================================================================================
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 June 30, 1999
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 character)
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 July 30, 1999, there were outstanding 213,062,731 shares of Common
Stock, 331/3(cent) par value per share, and 348,223 shares of Class A Common
Stock, 331/3(cent) par value per share, of the Registrant.
================================================================================
<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, 1998, 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>
June 30, December 31,
ASSETS 1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 82.9 $ 106.9
Receivables, less allowance for doubtful accounts of $17.7 million
(1999) and $15.9 million (1998)...................................... 1,239.5 1,142.8
Inventories............................................................. 596.7 499.5
Prepaid expenses and other.............................................. 222.2 220.6
----------- -----------
Total Current Assets................................................. 2,141.3 1,969.8
----------- -----------
Property, Plant and Equipment - at cost:
Natural gas systems..................................................... 6,107.6 6,069.2
Refining, crude oil and chemical facilities............................. 2,460.7 2,424.2
Gas and oil properties - at full-cost................................... 3,289.8 2,870.8
Other................................................................... 505.8 366.6
----------- -----------
12,363.9 11,730.8
Accumulated depreciation, depletion and amortization.................... 3,885.1 3,706.9
----------- -----------
8,478.8 8,023.9
----------- -----------
Other Assets:
Goodwill................................................................ 461.3 470.8
Investments - equity method............................................. 1,149.1 970.8
Other................................................................... 920.0 868.8
----------- -----------
2,530.4 2,310.4
----------- -----------
$ 13,150.5 $ 12,304.1
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable........................................................... $ 200.0 $ 87.0
Accounts payable........................................................ 1,499.7 1,488.0
Accrued expenses........................................................ 352.4 305.0
Current maturities on long-term debt.................................... 69.5 126.5
----------- -----------
Total Current Liabilities............................................ 2,121.6 2,006.5
----------- -----------
Debt:
Long-term debt, excluding current maturities............................ 4,377.2 3,999.3
----------- -----------
Deferred Credits and Other:
Deferred income taxes................................................... 1,785.4 1,717.7
Other deferred credits.................................................. 779.2 704.8
----------- -----------
2,564.6 2,422.5
----------- -----------
Preferred Stock:
Company-obligated mandatory redemption
preferred securities of a consolidated trust......................... 300.0 300.0
Issued by subsidiaries.................................................. 100.0 100.0
----------- -----------
400.0 400.0
----------- -----------
Common Stock and Other Stockholders' Equity:
Cumulative preferred stock (with aggregate liquidation preference
of $7.5 million)..................................................... - -
Class A common stock.................................................... .1 .1
Common stock............................................................ 72.5 72.2
Additional paid-in capital.............................................. 1,026.2 1,016.2
Retained earnings....................................................... 2,720.8 2,519.8
----------- -----------
3,819.6 3,608.3
Less common stock in treasury - at cost................................. 132.5 132.5
----------- -----------
3,687.1 3,475.8
----------- -----------
$ 13,150.5 $ 12,304.1
=========== ===========
</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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues............................................ $ 1,892.1 $ 1,924.4 $ 3,601.7 $ 3,880.9
--------- ---------- --------- ---------
Operating Costs and Expenses:
Purchases.................................................. 1,184.3 1,176.8 2,130.2 2,363.2
Operating and general expenses............................. 413.1 427.1 824.5 849.2
Depreciation, depletion and amortization................... 115.8 116.7 224.4 223.7
--------- ---------- --------- ---------
1,713.2 1,720.6 3,179.1 3,436.1
--------- ---------- --------- ---------
Other Income - net............................................ 29.8 .2 55.1 22.5
--------- ---------- --------- ---------
Earnings Before Interest and Income Taxes..................... 208.7 204.0 477.7 467.3
--------- ---------- --------- ---------
Interest and debt expense, less $8.4 million (1999)
and $6.3 million (1998) three months and $15.8
million (1999) and $11.8 million (1998)
six months capitalized..................................... 81.5 75.8 158.5 151.1
Taxes on income............................................... 33.9 36.7 91.4 99.9
--------- ---------- --------- ---------
Earnings from continuing operations........................... 93.3 91.5 227.8 216.3
Earnings from discontinued operations......................... - 3.1 - 1.2
--------- ---------- --------- ---------
Net Earnings.................................................. 93.3 94.6 227.8 217.5
Dividends on Preferred Stock.................................. .1 1.6 .2 5.9
--------- ---------- --------- ---------
Net Earnings Available
to Common Stockholders..................................... $ 93.2 $ 93.0 $ 227.6 $ 211.6
========= ========== ========= =========
Basic Earnings Per Share:
From continuing operations................................. $ .44 $ .42 $ 1.07 $ .99
Discontinued operations.................................... - .02 - .01
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .44 $ .44 $ 1.07 $ 1.00
========= ========== ========= =========
Diluted Earnings Per Share:
From continuing operations................................. $ .43 $ .42 $ 1.05 $ .98
Discontinued operations.................................... - .01 - -
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .43 $ .43 $ 1.05 $ .98
========= ========== ========= =========
Cash Dividends Per Common Share............................... $ .0625 $ .0625 $ .125 $ .1125
========= ========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Shares and Millions of Dollars)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------
1999 1998
------------------------ ------------------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Preferred stock, par value
331/3(cent) per share, authorized 50,000,000 shares:
Cumulative convertible preferred:
$1.19, Series A, redemption or liquidation
amount of $33 per share:
Beginning balance........................... 56 $ - 58 $ -
Converted to common......................... (2) - (1) -
----------- ---------- ----------- ----------
Ending balance.............................. 54 - 57 -
=========== ---------- =========== ----------
$1.83, Series B, redemption or liquidation
amount of $50 per share:
Beginning balance........................... 61 - 68 -
Converted to common......................... (1) - (3) -
----------- ---------- ----------- ----------
Ending balance.............................. 60 - 65 -
=========== ---------- =========== ----------
$5.00, Series C, redemption or liquidation
amount of $100 per share:
Beginning balance........................... 28 - 30 -
Converted to common......................... (1) - (2) -
----------- ---------- ----------- ----------
Ending balance.............................. 27 - 28 -
=========== ---------- =========== ----------
Cumulative preferred:
$2.125, Series H, liquidation amount of
$25 per share:
Beginning balance........................... - - 8,000 2.6
Redeemed.................................... - - (8,000) (2.6)
----------- ---------- ----------- ----------
Ending balance.............................. - - - -
=========== ---------- =========== ----------
Class A common stock, par value 331/3(cent) per share,
authorized 2,700,000 shares:
Beginning balance................................ 354 .1 366 .1
Converted to common.............................. (8) - (8) -
Exercise of stock options........................ 2 - - -
----------- ---------- ----------- ----------
Ending balance................................... 348 .1 358 .1
=========== ---------- =========== ----------
Common stock, par value 331/3(cent) per share, authorized
500,000,000 shares:
Beginning balance................................ 216,765 72.2 110,117 36.7
Conversion of preferred stock.................... 42 - 19 -
Conversion of Class A common stock............... 8 - 8 -
Two-for-one stock split.......................... - - 106,268 35.4
Exercise of stock options........................ 638 .3 169 .1
----------- ---------- ----------- ----------
Ending balance................................... 217,453 $ 72.5 216,581 $ 72.2
=========== ---------- =========== ----------
</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>
Six Months Ended June 30,
------------------------------------------------------
1999 1998
------------------------ ------------------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Additional paid-in capital:
Beginning balance................................... $ 1,016.2 $ 1,243.6
Exercise of stock options........................... 10.0 5.5
Two-for-one stock split............................. - (35.4)
Redemption of Series H preferred stock.............. - (197.4)
---------- ----------
Ending balance...................................... 1,026.2 1,016.3
---------- ----------
Retained earnings:
Beginning balance................................... 2,519.8 2,131.9
Net earnings for period............................. 227.8 217.5
Dividends on preferred stock........................ (.2) (5.9)
Dividends on common stock........................... (26.6) (23.9)
---------- ----------
Ending balance...................................... 2,720.8 2,319.6
---------- ----------
Less treasury stock - at cost.......................... 4,397 (132.5) 4,396 (132.5)
=========== ---------- =========== ----------
Total.................................................. $ 3,687.1 $ 3,275.7
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
--------- --------
(Unaudited)
<S> <C> <C>
Net Cash Flow From Operating Activities:
Earnings from continuing operations......................................... $ 227.8 $ 216.3
Add (subtract) items not requiring (providing) cash:
Depreciation, depletion and amortization................................. 226.2 224.6
Deferred income taxes.................................................... 69.3 70.3
Undistributed earnings from equity investments........................... (23.6) (8.8)
Working capital and other changes, excluding changes
relating to cash and non-operating activities:
Accounts receivable................................................... (100.1) 218.2
Inventories........................................................... (19.5) 129.8
Prepaid expenses and other............................................ 5.1 (20.4)
Accounts payable...................................................... (113.3) (477.0)
Accrued expenses...................................................... 45.7 107.8
Other................................................................. 138.9 104.9
--------- --------
456.5 565.7
--------- --------
Cash Flow From Investing Activities:
Purchases of property, plant and equipment.................................. (663.4) (627.2)
Proceeds from sale of property, plant and equipment......................... 4.9 2.8
Additions to investments.................................................... (163.1) (114.0)
Proceeds from investments................................................... 19.1 11.3
Net from discontinued operations............................................ (15.6) 17.4
--------- --------
(818.1) (709.7)
--------- --------
Cash Flow From Financing Activities:
Increase (decrease) in short-term notes .................................... (57.0) 29.0
Redemption of preferred stock............................................... - (200.0)
Proceeds from issuing common stock.......................................... 10.3 5.6
Proceeds from long-term debt issues......................................... 618.1 397.0
Proceeds from issuing Company-obligated mandatory
redemption preferred securities of a consolidated trust.................. - 300.0
Payments to retire long-term debt........................................... (207.0) (294.8)
Dividends paid.............................................................. (26.8) (29.8)
--------- --------
337.6 207.0
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........................... (24.0) 63.0
Cash and Cash Equivalents at Beginning of Period............................... 106.9 20.5
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 82.9 $ 83.5
========= ========
</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, 1998. Prior period financial statements have been
restated to report the Company's 50% owned trucking operation as a discontinued
operation. In addition, certain minor reclassifications of prior period
statements have been made to conform with current reporting practices. The
effect of the reclassifications was not material to the Company's consolidated
results of operations, financial position or cash flows.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), as amended by Statement of Financial
Accounting Standards No. 137 ("FAS 137"), to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. FAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation. The Company is
currently evaluating the impact of FAS 133.
The Company adopted FASB Emerging Issues Task Force Issue No. 98-10,
"Accounting for Contracts in Energy Trading and Risk Management Activities," in
1999. The application of Issue No. 98-10 is not expected to have a material
effect on the Company's consolidated financial statements.
The Company adopted the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), in 1999. The
application of SOP 98-5 did not 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 $146.8 million and $156.9 million
for the six months ended June 30, 1999 and 1998, respectively. Cash payments for
income taxes amounted to $1.9 million and $14.1 million for the six months ended
June 30, 1999 and 1998, respectively.
2. Inventories
Inventories were as follows (millions of dollars):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Refined products, crude oil and chemicals............................... $ 404.1 $ 306.9
Natural gas in underground storage...................................... 36.3 32.0
Coal, materials and supplies............................................ 156.3 160.6
----------- ----------
$ 596.7 $ 499.5
=========== ==========
<FN>
Elements included in inventory cost are material, labor and manufacturing
expense.
</FN>
</TABLE>
3. Debt
At June 30, 1999, the Company had $430 million of outstanding indebtedness
to banks under short-term lines of credit. The Company's financial statements at
June 30, 1999 reflect $230 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
- 7 -
<PAGE>
and the Company's intent to maintain such amounts as long-term borrowings. There
was a similar reclassification of $400 million as of December 31, 1998.
In May 1999, the Company issued $200 million of 6.2% Notes due in 2004 and
$200 million of 6.5% Notes due in 2006. The net proceeds from the sale of the
notes were used to retire $150.0 million of 8.75% Senior Notes due May 15, 1999
and to repay floating rate indebtedness, including indebtedness of a subsidiary
under a revolving credit facility, and for general corporate purposes.
4. Common Stock
On June 30, 1999, 12,567,694 shares of Common Stock of the Company were
reserved for employee stock option plans, 1,222,023 shares were reserved for
conversion of the Series A, B, and C Preferred Stocks, 348,458 shares were
reserved for conversion of outstanding Class A Common Stock and 16,682 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 shares
reserved for conversion of the Series A, B, and C Preferred Stocks.
During the six months ended June 30, 1999, the Company has granted options
to purchase 1,746,250 common shares under stock option plans with exercise
prices ranging from $32.72 to $34.00. The exercise prices are equal to the
market price of the common shares at grant date.
5. Segment Information
The Company's operating revenues from external customers, intersegment
revenues and earnings (loss) before interest and income taxes for the three- and
six-months ended June 30, 1999 and 1998 are shown as follows (millions of
dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues From External Customers:
Natural gas............................................. $ 285.2 $ 311.6 $ 620.5 $ 727.7
Refining, marketing and chemicals....................... 1,402.3 1,388.3 2,588.5 2,740.9
Exploration and production.............................. 107.8 117.1 202.8 221.5
Coal.................................................... 61.1 61.7 125.9 115.5
Power................................................... 34.6 41.5 60.7 69.3
Corporate and other..................................... 1.1 4.2 3.3 6.0
--------- ---------- --------- ---------
$ 1,892.1 $ 1,924.4 $ 3,601.7 $ 3,880.9
========= ========== ========= =========
</TABLE>
Intersegment revenues for the three-month period were as follows: Natural
gas - $1.0 million (1999); Refining, marketing and chemicals - $.4 million
(1999), $.8 million (1998); Exploration and production - $5.6 million (1999),
$7.1 million (1998); and Corporate and other - $2.0 million (1999), $1.8 million
(1998).
- 8 -
<PAGE>
Intersegment revenues for the six-month period were as follows: Natural gas
- - $1.6 million (1999); Refining, marketing and chemicals - $.9 million (1999),
$1.8 million (1998); Exploration and production - $11.1 million (1999), $15.1
million (1998); and Corporate and other - $4.1 million (1999), $6.3 million
(1998).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings (Loss) Before Interest and Income Taxes:
Natural gas............................................. $ 115.5 $ 99.6 $ 302.4 $ 293.4
Refining, marketing and chemicals....................... 63.7 70.0 133.3 117.6
Exploration and production.............................. 24.1 30.3 35.5 55.8
Coal.................................................... 2.6 4.5 6.9 7.3
Power................................................... 24.8 25.8 43.7 37.4
Corporate and other..................................... (22.0) (26.2) (44.1) (44.2)
--------- ---------- --------- ---------
$ 208.7 $ 204.0 $ 477.7 $ 467.3
========= ========== ========= =========
</TABLE>
6. Income Taxes
Provisions for income taxes were as follows (millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current Income Taxes:
Federal................................................. $ 7.3 $ (2.2) $ 16.0 $ 18.6
Foreign................................................. 1.3 1.5 2.8 3.0
State................................................... (.3) 2.0 3.3 8.0
--------- ---------- --------- ---------
8.3 1.3 22.1 29.6
--------- ---------- --------- ---------
Deferred Income Taxes:
Federal................................................. 26.7 32.4 70.0 65.3
Foreign................................................. .9 .7 1.7 1.5
State................................................... (2.0) 2.3 (2.4) 3.5
--------- ---------- --------- ---------
25.6 35.4 69.3 70.3
--------- ---------- --------- ---------
$ 33.9 $ 36.7 $ 91.4 $ 99.9
========= ========== ========= =========
<FN>
Interim period provisions for federal income taxes are based on estimated
effective annual income tax rates.
</FN>
</TABLE>
- 9 -
<PAGE>
7. Earnings Per Share
Earnings per share are calculated following Statement of Financial
Accounting Standards No. 128. The following data shows the amounts used in
computing basic earnings per share and the effects on income and the weighted
average number of shares of dilutive securities.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
------------------------------------- ---------------------------------------
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 from continuing
operations............... $ 93.3 $ 227.8
Less preferred stock
dividends................ .1 .2
---------- ----------
Basic earnings per share from
continuing operations
Income available to
common stockholders.... 93.2 213,214 $ .44 227.6 212,998 $ 1.07
========= =========
Effect of dilutive securities
Options................ - 2,693 - 2,368
Convertible preferred stock .1 1,243 .2 1,258
----------- ------------ ---------- ------------
Diluted earnings per share from
continuing operations
Income available to
common stockholders
plus assumed conversions $ 93.3 217,150 $ .43 $ 227.8 216,624 $ 1.05
========== ============ ========= ========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 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 from continuing
operations............... $ 91.5 $ 216.3
Less preferred stock
dividends................ 1.6 5.9
---------- ----------
Basic earnings per share from
continuing operations
Income available to
common stockholders.... 89.9 212,473 $ .42 210.4 212,362 $ .99
========= =========
Effect of dilutive securities
Options................ - 2,484 - 2,300
Convertible preferred stock .1 1,333 .2 1,343
------- ------------ ---------- ------------
Diluted earnings per share from
continuing operations
Income available to
common stockholders
plus assumed conversions $ 90.0 216,290 $ .42 $ 210.6 216,005 $ .98
========== ============ ========= ========== ============ =========
</TABLE>
8. Litigation, Regulatory and Environmental Matters
Litigation Matters
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, Northern District of Texas, claiming underpayment of royalties,
breach of fiduciary duty, fraud and negligent misrepresentation. Management
believes that CIG has numerous defenses to the lessors' claims, including (i)
that the royalties were properly paid, (ii) that the majority of the claims were
released by
- 10 -
<PAGE>
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, the releases are valid and dismissing all tort
claims and claims for breach of any duty of disclosure. The remaining claim for
underpayment of royalties was tried to a jury which, in May 1995, made findings
favorable to CIG. On June 7, 1995, the trial court entered a judgment that the
lessors recover no monetary damages from CIG and permanently estopping the
lessors from asserting any claim based on an interpretation of the contract
different than that asserted by CIG in the litigation. The lessors' motion for a
new trial was denied on July 18, 1997, and both parties filed appeals. On June
7, 1996, the same plaintiffs sued CIG in state court in Amarillo, Texas, for
underpayment of royalties. CIG removed the second lawsuit to federal court which
granted a stay of the second suit pending the outcome of the first lawsuit. Oral
arguments were heard before the Fifth Circuit Court of Appeals on December 4,
1998, and the parties are awaiting the Court's decision.
In October 1996, the Company, along with several subsidiaries, was named as
a defendant in a suit filed by several former and current African American
employees in the United States District Court, Southern District of Texas
("Texas suit"). The Texas suit alleges racially discriminatory employment
policies and practices. Coastal vigorously denies these allegations and has
filed responsive pleadings. Plaintiffs' counsel are seeking to have the Texas
suit certified as a class action of all former and current African American
employees and initially claimed compensatory and punitive damages of $400
million. In February 1999, in response to Coastal's motion to deny class
certification, plaintiffs' counsel obtained permission from the Court to delete
all claims for compensatory and punitive damages and to seek equitable relief
only.
In January 1998, the plaintiffs in the Texas suit amended their suit to
exclude ANR Pipeline Company ("ANR Pipeline") employees from the potential
class. A new suit was then filed in state court in Wayne County, Michigan,
seeking to have the Michigan suit certified as a class action of African
American employees of ANR Pipeline and seeking unspecified damages as well as
attorneys and expert fees. ANR Pipeline has filed responsive pleadings denying
these allegations. In August 1999, the court denied plaintiffs' motion to have
the Michigan suit certified as a class action.
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 without prejudice 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. In April 1999, the United
States Department of Justice notified the Company that the United States will
not intervene in these cases. Action under these suits has been stayed pending a
determination on the motion by Mr. Grynberg to have the suits consolidated under
the federal Multidistrict Litigation rules.
Numerous other lawsuits and other proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company or its
subsidiaries.
Although no assurances can be given and no determination can be made at
this time as to the outcome of any particular lawsuit or proceeding, the Company
believes there are meritorious defenses to substantially all such claims and
that any liability which may finally be determined should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. Compliance with such laws
and regulations can be costly. Additionally, governmental authorities may
enforce the laws and regulations with a variety of civil and criminal
enforcement measures, including monetary penalties and remediation requirements.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as "Superfund," imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without
- 11 -
<PAGE>
regard to fault and even if the waste disposal was in compliance with the then
current laws and regulations. With the joint and several liability imposed under
Superfund, a potentially responsible party ("PRP") may be required to pay more
than its proportional share of such costs. Certain subsidiaries of the Company
and a company in which Coastal owns a 50% interest have been named as a PRP in
several "Superfund" waste disposal sites. At the 11 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$622 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $7 million and has made appropriate
provisions. At ten 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,
Environmental and Natural Resources has estimated the total cleanup costs to be
approximately $50 million, but the Company believes the subsidiary's activities
at this site were de minimis. At a second state site, the Florida Department of
Environmental Protection has demanded reimbursement of its costs, which total
$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 site, the owner of the California site has estimated the total cleanup
costs to be approximately $40 million, but the Company believes the subsidiary's
activities at this site were de minimis.
Future information and developments, including legislative and enforcement
developments, will require the Company to continually reassess the expected
impact of these environmental matters. However, the Company has evaluated its
total environmental exposure based on currently available data, including its
potential joint and several liability, and believes that compliance with all
applicable laws and regulations will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Regulatory Matters
On July 29, 1998, the Federal Energy Regulatory Commission ("FERC") issued
a "Notice of Proposed Rulemaking," in which the FERC has proposed a number of
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 services, elimination of the requirement of a matching term
cap on the renewal of existing contracts, and a review of its policies for
approving capacity construction. On the same day, the FERC also issued a "Notice
of Inquiry" soliciting industry input on various matters affecting the pricing
of long-term service and certificate pricing in light of changing market
conditions. The FERC has indicated that it may consider both proposals together
inasmuch as they raise several common issues. Comments on both of these matters
were due on April 22, 1999, and Coastal's interstate pipeline subsidiaries filed
comments with the FERC on that date, urging the FERC, among other things, to
modify its rate, service and certification policies for such pipelines.
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. Subsequently, WIC and most of the parties reached a settlement resolving
all issues in the case. That settlement was ultimately approved by the FERC on
June 21, 1999 (the "June 21, 1999 settlement"). Two parties who opposed the
FERC-approved settlement were severed from the settlement and a hearing will be
scheduled with respect to the issues raised by the severed parties. The
resolution of such issues will apply only to the severed parties regardless of
whether the resolution produces rates higher or lower than the settlement rates.
On June 30, 1999, WIC filed with the FERC a new rate case to increase its
rates by approximately $8 million annually (based on the rates determined under
the June 21, 1999 settlement). On July 29, 1999, the FERC issued its order
accepting the rate filing and suspending it for five months to become effective
on January 1, 2000. The order also set the case for hearing, but the date for
the hearing has not been scheduled.
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.
- 12 -
<PAGE>
9. Subsequent Event
In August 1999, the Company issued a total of 18,400,000 FELINE PRIDES(sm)
consisting of 17,000,000 Income PRIDES with a stated value of $25 and 1,400,000
Growth PRIDES with a stated value of $25, and also issued $35 million of 6.625%
Senior Debentures due August 16, 2004. The Income PRIDES consist of a unit
comprised of a 6.625% Senior Debenture due August 16, 2004, having a principal
amount of $25 and a purchase contract under which the holder will purchase from
the Company by no later than August 16, 2002 for $25 (the stated price) a number
of shares of the Company's common stock. The Growth PRIDES consist of a unit
comprised of a purchase contract under which the holder will purchase from the
Company by no later than August 16, 2002 for $25 (the stated price) a number of
shares of the Company's common stock and a 2.5% undivided beneficial interest in
a three-year Treasury security having a principal amount at maturity equal to
$1,000. The interest rate on the Senior Debentures is to be reset, subject to
certain limitations, effective August 16, 2002. Under the terms of the purchase
contracts, the Company will issue a minimum of approximately 9.9 million shares
up to a maximum of approximately 12.1 million shares of the Company's common
stock, depending on the market price upon settlement of the purchase contracts.
If the market price of Coastal's common stock is less than or equal to $38.0625,
the number of shares to be delivered will be calculated by dividing the stated
price by $38.0625. If the market price of Coastal's common stock is greater than
$46.4363, the number of shares to be delivered will be calculated by dividing
the stated price by $46.4363. If the market price is between $38.0625 and
$46.4363, the number of shares to be delivered will be calculated by dividing
the stated price by the market price. The Company received total gross proceeds
of approximately $460 million before applicable expenses. The proceeds from the
issuance of the FELINE PRIDES(sm) and the Senior Debentures were used to repay
indebtedness, including indebtedness of subsidiaries.
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. The forward-looking statements reflect the Company's expectations,
objectives and goals with respect to future events and financial performance,
and are based on assumptions and estimates which the Company believes are
reasonable. However, actual results could differ materially from anticipated
results. Important factors which may affect the actual results include, but are
not limited to, commodity prices, political developments, market and economic
conditions, industry competition, the weather, changes in financial markets,
changing legislation and regulations, and the impact of the Year 2000 issue. The
forward-looking statements contained in this Report are intended to qualify for
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended.
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
---------------------------------
June 30, December 31,
1999 1998
-------------- ----------------
(Unaudited)
<S> <C> <C>
Return on average common stockholders' equity.................. 14.2% 14.6%
Cash flow from operating activities to long-term debt.......... 23.7% 28.7%
Total debt to total capitalization............................. 53.2% 52.1%
Times interest earned (before tax)............................. 3.2 3.2
</TABLE>
The decrease in the cash flow from operating activities to long-term debt
ratio resulted primarily from changes in working capital and long-term debt.
- 13 -
<PAGE>
In February 1999, the Company completed a public offering of $200 million
of 6.375% senior debentures due 2009. The net proceeds from the sale were used
to repay floating rate indebtedness of a subsidiary under a revolving credit
facility.
In May 1999, the Company issued $200 million of 6.2% Notes due in 2004 and
$200 million of 6.5% Notes due in 2006. The net proceeds from the sale of the
notes were used to retire $150 million of 8.75% Senior Notes due May 15, 1999
and to repay floating rate indebtedness, including indebtedness of a subsidiary
under a revolving credit facility, and for general corporate purposes.
In August 1999, the Company issued a total of 18,400,000 FELINE PRIDES(sm)
consisting of 17,000,000 Income PRIDES with a stated value of $25 and 1,400,000
Growth PRIDES with a stated value of $25, and also issued $35 million of 6.625%
Senior Debentures due August 16, 2004. The Income PRIDES consist of a unit
comprised of a 6.625% Senior Debenture due August 16, 2004, having a principal
amount of $25 and a purchase contract under which the holder will purchase from
the Company by no later than August 16, 2002 for $25 (the stated price) a number
of shares of the Company's common stock. The Growth PRIDES consist of a unit
comprised of a purchase contract under which the holder will purchase from the
Company by no later than August 16, 2002 for $25 (the stated price) a number of
shares of the Company's common stock and a 2.5% undivided beneficial interest in
a three-year Treasury security having a principal amount at maturity equal to
$1,000. The interest rate on the Senior Debentures is to be reset, subject to
certain limitations, effective August 16, 2002. Under the terms of the purchase
contracts, the Company will issue a minimum of approximately 9.9 million shares
up to a maximum of approximately 12.1 million shares of the Company's common
stock, depending on the market price upon settlement of the purchase contracts.
If the market price of Coastal's common stock is less than or equal to $38.0625,
the number of shares to be delivered will be calculated by dividing the stated
price by $38.0625. If the market price of Coastal's common stock is greater than
$46.4363, the number of shares to be delivered will be calculated by dividing
the stated price by $46.4363. If the market price is between $38.0625 and
$46.4363, the number of shares to be delivered will be calculated by dividing
the stated price by the market price. The Company received total gross proceeds
of approximately $460 million before applicable expenses. The proceeds from the
issuance of the FELINE PRIDES(sm) and the Senior Debentures were used to repay
indebtedness, including indebtedness of subsidiaries.
In May 1999, the stockholders approved an increase in the authorized shares
of common stock from 250 million to 500 million shares.
The Company increased its 1999 capital budget for exploration and
production to $880 million from $590 million as a result of recent strength in
natural gas prices. The expanded budget will be dedicated to the Rocky
Mountains, onshore Gulf Coast of Texas and the Gulf of Mexico.
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
non-recourse 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.
The Company is undertaking an aggressive and comprehensive program in 1999
to reduce costs and improve efficiencies, as well as continuing an emphasis on
divestment of less profitable non-core operations.
Unused lines of credit at June 30, 1999 were as follows (millions of
dollars):
Short-term........................................ $ 609.3
Long-term*........................................ 925.1
-----------
$ 1,534.4
===========
*$45.1 million of unused long-term credit lines is dedicated to a specific
use.
- 14 -
<PAGE>
The FASB has issued FAS 133, as amended by FAS 137, to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. FAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation. The Company is
currently evaluating the impact of FAS 133.
Year 2000. 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 substantially completed for
all systems. 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 were essentially
completed for substantially all material systems by June 30, 1999. Remaining
systems modifications, replacement and testing are planned to be completed
before the end of 1999.
The Company is continuing 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 sent letters and questionnaires to these parties
and continues to evaluate 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 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 $16 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.
- 15 -
<PAGE>
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 six month periods
ended June 30, 1999 in comparison to the same periods in 1998 are a result of
the following:
Operating Revenues. The operating revenues by segment were as follows
(millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas............................................. $ 286.2 $ 311.6 $ 622.1 $ 727.7
Refining, marketing and chemicals....................... 1,402.7 1,389.1 2,589.4 2,742.7
Exploration and production.............................. 113.4 124.2 213.9 236.6
Coal.................................................... 61.1 61.7 125.9 115.5
Power................................................... 34.6 41.5 60.7 69.3
Other................................................... 3.1 6.0 7.4 12.3
Adjustments and eliminations............................ (9.0) (9.7) (17.7) (23.2)
--------- ---------- --------- ---------
$ 1,892.1 $ 1,924.4 $ 3,601.7 $ 3,880.9
========= ========== ========= =========
</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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas............................................. $ 115.5 $ 99.6 $ 302.4 $ 293.4
Refining, marketing and chemicals....................... 63.7 70.0 133.3 117.6
Exploration and production.............................. 24.1 30.3 35.5 55.8
Coal ................................................... 2.6 4.5 6.9 7.3
Power................................................... 24.8 25.8 43.7 37.4
Corporate and other..................................... (22.0) (26.2) (44.1) (44.2)
--------- ---------- --------- ---------
$ 208.7 $ 204.0 $ 477.7 $ 467.3
========= ========== ========= =========
</TABLE>
Natural Gas. The decrease in operating revenues of $25.4 million for the
second quarter can be primarily attributed to lower prices and volumes for gas
sales. Operating revenues decreased by $105.6 million in the six months ended
June 30, 1999 as a result of lower prices and volumes for gas sales and a
benefit of $38.7 million in 1998 first quarter from a rate case settlement.
Purchases decreased by $41.5 million for the three-month period and by $89.8
million for the six-month period due to lower natural gas costs and reduced
volumes purchased. Gross profit increased by $16.1 million and decreased by
$15.8 million for the three-month and six-month periods, respectively.
Earnings before interest and income taxes ("EBIT") increased by $15.9
million for the second quarter as the result of increased earnings from equity
investments of $18.1 million; increased gross profit from gas sales of $10.0
million and increased transportation, storage and gathering revenues of $1.2
million partially offset by increased operating and general expenses of $8.9
million; increased depreciation, depletion and amortization of $2.5 million and
other decreases of $2.0 million. The operating and general expense increase
results primarily from operations related to the increased
- 16 -
<PAGE>
gas sales gross profit. EBIT increased by $9.0 million for the six-month period
as increased earnings from equity investments of $20.5 million, increased gross
profit from gas sales of $14.6 million and a 1998 provision of $16.1 million
for environmental compliance and other matters not recurring were partially
offset by the 1998 rate case settlement of $38.7 million noted above; decreased
transportation, storage and gathering revenues of $2.5 million and other
decreases of $1.0 million.
Refining, Marketing and Chemicals. Operating revenues increased by $13.6
million in the 1999 second quarter due to higher prices and other increases
partially offset by lower volumes. The six-month decrease in operating revenues
of $153.3 million results from lower prices partially offset by increased
volumes. Purchases increased by $47.3 million in the second quarter due
primarily to higher prices and decreased by $147.4 million for the six-month
period due to lower prices partially offset by increased volumes. The gross
profit decrease of $33.7 million for the three months ended June 30, 1999
results from reduced gross margins of $42.7 million and lower volumes of $10.7
million partially offset by an increase of $3.7 million from the sale, trading
and exchanging of third-party products and other increases of $16.0 million. The
reduced gross margins resulted from second quarter refining margins being the
lowest in recent history. Gross profit decreased by $5.9 million for the
six-month period as reduced gross margins of $36.7 million were partially offset
by increased volumes of $5.6 million; an increase of $7.0 million from the sale,
trading and exchanging of third-party products and other increases of $18.2
million. The other increases include recoveries of environmental costs from
prior years.
EBIT decreased by $6.3 million for the second quarter as the decreased
gross profit of $33.7 million was partially offset by reduced operating and
general expenses of $20.5 million, increased earnings from equity investments of
$4.9 million and other of $2.0 million. The EBIT increase of $15.7 million for
the six-month period results from reduced operating and general expenses of
$13.3 million, increased earnings from equity investments of $6.1 million and
other increases of $2.2 million partially offset by the decreased gross profit
of $5.9 million. Operating and general expenses decreased as a result of reduced
operations at certain petrochemical plants and lower costs for the retail
operations.
Exploration and Production. Operating revenues decreased by $10.8 million
and $22.7 million in the three-month and six-month periods, respectively, as a
result of lower natural gas prices, reduced crude oil and condensate production
and the net effects of hedging activities partially offset by increased natural
gas production and higher prices for crude oil and condensate. The EBIT decrease
of $6.2 million for the second quarter results from reduced crude oil and
condensate production of $6.6 million; lower natural gas prices of $1.7 million;
decreases of $10.2 million from the net effects of hedging activities and other
decreases of $1.2 million partially offset by higher crude oil and condensate
prices of $3.8 million; increased natural gas production of $6.1 million; and
decreased depreciation, depletion and amortization of $3.6 million. EBIT
decreased by $20.3 million for the six months ended June 30, 1999 as a result of
reduced crude oil and condensate production of $11.8 million; lower natural gas
prices of $21.8 million and a decrease of $9.1 million from the net effects of
hedging activities partially offset by increased natural gas volumes of $13.2
million; reduced depreciation, depletion and amortization of $5.4 million and
other increases of $3.8 million. The other increases of $3.8 million for the
six-month period result primarily from a business tax refund. The depreciation,
depletion and amortization decreases result from a lower rate.
Coal. Operating revenues for Coal decreased by $.6 million in the second
quarter as a result of lower prices and reduced royalty income partially offset
by increased volumes. The operating revenue increase of $10.4 million for the
six-month period results from increased volumes partially offset by lower prices
and reduced royalty income. EBIT decreased by $1.9 million for the three-month
period as the result of reduced operating revenues of $.6 million, increased
operating and general expenses of $.9 million and other decreases of $.4
million. The EBIT decrease of $.4 million for the six-month period results from
increased operating and general expenses of $9.5 million and higher
depreciation, depletion and amortization of $1.3 million partially offset by the
increased operating revenues of $10.4 million. Operating and general expenses,
which include coal costs, increased in both periods as a result of the
additional volumes sold.
Power. The operating revenue decreases of $6.9 million in the three months
and $8.6 million in the six-month period are primarily due to a net gain of
$13.6 million recorded in the second quarter of 1998 resulting from the
restructuring of the power purchase agreement for the Company's Fulton power
plant partially offset by revenues from the Rensselaer power plant, which was
purchased in March 1999. The EBIT decrease of $1.0 million for the second
quarter results from the decreased revenues of $6.9 million, increased
depreciation and amortization of $2.0 million and
- 17 -
<PAGE>
other decreases of $.9 million partially offset by increased earnings from
equity investments of $8.8 million. EBIT increased by $6.3 million for the six
months ended June 30, 1999 as increased earnings from equity investments of
$15.7 million were partially offset by decreased revenues of $8.6 million and
other decreases of $.8 million.
Corporate and Other. The EBIT for these operations, which include certain
real estate activities and corporate income and expense not allocated to the
operating segments, increased in the second quarter due to increased income from
the expected return on pension assets partially offset by dividends on the
Company-obligated mandatory redemption preferred securities of a consolidated
trust.
Interest and Debt Expense. Interest and debt expense increased by $5.7
million in the three months and $7.4 million in the six months ended June 30,
1999 as the result of higher average debt partially offset by reduced average
interest rates and increased capitalized interest.
Taxes on Income. Federal income taxes increased by $3.8 million in the
three-month period due to increased earnings before income taxes and a higher
effective federal income tax rate. The $2.1 million increase in federal income
taxes for the six-month period results from increased earnings before income
taxes partially offset by a lower effective federal income tax rate. State
income taxes decreased by $6.6 million and $10.6 million in the three months and
six months, respectively, due to a tax refund, lower effective rates, and other
changes.
Earnings from Discontinued Operations. The 1998 earnings for the
three-month and six-month periods (net of income tax expense of $1.7 million and
$.7 million, respectively), represents the operating results of the Company's
50%- owned trucking operation, which has been discontinued.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. Compliance with such laws
and regulations can be costly. Additionally, governmental authorities may
enforce the laws and regulations with a variety of civil and criminal
enforcement measures, including monetary penalties and remediation requirements.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as "Superfund," imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations. With the joint and several liability imposed under
Superfund, a potentially responsible party ("PRP") may be required to pay more
than its proportional share of such costs. Certain subsidiaries of the Company
and a company in which Coastal owns a 50% interest have been named as a PRP in
several "Superfund" waste disposal sites. At the 11 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$622 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $7 million and has made appropriate
provisions. At ten other sites, the EPA is currently unable to provide the
Company with an estimate of total cleanup costs and, accordingly, the Company is
unable to calculate its share of those costs. Additionally, certain subsidiaries
of the Company have been named as PRPs in three state sites. At one site, the
North Carolina Department of Health, Environmental and Natural Resources has
estimated the total cleanup costs to be approximately $50 million, but the
Company believes the subsidiary's activities at this site were de minimis. At a
second state site, the Florida Department of Environmental Protection has
demanded reimbursement of its costs, which total $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 site, the owner of
the California site has estimated the total cleanup costs to be approximately
$40 million, but the Company believes the subsidiary's activities at this site
were de minimis.
Future information and developments, including legislative and enforcement
developments, will require the Company to continually reassess the expected
impact of these environmental matters. However, the Company has evaluated its
total environmental exposure based on currently available data, including its
potential joint and several liability, and believes that compliance with all
applicable laws and regulations will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
- 18 -
<PAGE>
Item 2.B. Other Developments.
In March 1999, the Company announced that it would commence development of
the proposed Gulfstream Natural Gas System ("Gulfstream System"). The Gulfstream
System would consist of approximately 700 miles of pipeline and related
facilities, originating near Mobile, Alabama and crossing the Gulf of Mexico in
a southeasterly direction to Manatee County, Florida. A study corridor for the
pipeline would begin in the vicinity of Piney Point, Manatee County, Florida,
cross the Florida Peninsula in an easterly direction and end near Fort Pierce,
St. Lucie County. The anticipated in-service date for the proposed Gulfstream
System is June 2002.
In May 1999, the Company announced that a subsidiary, Coastal Power Company
("Coastal Power") will build a 265-megawatt gas-fired power plant northeast of
Denver, with construction of the facility to begin in the summer of 1999. The
plant will be owned and operated by Fulton Cogeneration Associates, L.P., an
affiliate of Coastal Power, and it is expected that beginning in May 2000,
production of the plant will be sold to Public Service Company of Colorado. CIG
will transport natural gas to the plant.
- 19 -
<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 8 of the Notes to Consolidated Financial
Statements set forth in Part I of this Report 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.
The 1999 Annual Meeting of Stockholders of the Company was held on May
6, 1999. At such meeting all three directors nominated as a Class I director
were elected uncontested: (i) 187,258,282 votes were cast for the election of
Harold Burrow and 2,699,804 votes were withheld; (ii) 219,500,145 votes were
cast for the election of John M. Bissell and 1,962,641 votes were withheld;
(iii) 219,347,840 votes were cast for the election of Jerome S. Katzin and
2,114,946 votes were withheld.
The Company proposed to increase the authorized shares of Common Stock
from 250 million shares to 500 million shares. The proposal was approved;
205,277,229 affirmative votes and 15,504,710 negative votes were cast with
respect to such matter. There were also 680,567 abstentions and no broker
non-votes.
Stockholders who desire to submit proposals to the Company for
consideration for inclusion in the Company's Proxy Statement and form of proxy
for the 2000 Annual Meeting of Stockholders of Coastal must submit such
proposals to the Secretary of the Company by November 26, 1999. Stockholders who
intend to submit a proposal at the Annual Meeting without requesting its
inclusion in the Proxy Statement must submit such proposal to the Secretary of
the Company by February 9, 2000.
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.
(1) A report on Form 8-K was filed on May 7, 1999. The item
reported was:
Item 7. Financial Statements and Exhibits.
- 20 -
<PAGE>
(c) Exhibits. The following document is filed as an exhibit
to this current report.
99.1 Press release issued April 22, 1999, entitled
"Coastal Reports Record First Quarter Earnings
-- Up 11 Percent."
(2) A report on Form 8-K was filed on May 10, 1999. The item
reported was:
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
(12) Computation of Ratio of Earnings to Fixed Charges.
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: August 11, 1999 By: COBY C. HESSE
--------------------------------
Coby C. Hesse
Senior 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 -
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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
- ------------------------
Net earnings............................................... $ 93.3 $ 94.6 $ 227.8 $ 217.5
Dividends on preferred stock............................... .1 1.6 .2 5.9
--------- ---------- --------- ---------
Net earnings available to common stockholders.............. $ 93.2 $ 93.0 $ 227.6 $ 211.6
========= ========== ========= =========
Average number of common shares outstanding................... 212,864 212,113 212,647 212,000
Average number of Class A common shares outstanding........... 350 360 351 362
--------- ---------- --------- ---------
213,214 212,473 212,998 212,362
========= ========== ========= =========
Basic earnings per share:
From continuing operations................................. $ .44 $ .42 $ 1.07 $ .99
Discontinued operations.................................... - .02 - .01
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .44 $ .44 $ 1.07 $ 1.00
========= ========== ========= =========
DILUTED EARNINGS PER SHARE
- --------------------------
Net earnings used in calculating basic earnings per share.. $ 93.2 $ 93.0 $ 227.6 $ 211.6
Dividends applicable to dilutive preferred stock:
Series A................................................ - - - -
Series B................................................ .1 .1 .1 .1
Series C................................................ - - .1 .1
--------- ---------- --------- ---------
Income available to common shareholders plus
assumed conversions..................................... $ 93.3 $ 93.1 $ 227.8 $ 211.8
========= ========== ========= =========
Average number of shares used in calculating basic earnings
per share.................................................. 213,214 212,473 212,998 212,362
Effect of dilutive securities:
Options.................................................... 2,693 2,484 2,368 2,300
Series A, B and C preferred stock.......................... 1,243 1,333 1,258 1,343
--------- ---------- --------- ---------
217,150 216,290 216,624 216,005
========= ========== ========= =========
Diluted earnings per share:
From continuing operations................................. $ .43 $ .42 $ 1.05 $ .98
Discontinued operations.................................... - .01 - -
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .43 $ .43 $ 1.05 $ .98
========= ========== ========= =========
<FN>
- ------------------------------------
Convertible securities and options are not considered in the calculations
if the effect of the conversion is anti-dilutive.
</FN>
</TABLE>
<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 JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 83
<SECURITIES> 0
<RECEIVABLES> 1,240
<ALLOWANCES> 0
<INVENTORY> 597
<CURRENT-ASSETS> 2,141
<PP&E> 12,364
<DEPRECIATION> 3,885
<TOTAL-ASSETS> 13,151
<CURRENT-LIABILITIES> 2,122
<BONDS> 4,377
400
0
<COMMON> 73
<OTHER-SE> 3,614
<TOTAL-LIABILITY-AND-EQUITY> 13,151
<SALES> 3,602
<TOTAL-REVENUES> 3,657
<CGS> 2,130
<TOTAL-COSTS> 3,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> 319
<INCOME-TAX> 91
<INCOME-CONTINUING> 228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 228
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.05
</TABLE>
