------- --------- ---------
Operating Costs and Expenses:
Purchases.................................................. 966.9 1,427.9 3,330.1 5,366.5
Operating and general expenses............................. 421.9 438.2 1,271.1 1,270.9
Depreciation, depletion and amortization................... 111.2 108.5 334.9 330.8
--------- ---------- --------- ---------
1,500.0 1,974.6 4,936.1 6,968.2
--------- ---------- --------- ---------
Other Income - net............................................ 22.1 25.8 46.5 69.1
--------- ---------- --------- ---------
Earnings Before Interest and Income Taxes..................... 183.7 194.2 652.9 606.3
--------- ---------- --------- ---------
Interest and debt expense, less $6.7 million (1998)
and $2.3 million (1997) three months and $18.5
million (1998) and $7.1 million (1997) nine
months capitalized......................................... 70.1 77.9 221.2 230.3
Taxes on income............................................... 24.1 35.9 124.7 115.1
--------- ---------- --------- ---------
Earnings Before Extraordinary Item............................ 89.5 80.4 307.0 260.9
Extraordinary item - loss on early extinguishment
of debt................................................. - - - (90.6)
--------- ---------- --------- ---------
Net Earnings.................................................. 89.5 80.4 307.0 170.3
Dividends on Preferred Stock.................................. .1 4.3 6.0 13.0
--------- ---------- --------- ---------
Net Earnings Available
to Common Stockholders..................................... $ 89.4 $ 76.1 $ 301.0 $ 157.3
========= ========== ========= =========
Basic Earnings Per Share:
Before extraordinary item.................................. $ .42 $ .36 $ 1.42 $ 1.17
Extraordinary item......................................... - - - (.43)
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .42 $ .36 $ 1.42 $ .74
========= ========== ========= =========
Diluted Earnings Per Share:
Before extraordinary item.................................. $ .41 $ .35 $ 1.39 $ 1.15
Extraordinary item......................................... - - - (.42)
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .41 $ .35 $ 1.39 $ .73
========= ========== ========= =========
Cash Dividends Per Common Share............................... $ .0625 $ .05 $ .175 $ .15
========= ========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousand of Shares and Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------
1998 1997
------------------------ ------------------------
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........................... 58 $ - 60 $ -
Converted to common......................... (2) - (2) -
----------- ---------- ----------- ----------
Ending balance.............................. 56 - 58 -
=========== ---------- =========== ----------
$1.83, Series B, redemption or liquidation
amount of $50 per share:
Beginning balance........................... 68 - 74 -
Converted to common......................... (6) - (4) -
----------- ---------- ----------- ----------
Ending balance.............................. 62 - 70 -
=========== ---------- =========== ----------
$5.00, Series C, redemption or liquidation
amount of $100 per share:
Beginning balance........................... 30 - 32 -
Converted to common......................... (2) - (2) -
----------- ---------- ----------- ----------
Ending balance.............................. 28 - 30 -
=========== ---------- =========== ----------
Cumulative preferred:
$2.125, Series H, liquidation amount
of $25 per share:
Beginning balance........................... 8,000 2.6 8,000 2.6
Redeemed.................................... (8,000) (2.6) - -
----------- ---------- ----------- ----------
Ending balance.............................. - - 8,000 2.6
=========== ---------- =========== ----------
Class A common stock, par value 33-1/3 cents per share,
authorized 2,700,000 shares:
Beginning balance................................ 366 .1 382 .1
Converted to common.............................. (12) - (13) -
Conversion of preferred stock.................... 1 - 1 -
----------- ---------- ----------- ----------
Ending balance................................... 355 .1 370 .1
=========== ---------- =========== ----------
Common stock, par value 33-1/3 cents per share,
authorized 250,000,000 shares:
Beginning balance................................ 110,117 36.7 109,756 36.6
Conversion of preferred stock.................... 54 - 35 -
Conversion of Class A common stock............... 12 - 13 -
Two-for-one stock split.......................... 106,268 35.4 - -
Exercise of stock options........................ 208 .1 277 .1
----------- ---------- ----------- ----------
Ending balance................................... 216,659 $ 72.2 110,081 $ 36.7
=========== ---------- =========== ----------
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Shares and Millions of Dollars)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------
1998 1997
------------------------ ------------------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Additional paid-in capital:
Beginning balance................................... $ 1,243.6 $ 1,239.6
Exercise of stock options........................... 5.7 6.7
Two-for-one stock split............................. (35.4) -
Redemption of Series H preferred stock.............. (197.4) -
---------- ----------
Ending balance...................................... 1,016.5 1,246.3
---------- ----------
Retained earnings:
Beginning balance................................... 2,131.9 1,890.1
Net earnings for period............................. 307.0 170.3
Dividends on preferred stock........................ (6.0) (13.0)
Dividends on common stock........................... (37.1) (31.8)
---------- ----------
Ending balance...................................... 2,395.8 2,015.6
---------- ----------
Less treasury stock - at cost.......................... 4,395 (132.5) 4,395 (132.5)
=========== ---------- =========== ----------
Total.................................................. $ 3,352.1 $ 3,168.8
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
--------- --------
(Unaudited)
<S> <C> <C>
Net Cash Flow From Operating Activities:
Earnings before extraordinary item.......................................... $ 307.0 $ 260.9
Add (subtract) items not requiring (providing) cash:
Depreciation, depletion and amortization................................. 337.3 333.1
Deferred income taxes.................................................... 84.7 32.9
Undistributed earnings from equity investments........................... (26.3) (29.2)
Working capital and other changes, excluding changes relating to cash and
nonoperating activities:
Accounts receivable................................................... 340.0 512.3
Inventories........................................................... 89.9 194.5
Prepaid expenses and other............................................ (6.5) (17.8)
Accounts payable...................................................... (434.4) (529.0)
Accrued expenses...................................................... 119.7 (39.7)
Other................................................................. 103.3 (114.2)
--------- --------
914.7 603.8
--------- --------
Cash Flow From Investing Activities:
Purchases of property, plant and equipment.................................. (917.6) (638.3)
Proceeds from sale of property, plant and equipment......................... 28.9 77.1
Additions to investments.................................................... (199.0) (195.2)
Proceeds from investments................................................... 10.9 70.1
--------- --------
(1,076.8) (686.3)
--------- --------
Cash Flow From Financing Activities:
Increase in short-term notes ............................................... 96.0 400.0
Redemption of preferred stock............................................... (200.0) -
Proceeds from issuing common stock.......................................... 5.8 6.8
Proceeds from long-term debt issues......................................... 397.0 782.8
Proceeds from issuing Company-obligated mandatory
redemption preferred securities of a consolidated trust.................. 300.0 -
Payments to retire long-term debt........................................... (393.5) (1,106.1)
Dividends paid.............................................................. (43.1) (44.8)
--------- --------
162.2 38.7
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........................... .1 (43.8)
Cash and Cash Equivalents at Beginning of Period............................... 20.5 106.3
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 20.6 $ 62.5
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
- 6 -
<PAGE>
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, 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 certain assets associated with the interstate
natural gas pipeline and storage subsidiaries. In July 1997, the depreciation
rates related to these assets were revised. This revision had the effect of
increasing "Earnings Before Extraordinary Item" and "Net Earnings" by
approximately $19.0 million ($.09 per share) for the nine-month period ended
September 30, 1998.
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 7 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: The Company made cash payments for interest and
financing fees, net of amounts capitalized, of $212.2 million and $209.3 million
for the nine months ended September 30, 1998 and 1997, respectively. Cash
payments for income taxes amounted to $41.8 million and $52.9 million for the
nine months ended September 30, 1998 and 1997, respectively.
- 7 -
<PAGE>
2. Inventories
Inventories were as follows (millions of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
Refined products, crude oil and chemicals............................... $ 405.5 $ 492.3
Natural gas in underground storage...................................... 29.8 40.5
Coal, materials and supplies............................................ 159.4 151.9
----------- ----------
$ 594.7 $ 684.7
=========== ==========
</TABLE>
Elements included in inventory cost are material, labor and manufacturing
expense.
3. Stock Split
On May 7, 1998, the Board of Directors of Coastal authorized a two-for-one
stock split of the Coastal common stock. On July 1, 1998, stockholders of record
received one additional share of common stock for each share of common stock
and/or Class A common stock held of record on May 29, 1998. The stock split has
been reflected in the accompanying financial statements, and all applicable
references as to the number of common shares and per share information have been
restated. Appropriate adjustments have been made in the conversion ratios of
shares of convertible preferred stock and in the exercise price and number of
shares subject to stock options. Effective with the stock split, the annual cash
dividend rate on the common stock is $.25 per share.
4. Debt
At September 30, 1998, the Company had $460 million of outstanding
indebtedness to banks under short-term lines of credit. The Company's financial
statements at September 30, 1998 reflect $400 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 $250 million as of December 31, 1997.
The Company has $150 million of 8.75% Senior Notes which are due May 15,
1999. The financial statements at September 30, 1998, reflect this amount as
long-term, based on the availability of committed credit lines with maturities
in excess of one year and the Company's intent to refinance the debt on a
long-term basis.
5. Common and Preferred Stock
On September 30, 1998, 13,305,866 shares of Common Stock of the Company
were reserved for employee stock option plans, 1,271,434 shares were reserved
for conversion of the Series A, B, and C Preferred Stocks, 355,345 shares were
reserved for conversion of outstanding Class A Common Stock and 19,638 shares
were reserved for conversion of Class A Common Stock subject to future issuance.
The Class A Common Stock reserved for future issuance consists of 2,280 shares
reserved for employee stock option plans and 17,358 shares reserved for
conversion of the Series A, B, and C Preferred Stocks.
During 1998, the Company has granted options to purchase 2,076,767 common
shares under stock option plans with exercise prices ranging from $27.75 to
$35.28. The exercise prices are equal to the market price of the common shares
at grant date.
On April 15, 1998, the Company redeemed all 8,000,000 outstanding shares of
its $2.125 Cumulative Preferred Stock, Series H. Redemption price for the Series
H stock was $25 per share plus accrued dividends of $.182986 to April 15, 1998.
- 8 -
<PAGE>
6. Company-Obligated Mandatory Redemption Preferred Securities
of a Consolidated Trust
On May 13, 1998, Coastal completed a public offering of 12,000,000
Coastal-obligated mandatory redemption preferred securities through an
affiliate, Coastal Finance I, a business trust (the "Trust"), for $300 million
in cash. The Trust holds debt securities of Coastal (the "Debt Securities")
purchased with the proceeds of the preferred securities offering. Cumulative
quarterly distributions are being paid on the preferred securities at an annual
rate of 8.375% of the liquidation amount of $25 per preferred security. The
proceeds were used to refinance borrowings incurred to finance the redemption of
the Series H Preferred Stock discussed in Note 5 and to repay certain
outstanding subsidiary indebtedness. The preferred securities are mandatorily
redeemable on the maturity date, May 13, 2038, or earlier to the extent of any
redemption by Coastal of any Debt Securities. The redemption price to be paid is
$25 per preferred security, plus accrued and unpaid distributions to the date of
redemption.
7. 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 (millions 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>
Operating Revenues From External Customers:
Natural gas............................................. $ 268.8 $ 291.9 $ 996.5 $ 1,773.4
Refining, marketing and chemicals....................... 1,196.2 1,657.0 3,937.1 5,204.7
Exploration and production.............................. 103.5 107.1 325.0 265.6
Coal.................................................... 65.2 55.7 180.7 169.0
Power................................................... 23.2 26.5 92.5 78.2
Corporate and other..................................... 4.7 4.8 10.7 14.5
--------- ---------- --------- ---------
$ 1,661.6 $ 2,143.0 $ 5,542.5 $ 7,505.4
========= ========== ========= =========
</TABLE>
Intersegment revenues for the three-month period were as follows: Refining,
marketing and chemicals - $.3 million (1998), $1.7 million (1997); Exploration
and production - $4.4 million (1998), $3.7 million (1997); and Corporate and
other - $1.8 million (1998), $1.4 million (1997).
Intersegment revenues for the nine-month period were as follows: Natural
gas - $49.5 million (1997); Refining, marketing and chemicals - $2.1 million
(1998), $4.5 million (1997); Exploration and production - $19.5 million (1998),
$94.1 million (1997); and Corporate and other - $8.1 million (1998), $7.8
million (1997).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings (Loss) Before Interest and Income Taxes:
Natural gas............................................. $ 109.1 $ 110.8 $ 402.5 $ 441.0
Refining, marketing and chemicals....................... 58.7 53.9 176.3 50.7
Exploration and production.............................. 15.9 33.1 71.7 120.3
Coal.................................................... 7.7 3.3 15.0 22.1
Power................................................... 14.8 11.3 52.2 31.7
Corporate and other..................................... (22.5) (18.2) (64.8) (59.5)
--------- ---------- --------- ---------
$ 183.7 $ 194.2 $ 652.9 $ 606.3
========= ========== ========= =========
</TABLE>
- 9 -
<PAGE>
8. Fulton Power Plant
In June 1998, the power purchase agreement associated with the Company's
Fulton Power Plant ("Plant") was restructured. In connection with the
restructuring, a net gain of $13.6 million was recorded in the Power segment for
the second quarter. The net gain reflects a $23 million reduction in the Plant's
carrying value (to estimated fair value following the restructuring) and
deferral of certain proceeds to cover estimated future costs.
9. Income Taxes
Provisions for income taxes were as follows (millions 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................................................. $ 6.6 $ 28.0 $ 26.0 $ 68.9
Foreign................................................. 1.1 1.5 4.1 3.5
State................................................... 1.9 2.2 9.9 9.8
--------- ---------- --------- ---------
9.6 31.7 40.0 82.2
--------- ---------- --------- ---------
Deferred Income Taxes:
Federal................................................. 11.1 2.5 76.3 30.0
Foreign................................................. 1.1 .7 2.6 2.5
State................................................... 2.3 1.0 5.8 .4
--------- ---------- --------- ---------
14.5 4.2 84.7 32.9
--------- ---------- --------- ---------
$ 24.1 $ 35.9 $ 124.7 $ 115.1
========= ========== ========= =========
</TABLE>
Interim period provisions for federal income taxes are based on estimated
effective annual income tax rates.
10. 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 September 30, 1998 Nine Months Ended September 30, 1998
------------------------------------- ---------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) Per-Share (Numerator) (Denominator) Per-Share
(Millions) (Thousands) Amount (Millions) (Thousands) Amount
----------- ------------ --------- ----------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earnings before extraordinary
item................... $ 89.5 $ 307.0
Less preferred stock
dividends.............. .1 6.0
---------- ----------
Basic earnings per share
Income available to
common stockholders.... 89.4 212,588 $ .42 301.0 212,497 $ 1.42
========= =========
Effect of dilutive securities
Options................ - 2,013 - 2,204
Convertible preferred stock - 1,297 .2 1,327
---- -------- ------ ----------
Diluted earnings per share
Income available to
common stockholders
plus assumed conversions $ 89.4 215,898 $ .41 $ 301.2 216,028 $ 1.39
========== ============ ========= ========== ============ =========
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997 Nine Months Ended September 30, 1997
------------------------------------- ---------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) Per-Share (Numerator) (Denominator) Per-Share
(Millions) (Thousands) Amount (Millions) (Thousands) Amount
----------- ------------- --------- ----------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Earnings before extraordinary
item................... $ 80.4 $ 260.9
Less preferred stock
dividends.............. 4.3 13.0
---------- ----------
Basic earnings per share
Income available to
common stockholders.... 76.1 212,028 $ .36 247.9 211,808 $ 1.17
========= =========
Effect of dilutive securities
Options................ - 1,989 - 1,688
Convertible preferred stock - 1,405 .2 1,427
---- -------- ------ --------
Diluted earnings per share
Income available to
common stockholders
plus assumed conversions $ 76.1 215,422 $ .35 $ 248.1 214,923 $ 1.15
========== ============ ========= ========== ============ =========
</TABLE>
11. Litigation, Environmental and Regulatory Matters
Litigation
In connection with the December 20, 1996 sale of the Company's western coal
operations, the Company has assumed control of a pending dispute with the
Intermountain Power Agency ("IPA") involving two coal sales agreements of
Coastal States Energy Company, which contracts were included in the sale, and
for which the Company continues to have certain responsibilities. On July 14,
1997, IPA made a demand for arbitration between the parties, asserting a claim
of a gross inequity under the contracts requiring a reduction in the purchase
price of coal sold before and after the sale of these coal operations. The
Company believes that no gross inequity has occurred and that it should prevail
in the arbitration on the merits.
In December 1992, certain of Colorado Interstate Gas Company's ("CIG")
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 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, 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 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 have 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 argument before the Fifth Circuit Court of Appeals has been
scheduled for December 4, 1998.
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 United States District Court, Southern District of Texas. The
suit alleges racially discriminatory employment policies and practices and seeks
damages in the amount of at least $100 million and punitive damages of at least
three times that amount. Plaintiffs' counsel are seeking to have the suit
certified as a class action. Coastal vigorously denies these allegations and has
filed responsive pleadings. In January 1998, the plaintiffs 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.
- 11 -
<PAGE>
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 ANR Pipeline and CIG. 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. Coastal and several of its subsidiaries have been included
in two of the September 1997 suits. The suits were filed in both the U.S.
District Court, District of Colorado and the U.S. District Court, Eastern
District of Michigan.
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. The Company anticipates
capital expenditures of approximately $35 million in 1998 in order to comply
with such laws and regulations. The majority of the 1998 expenditures is
attributable to projects at the Company's refining, chemical and terminal
facilities. The Company currently anticipates capital expenditures for
environmental compliance for the years 1999 through 2001 of $20 to $40 million
per year. 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.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as Superfund, as reauthorized, imposes liability, without regard to
fault or the legality of the original act, for disposal of a "hazardous
substance." Certain subsidiaries of the Company and a company in which Coastal
owns a 50% interest have been named as a potentially responsible party ("PRP")
in several Superfund waste disposal sites. At the 11 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$281 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $7.4 million and has made appropriate
provisions. At nine other sites, the 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,
Environment 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
$100,000, and suitable remediation. There is not sufficient information to
estimate the remedial costs or the Company's pro-rata exposure at this site. At
the third state site, the North Dakota Department of Health has estimated the
total cleanup costs to be approximately $1 million, but the Company believes the
subsidiary's activities at this site were de minimis.
In Michigan, where ANR Pipeline has extensive operations, the Environmental
Response Act requires individuals (including corporations) who have caused
contamination to remediate the contamination to regulatory standards. Owners or
operators of contaminated property who did not cause the contamination are not
required to remediate the contamination, but must exercise due care in their use
of the property so that the contamination is not exacerbated and the property
does not pose a threat to human health. ANR Pipeline estimates that its costs to
comply with the Michigan regulations will be approximately $12 million, which
will be expended over a period of two to ten years and for which appropriate
provisions have been made.
By letter dated April 8, 1997, the United States Department of Justice (the
"Justice Department") notified Coastal Coal Company, LLC (formerly ANR Coal
Company, LLC) ("Coastal Coal"), a subsidiary of Coastal, that the EPA has
requested the Justice Department to bring an action against Coastal Coal for
alleged violations of the Clean Water Act
- 12 -
<PAGE>
resulting from discharges from a mine in which Coastal Coal had a leasehold
interest in the minerals. The letter offers to settle the matter prior to
litigation for $900,000 and agreement to implement certain injunctive relief
which includes the necessary improvements to the existing water treatment
system. Coastal Coal has negotiated a settlement of the matter with the EPA and
the West Virginia Division of Environmental Protection ("WVDEP"). Under the
settlement, the Company will pay a $100,000 penalty and implement a project to
abate the discharge. The WVDEP will make a substantial contribution to the
project. The settlement agreement has been lodged in federal district court and
has been noticed for public comment.
In April 1996, Coastal Oil & Gas Corporation ("COG"), a subsidiary of
Coastal, received a letter from the EPA Region VIII notifying it that the EPA
believes that COG's facility located in Patrick Draw, Wyoming is in violation of
certain PCB regulations promulgated pursuant to the Toxic Substances Control
Act. The EPA has offered COG an opportunity to resolve this matter without
litigation. The Company has complied with the EPA's suggested remediation and
the EPA has approved the remediation.
In January 1996, the EPA issued a Notice of Violation ("NOV") to Coastal
Eagle Point Oil Company and Eagle Point Cogeneration Partnership ("EPCP"), in
which Company subsidiaries hold a 50% interest. The NOV alleged violations of
the Clean Air Act for the failure to obtain a Prevention of Significant
Deterioration ("PSD") permit when EPCP was constructing the facility and for
alleged violations of the facility's operating permits. On June 25, 1997, the
Justice Department sent the companies a letter on behalf of the EPA demanding $3
million in penalties for the violations of the operating permits. The PSD
allegation was not included in the demand. The companies, along with Coastal
Technology, Inc., a subsidiary of Coastal that operates the EPCP facility, have
agreed to pay $300,000 as a penalty and to implement a Supplemental
Environmental Project. The EPA has withdrawn, without prejudice, the PSD
allegation in the NOV. The settlement agreement, in the form of a consent
decree, has been lodged in federal district court. The Justice Department has
filed a motion to have the court enter the settlement.
On August 10, 1998, the Javelina Company ("Javelina"), in which a wholly
owned subsidiary of the Company is a 40 percent partner, received a Notice of
Enforcement Action from the Texas Natural Resource Conservation Commission
("TNRCC") related to alleged violations of the Texas Health and Safety Code
pertaining to air pollution by Javelina's plant located in Corpus Christi,
Texas. The notice offers to resolve the alleged violations in exchange for the
payment of a $190,000 civil penalty and the implementation of certain specified
remedial measures. Javelina has settled this matter with the TNRCC staff for
$40,000. An order will be presented to the TNRCC for final approval.
Future information and 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 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, CIG filed with the FERC to change its rates, and as part
of that filing, included tariff sheets that would allow CIG 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, CIG 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
- 13 -
<PAGE>
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 CIG appeal on the grounds that it is premature, and CIG 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, CIG 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.
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. After the filing of testimony by WIC and other parties on July 2, 1998,
WIC filed a settlement offer which, if approved, will resolve all issues in the
case. By order dated November 3, 1998, the FERC remanded the settlement to the
Administrative Law Judge for further proceedings because of opposition to the
settlement by certain parties.
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.
- 14 -
<PAGE>
Item 2.A. 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 commodity
prices, market 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>
Return on average common stockholders' equity.................. 13.5% 12.9%
Cash flow from operating activities to long-term debt.......... 33.4% 26.2%
Total debt to total capitalization............................. 51.1% 53.0%
Times interest earned (before tax)............................. 3.0 2.7
</TABLE>
The increase in the return on average common stockholders' equity and times
interest earned ratios are primarily due to increased earnings in the 1998
period. The increase in cash flow from operating activities to long-term debt
resulted from changes in working capital and other, earnings and long-term debt.
On April 15, 1998, the Company redeemed all 8,000,000 outstanding shares of
its $2.125 Cumulative Preferred Stock, Series H. Redemption price for the Series
H stock was $25 per share plus accrued dividends of $.182986 to April 15, 1998.
On May 13, 1998, Coastal completed a public offering of 12,000,000
Coastal-obligated mandatory redemption preferred securities through an
affiliate, Coastal Finance I, a business trust (the "Trust"), for $300 million
in cash. The Trust holds debt securities of Coastal (the "Debt Securities")
purchased with the proceeds of the preferred securities offering. Cumulative
quarterly distributions are being paid on the preferred securities at an annual
rate of 8.375% of the liquidation amount of $25 per preferred security. The
proceeds were used to refinance borrowings incurred to finance the redemption of
the Series H Preferred Stock discussed above and to repay certain outstanding
subsidiary indebtedness. The preferred securities are mandatorily redeemable on
the maturity date, May 13, 2038, or earlier to the extent of any redemption by
Coastal of any Debt Securities. The redemption price to be paid is $25 per
preferred security, plus accrued and unpaid distributions to the date of
redemption.
In June 1998, the Company completed public offerings of $200 million of
6.5% senior debentures due 2008 and $200 million of 6.95% senior debentures due
2028. The net proceeds from the sale were used to repay variable rate
indebtedness, including indebtedness of a subsidiary under a revolving credit
facility.
In the third quarter, the Company increased its Exploration and Production
1998 capital expansion budget by $100 million. Financing for capital expansion,
mandatory debt retirements and other expenditures will be provided by internally
generated funds, existing credit lines, proceeds from the sale of selective
non-core assets and new financings.
Funding for certain proposed projects is anticipated to be provided through
nonrecourse project financings in which the projects' assets and contracts will
be pledged as collateral. Equity participation by other entities will be
considered. To the extent required, cash for equity contributions to projects
will be from general corporate funds.
- 15 -
<PAGE>
The Company continues to maintain a financial position that will enable it
to generate and obtain capital for financing needs in the foreseeable future.
Unused lines of credit at September 30, 1998 were as follows (millions of
dollars):
Short-term .............................................. $ 770.3
Long-term* .............................................. 750.6
---------
$ 1,520.9
*$45.1 million of unused long-term credit lines is dedicated to a
specific use.
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. Coastal, 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 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. Coastal's diversity and distribution
on a business unit, geographical and customer basis are expected to naturally
reduce the risk of major disruptions to worldwide 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
- 16 -
<PAGE>
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 $8 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 $9 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.
Results of Operations
The changes in the Company's earnings for the three- and nine-month periods
ended September 30, 1998 in comparison to the same periods in 1997 are a result
of the following:
Operating Revenues. The operating revenues by segment were as follows
(millions 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............................................. $ 268.8 $ 291.9 $ 996.5 $ 1,822.9
Refining, marketing and chemicals....................... 1,196.5 1,658.7 3,939.2 5,209.2
Exploration and production.............................. 107.9 110.8 344.5 359.7
Coal.................................................... 65.2 55.7 180.7 169.0
Power................................................... 23.2 26.5 92.5 78.2
Other................................................... 6.5 6.2 18.8 22.3
Adjustments and eliminations............................ (6.5) (6.8) (29.7) (155.9)
--------- ---------- --------- ---------
$ 1,661.6 $ 2,143.0 $ 5,542.5 $ 7,505.4
========= ========== ========= =========
</TABLE>
Earnings (Loss) Before Interest and Income Taxes. The earnings (loss)
before interest and income taxes by segment was as follows (millions 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............................................. $ 109.1 $ 110.8 $ 402.5 $ 441.0
Refining, marketing and chemicals....................... 58.7 53.9 176.3 50.7
Exploration and production.............................. 15.9 33.1 71.7 120.3
Coal ................................................... 7.7 3.3 15.0 22.1
Power................................................... 14.8 11.3 52.2 31.7
Corporate and other..................................... (22.5) (18.2) (64.8) (59.5)
--------- ----------- --------- ---------
$ 183.7 $ 194.2 $ 652.9 $ 606.3
========= ========== ========= =========
</TABLE>
- 17 -
<PAGE>
Natural Gas. The decrease in operating revenues of $23.1 million for the
third quarter can be attributed to lower transportation, storage and gathering
revenues. Operating revenues decreased by $826.4 million in the nine months
ended September 30, 1998, primarily as a result of the Company's unregulated gas
marketing operations which became a part of Engage Energy US, L.P. and Engage
Energy Canada, L.P. (collectively, "Engage Energy"). The revenues from these
operations, which are included in the Company's revenues through February 1997,
resulted in a decrease of $833.5 million for the nine-month period of 1998.
Revenues for the 1997 nine-month period also included a $42 million gain from an
equalization payment associated with the formation of Engage Energy.
Purchases decreased $11.2 million for the three months ended September 30,
1998, resulting in a gross profit decrease of $11.9 million. For the nine-month
period, purchases decreased $766.0 million, primarily due to the combination of
the Company's unregulated natural gas marketing operations noted above. Gross
profit decreased by $60.4 million for the nine-month period ended September 30,
1998.
Earnings before interest and income taxes ("EBIT") decreased by $1.7
million for the third quarter as a result of reduced transportation, storage and
gathering revenues of $28.4 million offset by proceeds of $26.7 million received
from the termination of gas transportation contracts. The nine-month EBIT
decrease of $38.5 million results from the $42.0 million gain discussed above;
reduced transportation, storage and gathering revenues of $58.4 million;
decreased earnings from equity investments of $18.8 million and other decreases
of $10.4 million partially offset by increases of $38.7 million from a rate case
settlement; the $26.7 million proceeds received from the termination of gas
transportation contracts and reduced depreciation, depletion and amortization of
$25.7 million. The reduced transportation, storage and gathering revenues result
from warmer than normal weather, decreased rates and continued intensified
competition across the United States natural gas industry. Depreciation,
depletion and amortization decreased due to the revision of depreciation rates
for certain assets as discussed in Note 1 of Notes to Consolidated Financial
Statements. The decreased earnings from equity investments for the nine-month
period includes a one-time charge of $14.6 million in the second quarter of 1998
related primarily to the default on delivery obligations by a supplier of
electricity to Engage Energy. The other decreases for the nine-month period are
primarily due to a nonrecurring provision of $16.1 million for environmental
compliance and other matters offset by an increase for interest income and a
gain on the sale of certain assets.
Refining, Marketing and Chemicals. Operating revenues decreased by $462.2
million in the 1998 third quarter and $1,270.0 million in the nine months ended
September 30,1998 due to reduced prices partially offset by increased volumes.
Purchases decreased by $455.0 million and $1,393.0 million in the three and nine
months, respectively, also due to reduced prices partially offset by increased
volumes, resulting in a gross profit decrease of $7.2 million for the quarter
and an increase of $123.0 million for the nine months. The reduced purchases can
also be attributed to the Company's increasing ability to use less expensive
heavy and sour crudes. The gross profit decrease of $7.2 million for the third
quarter resulted from decreased margins of $20.2 million offset by increased
volumes of $12.2 million and other increases of $.8 million. The nine-month
period gross profit increase of $123.0 million is due to increased margins of
$92.6 million; an increase of $7.8 million from the sale, trading and exchanging
of third-party products, higher sales volumes of $20.4 million and other of $2.2
million. Included in the gross profit for the 1997 nine-month period was an
inventory loss of $60.0 million which resulted from falling product and crude
oil prices.
The EBIT increase of $4.8 million for the third quarter resulted from
reduced operating and general expenses of $11.2 million and other increases of
$.8 million partially offset by reduced gross profit of $7.2 million. EBIT
increased by $125.6 million for the nine months ended September 30, 1998 due to
increased gross profit of $123.0 million and reduced operating and general
expenses of $10.8 million partially offset by reduced earnings from equity
investments of $5.5 million and other of $2.7 million. The reduced operating and
general expenses for both periods result from lower fuel costs at the
refineries.
Exploration and Production. Operating revenues decreased by $2.9 million in
the third quarter as a result of lower prices for all products partially offset
by increased natural gas volumes. The decrease in operating revenues of $15.2
million for the nine months ended September 30, 1998 resulted from lower prices
for all products partially offset by increased volumes. The volume increases
reflect the continued success of Coastal's drilling programs. EBIT decreased by
$17.2 million in the third quarter of 1998 as lower prices of $19.0 million;
increased depreciation, depletion and amortization of $6.6 million and increased
operating and general expenses of $7.9 million were offset by increased natural
gas volumes of $16.0 million and other of $.3 million. The EBIT decrease of
$48.6 million for the nine-month
- 18 -
<PAGE>
period results from lower prices of $71.5 million; increased depreciation,
depletion and amortization of $26.3 million and increased operating and general
expenses of $8.4 million partially offset by increased volumes of $50.7 million
and other increases of $6.9 million. The depreciation, depletion and
amortization increases for both periods resulted from increased production
volumes and a higher rate. Operating expenses were higher as a result of
increases for producing wells and drilling rigs.
Coal. Operating revenues from the coal segment increased by $9.5 million in
the three months and $11.7 million in the nine months ended September 30, 1998
as a result of increased volumes and a gain of $3.1 million from the sale of
assets partially offset by lower prices. EBIT increased by $4.4 million in the
three months ended September 30, 1998 as the increased revenues of $9.5 million
were partially offset by increased operating and general expenses of $4.8
million and other of $.3 million The decrease in EBIT of $7.1 million for the
nine-month period resulted from a nonrecurring favorable resolution of a
contingency in the first quarter of 1997 for $9.0 million, increased operating
and general expenses of $8.7 million and other of $1.1 million partially offset
by increased revenues of $11.7 million. The increased operating and general
expenses, which include coal costs, are primarily due to the increased volumes
sold.
Power. The operating revenue decrease of $3.3 million for the third quarter
results primarily from lower revenues from the El Salvador operations. Operating
revenues increased $14.3 million for the nine-month period ended September 30,
1998 primarily due to a net gain of $13.6 million recorded in the second quarter
of 1998 from the restructuring of the power purchase agreement for the Company's
Fulton power plant ("Plant"). The net gain reflects a $23.0 million reduction in
the Plant's carrying value (to estimated fair value following the restructuring)
and deferral of certain proceeds to cover estimated future costs. The EBIT
increase of $3.5 million for the third quarter results from lower operating and
general expenses of $4.9 million and increased earnings from equity investments
of $1.9 million partially offset by the operating revenue decrease of $3.3
million. EBIT increased by $20.5 million for the nine-month period due to
increased revenues of $14.3 million and increased earnings from equity
investments of $8.8 million partially offset by increased operating and general
expenses of $2.4 million and other of $.2 million. The decreased operating and
general expenses for the third quarter result from lower costs for the El
Salvador operations, while the nine-month increase results from increased
administrative and development costs related to joint venture projects.
Corporate and Other. The EBIT for these operations, which include equity
income from trucking, real estate activities and corporate income and expense
not allocated to the operating segments, decreased in the third quarter
primarily as a result of dividends on the Company-obligated mandatory redemption
preferred securities of a consolidated trust. The EBIT for the nine months ended
September 30, 1998 decreased as a result of the sale of certain real estate
properties in 1997 and the dividends noted above, partially offset by increased
earnings from equity investments in trucking.
Interest and Debt Expense. Interest and debt expense decreased by $7.8
million in the three-month period due primarily to increased capitalized
interest and reduced interest associated with regulatory matters partially
offset by higher average debt. The decrease of $9.1 million for the nine months
ended September 30, 1998 results from reduced average interest rates, reduced
interest associated with regulatory matters and increased capitalized interest
partially offset by increases due to higher average debt.
Taxes on Income. Federal income taxes decreased by $12.8 million in the
three-month period as a result of a lower effective federal income tax rate. The
nine month increase in federal income taxes of $3.4 million results from
increased earnings before taxes partially offset by a lower effective federal
income tax rate. State and foreign income taxes increased $1.0 million in the
three months and $6.2 million in the nine months ended September 30, 1998.
Extraordinary Item. The 1997 extraordinary item, net of income taxes,
resulted from the early retirement of debt.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. The Company anticipates
capital expenditures of approximately $35 million in 1998 in order to comply
with such laws and regulations. The majority of the 1998 expenditures is
attributable to projects at the Company's refining, chemical and terminal
facilities. The Company currently anticipates capital expenditures for
environmental compliance for the years 1999 through 2001 of $20 to $40 million
per year. Additionally, appropriate governmental authorities may
- 19 -
<PAGE>
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, as reauthorized, imposes liability, without regard to
fault or the legality of the original act, for disposal of a "hazardous
substance." Certain subsidiaries of the Company and a company in which Coastal
owns a 50% interest have been named as a potentially responsible party ("PRP")
in several Superfund waste disposal sites. At the 11 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$281 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $7.4 million and has made appropriate
provisions. At nine other sites, the 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,
Environment 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
$100,000, and suitable remediation. There is not sufficient information to
estimate the remedial costs or the Company's pro-rata exposure at this site. At
the third state site, the North Dakota Department of Health has estimated the
total cleanup costs to be approximately $1 million, but the Company believes the
subsidiary's activities at this site were de minimis.
Future information and 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.
Item 2.B. Other Developments.
In September 1998, Coastal announced that its subsidiary, Coastal Power
Company, acquired a majority interest in a 110-megawatt, fuel oil-fired power
plant located in Khulna in southwestern Bangladesh. Commercial operation of the
$96 million Khulna project began in October 1998. Coastal Petroleum, N.V.,
another Coastal subsidiary, will supply fuel oil to the Khulna plant in a joint
venture with two local companies.
In November 1998, Coastal Oil & Gas Corporation ("COG"), a Coastal
subsidiary, purchased from Conoco, Inc. certain upstream oil and gas assets
located in the Uintah Basin of northeastern Utah and the Piceance Basin in
western Colorado. The acquired assets are comprised of interests in 21 oil- and
gas-producing fields, an estimated 312,500 acres of producing and nonproducing
leasehold interests, the Dragon Trail processing plant and two natural gas
gathering systems. The leasehold interests include 106,000 acres of prospective
deep rights under and adjoining the Natural Buttes Federal Exploratory Unit in
Uintah County, Utah, which COG currently operates. The Dragon Trail processing
plant is located near Rangely, Colorado and is capable of processing up to 60
million cubic feet of natural gas per day. The gathering systems are located in
the Douglas Arch area of Colorado and in the Ouray Field in Uintah County, Utah.
- 20 -
<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 11 of the Notes to Consolidated Financial Statements
and from Item 2.A., "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.
11 - Statement re Computation of Per Share Earnings.
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.
THE COASTAL CORPORATION
(Registrant)
Date: November 12, 1998 By: COBY C. HESSE
--------------------------------
Coby C. Hesse
Executive Vice President
and Principal Accounting Officer
(As Authorized Officer and
Chief Accounting Officer)
- 21 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------------------------------------------------------------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
- 22 -
<PAGE>
EXHIBIT 11
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Millions of Dollars, Except Per Share Amounts,
and Thousands of Shares)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings............................................... $ 89.5 $ 80.4 $ 307.0 $ 170.3
Dividends on preferred stock............................... .1 4.3 6.0 13.0
--------- ---------- --------- ---------
Net earnings available to common stockholders.............. $ 89.4 $ 76.1 $ 301.0 $ 157.3
========= ========== ========= =========
Average number of common shares outstanding................... 212,231 211,657 212,136 211,432
Average number of Class A common shares outstanding........... 357 371 361 376
--------- ---------- --------- ---------
212,588 212,028 212,497 211,808
========= ========== ========= =========
Basic earnings per share:
Before extraordinary item.................................. $ .42 $ .36 $ 1.42 $ 1.17
Extraordinary item......................................... - - - (.43)
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .42 $ .36 $ 1.42 $ .74
========= ========== ========= =========
DILUTED EARNINGS PER SHARE
Net earnings used in calculating basic earnings per share.. $ 89.4 $ 76.1 $ 301.0 $ 157.3
Dividends applicable to dilutive preferred stock:
Series A................................................ - - - -
Series B................................................ - - .1 .1
Series C................................................ - - .1 .1
--------- ---------- --------- ---------
Income available to common shareholders plus
assumed conversions..................................... $ 89.4 $ 76.1 $ 301.2 $ 157.5
========= ========== ========= =========
Average number of shares used in calculating basic earnings
per share.................................................. 212,588 212,028 212,497 211,808
Effect of dilutive securities:
Options.................................................... 2,013 1,989 2,204 1,688
Series A, B and C preferred stock.......................... 1,297 1,405 1,327 1,427
--------- ---------- --------- ---------
215,898 215,422 216,028 214,923
========= ========== ========= =========
Diluted earnings per share:
Before extraordinary item.................................. $ .41 $ .35 $ 1.39 $ 1.15
Extraordinary item......................................... - - - (.42)
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .41 $ .35 $ 1.39 $ .73
========= ========== ========= =========
<FN>
- ------------------------------------
Convertible securities and options are not considered in the calculations if
the effect of the conversion is anti-dilutive.
</FN>
</TABLE>
- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COASTAL CORPORATION 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> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 1,231
<ALLOWANCES> 0
<INVENTORY> 595
<CURRENT-ASSETS> 2,089
<PP&E> 11,454
<DEPRECIATION> 3,785
<TOTAL-ASSETS> 11,994
<CURRENT-LIABILITIES> 2,151
<BONDS> 3,805
400
0
<COMMON> 72
<OTHER-SE> 3,280
<TOTAL-LIABILITY-AND-EQUITY> 11,994
<SALES> 5,543
<TOTAL-REVENUES> 5,589
<CGS> 3,330
<TOTAL-COSTS> 4,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 432
<INCOME-TAX> 125
<INCOME-CONTINUING> 307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.39
</TABLE>
