<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-2700
------------------------
EL PASO NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 74-0608280
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
----- -----------
<S> <C>
Common Stock, par value $1.00 per share
as of November 12, 1998 1,000 shares
</TABLE>
EL PASO NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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NOTICE
Effective August 1, 1998, by virtue of a merger conducted pursuant to
Section 251(g) of the Delaware General Corporation Law, the Company reorganized
into a holding company form of organizational structure whereby El Paso Energy
Corporation ("EPEC") became the holding company, and the equity securities of
the Company ceased to be publicly traded. The holding company reorganization is
discussed further in Item 1, Note 1, Basis of Presentation -- Holding Company
Reorganizations of this quarterly report on Form 10-Q.
All of the Company's outstanding capital stock was converted, on a share
for share basis, into capital stock of EPEC. Previous shareholders of EPNG are
now shareholders of EPEC, and are advised to read the quarterly report on Form
10-Q for EPEC.
<PAGE> 3
GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<TABLE>
<CAPTION>
DEFINITIONS
-----------
<S> <C>
ALJ................... Administrative Law Judge
Bcf................... Billion cubic feet
Bcf/d................. Billion cubic feet per day
Company............... El Paso Natural Gas Company and its subsidiaries
Court of Appeals...... United States Court of Appeals for the District of Columbia Circuit
Dynegy................ Dynegy Inc., formerly known as NGC Corporation
EBIT.................. Earnings before interest expense and income taxes, excluding affiliated
interest income
Edison................ Southern California Edison Company
EPA................... United States Environmental Protection Agency
EPEC.................. El Paso Energy Corporation
EPFS.................. El Paso Field Services Company, a wholly owned subsidiary of El Paso
Natural Gas Company
EPNG.................. El Paso Natural Gas Company, a wholly owned subsidiary of El Paso Energy
Corporation subsequent to August 1, 1998
EPTPC................. El Paso Tennessee Pipeline Co., a wholly owned subsidiary of El Paso
Natural Gas Company
FERC.................. Federal Energy Regulatory Commission
GSR................... Gas supply realignment
PCB(s)................ Polychlorinated biphenyl(s)
PLN................... Perusahaan Listrik Negara, the Indonesian government-owned electric
utility
PRP(s)................ Potentially responsible party(ies)
SEC................... Securities and Exchange Commission
SFAS.................. Statement of Financial Accounting Standards
TGP................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of El Paso
Tennessee Pipeline Co.
TransAmerican......... TransAmerican Natural Gas Corporation
</TABLE>
i
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues................................... $1,615 $1,251 $4,530 $4,061
------ ------ ------ ------
Operating expenses
Cost of gas and other products..................... 1,244 877 3,372 2,946
Operation and maintenance.......................... 168 173 523 477
Depreciation, depletion, and amortization.......... 66 58 198 182
Taxes, other than income taxes..................... 24 23 70 72
------ ------ ------ ------
1,502 1,131 4,163 3,677
------ ------ ------ ------
Operating income..................................... 113 120 367 384
------ ------ ------ ------
Other (income) and expense
Interest and debt expense.......................... 66 58 191 178
Other -- net....................................... (55) (20) (113) (44)
------ ------ ------ ------
11 38 78 134
------ ------ ------ ------
Income before income taxes and minority interest..... 102 82 289 250
Income tax expense................................... 35 31 97 96
------ ------ ------ ------
Income before minority interest...................... 67 51 192 154
Minority interest
Preferred stock dividend requirement of
subsidiary...................................... 7 7 19 19
------ ------ ------ ------
Net income........................................... $ 60 $ 44 $ 173 $ 135
====== ====== ====== ======
Comprehensive income................................. $ 57 $ 41 $ 165 $ 131
====== ====== ====== ======
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
1
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 49 $ 116
Accounts and notes receivable, net........................ 1,193 989
Inventories............................................... 46 68
Deferred income tax benefit............................... 68 168
Other..................................................... 322 288
------ ------
Total current assets.............................. 1,678 1,629
Property, plant, and equipment, net......................... 7,221 7,116
Investments in unconsolidated affiliates.................... 692 373
Other....................................................... 405 414
------ ------
Total assets...................................... $9,996 $9,532
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 753 $ 886
Short-term borrowings (including current maturities of
long-term debt)........................................ 924 885
Other..................................................... 688 693
------ ------
Total current liabilities......................... 2,365 2,464
------ ------
Long-term debt, less current maturities..................... 2,360 2,119
------ ------
Deferred income taxes....................................... 1,487 1,550
------ ------
Other....................................................... 954 1,075
------ ------
Commitments and contingencies (See Note 3)
Minority interest
Preferred stock of subsidiary............................. 300 300
------ ------
Other minority interest................................... 65 65
------ ------
Stockholders' equity
Common stock, par value $3 per share; authorized
275,000,000 shares; issued 122,581,816 shares at
December 31, 1997...................................... -- 368
Common stock, par value $1.00 per share; authorized 1,000
shares; issued 1,000 shares at September 30, 1998...... -- --
Additional paid-in capital................................ 2,027 1,389
Retained earnings......................................... 453 327
Accumulated other comprehensive income.................... (15) (7)
Treasury stock (at cost) 2,946,832 shares at December 31,
1997................................................... -- (47)
Deferred compensation at December 31, 1997................ -- (71)
------ ------
Total stockholders' equity........................ 2,465 1,959
------ ------
Total liabilities and stockholders' equity........ $9,996 $9,532
====== ======
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
2
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1998 1997
----- -------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 173 $ 135
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 198 182
Deferred income taxes.................................. 82 215
Amortization of risk-sharing revenue................... (24) --
Other.................................................. (25) (2)
Working capital changes................................... 86 (110)
Other..................................................... (80) (12)
----- -------
Net cash provided by operating activities......... 410 408
----- -------
Cash flows from investing activities
Capital expenditures...................................... (245) (138)
Investment in joint ventures and equity investees......... (396) (196)
Proceeds from disposal of property........................ 47 10
Net change in advances to affiliate....................... (392) --
Other..................................................... 2 13
----- -------
Net cash used in investing activities............. (984) (311)
----- -------
Cash flows from financing activities
Net commercial paper proceeds............................. 278 113
Revolving credit borrowings............................... 260 --
Revolving credit repayments............................... (187) (1,200)
Long-term debt retirements................................ (71) (110)
Net proceeds from issuance of El Paso Energy Capital Trust
I preferred securities................................. 317 --
Net proceeds from issuance of long-term debt.............. -- 883
Net proceeds from equity offering......................... -- 152
Acquisition of treasury stock............................. (33) --
Dividends paid on common stock............................ (68) (56)
Other..................................................... 11 20
----- -------
Net cash provided by (used in) financing
activities....................................... 507 (198)
----- -------
Decrease in cash and temporary investments.................. (67) (101)
Cash and temporary investments
Beginning of period............................... 116 200
----- -------
End of period..................................... $ 49 $ 99
===== =======
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
3
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EL PASO NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1997 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated financial statements
at September 30, 1998, and for the quarters and nine months ended September 30,
1998, and 1997, are unaudited. The condensed consolidated balance sheet at
December 31, 1997, is derived from the audited financial statements at that
date. These financial statements do not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
material adjustments necessary to present fairly the results of operations for
such periods have been included. All such adjustments are of a normal recurring
nature. Results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year due to the seasonal
nature of the Company's businesses. Financial statements for the previous
periods include certain reclassifications which were made to conform to the
current presentation. Such reclassifications have no effect on reported net
income or total stockholders' equity. See Holding Company Reorganization below
for impact on Basis of Presentation.
Holding Company Reorganization
Effective August 1, 1998, the Company reorganized into a holding company
form of organizational structure, whereby EPEC, a Delaware corporation, became
the holding company. The holding company organizational structure was effected
by a merger conducted pursuant to Section 251(g) of the Delaware General
Corporation Law (the "Merger"), which provides for the formation of a holding
company structure without a vote of the stockholders of EPNG. In the Merger, El
Paso Energy Merger Company ("Merger Sub"), a Delaware corporation and wholly
owned subsidiary of EPEC, merged with and into EPNG, with EPNG as the surviving
corporation. By virtue of the Merger, EPNG became a direct, wholly owned
subsidiary of EPEC, and all of EPNG's outstanding capital stock was converted,
on a share for share basis, into capital stock of EPEC. As a result of such
restructuring, each outstanding share of $3.00 par value common stock of EPNG
was converted into one share of $3.00 par value common stock of EPEC, and each
one-half outstanding preferred stock purchase right of EPNG was converted into
one preferred stock purchase right of EPEC common stock, with such right
representing the right to purchase one two-hundredth (subject to adjustment) of
a share of Series A Junior Participating Preferred Stock of EPEC. EPEC assumed
ownership of the Trust (as defined in Note 4) as well as EPNG's obligations
related to the Trust. See Note 4, Trust Preferred Securities for a further
discussion. Also, as part of the reorganization, $66 million in cash and certain
assets and liabilities associated with the equity compensation programs were
transferred to EPEC, and EPEC became the successor to EPNG's previous shelf
registration in the amount of $565 million.
The September 30, 1998, stockholders' equity reflects the change in the
number of shares outstanding, other reorganization related reclassifications,
the transfer of ownership of the Trust, and the transfer of certain assets and
liabilities as discussed above.
Comprehensive Income
In accordance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Consolidated
Statements of Income. The only component of comprehensive income is the
cumulative translation adjustment which results from differences in the
translation of foreign currencies. This amount is reflected as accumulated other
comprehensive income in the Condensed Consolidated Balance Sheets.
4
<PAGE> 8
Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisers, Investment Companies, and Municipal Securities Issuers
In August 1998, the SEC issued the Interpretive Release: Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers. The Company has
addressed the requirements of the release in its disclosure on Year 2000 in Note
3, Commitments and Contingencies.
2. SEGMENTS
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer a variety of different energy products and services. They are managed
separately as each business requires different technology and marketing
strategies.
The El Paso Natural Gas segment, which includes the interstate pipeline
systems of EPNG and Mojave Pipeline Company, transports natural gas primarily to
the California market. The Tennessee Gas Pipeline segment, which includes the
interstate pipeline systems of TGP, Midwestern Gas Transmission Company, and
East Tennessee Natural Gas Company, transports natural gas to the northeast,
midwest, and mid-Atlantic sections of the U.S. including the states of
Tennessee, Virginia and Georgia as well as the New York City, Chicago, and
Boston metropolitan areas. The El Paso Field Services segment provides natural
gas gathering, products extraction, dehydration, purification, compression and
intrastate transmission services. The El Paso Energy Marketing segment markets
and trades natural gas, power, and petroleum products and participates in the
development and ownership of domestic power generation projects. The El Paso
Energy International segment develops and operates energy infrastructure
facilities worldwide.
The accounting policies of the individual segments are the same as those of
the Company as a whole, as summarized in Note 1, Basis of Presentation. Certain
business segments' earnings are largely derived from the earnings of equity
investments. Accordingly, the Company evaluates segment performance based on
EBIT. To the extent practicable, results of operations for the nine months and
quarter ended September 30, 1997, have been reclassified to conform to the
current business segment presentation, although such results are not necessarily
indicative of the results which would have been achieved had the revised
business segment structure been in effect during that period.
5
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<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------
EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers........ $ 117 $ 171 $ 36 $1,275 $ 14 $1,613
Intersegment revenues................... 1 9 18 4 -- 32
Operating income (loss)................. 57 71 8 -- (10) 126
EBIT.................................... 58 81 13 -- 12 164
Segment assets.......................... 1,745 5,085 985 754 918 9,487
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------
EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers........ $ 130 $ 179 $ 90 $847 $ 5 $1,251
Intersegment revenues................... -- 7 1 5 -- 13
Operating income (loss)................. 64 68 12 1 (5) 140
EBIT.................................... 67 74 15 2 2 160
Segment assets.......................... 1,816 5,333 597 812 380 8,938
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------
EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers........ $ 355 $ 542 $145 $3,440 $ 43 $4,525
Intersegment revenues................... 2 28 41 13 -- 84
Operating income (loss)................. 165 230 42 (4) (22) 411
EBIT.................................... 167 252 54 -- 23 496
Segment assets.......................... 1,745 5,085 985 754 918 9,487
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------
EL PASO TENNESSEE EL PASO EL PASO EL PASO
NATURAL GAS FIELD ENERGY ENERGY
GAS PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
(IN MILLIONS) ------- --------- -------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers........ $384 $ 565 $291 $2,812 $ 5 $4,057
Intersegment revenues................... 1 25 12 19 -- 57
Operating income (loss)................. 195 219 50 (32) (14) 418
EBIT.................................... 200 229 56 (29) 5 461
Segment assets.......................... 1,816 5,333 597 812 380 8,938
</TABLE>
The reconciliations of EBIT to income before income taxes and minority
interest are presented below.
<TABLE>
<CAPTION>
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Total EBIT for reportable segments.................. $164 $160 $ 496 $ 461
Affiliated interest income not included in segment
EBIT.............................................. 9 -- 9 --
Corporate expenses, net............................. (5) (20) (25) (33)
Interest and debt expense........................... (66) (58) (191) (178)
---- ---- ----- -----
Income before income taxes and minority interest.... $102 $ 82 $ 289 $ 250
==== ==== ===== =====
</TABLE>
6
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3. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia. Under the terms of the project's Power
Purchase Agreement, PLN purchases power from the Company in local currency
(Rupiah) indexed to the U.S. dollar at the date of payment. Due to the
devaluation of the Rupiah, the cost of power to PLN has significantly increased.
PLN is currently unable to pass this increase in cost on to its customers
without creating further political instability. PLN has requested financial aid
from the Minister of Finance to help ease the effects of the devaluation. PLN
has been paying the Company in Rupiah indexed to the U.S. dollar at the rate in
effect prior to the Rupiah devaluation, with a commitment to pay the balance
when financial aid is received. The difference between the current and prior
exchange rate has resulted in an outstanding balance due from PLN of $5.6
million at September 30, 1998. While the Company cannot predict the ultimate
outcome of Indonesia's financial difficulties, it believes PLN, with the backing
of the Minister of Finance, will honor the obligations on the Sengkang project
in full. The Company's investment in the Sengkang project was approximately $25
million at September 30, 1998. Additionally, the Company has provided specific
recourse guarantees of up to $6 million for loans from the project lenders.
Other project debt is nonrecourse. The Company has obtained political risk
insurance for the Sengkang project. The Company believes the current economic
difficulties in Indonesia will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Rates and Regulatory Matters
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it seeks comments on a wide range of initiatives to change the manner in which
short-term transportation markets (contracts for less than one year) are
regulated. Among other things, the NOPR proposes the following: (i) removing the
price cap for the short-term capacity market; (ii) establishing procedures to
make pipeline and shipper-owned capacity comparable; (iii) the auction of all
available short-term pipeline capacity on a daily basis, for which the pipeline
is not able to set a reserve price above variable costs; (iv) changing policies
or pipeline penalties, nomination procedures and services; (v) increasing
pipeline reporting requirements; (vi) permitting the negotiation of terms and
conditions of service; and (vii) potentially modifying the procedures for
certificating new pipeline construction. Also in July 1998, FERC issued a Notice
of Inquiry ("NOI") seeking comments on FERC's policy for pricing long-term
capacity. Comments on the NOPR and NOI are due in January 1999, and it is
unclear when and what action, if any, FERC will take in connection with the NOPR
and NOI and the comments received in response to them.
TGP -- In February 1997, TGP filed with FERC a settlement of all issues
related to the recovery of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). In April 1997, FERC approved
the settlement and TGP implemented the settlement on May 1, 1997. Under the
terms of the GSR Stipulation and Agreement, TGP is entitled to collect from
customers up to $770 million, of which approximately $735 million has been
collected as of September 30, 1998. TGP is entitled to recover additional
transition costs, up to the remaining $35 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provide for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and an escalating rate
cap, indexed to inflation, through October 2005, for certain of TGP's customers.
Under the terms of the GSR Stipulation and Agreement, TGP will be required to
refund to customers amounts collected in excess of each customer's share of
transition costs.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. TGP
provided a reserve for these rate refunds as revenues were collected. One party,
a competitor of TGP, filed with the Court of Appeals a Petition for Review of
the FERC orders. In July 1998, the Court of Appeals
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<PAGE> 11
issued a decision remanding the case to FERC to respond to the competitor's
argument that TGP's cost allocation methodology deterred the development of
market centers. In October 1998, FERC issued an order requesting comments be
filed in January 1999 on the issues raised in the Court of Appeals remand.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding ALJ the issue of proper allocation of TGP's New England lateral
costs. In the July 1997 order on rehearing, FERC clarified, among other things,
that although the ultimate resolution as to the proper allocation of costs will
be applied retroactively to July 1, 1995, the cost of service settlement does
not allow TGP to recover from other customers amounts that TGP may ultimately be
required to refund. TGP, as well as several other customers, have filed with the
Court of Appeals a Petition for Review of the FERC orders. In December 1997, the
ALJ issued his decision on the proper allocation of the New England lateral
costs. The decision adopts a methodology that economically approximates TGP's
current methodology. In October 1998, FERC issued an order affirming the ALJ's
decision.
TGP has filed cashout reports for the period September 1993 through August
1997. TGP's filings showed a cumulative loss of approximately $8 million that
would be rolled forward to the next cashout period pursuant to its tariff. FERC
has requested additional information and justification from TGP as to its
cashout methodology and reports. TGP's cashout methodology and reports are
currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
EPNG -- In June 1995, EPNG filed with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. In March 1996, EPNG
filed a comprehensive offer of settlement to resolve that proceeding as well as
issues surrounding certain contract reductions and expirations that were to
occur from January 1, 1996, through December 31, 1997. In April 1997, FERC
approved EPNG's settlement as filed and determined that only the contesting
party, Edison, should be severed for separate determination of the rate it
ultimately pays EPNG. Hearings to determine Edison's rates were completed in May
1998, and an initial decision was issued by the presiding ALJ in July 1998. The
decision is subject to review by FERC. EPNG and Edison have filed exceptions to
the decision. If the ALJ's decision is affirmed by FERC, EPNG believes that the
resulting rates to Edison would be such that no significant, if any, refunds in
excess of the amounts reserved would be required. Pending the final outcome,
Edison continues to pay the filed rates, subject to refund, and EPNG continues
to provide a reserve for such potential refunds. In July 1997, FERC issued an
order denying the requests for rehearing of the April 1997 order and the
settlement was implemented effective July 1, 1997. Edison filed with the Court
of Appeals a petition for review of FERC's April 1997 and July 1997 orders, in
which it challenges the propriety of FERC's approving the settlement over
Edison's objections to the settlement as a customer of Southern California Gas
Company. This matter has been briefed, oral arguments were held in October 1998,
and a decision is pending.
The rate settlement establishes, among other things, base rates through
December 31, 2005. Such rates escalate annually beginning in 1998. In addition,
the settlement provides for settling customers to (i) pay $295 million
(including interest) as a risk sharing obligation, which approximates 35 percent
of anticipated revenue shortfalls over an 8 year period, resulting from the
contract reductions and expirations referred to above, (ii) receive 35 percent
of additional revenues received by EPNG, above a threshold, for the same
eight-year period, and (iii) have the base rates increase or decrease if certain
changes in laws or regulations result in increased or decreased costs in excess
of $10 million a year. In accordance with the terms of the rate
8
<PAGE> 12
settlement, EPNG's refund obligation (including interest) was approximately $194
million. EPNG refunded $61 million to customers in August 1997 and, in
accordance with certain customer's elections, the remaining $133 million of
refund obligation was applied towards their $295 million risk sharing
obligation. Through September 30, 1998, an additional $91 million of the risk
sharing obligation was paid and the $71 million balance, including interest,
will be collected by the end of 2003. From 1996 through September 30, 1998, $58
million of the risk sharing obligation has been recognized. The remaining
unearned balance of risk sharing amounts totaling $237 million will be
recognized ratably through the year 2003.
The contract reductions and expirations referred to above resulted in
EPNG's having, as of September 30, 1998, approximately 1.6 Bcf/d (or 34 percent)
of its total capacity committed under contracts requiring the payment of less
than full tariff reservation rates. As of September 30, 1998, this capacity had
an annual value, at full tariff reservation rates, of approximately $172
million.
EPNG has substantially offset the effects of these reductions in firm
capacity commitments referred to above by implementing cost control programs and
by actively seeking new markets and pursuing attractive opportunities to
increase traditional market share. The new markets EPNG has targeted include
various natural gas users in California which were served indirectly through
Southern California Gas Company and Pacific Gas & Electric Company, as well as
new markets in northern Mexico and off the east end of its system. In addition
to other arrangements, in October 1997, EPNG entered into three contracts with
Dynegy for the sale of substantially all of its turned back firm capacity
available as of January 1, 1998, to California (approximately 1.3 Bcf) for a
two-year period beginning January 1, 1998, at rates negotiated pursuant to
EPNG's tariff provisions and FERC policies. EPNG anticipates realizing at least
$70 million in revenues (which will be subject to the revenue sharing provisions
of the rate settlement) under these contracts over the two-year period. The
contracts have a transport-or-pay provision requiring Dynegy to pay a minimum
charge equal to the reservation component of the contractual charge on at least
50 percent of the contracted volumes in each month in 1998 and on at least 72
percent of the contracted volumes each month in 1999. In December 1997, EPNG
filed to implement several negotiated rate contracts, including those with
Dynegy. In a protest to this filing made in January 1998, three shippers
(producers/marketers) requested FERC to require EPNG to eliminate certain
provisions from the Dynegy contracts, to publicly disclose and repost the
contracts for competitive bidding, and to suspend their effectiveness. In an
order issued in January 1998, FERC rejected several of the arguments made in the
protest and allowed the contracts to become effective as of January 1, 1998,
subject to refund, and to the outcome of a technical conference, which was held
in March 1998. In June 1998, FERC issued an order rejecting the protests to the
Dynegy contracts, but requiring EPNG to file with FERC modifications to the
contracts clarifying the credits under the reservation reduction mechanism and
the recall of certain capacity. In addition, capacity covered by the Dynegy
contracts which becomes available in the future must be separately posted.
Several parties have protested EPNG's compliance filing and/or requested
rehearing of FERC's June 1998 order. In June 1998, EPNG filed a letter agreement
in compliance with the June 1998 FERC order. In September 1998, FERC issued an
order accepting the letter agreement subject to EPNG making additional
modifications. The additional modifications to the letter agreement required
further clarification of credits available to Dynegy under the reservation
reduction mechanism and the recall of certain capacity. In October 1998, EPNG
filed with FERC a revised letter agreement and requested rehearing of the
September 1998 order.
Under FERC procedures, take-or-pay cost recovery filings may be challenged
by pipeline customers on prudence and certain other grounds. Certain parties
sought review in the Court of Appeals of FERC's determination in an October 1992
order that certain buy-down/buy-out costs were eligible for recovery. In January
1996, the Court of Appeals remanded the order to FERC with direction to clarify
the basis for its decision that the take-or-pay buy-down/buy-out costs were
eligible for recovery. In March 1997, following a technical conference and the
submission of statements of position and replies, FERC issued an order
determining that the costs related to all but one of EPNG's disputed contracts
were eligible for recovery. The costs ruled ineligible for recovery totaled
approximately $3 million, including interest, and were refunded to customers in
the second quarter of 1997. In October 1997, FERC issued an order denying the
challenging parties' request for rehearing of the March 1997 order in most
respects, but determined that the costs incurred pursuant to two additional EPNG
contracts were ineligible for recovery. These costs, including interest,
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<PAGE> 13
totaled approximately $9 million, and were refunded to customers in February
1998. The challenging parties, which claim that EPNG should be required to
refund up to an additional $31 million, excluding interest, have filed a
petition for review of the FERC order in the Court of Appeals. The matter has
been briefed and arguments are scheduled for January 1999.
In an order issued in April 1997 in the proceeding involving the spin down
of EPNG's gathering facilities to EPFS, FERC found that EPNG acted appropriately
in not including its Chaco Compressor Station in the facilities to be
transferred to EPFS, and that the Chaco Station had been correctly
functionalized by EPNG as a transmission facility. Requests for rehearing of
this order were filed by Williams Field Services and GPM Corporation. In a
November 1997 order, FERC reversed its previous decision and found that the
Chaco Station is a gathering facility and should be transferred to EPFS. FERC
denied all requests for rehearing and reaffirmed that the Chaco Station is a
non-jurisdictional facility and should be transferred to EPFS. Further requests
for rehearing were also denied. EPNG and two other parties have filed petition
for review with the Court of Appeals. In accordance with the FERC orders, the
Chaco Station was transferred to EPFS in April 1998.
Separately, in November 1996, GPM Corporation filed a complaint, as
amended, with FERC alleging that EPNG's South Carlsbad compression facilities
were gathering facilities and were improperly functionalized by EPNG as
transmission facilities. In accordance with the FERC orders, the South Carlsbad
compressor facilities were transferred to EPFS in April 1998.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
Environmental Matters
As of September 30, 1998, the Company had a reserve of approximately $264
million to cover environmental assessments and remediation activities discussed
below.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, to assure that its efforts meet
regulatory requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. The
Environmental Stipulation was effective July 1, 1995. As of September 30, 1998,
a balance of $7 million remains to be collected under this stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they may be designated, or have been asked for information
to determine whether they could be designated, as a PRP with respect to 31 sites
under the Comprehensive Environmental Response, Compensation and Liability Act
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Company's allocable share of
remediation costs. Since the clean-up costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required, and because in some cases the Company has asserted a defense to any
liability, the Company's estimate of its share of remediation costs could
change. Moreover, liability under the federal Superfund statute is joint and
several, meaning that the Company could be required to pay in excess of its pro
rata share of remediation costs. The Company's understanding of the financial
strength of other PRPs has been considered, where appropriate, in its
determination of its estimated liability as described herein. The Company
presently believes that the costs
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<PAGE> 14
associated with the current status of such entities as PRPs at the sites
referenced above will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. While there are still uncertainties
relating to the ultimate costs which may be incurred, based upon the Company's
evaluation and experience to date, the Company believes the recorded reserve is
adequate.
Legal Proceedings
In November 1993, TransAmerican filed a complaint in a Texas state court,
TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et al.,
alleging fraud, tortious interference with contractual relationships, negligent
misrepresentation, economic duress, civil conspiracy, and violation of state
antitrust laws arising from a settlement agreement entered into by EPNG,
TransAmerican, and others in 1990 to settle litigation then pending and other
potential claims. The complaint, as amended, seeks actual damages of $1.5
billion and exemplary damages of $6 billion. EPNG is defending the matter in the
State District Court of Dallas County, Texas. In April 1996, a former employee
of TransAmerican filed a related case in Harris County, Texas, Vickroy E. Stone
v. Godwin & Carlton, P.C., et al. (including EPNG), seeking indemnification and
other damages in unspecified amounts relating to litigation consulting work
allegedly performed for various entities, including EPNG, in cases involving
TransAmerican. EPNG filed a motion for summary judgment in the TransAmerican
case arguing that plaintiff's claims are barred by a prior release executed by
TransAmerican, by statutes of limitations, and by the final court judgment
ending the original litigation in 1990. Following a hearing in January 1998, the
court granted summary judgment in EPNG's favor on TransAmerican's claims based
on economic duress and negligent misrepresentation, but denied the motion as to
the remaining claims. In February 1998, EPNG filed a motion for summary judgment
in the Stone litigation arguing that all claims are baseless, barred by statutes
of limitations, subject to executed releases, or have been assigned to
TransAmerican. In June 1998, the court granted EPNG's motion in its entirety and
dismissed all the remaining claims in the Stone litigation. In August 1998, the
court denied Stone's motion for a new trial seeking reconsideration of that
ruling. Stone has appealed the court's ruling to the Texas Court of Appeals in
Houston, Texas. The TransAmerican trial is set to commence in September 1999.
Based on information available at this time, management believes that the claims
asserted against it in both cases have no factual or legal basis and that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position, results of operations, or cash flows.
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPEC: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site,
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<PAGE> 15
and seeks to recover that amount plus interest. Other companies named as
defendants include Atlantic Richfield Company, Crown Central Petroleum
Corporation, Occidental Chemical Corporation, Exxon Corporation, Goodyear Tire &
Rubber Company, Rohm & Haas Company, Shell Oil Company and Vacuum Tanks, Inc.
These defendants have filed their answers and third-party complaints seeking
contribution from twelve other entities believed to be PRPs at Sikes. Although
factual investigation relating to Sikes is in very preliminary stages, the
Company believes that the amount of material, if any, disposed at Sikes from the
Tenneco Chemicals, Inc. or Petro-Tex Chemical Corporation facilities was small,
possibly de minimis. However, the government plaintiffs have alleged that the
defendants are each jointly and severally liable for the entire remediation
costs and have also sought a declaration of liability for future response costs
such as groundwater monitoring. While the outcome of this matter cannot be
predicted with certainty, management does not expect this matter to have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky stations from the agency, and continues to
work to resolve the remaining issues. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent order with
the EPA. Management believes that the resolution of this issue will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the five phases of its Year 2000 project to assure that the
Company's key automated systems and related processes will remain functional
through the year 2000. Those phases include: (i) awareness; (ii) assessment;
(iii) remediation; (iv) testing; and (v) implementation of the necessary
modifications. The key automated systems of the Company consist of (a)
internally developed computer applications, (b) hardware and equipment, (c)
embedded chip systems in property, plant and equipment, and (d) third-party
developed software. The Company has hired outside consultants (both domestic and
international) to supplement the Company's project team. In addition, the
Company is involved in several industry trade-groups to share insight on issues
facing the industry related to Year 2000.
The Company's awareness phase recognizes the importance of Year 2000 issues
and its potential impact to the Company. Through the executive steering
committee and project team, the Company has established a
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<PAGE> 16
company-wide awareness program which includes participation of senior management
in each core business area. Even though the awareness phase is substantially
completed, the Company will continually update awareness efforts throughout the
Year 2000 project.
The Company's assessment phase consists of conducting a company-wide
inventory of its key automated systems and related processes, analyzing and
assigning levels of criticality to those systems and processes, identifying and
prioritizing resource requirements, developing validation strategies and testing
plans, and evaluating business partner relationships. The portion of the
assessment phase related to internally developed computer applications is
substantially complete. The Company estimates that it has finished more than
half of the portion of the assessment to determine the nature and impact of the
Year 2000 date change for hardware and equipment, embedded chip systems, and
third-party-developed software. The assessment phase of the project, among other
things, involves efforts to obtain representations and assurances from third
parties, including third party vendors, that their hardware and equipment
products, embedded chip systems, and software products being used by or
impacting the Company are or will be modified to be Year 2000 compliant. To
date, the responses from such third parties are inconclusive. As a result, the
Company cannot predict the potential consequences if these or other third
parties or their products are not Year 2000 compliant. The Company is currently
evaluating the exposure associated with such business partner relationships.
The Company expects that the remediation phase, which involves converting,
modifying, replacing or eliminating selected key automated systems, will be
substantially completed by mid-1999. The Company's testing phase represents the
validation process for key automated systems. The Company is utilizing test
tools and written test procedures to document and validate, as necessary, its
unit, system, integration, and acceptance testing. The testing phase is also
anticipated to be substantially completed by mid-1999. While work has begun on
both the remediation and testing phases, the Company estimates that
approximately three-quarters of the work in these phases remain.
The Company's implementation phase involves placing the converted or
replaced key automated systems into operations. In some cases, the
implementation phase will consist of developing and executing contingency plans
needed to support business functions and processes that may be interrupted by
Year 2000 failures which are outside of the Company's control. Contingency plans
will also be developed to prepare for unforeseen failures of the Company's key
automated systems. The Company is in the early stages of the implementation
phase. This phase is expected to be substantially completed by mid-1999.
While the total cost of the Company's Year 2000 project is still being
evaluated, the Company estimates that the costs to be incurred in 1998, 1999,
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software is between $17 million and $36 million. Of these
estimated costs, the Company expects between $4 million and $15 million to be
capitalized and the remainder to be expensed. As of September 30, 1998, the
Company has incurred expenses of approximately $3 million.
It is possible the Company may need to reassess its estimate of Year 2000
costs in the event the Company completes an acquisition of, or makes a material
investment in, substantial facilities or another business entity.
The Company's goal is to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, certain
systems and processes may be interrelated with systems outside the control of
the Company, and therefore there can be no assurance that all implementations
will be successful. The Company's present analysis of its most reasonably likely
worst case scenario for Year 2000 disruptions include Year 2000 failures in the
telecommunications and electricity industries, as well as interruptions from
suppliers that might cause disruptions in the Company's operations, thus causing
temporary financial losses and an inability to deliver products and services to
customers. Accordingly, the Company's contingency plan may also consider any
significant failures related to the most reasonably likely worst case scenario,
as they may occur. The plan is expected to assess the risk of a significant
failure to critical processes performed by the Company. This assessment is
expected to also factor in the severity and duration of the impact of a
significant failure. From this analysis, the Year 2000 contingency plan will be
developed to mitigate those risks.
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<PAGE> 17
While most of the Company's domestic plants, pipelines and other facilities
are owned or controlled by the Company, or its wholly owned subsidiaries, nearly
all of the Company's international investments are in plant, pipeline and other
facilities owned in conjunction with unrelated third parties. In many cases, the
operators of such international facilities are not under the sole or direct
control of the Company. As a consequence, the Year 2000 programs instituted at
some of the international facilities may be materially different from the Year
2000 program implemented by the Company domestically, and the party responsible
for the results of such programs may not be under the direct or indirect control
of the Company. The persons responsible for instituting such international Year
2000 programs may not provide the same degree of communication, documentation
and coordination as the Company achieves in its domestic Year 2000 program.
Also, the regulatory and legal environment in which such international
facilities operate make analysis of the most reasonably likely worst case
scenario with respect to certain facilities difficult at this time. Many foreign
jurisdictions appear to be substantially behind the United States in formulating
a Year 2000 strategy with respect to infrastructure or the reporting
requirements of business entities. Accordingly, the Year 2000 risks posed by
international operations as a whole are different than those presented
domestically. The Company has formulated and instituted a program for
identifying such risks and preparing a response to such risks, but is not yet
able to articulate the most reasonably likely worst case scenario for each of
its international operations at this time.
Management does not expect the costs of the Company's Year 2000 project to
have a material adverse effect on the Company's financial position, results of
operations, or cash flows. Based on information available at this time, however,
the Company cannot conclude that any failure of the Company or third-party
entities to achieve Year 2000 compliance will not adversely effect the Company.
Specific factors which might affect the success of the Company's Year 2000
efforts and the occurrence of Year 2000 disruption or expense include failure of
the Company or its outside consultants to properly identify deficient systems,
the failure of the selected remedial action to adequately address the
deficiencies, failure of the Company's outside consultants to complete the
remediation in a timely manner (due to shortages of qualified labor or other
factors), unforeseen expenses related to the remediation of existing systems or
the transition to replacement systems, and the failure of third parties to
become compliant or to adequately notify the Company of potential noncompliance.
4. TRUST PREFERRED SECURITIES
In March 1998, El Paso Energy Capital Trust I (the "Trust"), issued 6.5
million of 4 3/4% trust convertible preferred securities (the "Trust Preferred
Securities") for $325 million ($317 million, net of issuance costs). The net
proceeds to EPNG were used to pay down commercial paper. At the time of the
issuance, the Trust, a Delaware business trust, was a wholly owned consolidated
subsidiary of EPNG by virtue of its holding Trust convertible common securities
of approximately $10 million. As a result of the holding company reorganization,
EPEC assumed the ownership of the Trust.
See Note 1, Basis of Presentation, Holding Company Reorganization, for a
further discussion of the impact of the holding company reorganization on the
Trust Preferred Securities.
5. FINANCING TRANSACTIONS
The Company had short-term borrowings, including current maturities of
long-term debt, at September 30, 1998 and December 31, 1997, as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
EPNG Revolving Credit Facility.............................. $200 $ 45
EPNG Revolving Credit Facility with TGP designated as
borrower.................................................. -- 417
Commercial paper............................................ 605 326
Other credit facilities..................................... 60 25
Current maturities of long-term debt........................ 59 72
---- ----
$924 $885
==== ====
</TABLE>
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In March 1998, EPNG retired its outstanding 8 5/8% debentures due 2012 in
the amount of $17 million.
In August 1998, EPTPC retired its outstanding 10% debentures due August 1,
1998 in the amount of $38 million.
In August 1998, EPEC became a guarantor of EPNG's $750 million 5-year
revolving credit and competitive advance facility and $750 million 364-day
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). In October 1998, the $750 million 364-day portion of the
Revolving Credit Facility was amended to extend the termination date to October
27, 1999. Further, in October 1998, the Revolving Credit Facility was amended to
permit TGP, a designated borrower, to issue commercial paper, provided the total
amount of commercial paper outstanding at EPNG and TGP is equal to or less than
the unused capacity under the Revolving Credit Facility.
In September 1998, TGP filed a shelf registration permitting TGP to offer
up to $600 million (including $100 million carried forward from a prior shelf
registration) of debt securities. In October 1998, TGP issued $400 million ($391
million net of issuance cost) aggregate principal amount of 7% debentures due
2028. Approximately $300 million of the proceeds were used to repay TGP's
short-term indebtedness under the Revolving Credit Facility and the remainder
was used by TGP for general corporate purposes. After this issuance, TGP has
$200 million of capacity remaining under its shelf registration. As a result of
this transaction, the $300 million EPNG Revolving Credit Facility with TGP
designated as borrower was reclassified to long-term debt in the September 30,
1998, Condensed Consolidated Balance Sheets.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1998, and December 31,
1997, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $6,342 $6,004
Less accumulated depreciation and depletion................. 1,607 1,395
------ ------
4,735 4,609
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,486 2,507
------ ------
Total property, plant, and equipment, net......... $7,221 $7,116
====== ======
</TABLE>
7. INVENTORIES
Inventories at September 30, 1998, and December 31, 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Materials and supplies...................................... $43 $42
Gas in storage.............................................. 3 26
--- ---
$46 $68
=== ===
</TABLE>
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
8. RECENT PRONOUNCEMENTS
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the
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<PAGE> 19
benefit obligation and fair values of plan assets, and eliminates certain
disclosures no longer considered useful, including general descriptions of the
plans. Aggregation of information about certain plans is also permitted. This
statement does not change the requirements for the measurement and recognition
of obligations under those plans. The standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 is primarily a disclosure
requirement, and, accordingly, will not have any effect on the Company's
financial position, results of operations, or cash flows.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for such costs, and also defines internal-use computer software. It
is effective for fiscal years beginning after December 15, 1998. The application
of this pronouncement will not have a material impact in the Company's financial
position, results of operations, or cash flows.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. In addition, it requires that any
such cost that exists on the balance sheet be expensed upon adoption of this
pronouncement. It is effective for fiscal years beginning after December 15,
1998. The Company is currently evaluating the effects of this pronouncement.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal quarters beginning after June 15, 1999. The Company is currently
evaluating the effects of this pronouncement.
Disclosure relating to Euro Conversion
In July 1998, the SEC issued Staff Legal Bulletin No. 6 to provide guidance
for disclosure related to the Euro Conversion. The guidance primarily focuses on
disclosure in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as Description of Business. The Company
currently has no investments in the countries affected by the Euro Conversion.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
HOLDING COMPANY REORGANIZATION
Effective on August 1, 1998, the Company reorganized into a holding company
form of organizational structure, whereby EPEC, a Delaware corporation, became
the holding company. See Item 1, Financial Statements, Note 1, Basis of
Presentation, Holding Company Reorganization, for further discussion of the
holding company reorganization.
RESULTS OF OPERATIONS
GENERAL
Consolidated EBIT for the third quarter increased to $159 million compared
to $140 million in the year ago period. Consolidated EBIT for the nine months
increased to $471 million compared to $428 million in 1997.
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer a variety of different energy products and services. They are managed
separately as each business requires different technology and marketing
strategies. Certain business segments' earnings are largely derived from the
earnings of equity investments. Accordingly, the Company evaluates segment
performance based on EBIT. To the extent practicable, results of operations for
1997 have been reclassified to conform to the current business segment
presentation, although such results are not necessarily indicative of the
results which would have been achieved had the revised business segment
structure been in effect during that period. Operating revenues and expenses by
segment include intersegment sales and expenses which are eliminated in
consolidation. For a further discussion of the individual segments, See Note 2
of Item 1, Financial Statements.
SEGMENT RESULTS
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
El Paso Natural Gas......................................... $ 58 $ 67 $167 $200
Tennessee Gas Pipeline...................................... 81 74 252 229
---- ---- ---- ----
Regulated segments........................................ 139 141 419 429
---- ---- ---- ----
El Paso Field Services...................................... 13 15 54 56
El Paso Energy Marketing.................................... -- 2 -- (29)
El Paso Energy International................................ 12 2 23 5
---- ---- ---- ----
Non-regulated segments.................................... 25 19 77 32
---- ---- ---- ----
Corporate expenses, net..................................... (5) (20) (25) (33)
---- ---- ---- ----
Total EBIT................................................ $159 $140 $471 $428
==== ==== ==== ====
</TABLE>
17
<PAGE> 21
Consolidated EBIT for the quarter and nine months ended September 30, 1998,
was $19 million higher and $43 million higher, respectively, than for the same
periods of 1997. Variances by segment are presented below.
EL PASO NATURAL GAS
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1998 1997 1998 1997
---- ---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................. $118 $130 $ 357 $ 385
Operating expenses................................. (61) (67) (192) (190)
Other -- net....................................... 1 4 2 5
---- ---- ----- -----
EBIT............................................. $ 58 $ 67 $ 167 $ 200
==== ==== ===== =====
</TABLE>
Third Quarter 1998 Compared to Third Quarter 1997
Operating revenues for the quarter ended September 30, 1998, were $12
million lower than for the same period of 1997 primarily due to lower net
revenues resulting from the currently effective rate structure and the Pacific
Gas & Electric Company contract expiration which was effective December 31,
1997. The decrease was significantly offset by risk sharing revenue and revenue
from the sale of excess capacity to Dynegy. (See Item 1, Financial Statements,
Note 3, for a discussion of the Dynegy contracts).
Operating expenses for the quarter ended September 30, 1998, were $6
million lower than for the same period of 1997 primarily due to recovery of a
receivable previously deemed uncollectible, lower purchase gas costs, and
decreased depreciation expense.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Operating revenues for the nine months ended September 30, 1998, were $28
million lower than for the same period of 1997 primarily due to lower net
revenues resulting from the currently effective rate structure including the
Pacific Gas & Electric Company contract expiration which was effective December
31, 1997. The decrease was significantly offset by risk sharing revenue, other
non-traditional revenues including revenue from the sale of excess capacity to
Dynegy, and the favorable resolution of a contested rate matter. (See Item 1,
Financial Statements, Note 3, for a discussion of the Dynegy contracts).
Operating expenses for the nine months ended September 30, 1998, were $2
million higher than for the same period of 1997 primarily due to increased
purchase gas costs mainly resulting from lower 1998 fuel recovery rates and an
increase in maintenance expense offset by recovery of a receivable previously
deemed uncollectible.
TENNESSEE GAS PIPELINE
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues............................. $ 180 $ 186 $ 570 $ 590
Operating expenses............................. (109) (118) (340) (371)
Other -- net................................... 10 6 22 10
----- ----- ----- -----
EBIT......................................... $ 81 $ 74 $ 252 $ 229
===== ===== ===== =====
</TABLE>
18
<PAGE> 22
Third Quarter 1998 Compared to Third Quarter 1997
Operating revenues for the quarter ended September 30, 1998, were $6
million lower than for the same period of 1997 primarily because of a downward
revision in the amount of recoverable interest on GSR costs, and lower
throughput resulting from milder temperatures in the northeastern and midwestern
markets.
Operating expenses for the quarter ended September 30, 1998, were $9
million lower than for the same period of 1997 primarily due to lower system
fuel usage associated with operating efficiencies attained during the period of
lower throughput.
Other -- net for the quarter ended September 30, 1998, was $4 million
higher than for the same period of 1997 primarily due to interest income on a
favorable sales and use tax settlement.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Operating revenues for the nine months ended September 30, 1998, were $20
million lower than for the same period of 1997 primarily because of lower
throughput resulting from warmer average temperatures in the northeastern and
midwestern markets and a downward revision in the amount of recoverable interest
on GSR costs.
Operating expenses for the nine months ended September 30, 1998, were $31
million lower than for the same period of 1997 primarily due to lower system
fuel usage associated with operating efficiencies attained during the period of
lower throughput.
Other -- net for the nine months ended September 30, 1998, was $12 million
higher than for the same period of 1997 due to interest income on a favorable
sales and use tax settlement and gains on the sale of assets.
EL PASO FIELD SERVICES
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1998 1997 1998 1997
---- ---- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Gathering and treating margin..................... $ 35 $ 28 $ 111 $ 87
Processing margin................................. 10 10 36 42
Other margin...................................... (1) 2 2 5
---- ---- ----- ----
Total gross margin...................... 44 40 149 134
Operating expenses................................ (36) (28) (107) (84)
Other -- net...................................... 5 3 12 6
---- ---- ----- ----
EBIT............................................ $ 13 $ 15 $ 54 $ 56
==== ==== ===== ====
</TABLE>
Third Quarter 1998 Compared to Third Quarter 1997
Total gross margin (revenue less cost of sales) for the quarter ended
September 30, 1998, was $4 million higher than for the same period of 1997. The
increase in the gathering and treating margin was primarily from an increase in
gathering and treating volumes largely attributable to the acquisition in
December 1997 of Pacificorp's Gulf Coast gathering and processing subsidiaries
("TPC") and the January 1998 transfer of the Channel Industries Gas Company
("Channel") to El Paso Field Services segment from the El Paso Energy Marketing
segment.
Operating expenses for the quarter ended September 30, 1998, were $8
million higher than for the same period of 1997 primarily as a result of
additional expenses associated with TPC and Channel.
Other -- net for the quarter ended September 30, 1998, was $2 million
higher than for the same period of 1997 primarily as a result of additional
earnings from equity investments.
19
<PAGE> 23
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Total gross margin (revenue less cost of sales) for the nine months ended
September 30, 1998, was $15 million higher than for the same period of 1997. The
increase in the gathering and treating margin primarily resulted from an
increase in gathering and treating volumes largely attributable to the
acquisition of TPC in December 1997 and the January 1998 transfer of Channel to
El Paso Field Services segment from the El Paso Energy Marketing segment. The
decrease in the processing margin was largely attributable to lower liquids
prices during 1998 compared to the same period of 1997. Liquids prices directly
impact a substantial portion of EPFS's processing revenues. During 1998, liquids
prices have been at their lowest level since 1990, and the Company expects this
trend to continue for the remainder of the year. The Company attempts to
mitigate the impact of lower liquids prices by utilizing hedging strategies
where possible.
Operating expenses for the nine months ended September 30, 1998, were $23
million higher than for the same period of 1997 primarily as a result of
additional expenses associated with TPC and Channel.
Other -- net for the nine months ended September 30, 1998, was $6 million
higher than for the same period of 1997 reflecting higher earnings from equity
investments.
EL PASO ENERGY MARKETING
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Natural gas margin................................. $13 $ 15 $ 11 $ 10
Power margin....................................... (4) (1) 15 (1)
Petroleum products margin.......................... -- 1 -- (1)
--- ---- ---- ----
Total gross margin....................... 9 15 26 8
Operating expenses................................. (9) (14) (30) (40)
Other -- net....................................... -- 1 4 3
--- ---- ---- ----
EBIT............................................. $-- $ 2 $ -- $(29)
=== ==== ==== ====
</TABLE>
Third Quarter 1998 Compared to Third Quarter 1997
Total gross margin (revenue less cost of sales) for the quarter ended
September 30, 1998 was $6 million lower than for the same period of 1997. The
decrease was primarily attributable to price volatility for energy commodities,
particularly power prices, resulting in decreases in the market value of energy
positions which are accounted for on a mark-to-market basis. Third quarter 1998
power prices returned to more normal levels after significant price increases in
the second quarter brought on by unexpected power shortages in the Midwest.
Operating expenses were $5 million lower than for the same period of 1997
primarily due to the restructuring of the marketing organization, including the
January 1998 transfer of Channel from El Paso Energy Marketing segment to the El
Paso Field Services segment.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Total gross margin (revenue less cost of sales) for the nine months ended
September 30, 1998, was $18 million higher than for the same period of 1997. The
increase in total gross margin was primarily due to increased power volumes
compared to 1997, income recognition from a long-term power contract closed
during the first quarter of 1998, and an overall increase in the market value of
open power contracts due to price volatility in June and July.
Operating expenses were $10 million lower than for the same period of 1997.
The decrease was attributable to the restructuring of the marketing
organization, including the January 1998 transfer of Channel from El Paso Energy
Marketing segment to the El Paso Field Services segment.
20
<PAGE> 24
EL PASO ENERGY INTERNATIONAL
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................. $ 14 $ 5 $ 43 $ 5
Operating expenses................................. (24) (10) (65) (19)
Other -- net....................................... 22 7 45 19
---- ---- ---- ----
EBIT............................................. $ 12 $ 2 $ 23 $ 5
==== ==== ==== ====
</TABLE>
Third Quarter 1998 Compared to Third Quarter 1997
Operating revenues for the quarter ended September 30, 1998, were $9
million higher than for the same period of 1997 due to the consolidation for
financial reporting purposes of the Manaus Power project in May 1998 after
acquiring an additional ownership interest and an increase in revenue
attributable to the EMA Power project which the Company began reporting on a
consolidated basis in July 1997.
Operating expenses for the quarter ended September 30, 1998, were $14
million higher than for the same period of 1997 primarily due to the
consolidation of the Manaus Power project and higher project development costs
in the third quarter of 1998 reflecting an increase in project-related
activities.
Other -- net for the quarter ended September 30, 1998, was $15 million
higher than for the same period of 1997 primarily due to higher equity earnings,
increased development fees, and a gain on the sale of surplus power equipment.
The increases were partially offset by the recognition of a loss on an equity
swap agreement.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Operating revenues for the nine months ended September 30, 1998, were $38
million higher than for the same period of 1997 due to the consolidation for
financial reporting purposes of the Manaus Power project in May 1998 after
acquiring an additional ownership interest and an increase in revenue
attributable to the EMA Power project which the Company began reporting on a
consolidated basis in July 1997.
Operating expenses for the nine months ended September 30, 1998, were $46
million higher than for the same period of 1997 primarily due to costs related
to the EMA Power and Manaus Power projects and higher project development costs
in 1998 reflecting an increase in project-related activities.
Other -- net for the nine months ended September 30, 1998, was $26 million
higher than for the same period of 1997 primarily due to increased equity
earnings, a gain on the sale of surplus power equipment, higher development
fees, and the recognition of certain gains from project-related activities.
As El Paso Energy International's projects move from the developmental
stage to the operational stage, it is common to recognize one-time gains and
fees which may include management fees, development fees, financing fees, and
gains on the sell-down of partnership interests. The Company anticipates
additional
one-time events may result in the recognition of income or expense in the
future.
CORPORATE EXPENSES, NET
Third Quarter 1998 Compared to Third Quarter 1997
Net corporate expenses for the quarter ended September 30, 1998, were $15
million lower than for the same period of 1997 primarily due to decreased equity
compensation and benefits costs in 1998 and severance expenses in 1997,
partially offset by administrative costs associated with the formation and
startup of El Paso Power Services, a power services organization formed in the
first quarter of 1998.
21
<PAGE> 25
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Net corporate expenses for the nine months ended September 30, 1998, were
$8 million lower than for the same period of 1997 primarily due to gains on the
sale of assets and decreased benefits costs, partially offset by administrative
costs associated with the formation and startup of El Paso Power Services, a
power group services organization formed in the first quarter of 1998.
INTEREST AND DEBT EXPENSE
Third Quarter 1998 Compared to Third Quarter 1997
Interest and debt expense for the third quarter ended September 30, 1998,
was $8 million higher than for the same period of 1997 primarily because of
increased borrowings to fund capital expenditures, acquisitions, and other
investment expenditures.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Interest and debt expense for the nine months ended September 30, 1998, was
$13 million higher than for the same period of 1997 primarily because of
increased borrowings to fund capital expenditures, acquisitions, and other
investing expenditures and a higher average effective rate during the first half
of 1998 resulting from higher rates associated with the March 1997 issuance of
TGP long-term debt of approximately $883 million. These increases are partially
offset by interest accruals on the 1997 rate refund to EPNG's customers.
INCOME TAX EXPENSE
The effective tax rate for the quarter and nine months ended September 30,
1998, was lower than the rate for the same periods of 1997 primarily as a result
of increased consolidated foreign income subject to foreign tax rates different
than U.S. tax rates, increased equity income from unconsolidated foreign
affiliates recorded net of foreign income taxes for which no provision for U.S.
income tax is required, and lower state income taxes.
EPEC'S INTERNAL REORGANIZATION
EPEC, the corporate parent of EPNG, has recently received a ruling from the
Internal Revenue Service that would allow EPEC to implement a business structure
reorganization in which EPNG would transfer substantially all of its
subsidiaries (and their assets and operations) to EPEC or other entities owned
by EPEC. If EPEC completes this internal reorganization, EPNG's only assets will
be its interstate pipeline systems known as the EPNG System and the MPC System
which connect natural gas supply regions in New Mexico, Texas, Oklahoma and
Colorado to markets in California, Nevada, Arizona, New Mexico, Texas and
northern Mexico. Completion of the reorganization will cause the Company to
transfer ownership of: (i) its trading and marketing operations; (ii) its
international operations; (iii) its field services operations; (iv) the TGP
System, Midwestern System, and East Tennessee System interstate pipeline
systems; and (v) certain subsidiaries with corporate or discontinued operations.
If implemented, the Company will report the ownership transfers associated with
the reorganization as if they were discontinued business operations. The
reorganization is contingent upon the acceptable resolution of several factors
including the finalization of the Company's capital structure. If the
reorganization occurs, the Company anticipates that it will not occur before
late 1998 or early 1999.
22
<PAGE> 26
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from the actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to the Company's acquisitions, including
EPTPC, political and economic risks associated with current and future
operations in foreign countries, conditions of the equity and other capital
markets during the periods covered by the forward-looking statements, and other
risks, uncertainties and factors, including the effect of the Year 2000 date
change, discussed more completely in the Company's other filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, in addition to
the interim consolidated financial statements and accompanying notes presented
in Items 1 and 2 of this Form 10-Q.
There are no material changes in market risks faced by the Company from
those reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
23
<PAGE> 27
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1, Financial Statements, Note 3, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Item 1, Financial Statements, Note 1, which is incorporated herein by
reference.
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
Each exhibit identified below not designated by an asterisk is incorporated
by reference to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.A -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.A to EPEC's Form 10-Q (Commission File No.
1-14365) for the quarter ended September 30, 1998 filed
with the SEC (the "EPEC Third Quarter 10-Q")).
10.B -- First Amendment to the $750 million 364-Day Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.B to the EPEC Third Quarter
10-Q).
10.C -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.D to the EPEC Third Quarter 10-Q).
10.D -- First Amendment to the $750 million 5-Year Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.E to the EPEC Third Quarter
10-Q).
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates documents filed as part of this report.
24
<PAGE> 28
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of EPNG and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPNG and its consolidated subsidiaries.
b. Reports on Form 8-K
On August 3, 1998, EPNG filed a current report under Item 5 and Item 7
on Form 8-K with respect to the merger of EPNG with Merger Sub to create a
holding company structure.
25
<PAGE> 29
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.
EL PASO NATURAL GAS COMPANY
Date: November 12, 1998 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
26
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.A -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.A to EPEC's Form 10-Q (Commission File No.
1-14365) for the quarter ended September 30, 1998 filed
with the SEC (the "EPEC Third Quarter 10-Q")).
10.B -- First Amendment to the $750 million 364-Day Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.B to the EPEC Third Quarter
10-Q).
10.C -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.D to the EPEC Third Quarter 10-Q).
10.D -- First Amendment to the $750 million 5-Year Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.E to the EPEC Third Quarter
10-Q).
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates documents filed as part of this report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 1,193
<ALLOWANCES> 0<F1>
<INVENTORY> 46
<CURRENT-ASSETS> 1,678
<PP&E> 7,221
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 9,996
<CURRENT-LIABILITIES> 2,365
<BONDS> 2,360
0
0
<COMMON> 0
<OTHER-SE> 2,465
<TOTAL-LIABILITY-AND-EQUITY> 9,996
<SALES> 0
<TOTAL-REVENUES> 4,530
<CGS> 0
<TOTAL-COSTS> 4,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> 289
<INCOME-TAX> 97
<INCOME-CONTINUING> 173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Not separately identified in the consolidated financial statements or
accompanying notes thereto.
<F2>Not applicable because the Company is a wholly owned subsidiary of El Paso
Energy Corporation.
</FN>
</TABLE>
