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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 JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-2700
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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.
Common Stock, par value $1.00 per share. Shares outstanding on August 10,
1999: 1,000
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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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
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
EPEC.................. El Paso Energy Corporation, the parent company of El Paso Natural Gas
Company
EPFS.................. El Paso Field Services Company, a wholly owned subsidiary of El Paso
Tennessee Pipeline Co.
EPNG.................. El Paso Natural Gas Company, a wholly owned subsidiary of El Paso Energy
Corporation
FERC.................. Federal Energy Regulatory Commission
PRP(s)................ Potentially responsible party(ies)
</TABLE>
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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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues.......................................... $121 $124 $239 $239
---- ---- ---- ----
Operating expenses
Operation and maintenance................................. 44 46 82 86
Depreciation, depletion, and amortization................. 15 15 31 31
Taxes, other than income taxes............................ 8 6 16 15
---- ---- ---- ----
67 67 129 132
---- ---- ---- ----
Operating income............................................ 54 57 110 107
---- ---- ---- ----
Other (income) and expense
Non-affiliated interest and debt expense.................. 29 28 55 59
Affiliated interest income, net........................... (16) (11) (28) (21)
Other -- net.............................................. -- -- -- (2)
---- ---- ---- ----
13 17 27 36
---- ---- ---- ----
Income before income taxes and discontinued operations...... 41 40 83 71
Income tax expense.......................................... 16 15 32 27
---- ---- ---- ----
Income before discontinued operations....................... 25 25 51 44
Discontinued operations, net of income taxes................ -- 30 -- 69
---- ---- ---- ----
Net income.................................................. $ 25 $ 55 $ 51 $113
==== ==== ==== ====
</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)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 9 $ 9
Accounts and notes receivable, net........................ 1,289 1,107
Materials and supplies.................................... 27 28
Other..................................................... 6 7
------ ------
Total current assets.............................. 1,331 1,151
Property, plant, and equipment, net......................... 1,523 1,537
Other....................................................... 93 98
------ ------
Total assets...................................... $2,947 $2,786
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 35 $ 34
Short-term borrowings (including current maturities of
long-term debt)........................................ 357 268
Other..................................................... 163 117
------ ------
Total current liabilities......................... 555 419
------ ------
Long-term debt, less current maturities..................... 975 980
------ ------
Other....................................................... 336 343
------ ------
Commitments and contingencies (See Note 3)
Stockholder's equity
Preferred stock, 1,000,000 shares authorized; 8% par value
$0.01 per share: 500,000 shares issued; stated at
liquidation value...................................... 350 350
Common stock, par value $1 per share; authorized 1,000
shares; issued 1,000................................... -- --
Additional paid-in capital................................ 694 694
Retained earnings......................................... 37 --
------ ------
Total stockholder's equity........................ 1,081 1,044
------ ------
Total liabilities and stockholder's equity........ $2,947 $2,786
====== ======
</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>
SIX MONTHS
ENDED
JUNE 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 51 $ 113
Less income from discontinued operations, net of income
taxes.................................................. -- 69
----- -----
Income from continuing operations........................... 51 44
Adjustments to reconcile net income to net cash from
operating activities...................................
Depreciation, depletion, and amortization.............. 31 31
Deferred income taxes.................................. 8 9
Other.................................................. (15) (4)
Working capital changes................................... 127 (75)
Other..................................................... 1 (5)
----- -----
Cash provided by continuing operations................. 203 -
Cash provided by discontinued operations............... -- 282
----- -----
Net cash provided by operating activities......... 203 282
----- -----
Cash flows from investing activities
Capital expenditures...................................... (14) (14)
Net change in advances to EPEC............................ (274) (224)
Other..................................................... 1 3
Cash used in investing activities by discontinued
operations............................................. -- (180)
----- -----
Net cash used in investing activities............. (287) (415)
----- -----
Cash flows from financing activities
Net commercial paper borrowings (repayments).............. 79 (6)
Other credit facilities borrowings........................ 382 --
Other credit facilities repayments........................ (372) --
Long-term debt retirements................................ (5) (21)
Dividends paid on common stock............................ -- (45)
Net proceeds from stock issuance.......................... -- 295
Cash used in financing activities by discontinued
operations............................................. -- (117)
----- -----
Net cash provided by financing activities......... 84 106
----- -----
Decrease in cash and temporary investments.................. -- (27)
Less decrease in cash and temporary investments related to
discontinued operations................................ -- (15)
----- -----
Decrease in cash and temporary investments from continuing
operations................................................ -- (12)
Cash and temporary investments
Beginning of period....................................... 9 62
----- -----
End of period............................................. $ 9 $ 50
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1998 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 Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at June 30, 1999, and for the quarters and six months ended
June 30, 1999, and 1998, are unaudited. The condensed balance sheet at December
31, 1998, is derived from audited financial statements at that date. These
financial statements do not include all disclosures required by generally
accepted accounting principles, but have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. 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, except for
those relating to discontinued operations as described below, 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 stockholder's equity.
Tax-free Internal Reorganization (Discontinued Operations)
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal reorganization. The Company has treated the assets and operations
distributed to EPEC or other subsidiaries of EPEC in the tax-free internal
reorganization as though they were discontinued operations as of December 31,
1998. Accordingly, the information for the quarter and six months ended June 30,
1998, in these financial statements has been restated as though the transactions
occurred on January 1, 1998. Revenues related to those items treated as
discontinued operations were $1,172 million and $2,676 million for the quarter
and six months ended June 30, 1998, respectively.
2. DEBT AND OTHER CREDIT FACILITIES
The average interest rate of short-term borrowings was 5.2% and 5.8% at
June 30, 1999, and December 31, 1998, respectively. The Company had short-term
borrowings, including current maturities of long term debt, at June 30, 1999,
and December 31, 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $229 $150
Other credit facilities..................................... 70 60
Current maturities of long-term debt........................ 58 58
---- ----
$357 $268
==== ====
</TABLE>
During the first half of 1999, the Company accrued $14 million in dividends
payable on its 8% preferred stock.
In July 1999, EPEC issued $600 million aggregate principal amount of 6.625%
Senior Notes due 2001 and $100 million aggregate principal amount of floating
rate Senior Notes due 2001 with an interest rate equal to LIBOR plus .65%.
Proceeds of approximately $299 million were advanced to EPNG and were used by
the Company to repay its outstanding short-term borrowings.
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<PAGE> 7
3. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets 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) auctioning all available short-term
pipeline capacity on a daily basis with the pipeline unable 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. The
Company provided comments on the NOPR and NOI in April 1999. It is not known
when FERC will act on the NOPR and NOI.
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 rates it
ultimately pays EPNG. 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. Hearings to determine Edison's rates were completed in
May 1998, and an initial decision was issued by the presiding ALJ in July 1998.
EPNG and Edison have filed exceptions to the decision with FERC.
Edison filed with the Court of Appeals a petition for review of FERC's
April 1997 and July 1997 orders, in which it challenged the propriety of FERC's
approving the settlement over Edison's objections to the settlement as a
customer of Southern California Gas Company. In December 1998, the Court of
Appeals issued its decision vacating and remanding FERC's order. In April 1999,
FERC issued an order requiring the parties to submit briefs setting forth their
positions as to whether FERC can approve the settlement over Edison's continuing
objections.
In August 1999, EPNG filed with FERC a joint settlement entered into with
Edison resolving all issues raised by Edison, either as a direct or indirect
customer, regarding EPNG's June 1995 rate filing. The joint settlement provides
for Edison to withdraw its opposition to the rate settlement and to pay EPNG the
maximum tariff rate for transportation service to California, exclusive of
applicable risk sharing add-on, from July 1, 1999, through the term of the rate
settlement. EPNG will pay Edison $32 million in resolution of any and all claims
raised by Edison regarding EPNG's June 1995 rate filing. Payment to Edison is
expected to occur in the fourth quarter 1999. In addition to not having a risk
sharing obligation, Edison will not participate in revenue sharing (both
described below). The agreed upon payment to Edison exceeds the reserve
previously provided by EPNG by approximately $14 million, which will be
reflected in results of operations in the third quarter of 1999.
The joint settlement is subject to FERC approval and to FERC's issuing
another order approving the rate settlement. As a part of the remand proceedings
before FERC following the Court of Appeals' December 1998 decision, certain
parties have raised issues concerning the rate settlement. EPNG believes that,
notwithstanding these issues, FERC will issue an order approving, again, the
rate settlement.
The rate settlement effective January 1996, 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 certain contract reductions and expirations identified in the
settlement, (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. Through June 30,
1999, approximately $234 million of the risk sharing obligation had been paid,
and the remaining
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<PAGE> 8
balance of $61 million will be collected by the end of 2003. At June 30, 1999,
the balance of the unearned risk sharing revenue was $203 million. This amount
will be recognized ratably through the year 2003.
In addition to other arrangements to offset the effects of the reduction in
firm capacity commitments referred to above, EPNG entered into contracts with
Dynegy for the sale of substantially all of its turned back firm capacity
available to California as of January 1, 1998, (approximately 1.3 billion cubic
feet) for a two-year period beginning January 1, 1998, at rates negotiated
pursuant to EPNG's tariff provisions and FERC policies. 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 72 percent of the
contracted volumes each month in 1999. EPNG realized $21 million in revenue in
the first six months of 1999 and anticipates realizing at least $21 million in
revenues during the remainder of 1999 for this capacity. Such revenue is subject
to the revenue sharing provisions of the rate settlement. In the third quarter
of 1999, EPNG intends to remarket this capacity pursuant to EPNG's tariff
provisions and FERC regulations, subject to Dynegy's right of first refusal.
In December 1997, EPNG filed to implement several negotiated rate
contracts, including those with Dynegy. In a protest to this filing, three
shippers (producers/marketers) requested that FERC 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 subject 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 required EPNG to file modifications with
FERC to the contracts clarifying the credits under the reservation reduction
mechanism and the recall rights of certain capacity. In addition, EPNG agreed to
separately post capacity covered by the Dynegy contracts as it becomes
available. 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 rights of certain capacity. In October 1998,
EPNG filed a revised letter agreement with FERC and requested rehearing of the
September 1998 order. In May 1999, subject to the outcome of the other Dynegy
issues, FERC accepted a separate EPNG contract that provided Dynegy an
additional delivery point for its existing capacity. In July 1999, FERC issued
an order on rehearing which generally denied all pending rehearing requests and
accepted EPNG's October 1998 revised letter agreement subject to certain
modifications to the capacity recall provisions applicable to one of the Dynegy
contracts.
Under the revenue sharing provisions of its rate case settlement, EPNG was
obligated to return approximately $12 million of non-traditional fixed cost
revenues earned in 1998 to certain customers. This amount was credited to those
customers' transportation invoices between October 1998 and March 1999. EPNG
continues to reserve for the revenue sharing provisions. At June 30, 1999, EPNG
had a reserve of approximately $8 million for additional amounts, which are
expected to be credited to customer accounts during the period September 1999
through March 2000.
In a November 1997 order, FERC reversed its previous decision and found
that EPNG's Chaco Station should be functionalized as a gathering, not a
transmission, facility and should be transferred to EPFS. In accordance with the
FERC orders, the Chaco Station was transferred to EPFS in April 1998. EPNG and
two other parties filed petitions for review with the Court of Appeals. EPNG and
others contested FERC's functionalization ruling and other parties contested
FERC's determination of the impact of the functionalization ruling on the
treatment of the Chaco Station costs in the rate settlement. The matter has been
briefed and will be argued in September 1999.
As an interstate pipeline, EPNG is subject to FERC audits of their books
and records. EPNG currently has an open audit covering the years 1990 through
1995. FERC is expected to issue its final audit report in 1999. As part of an
industry-wide initiative, EPNG's property retirements are currently under review
by the FERC audit staff.
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As the aforementioned rate and regulatory matters are fully and
unconditionally resolved, the Company may either recognize an additional refund
obligation or a non-cash benefit to finalize previously estimated liabilities.
Management believes the ultimate resolution of these 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.
Legal Proceedings
In November 1993, TransAmerican Natural Gas Corporation ("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 statues 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 March
1999, the Court ruled in EPNG's favor, denying TransAmerican's summary judgment
motion which sought to dismiss EPNG's counterclaims. In April 1999, EPNG filed a
motion for partial summary judgment as to TransAmerican's claims of fraudulent
inducement, tortious interference and civil conspiracy. That motion was heard by
the Court in June 1999. In its order granting the motion, the Court dismissed
TransAmerican's claim for fraudulent inducement altogether, and dismissed its
claims for tortious interference with contract and civil conspiracy to the
extent those claims are based on acts occurring on or before January 30, 1990,
the effective date of the release. In August 1999, the Court dismissed
TransAmerican's promissory estoppel claim with prejudice. It is anticipated that
the remaining motions for summary judgment will be heard by the Court over the
next two to three months. The trial of any claims that remain after those
motions have been argued and ruled upon is set to commence in January 2000. 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. Stone has appealed the court's ruling to the
Texas Court of Appeals in Houston, Texas. 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.
A number of subsidiaries of EPEC, both wholly and partially owned,
including the Company, have been named defendants in actions brought by Jack
Grynberg on behalf of the U.S. Government under the false claims act. Generally,
the complaints allege an industry-wide conspiracy to underreport the heating
value as well as the volumes of the natural gas produced from federal and Indian
lands, thereby depriving the U.S. Government of royalties. In April 1999, the
U.S. Government filed a notice that it would not intervene in these actions.
Grynberg has petitioned for consolidation of pre-trial matters with the
Multidistrict Litigation Panel, which will not consider this matter until
September 1999. The Company believes the complaint to be without merit.
Management believes that the ultimate 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
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these matters to have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Environmental
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at current and
former operating sites. As of June 30, 1999, the Company had reserves of
approximately $22 million for expected environmental costs.
Capital expenditures are expected to be approximately $9 million in total
for the years 2000 through 2007. These expenditures primarily relate to
compliance with air regulations.
The Company and certain of its subsidiaries have been designated, have
received notice that they could be designated, or have been asked for
information to determine whether they could be designated as a PRP with respect
to 5 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund 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 associated with the
current status of such other entities as PRPs at the Superfund 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 the
discovery stage, and it is not yet 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 other relevant 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 reserves are adequate.
For a further discussion of other environmental matters, see Legal
Proceedings above.
Other than the items discussed above, management is not aware of any other
commitments or contingent liabilities which would have a material adverse effect
on the Company's financial condition, results of operations, or cash flows.
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4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,419 $2,417
Less accumulated depreciation and depletion................. 975 961
------ ------
1,444 1,456
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 79 81
------ ------
Total property, plant, and equipment, net......... $1,523 $1,537
====== ======
</TABLE>
Current FERC policy does not permit the Company to recover amounts in
excess of original cost allocated in purchase accounting to its regulated
operations through rates.
5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards 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. This pronouncement
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 was amended by Statement
of Financial Accounting Standards No. 137 issued in June 1999. The amendment
defers the effective date to fiscal years beginning after June 15, 2000. The
Company is currently evaluating the effects of this pronouncement.
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<PAGE> 12
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, 1998, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
GENERAL
On December 31, 1998, EPEC completed a tax-free internal reorganization of
its assets and operations and those of its subsidiaries. After giving effect to
the reorganization, the Company's primary assets are its interstate pipeline
systems known as the EPNG System and the Mojave Pipeline Company System. See
Note 1 for a further discussion of the tax-free internal reorganization.
RESULTS OF CONTINUING OPERATIONS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues.................................. $121 $124 $ 239 $ 239
Operating expenses.................................. (67) (67) (129) (132)
Other -- net........................................ -- -- -- 2
---- ---- ----- -----
EBIT.............................................. $ 54 $ 57 $ 110 $ 109
==== ==== ===== =====
</TABLE>
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Operating revenues for the quarter ended June 30, 1999, were $3 million
lower than for the same period of 1998 primarily due to the favorable resolution
of a contested rate matter in the second quarter of 1998. This decrease was
partially offset by revenues from the sale of capacity to Dynegy, as well as an
increase in other transportation revenues.
SIX MONTHS ENDED 1999 COMPARED TO SIX MONTHS ENDED 1998
Operating revenues for the six months ended June 30, 1999, were unchanged
from the same period of 1998. The 1999 results reflect an increase in revenues
from the sale of capacity to Dynegy, as well as an increase in other
transportation revenues. These increases were offset by the favorable resolution
of a contested rate matter in the second quarter of 1998.
Operating expenses for the six months ended June 30, 1999, were $3 million
lower than for the same period of 1998 primarily due to decreased purchase gas
costs resulting from favorable fuel variances in 1999 partially offset by higher
miscellaneous operating and maintenance costs.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Non-affiliated interest and debt expense for the quarter ended June 30,
1999, was $1 million higher than for the same period of 1998 primarily due to
higher average principal balances on commercial paper and other credit
facilities during the second quarter of 1999.
SIX MONTHS ENDED 1999 COMPARED TO SIX MONTHS ENDED 1998
Non-affiliated interest and debt expense for the six months ended June 30,
1999, was $4 million lower than for the same period of 1998 primarily due to
lower average principal balances on commercial paper and other credit facilities
during the first quarter of 1999.
10
<PAGE> 13
AFFILIATED INTEREST INCOME, NET
Affiliated interest income, net for the quarter and six months ended June
30, 1999, was higher than for the same period of 1998 primarily due to the
reduction of affiliate debt and increased advances to EPEC during 1999.
OTHER
YEAR 2000
EPEC has established an executive steering committee and a project team to
coordinate the phases of its Year 2000 project to assure that the Company's key
automated systems, equipment, and related processes will remain functional
through the Year 2000. Those phases are: (i) awareness; (ii) assessment; (iii)
remediation; (iv) testing; (v) implementation of the necessary modifications and
(vi) contingency planning. The Company has participated in EPEC's Year 2000
project as described below.
In recognition of the importance of Year 2000 issues and their potential
impact on EPEC, the initial phase of the Year 2000 project involved the
establishment of a company-wide awareness program. The awareness program is
directed by the executive steering committee and project team and includes
participation of senior management in each core business area. The awareness
phase is substantially completed, although EPEC will continually update
awareness efforts for the duration of 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, hardware
and equipment, third-party-developed software, and embedded chips is
substantially complete. 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. Increasingly, the
responses from such third parties are generally encouraging. Nonetheless, many
of these responses lack the substantive detail to allow the Company to make a
meaningful evaluation of such third-parties' Year 2000 readiness. Furthermore,
in some circumstances, third parties are refusing to provide any response beyond
those contained in their publicly-disseminated information. As a result, the
overall evaluation of the Company's business partners' Year 2000 readiness
remains inconclusive. Accordingly, the Company cannot predict the potential
consequences if these or other third parties or their products are not Year 2000
compliant. The Company continues to evaluate the exposure associated with such
business partner relationships, and will use the contingency planning process to
attempt to mitigate the uncertainty concerning third-party readiness.
The remediation phase involves converting, modifying, replacing or
eliminating key automated systems identified in the assessment phase. The
testing phase involves the validation of the identified 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 implementation phase involves placing the converted or replaced key
automated systems into operation. The Company is substantially complete with its
remediation, testing and implementation phases for domestic systems.
The Company had previously identified the contingency planning phase as a
subset of the implementation phase, but has now established the process as its
own phase of the overall Year 2000 program. The contingency planning phase
consists of developing a risk profile of the Company's critical business
processes and then providing for actions the Company will pursue to keep such
processes operational in the event of Year 2000 disruptions. The focus of such
contingency planning is on prompt response to any Year 2000 events, and a plan
for subsequent resumption of normal operations. The plan is expected to assess
the risk of a significant failure to critical processes performed by the
Company, and to address the mitigation of those risks. The plan will also
consider any significant failures related to the most reasonably likely worst
case scenario,
11
<PAGE> 14
discussed below, as they may occur. In addition, the plan is expected to factor
in the severity and duration of the impact of a significant failure. The Company
has developed contingency plans for each business unit and significant business
process. By June 30, 1999, the Company had conducted desk-top testing of its
contingency plans and anticipates conducting drills and mock outages over the
next two calendar quarters, including some testing with certain customers and
other significant third parties. The Year 2000 contingency plans will continue
to be tested, modified and adjusted throughout the year as additional
information becomes available.
The goal of the Year 2000 project is to ensure that all of the critical
systems and processes which are under the Company's direct control remain
functional. Certain systems and processes may be interrelated with or dependent
upon systems outside the Company's control. However, systems within the
Company's control may also have unpredicted problems. Accordingly, there can be
no assurance that significant disruptions will be avoided. The Company's present
analysis of its most reasonably likely worst case scenario for Year 2000
disruptions includes sporadic 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. Virtually all of
the natural gas transported through the Company's interstate pipelines is owned
by third parties. Accordingly, failures of natural gas producers to be ready for
the Year 2000 could significantly disrupt the flow of product to the Company's
customers. In many cases, the producers have no direct contractual relationship
with the Company, and the Company relies on its customers to verify the Year
2000 readiness of the producers from whom they purchase natural gas. Since most
of the Company's revenues from the delivery of natural gas are based upon fees
paid by its customers for the reservation of capacity, and not based upon the
volume of actual deliveries, short-term disruptions in deliveries caused by
factors beyond the Company's control should not have a significant financial
impact on the Company, although it could cause operational problems for the
Company's customers. Longer-term disruptions, however, could materially impact
the Company's results of operations, financial condition, and cash flows.
While the total cost of the Company's Year 2000 project continues to be
evaluated, the Company estimates that the costs remaining to be incurred in 1999
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software will be between $1 million and $2 million. Of
these estimated costs, the Company expects approximately $1 million to be
capitalized and the remainder to be expensed. As of June 30, 1999, the Company
has incurred expenses of approximately $3 million and has capitalized costs of
approximately $1 million. The Company has previously only traced incremental
expenses related to its Year 2000 project. This means that the costs of the Year
2000 project related to salaried employees of the Company, including their
direct salaries and benefits, are not available, and have not been included in
the estimated costs of the project. Since the earlier phases of the project
mostly involved work performed by such salaried employees, the costs expended to
date do not reflect the percentage completion of the project. The Company
anticipates that it will expend a substantial amount of the remaining costs in
the contingency planning phase of the project, including the potential
acquisition of back-up assets and systems that may be deployed in the event
primary systems fail to perform fully according to expectations. 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.
Although the Company does not expect the costs of its Year 2000 project to
have a material adverse effect on its financial position, results of operations,
or cash flows, based on information available at this time the Company cannot
conclude that disruption caused by internal or external Year 2000 related
failures will not have such an effect. Specific factors which might affect the
success of the Company's Year 2000 efforts and the frequency or severity of a
Year 2000 disruption or the amount of expense include the 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, the
failure of the Company or its outside consultants to complete the remediation in
a timely manner (due to shortages of qualified labor or other factors), the
failure of other parties to joint ventures in which the Company is involved to
meet their obligations, both financial and operational, under the relevant joint
venture agreements to remediate assets used by the joint venture, unforeseen
expenses related to the remediation of existing systems or the transition to
replacement systems,
12
<PAGE> 15
the failure of third parties to become Year 2000 compliant or to adequately
notify the Company of potential noncompliance.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in the
Company's -- or an affiliate's -- equity or debt securities, this disclosure is
made for the SOLE PURPOSE of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
13
<PAGE> 16
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, 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 U.S. Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 1998.
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, 1998, in addition to
the interim consolidated financial statements, accompanying notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Items 1 and 2 of this Quarterly Report on 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, 1998.
14
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. 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
None
15
<PAGE> 18
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: August 12, 1999 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: August 12, 1999 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 1,289
<ALLOWANCES> 0<F1>
<INVENTORY> 27
<CURRENT-ASSETS> 1,331
<PP&E> 1,523
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 2,947
<CURRENT-LIABILITIES> 555
<BONDS> 975
0
350
<COMMON> 0
<OTHER-SE> 731
<TOTAL-LIABILITY-AND-EQUITY> 2,947
<SALES> 0
<TOTAL-REVENUES> 239
<CGS> 0
<TOTAL-COSTS> 129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 83
<INCOME-TAX> 32
<INCOME-CONTINUING> 51
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
