- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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, 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
incorporation or organization) (I.R.S. Employer 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 29, 1999, there were outstanding 213,265,868 shares of Common
Stock, 33-1/3 cents par value per share, and 346,441 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, 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.
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 56.2 $ 106.9
Receivables, less allowance for doubtful accounts of $17.4 million
(1999) and $15.9 million (1998)...................................... 1,520.9 1,142.8
Inventories............................................................. 757.2 499.5
Prepaid expenses and other.............................................. 225.3 220.6
----------- -----------
Total Current Assets................................................. 2,559.6 1,969.8
----------- -----------
Property, Plant and Equipment - at cost:
Natural gas systems..................................................... 6,180.3 6,069.2
Refining, crude oil and chemical facilities............................. 2,502.0 2,424.2
Gas and oil properties - at full-cost................................... 3,659.3 2,870.8
Other................................................................... 546.6 366.6
----------- -----------
12,888.2 11,730.8
Accumulated depreciation, depletion and amortization.................... 3,947.8 3,706.9
----------- -----------
8,940.4 8,023.9
----------- -----------
Other Assets:
Goodwill................................................................ 456.5 470.8
Investments - equity method............................................. 1,368.9 970.8
Other................................................................... 938.3 868.8
----------- -----------
2,763.7 2,310.4
----------- -----------
$ 14,263.7 $ 12,304.1
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable........................................................... $ 100.0 $ 87.0
Accounts payable........................................................ 2,026.7 1,488.0
Accrued expenses........................................................ 406.1 305.0
Current maturities on long-term debt.................................... 25.4 126.5
----------- -----------
Total Current Liabilities............................................ 2,558.2 2,006.5
----------- -----------
Debt:
Long-term debt, excluding current maturities............................ 4,944.5 3,999.3
----------- -----------
Deferred Credits and Other:
Deferred income taxes................................................... 1,828.4 1,717.7
Other deferred credits.................................................. 746.6 704.8
----------- -----------
2,575.0 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 $7.4 million)..................................................... - -
Class A common stock.................................................... .1 .1
Common stock............................................................ 72.5 72.2
Additional paid-in capital.............................................. 1,036.4 1,016.2
Retained earnings....................................................... 2,809.5 2,519.8
----------- -----------
3,918.5 3,608.3
Less common stock in treasury - at cost................................. 132.5 132.5
----------- -----------
3,786.0 3,475.8
----------- -----------
$ 14,263.7 $ 12,304.1
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Millions of Dollars, Except Per Share)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues............................................ $ 2,060.1 $ 1,661.6 $ 5,661.8 $ 5,542.5
--------- ---------- --------- ---------
Operating Costs and Expenses:
Purchases.................................................. 1,295.5 966.9 3,425.7 3,330.1
Operating and general expenses............................. 442.2 421.9 1,266.7 1,271.1
Depreciation, depletion and amortization................... 124.2 111.2 348.6 334.9
--------- ---------- --------- ---------
1,861.9 1,500.0 5,041.0 4,936.1
--------- ---------- --------- ---------
Other Income - net............................................ 22.9 25.7 78.0 48.2
--------- ---------- --------- ---------
Earnings Before Interest and Income Taxes..................... 221.1 187.3 698.8 654.6
--------- ---------- --------- ---------
Interest and debt expense, less $8.6 million (1999) and $6.7 million (1998)
three months and $24.4 million (1999) and $18.5 million (1998)
nine months capitalized.................................... 81.5 70.1 240.0 221.2
Taxes on income............................................... 37.5 25.4 128.9 125.3
--------- ---------- --------- ---------
Earnings from continuing operations........................... 102.1 91.8 329.9 308.1
Loss from discontinued operations............................. - (2.3) - (1.1)
--------- ---------- --------- ---------
Net Earnings.................................................. 102.1 89.5 329.9 307.0
Dividends on Preferred Stock.................................. - .1 .2 6.0
--------- ---------- --------- ---------
Net Earnings Available
to Common Stockholders..................................... $ 102.1 $ 89.4 $ 329.7 $ 301.0
========= ========== ========= =========
Basic Earnings Per Share:
From continuing operations................................. $ .48 $ .43 $ 1.55 $ 1.42
Discontinued operations.................................... - (.01) - -
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .48 $ .42 $ 1.55 $ 1.42
========= ========== ========= =========
Diluted Earnings Per Share:
From continuing operations................................. $ .47 $ .42 $ 1.52 $ 1.40
Discontinued operations.................................... - (.01) - (.01)
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .47 $ .41 $ 1.52 $ 1.39
========= ========== ========= =========
Cash Dividends Per Common Share............................... $ .0625 $ .0625 $ .1875 $ .175
========= ========== ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Shares and Millions of Dollars)
<CAPTION>
Nine Months Ended September 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......................... (3) - (2) -
----------- ---------- ----------- ----------
Ending balance.............................. 53 - 56 -
=========== ---------- =========== ----------
$1.83, Series B, redemption or liquidation
amount of $50 per share:
Beginning balance........................... 61 - 68 -
Converted to common......................... (1) - (6) -
----------- ---------- ----------- ----------
Ending balance.............................. 60 - 62 -
=========== ---------- =========== ----------
$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.............................. (10) - (12) -
Conversion of preferred stock and exercise of
stock options................................. 3 - 1 -
----------- ---------- ----------- ----------
Ending balance................................... 347 .1 355 .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.................... 48 - 54 -
Conversion of Class A common stock............... 10 - 12 -
Two-for-one stock split.......................... - - 106,268 35.4
Exercise of stock options........................ 820 .3 208 .1
----------- ---------- ----------- ----------
Ending balance................................... 217,643 $ 72.5 216,659 $ 72.2
=========== ---------- =========== ----------
See Notes to Consolidated Financial Statements.
</TABLE>
- 4 -
<PAGE>
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Shares and Millions of Dollars)
(Continued)
<CAPTION>
Nine Months Ended September 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........................... 13.7 5.7
Two-for-one stock split............................. - (35.4)
Issuance of FELINE PRIDES(sm)....................... 6.5 -
Redemption of Series H preferred stock.............. - (197.4)
---------- ----------
Ending balance...................................... 1,036.4 1,016.5
---------- ----------
Retained earnings:
Beginning balance................................... 2,519.8 2,131.9
Net earnings for period............................. 329.9 307.0
Dividends on preferred stock........................ (.2) (6.0)
Dividends on common stock........................... (40.0) (37.1)
---------- ----------
Ending balance...................................... 2,809.5 2,395.8
---------- ----------
Less treasury stock - at cost.......................... 4,396 (132.5) 4,395 (132.5)
=========== ----------- =========== ----------
Total.................................................. $ 3,786.0 $ 3,352.1
========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
- 5 -
<PAGE>
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
--------- --------
(Unaudited)
<S> <C> <C>
Net Cash Flow From Operating Activities:
Earnings from continuing operations......................................... $ 329.9 $ 308.1
Add (subtract) items not requiring (providing) cash:
Depreciation, depletion and amortization................................. 351.3 337.3
Deferred income taxes.................................................... 96.4 86.4
Undistributed earnings from equity investments........................... (29.3) (31.2)
Working capital and other changes, excluding changes relating to cash and
non-operating activities:
Accounts receivable................................................... (397.6) 333.0
Inventories........................................................... (155.7) 89.9
Prepaid expenses and other............................................ 13.6 (6.5)
Accounts payable...................................................... 393.6 (434.4)
Accrued expenses...................................................... 101.6 119.7
Other................................................................. 119.5 101.0
--------- --------
823.3 903.3
--------- --------
Cash Flow From Investing Activities:
Purchases of property, plant and equipment.................................. (1,226.8) (917.6)
Proceeds from sale of property, plant and equipment......................... 9.4 28.9
Additions to investments.................................................... (359.5) (199.0)
Proceeds from investments................................................... 15.1 10.9
Net from discontinued operations............................................ - 11.4
--------- --------
(1,561.8) (1,065.4)
--------- --------
Cash Flow From Financing Activities:
Increase in short-term notes ............................................... 153.0 96.0
Redemption of preferred stock............................................... - (200.0)
Proceeds from issuing common stock.......................................... 14.0 5.8
Proceeds from long-term debt issues......................................... 1,065.2 397.0
Proceeds from issuing Company-obligated mandatory
redemption preferred securities of a consolidated trust.................. - 300.0
Payments to retire long-term debt........................................... (504.2) (393.5)
Dividends paid.............................................................. (40.2) (43.1)
--------- --------
687.8 162.2
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........................... (50.7) .1
Cash and Cash Equivalents at Beginning of Period............................... 106.9 20.5
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 56.2 $ 20.6
========= ========
See Notes to Consolidated Financial Statements.
</TABLE>
- 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 $214.6 million and $212.2 million
for the nine months ended September 30, 1999 and 1998, respectively. Cash
payments for income taxes amounted to $8.1 million and $41.8 million for the
nine months ended September 30, 1999 and 1998, respectively.
2. Inventories
Inventories were as follows (millions of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Refined products, crude oil and chemicals............................... $ 582.9 $ 306.9
Natural gas in underground storage...................................... - 32.0
Coal, materials and supplies............................................ 174.3 160.6
----------- ----------
$ 757.2 $ 499.5
=========== ==========
</TABLE>
Elements included in inventory cost are material, labor and manufacturing
expense.
3. Debt
At September 30, 1999, the Company had $640 million of outstanding
indebtedness to banks under short-term lines of credit. The Company's financial
statements at September 30, 1999 reflect $540 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
- 7 -
<PAGE>
year 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 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, having a principal amount of $25 and due August 16, 2004 (the
"Senior Debentures"). The Income PRIDES consist of a unit comprised of a Senior
Debenture 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 shares of the Company's common stock in a
number ranging from a minimum of approximately 9.9 million shares up to a
maximum of approximately 12.1 million, 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.
4. Common Stock
On September 30, 1999, 12,385,276 shares of Common Stock of the Company
were reserved for employee stock option plans, 1,216,105 shares were reserved
for conversion of the Series A, B, and C Preferred Stocks, 347,236 shares were
reserved for conversion of outstanding Class A Common Stock and 16,602 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 nine months ended September 30, 1999, the Company has granted
options to purchase 1,751,250 common shares under stock option plans with
exercise prices ranging from $32.72 to $40.25. 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
nine-months ended September 30, 1999 and 1998 are shown as follows (millions of
dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues From External Customers:
Natural gas............................................. $ 279.3 $ 268.8 $ 899.8 $ 996.5
Refining, marketing and chemicals....................... 1,527.7 1,196.2 4,116.2 3,937.1
Exploration and production.............................. 151.7 103.5 354.5 325.0
Power................................................... 34.0 23.2 94.7 92.5
Coal.................................................... 66.1 65.2 192.0 180.7
Corporate and other..................................... 1.3 4.7 4.6 10.7
--------- ---------- --------- ---------
$ 2,060.1 $ 1,661.6 $ 5,661.8 $ 5,542.5
========= ========== ========= =========
</TABLE>
- 8 -
<PAGE>
Intersegment revenues for the three-month period were as follows: Natural
gas - $.8 million (1999); Refining, marketing and chemicals - $.1 million
(1999), $.3 million (1998); Exploration and production - $7.8 million (1999),
$4.4 million (1998); and Corporate and other - $2.5 million (1999), $1.8 million
(1998).
Intersegment revenues for the nine-month period were as follows: Natural
gas - $2.4 million (1999); Refining, marketing and chemicals - $1.0 million
(1999), $2.1 million (1998); Exploration and production - $18.9 million (1999),
$19.5 million (1998); and Corporate and other - $6.6 million (1999), $8.1
million (1998).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings (Loss) Before Interest and Income Taxes:
Natural gas............................................. $ 113.6 $ 109.1 $ 416.0 $ 402.5
Refining, marketing and chemicals....................... 52.6 58.7 185.9 176.3
Exploration and production.............................. 53.4 15.9 88.9 71.7
Power................................................... 21.3 14.8 65.0 52.2
Coal.................................................... 5.9 7.7 12.8 15.0
Corporate and other..................................... (25.7) (18.9) (69.8) (63.1)
--------- ---------- --------- ---------
$ 221.1 $ 187.3 $ 698.8 $ 654.6
========= ========== ========= =========
</TABLE>
6. Income Taxes
Provisions for income taxes were as follows (millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current Income Taxes:
Federal................................................. $ 4.0 $ 6.3 $ 20.0 $ 24.9
Foreign................................................. 2.6 1.1 5.4 4.1
State................................................... 3.8 1.9 7.1 9.9
--------- ---------- --------- ---------
10.4 9.3 32.5 38.9
--------- ---------- --------- ---------
Deferred Income Taxes:
Federal................................................. 29.0 12.7 99.0 78.0
Foreign................................................. .4 1.1 2.1 2.6
State................................................... (2.3) 2.3 (4.7) 5.8
--------- ---------- --------- ---------
27.1 16.1 96.4 86.4
--------- ---------- --------- ---------
$ 37.5 $ 25.4 $ 128.9 $ 125.3
========= ========== ========= =========
</TABLE>
Interim period provisions for federal income taxes are based on estimated
effective annual income tax rates.
- 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 September 30, 1999 Nine Months Ended September 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............... $ 102.1 $ 329.9
Less preferred stock
dividends................ - .2
---------- ----------
Basic earnings per share
from continuing operations
Income available to
common stockholders.... 102.1 213,496 $ .48 329.7 213,166 $ 1.55
========= =========
Effect of dilutive securities
Options................ - 2,835 - 2,524
Convertible preferred stock - 1,235 .2 1,251
---------- ------------ ---------- ------------
Diluted earnings per share
from continuing operations
Income available to
common stockholders
plus assumed conversions $ 102.1 217,566 $ .47 $ 329.9 216,941 $ 1.52
========== ============ ========= ========== ============ =========
</TABLE>
<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 from continuing
operations............... $ 91.8 $ 308.1
Less preferred stock
dividends................ .1 6.0
---------- ----------
Basic earnings per share
from continuing operations
Income available to
common stockholders.... 91.7 212,588 $ .43 302.1 212,497 $ 1.42
========= =========
Effect of dilutive securities
Options................ - 2,013 - 2,204
Convertible preferred stock .1 1,297 .3 1,327
---------- ------------ ---------- ------------
Diluted earnings per share
from continuing operations
Income available to
common stockholders
plus assumed conversions $ 91.8 215,898 $ .42 $ 302.4 216,028 $ 1.40
========== ============ ========= ========== ============ =========
</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 and the releases are valid and dismissing all
tort claims and claims for breach of any duty of disclosure. The remaining claim
for underpayment of royalties was tried to a jury which, in May 1995, made
findings favorable to CIG. On June 7, 1995, the trial court entered a judgment
that the lessors recover no monetary damages from CIG and permanently estopping
the lessors from asserting any claim based on an interpretation of the contract
different than that asserted by CIG in the litigation. The lessors' motion for a
new trial was denied on July 18, 1997, and both parties filed appeals. On June
7, 1996, the same plaintiffs sued CIG in state court in Amarillo, Texas, for
underpayment of royalties. CIG removed the second lawsuit to federal court which
granted a stay of the second suit pending the outcome of the first lawsuit. Oral
arguments were heard before the Fifth Circuit Court of Appeals on December 4,
1998, and the parties are awaiting the Court's decision.
In October 1996, the Company, along with several subsidiaries, was named
as a defendant in a suit filed by several former and current African American
employees in the 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. Plaintiffs filed with the
Michigan Court of Appeals an application for leave to appeal the denial of the
class certification. On November 5, 1999, the Michigan Court of Appeals denied
the application for leave to appeal.
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 which could include
treble damages for the maximum period permitted by law (potentially as much as
10 years) and penalties of up to $10,000 per false claim. 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 (the "Grynberg suits"). In
April 1999, the United States Department of Justice notified the Company that
the United States will not intervene in these cases. In response to a motion
filed by Mr. Grynberg, the MultiDistrict Litigation Panel has consolidated the
Grynberg suits with several other Grynberg cases for pre-trial proceedings in
Wyoming.
In May 1999, the Quinque Operating Company, on behalf of itself and
subclasses of gas producers, royalty owners, overriding royalty owners and state
taxing authorities, instituted a legal proceeding in State Court, Stevens
County, Kansas against over 200 gas pipeline companies, including several
Coastal subsidiaries (the "Quinque suit"). The Quinque suit seeks unspecified
damages and seeks treble damages for the alleged mismeasurement of the heating
value and the volume of all natural gas measured in the United States since
1974. The plaintiffs are seeking certification of a national class of all
similarly situated gas producers, royalty owners, overriding royalty owners and
state taxing authorities. The suit has been removed to the U.S. District Court,
Southern District of Kansas. The defendants in the Quinque suit have filed a
motion under the MultiDistrict Litigation rules to have the suit transferred to
Wyoming and consolidated with the Grynberg proceedings.
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.
- 11 -
<PAGE>
Although no assurances can be given and no determination can be made at
this time as to the outcome of any particular lawsuit or proceeding, the Company
believes there are meritorious defenses to substantially all such claims and
that any liability which may finally be determined should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. Compliance with such laws
and regulations can be costly. Additionally, governmental authorities may
enforce the laws and regulations with a variety of civil and criminal
enforcement measures, including monetary penalties and remediation requirements.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as "Superfund," imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations. With the joint and several liability imposed under
Superfund, a potentially responsible party ("PRP") may be required to pay more
than its proportional share of such costs. Certain subsidiaries of the Company
and a company in which Coastal owns a 50% interest have been named as a PRP in
various "Superfund" waste disposal sites. At the 10 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$624 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $8 million and has made appropriate
provisions. At the eleventh previously reported site, the Company's potential
liability has been settled by a consent order under which none of the
remediation costs were apportioned to the Company's subsidiary. At eight 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 four 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
a 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. At the fourth site, the Texas Natural
Resource Conservation Commission has estimated the total cleanup costs to be
approximately $2 million, but the Company believes the subsidiary's activities
at this site were de minimis.
Future information and developments, including legislative and enforcement
developments, will require the Company to continually reassess the expected
impact of these environmental matters. However, the Company has evaluated its
total environmental exposure based on currently available data, including its
potential joint and several liability, and believes that compliance with all
applicable laws and regulations will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Regulatory Matters
On July 29, 1998, the Federal Energy Regulatory Commission ("FERC") issued
a "Notice of Proposed Rulemaking," in which the FERC has proposed a number of
significant changes to the industry, including, among other things, removal of
price caps in the short-term market (less than one year), capacity auctions,
changed reporting obligations, the ability to negotiate terms and conditions of
all services, elimination of the requirement of a matching term cap on the
renewal of existing contracts, and a review of its policies for approving
capacity construction. On the same day, the FERC also issued a "Notice of
Inquiry" soliciting industry input on various matters affecting the pricing of
long-term service and certificate pricing in light of changing market
conditions. 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.
- 12 -
<PAGE>
On September 15, 1999, the FERC issued a Policy Statement addressing the
certification and pricing of new pipeline construction projects. Under the
Policy Statement, applicants must first satisfy a threshold pricing requirement
of demonstrating that their projects can be constructed without subsidies from
existing customers. Second, the applicants must show that any adverse impacts of
the project on identified interests (existing customers of the applicant, other
existing pipelines and their captive customers, landowners and the surrounding
communities) are outweighed by its benefits. On October 19, 1999, Coastal's
interstate pipeline subsidiaries sought clarification and/or rehearing of the
Policy Statement insofar as it does not apply directly to those projects filed
for approval under the FERC's "optional certificate" regulations. Other parties
also sought rehearing of this and other aspects of the Policy Statement. The
matter is still pending.
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. WIC and most of the parties subsequently reached a settlement resolving
all issues in the case. That settlement was ultimately approved by the FERC on
June 21, 1999 (the "June 21, 1999 settlement"). Two parties opposed the
settlement and the FERC initially severed them from the settlement and ordered a
separate hearing on their issues. However, on October 13, 1999, the FERC
determined that the settlement should also apply to those parties as well,
inasmuch as WIC had filed a new rate case (discussed below) which would become
effective before any decision could be reached and implemented.
On July 1, 1999, WIC filed with the FERC a new rate case to increase its
rates by approximately $8 million annually (based on the rates determined under
the June 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, which is currently
scheduled to commence in the second half of 2000.
Certain other regulatory issues remain unresolved among CIG, ANR Pipeline,
ANR Storage Company and WIC, their customers, their suppliers and the FERC. The
Company has made provisions which represent management's assessment of the
ultimate resolution of these issues. As a result, the Company anticipates that
these regulatory matters will not have a material adverse effect on its
consolidated financial position or results of operations. While the Company
estimates the provisions to be adequate to cover potential adverse rulings on
these and other issues, it cannot estimate when each of these issues will be
resolved.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, includes certain forward-looking
statements. 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.
- 13 -
<PAGE>
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,
1999 1998
-------------- ----------------
(Unaudited)
<S> <C> <C>
Return on average common stockholders' equity.................. 14.1% 14.6%
Cash flow from operating activities to long-term debt.......... 21.6% 28.7%
Total debt to total capitalization............................. 54.8% 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.
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, having a principal amount of $25 and due August 16, 2004 (the
"Senior Debentures"). The Income PRIDES consist of a unit comprised of a Senior
Debenture 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 shares of the Company's common stock in a
number ranging from a minimum of approximately 9.9 million shares up to a
maximum of approximately 12.1 million, 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 $980 million from the initial level of $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.
- 14 -
<PAGE>
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 September 30, 1999 were as follows (millions of
dollars):
Short-term.................................. $ 982.3
Long-term*.................................. 698.0
-----------
$ 1,680.3
===========
*$45.1 million of unused long-term credit lines is dedicated to a specific
use.
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 global 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
global condition could result in a system failure or miscalculations causing
disruptions of operations.
The Company's Year 2000 compliance project relates to both information
technology and embedded systems throughout the Company and has focused on all
technology hardware and software, external interfaces with customers and
suppliers, operations process control, automation and instrumentation systems.
Necessary assessments, modifications or replacement and the testing of systems
critical for the delivery of products and services have been completed. The
Company, therefore, believes it has met its Year 2000 readiness objectives.
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. 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 has prepared 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 contingency plan, which is reviewed on an ongoing basis, includes manual
intervention, if necessary, 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.
- 15 -
<PAGE>
The Company has used 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 $18 million. The total remaining expenditures are estimated to be
less than $1 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, 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas............................................. $ 280.1 $ 268.8 $ 902.2 $ 996.5
Refining, marketing and chemicals....................... 1,527.8 1,196.5 4,117.2 3,939.2
Exploration and production.............................. 159.5 107.9 373.4 344.5
Power................................................... 34.0 23.2 94.7 92.5
Coal.................................................... 66.1 65.2 192.0 180.7
Other................................................... 3.8 6.5 11.2 18.8
Adjustments and eliminations............................ (11.2) (6.5) (28.9) (29.7)
--------- ---------- --------- ---------
$ 2,060.1 $ 1,661.6 $ 5,661.8 $ 5,542.5
========= ========== ========= =========
</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,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Natural gas............................................. $ 113.6 $ 109.1 $ 416.0 $ 402.5
Refining, marketing and chemicals....................... 52.6 58.7 185.9 176.3
Exploration and production.............................. 53.4 15.9 88.9 71.7
Power................................................... 21.3 14.8 65.0 52.2
Coal ................................................... 5.9 7.7 12.8 15.0
Corporate and other..................................... (25.7) (18.9) (69.8) (63.1)
--------- ---------- --------- ---------
$ 221.1 $ 187.3 $ 698.8 $ 654.6
========= ========== ========= =========
</TABLE>
Natural Gas. The increase in operating revenues of $11.3 million for the
third quarter can be primarily attributed to increased prices and volumes for
gas sales. Operating revenues decreased by $94.3 million for the nine months
ended September 30, 1999 as a result of lower prices and volumes for gas sales;
a benefit of $38.7 million in the 1998 first quarter from a rate case settlement
and reduced transportation, storage and gathering revenues. Purchases increased
by
- 16 -
<PAGE>
$7.9 million for the three-month period due primarily to increased natural gas
costs and volumes, resulting in a gross profit increase of $3.4 million.
Purchases decreased by $81.9 million in the nine-month period due primarily to
reduced natural gas costs and volumes, resulting in a gross profit decrease of
$12.4 million.
Earnings before interest and income taxes ("EBIT") increased by $4.5
million for the third quarter as the result of increased gross profit from gas
sales of $7.4 million; increased transportation, storage and gathering revenues
of $5.1 million; improved gross profit from extraction plants of $10.6 million;
increased earnings from equity investments of $1.3 million; reduced operating
and general expenses of $1.2 million and other of $5.6 million partially offset
by proceeds of $26.7 million received in 1998 from the termination of gas
transportation contracts. The EBIT increase of $13.5 million for the nine months
ended September 30, 1999 results from increased gross profit from gas sales of
$37.3 million, increased earnings from equity investments of $21.8 million, a
1998 provision of $16.1 million for environmental compliance and other matters
not recurring and other increases of $3.7 million partially offset by the 1998
rate case settlement of $38.7 million and proceeds of $26.7 million received in
1998 from the termination of gas transportation contracts.
Refining, Marketing and Chemicals. Operating revenues increased by $331.3
million in the 1999 third quarter and by $178.0 million in the nine-month period
due primarily to higher prices and other increases partially offset by lower
volumes. Purchases increased by $324.6 million and $177.2 million in the three
and nine months, respectively, primarily as a result of higher costs partially
offset by reduced volumes. The gross profit increase of $6.7 million for the
three-month period ended September 30, 1999 results from increased margins of
$13.5 million; an increase of $13.1 million from the sale, trading and
exchanging of third-party products and other increases of $6.2 million partially
offset by reduced volumes of $26.1 million. Gross profit increased by $.8
million for the nine-month period due to an increase of $20.1 million from the
sale, trading and exchanging of third-party products and other increases of
$19.9 million, primarily from recoveries of environmental costs from prior
years, partially offset by reduced margins of $18.7 million and lower volumes of
$20.5 million.
EBIT decreased by $6.1 million for the third quarter as increased
operating and general expenses of $20.7 million were partially offset by the
increased gross profit of $6.7 million, increased earnings from equity
investments of $7.3 million and other increases of $.6 million. The EBIT
increase of $9.6 million for the nine months ended September 30, 1999 results
from the increased gross profit of $.8 million, increased earnings from equity
investments of $13.4 million and other increases of $2.7 million partially
offset by increased operating and general expenses of $7.3 million. Operating
and general expenses increased in both periods primarily as a result of
increased throughput at the Company's refineries.
Exploration and Production. Operating revenues increased by $51.6 million
and $28.9 million in the three-month and nine-month periods, respectively,
primarily as a result of improved prices for both natural gas and crude oil and
condensate and higher natural gas production volumes partially offset by lower
crude oil and condensate volumes and the net effects of hedging activities. The
EBIT increase of $37.5 million for the third quarter results from improved
product prices of $43.5 million, higher natural gas production of $27.6 million
and other increases of $2.1 million partially offset by decreases of $23.8
million from the net effects of hedging activities; increased depreciation,
depletion and amortization of $10.7 million and reduced crude oil and condensate
production of $1.2 million. EBIT increased by $17.2 million for the nine-month
period as improved prices of $21.7 million, increased natural gas production of
$40.8 million and other increases of $6.0 million were partially offset by
decreases of $32.9 million from the net effects of hedging activities; increased
depreciation, depletion and amortization of $5.3 million and decreased crude oil
and condensate production of $13.1 million. The depreciation, depletion and
amortization increases result from increased volumes partially offset by a lower
depreciation rate. The other increases of $6.0 million for the nine-month period
result primarily from a business tax refund.
Power. The operating revenue increase for the third quarter of $10.8
million results primarily from the Rensselaer power plant, which was acquired in
March 1999, and an increase from the El Salvador operations. Operating revenues
increased by $2.2 million for the nine months ended September 30, 1999 as a
result of Rensselaer power plant revenues partially offset by 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. The EBIT increase of $6.5 million for the third quarter results from
increased revenues of $10.8 million and improved earnings from equity
investments of $4.7 million partially offset by increased operating and general
expenses of $7.4 million and higher depreciation and amortization of $1.6
million. EBIT increased by $12.8 million for the nine months ended September 30,
1999 as increased revenues
- 17 -
<PAGE>
of $2.2 million and improved earnings from equity investments of $20.4 million
were partially offset by increases for operating and general expenses of $6.2
million and depreciation and amortization of $3.6 million. The increases for
operating and general expenses and depreciation and amortization in both periods
is primarily due to the Rensselaer operations.
Coal. Operating revenues for Coal increased by $.9 million and $11.3
million in the three-month and nine-month periods, respectively, primarily as a
result of increased volumes partially offset by lower prices and a 1998 third
quarter gain from the sale of reclaimed mine properties. EBIT decreased by $1.8
million for the three-month period as increased operating and general expenses
of $2.6 million and other decreases of $.1 million were partially offset by
increased revenues of $.9 million. The EBIT decrease of $2.2 million for the
nine-month period results from increased operating and general expenses of $12.1
million and higher depreciation, depletion and amortization of $1.4 million
partially offset by the revenue increase of $11.3 million. Operating and general
expenses, which include coal costs, increased in both periods as a result of the
additional volumes sold.
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, decreased in the third quarter due to increased expenses
related to financing activities. The decrease for the nine-month period results
from dividends on the Company-obligated mandatory redemption preferred
securities of a consolidated trust and increased expenses from financing
activities partially offset by increased income from the expected return on
pension assets.
Interest and Debt Expense. Interest and debt expense increased by $11.4
million in the three months and $18.8 million in the nine months ended September
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 $14.0 million and $16.1
million in the three-month and nine-month periods, respectively, as a result of
increased earnings before federal income taxes and a higher effective federal
income tax rate. State income taxes decreased by $2.7 million in the three
months and $13.3 million in the nine months ended September 30, 1999 due to a
tax refund, lower effective rates and other changes.
Loss from Discontinued Operations. The 1998 losses for the three-month and
nine-month periods (net of income tax benefits of $1.3 million and $.6 million,
respectively), represent 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
various "Superfund" waste disposal sites. At the 10 sites for which there is
sufficient information, total cleanup costs are estimated to be approximately
$624 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $8 million and has made appropriate
provisions. At the eleventh previously reported site, the Company's potential
liability has been settled by a consent order under which none of the
remediation costs were apportioned to the Company's subsidiary. At eight 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 four state sites. At one site, the North Carolina Department of Health,
Environmental and Natural Resources has estimated the total cleanup costs to be
- 18 -
<PAGE>
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
a 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. At the fourth site, the Texas Natural
Resource Conservation Commission has estimated the total cleanup costs to be
approximately $2 million, but the Company believes the subsidiary's activities
at this site were de minimis.
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.
- 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., "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.
(1) A report on Form 8-K was filed on July 22, 1999. The item
reported was:
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
(12) Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
(2) A report on Form 8-K was filed on July 23, 1999. The item
reported was:
Item 7. Financial Statements and Exhibits.
(c) Exhibits. The following document is filed as an
exhibit to this current report.
99.1 Press release issued July 22, 1999,
entitled "Coastal Reports Record Second
Quarter Earnings From Continuing
Operations."
- 20 -
<PAGE>
(3) A report on Form 8-K was filed on July 27, 1999. The item
reported was:
Item 7. Financial Statements and Exhibits.
(c) Exhibits. The following document is filed as an
exhibit to this current report.
99.1 Press release issued July 22, 1999,
entitled "Coastal Reports Record Second
Quarter Earnings From Continuing
Operations."
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, 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 -
<TABLE>
THE COASTAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Millions of Dollars, Except Per Share Amounts,
and Thousands of Shares)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
- ------------------------
Net earnings............................................... $ 102.1 $ 89.5 $ 329.9 $ 307.0
Dividends on preferred stock............................... - .1 .2 6.0
--------- ---------- --------- ---------
Net earnings available to common stockholders.............. $ 102.1 $ 89.4 $ 329.7 $ 301.0
========= ========== ========= =========
Average number of common shares outstanding................... 213,148 212,231 212,816 212,136
Average number of Class A common shares outstanding........... 348 357 350 361
--------- ---------- --------- ---------
213,496 212,588 213,166 212,497
========= ========== ========= =========
Basic earnings per share:
From continuing operations................................. $ .48 $ .43 $ 1.55 $ 1.42
Discontinued operations.................................... - (.01) - -
--------- ---------- --------- ---------
Net basic earnings per share............................... $ .48 $ .42 $ 1.55 $ 1.42
========= ========== ========= =========
DILUTED EARNINGS PER SHARE
- --------------------------
Net earnings used in calculating basic earnings per share.. $ 102.1 $ 89.4 $ 329.7 $ 301.0
Dividends applicable to dilutive preferred stock:
Series A................................................ - .1 - .1
Series B................................................ - - .1 .1
Series C................................................ - - .1 .1
--------- ---------- --------- ---------
Income available to common shareholders plus
assumed conversions..................................... $ 102.1 $ 89.5 $ 329.9 $ 301.3
========= ========== ========= =========
Average number of shares used in calculating basic earnings
per share.................................................. 213,496 212,588 213,166 212,497
Effect of dilutive securities:
Options.................................................... 2,835 2,013 2,524 2,204
Series A, B and C preferred stock.......................... 1,235 1,297 1,251 1,327
--------- ---------- --------- ---------
217,566 215,898 216,941 216,028
========= ========== ========= =========
Diluted earnings per share:
From continuing operations................................. $ .47 $ .42 $ 1.52 $ 1.40
Discontinued operations.................................... - (.01) - (.01)
--------- ---------- --------- ---------
Net diluted earnings per share............................. $ .47 $ .41 $ 1.52 $ 1.39
========= ========== ========= =========
<FN>
- ------------------------------------
Convertible securities and options are not considered in the calculations if
the effect of the conversion is anti-dilutive.
- 23 -
</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 SEPTEMBER 30,
1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 1,521
<ALLOWANCES> 0
<INVENTORY> 757
<CURRENT-ASSETS> 2,560
<PP&E> 12,888
<DEPRECIATION> 3,948
<TOTAL-ASSETS> 14,264
<CURRENT-LIABILITIES> 2,558
<BONDS> 4,945
400
0
<COMMON> 73
<OTHER-SE> 3,713
<TOTAL-LIABILITY-AND-EQUITY> 14,264
<SALES> 5,662
<TOTAL-REVENUES> 5,740
<CGS> 3,426
<TOTAL-COSTS> 5,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 459
<INCOME-TAX> 129
<INCOME-CONTINUING> 330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.52
</TABLE>
