<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 MARCH 31, 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 May 12,
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
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)
TransAmerican......... TransAmerican Natural Gas Corporation
</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>
FIRST QUARTER
ENDED MARCH 31,
---------------
1999 1998
----- -----
<S> <C> <C>
Operating revenues.......................................... $118 $115
---- ----
Operating expenses
Operation and maintenance................................. 38 40
Depreciation, depletion, and amortization................. 16 16
Taxes, other than income taxes............................ 8 9
---- ----
62 65
---- ----
Operating income............................................ 56 50
---- ----
Other (income) and expense
Non-affiliated interest and debt expense.................. 26 31
Affiliated interest income, net........................... (12) (10)
Other -- net.............................................. -- (2)
---- ----
14 19
---- ----
Income before income taxes and discontinued operations...... 42 31
Income tax expense.......................................... 16 12
---- ----
Income before discontinued operations....................... 26 19
Discontinued operations, net of income tax.................. -- 39
---- ----
Net income.................................................. $ 26 $ 58
==== ====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 11 $ 9
Accounts and notes receivable, net........................ 1,236 1,107
Materials and supplies.................................... 28 28
Other..................................................... 6 7
------ ------
Total current assets.............................. 1,281 1,151
Property, plant, and equipment, net......................... 1,531 1,537
Other....................................................... 95 98
------ ------
Total assets...................................... $2,907 $2,786
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 42 $ 34
Short-term borrowings (including current maturities of
long-term debt)........................................ 358 268
Other..................................................... 140 117
------ ------
Total current liabilities......................... 540 419
------ ------
Long-term debt, less current maturities..................... 975 980
------ ------
Other....................................................... 329 343
------ ------
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......................................... 19 --
------ ------
Total stockholder's equity........................ 1,063 1,044
------ ------
Total liabilities and stockholder's equity........ $2,907 $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>
FIRST QUARTER
ENDED
MARCH 31,
--------------
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 26 $ 58
Less income from discontinued operations, net of income
tax.................................................... -- 39
----- -----
Income from continuing operations........................... 26 19
Adjustments to reconcile net income to net cash from
operating activities...................................
Depreciation, depletion, and amortization.............. 16 16
Deferred income taxes.................................. (1) 4
Other.................................................. (8) (3)
Working capital changes................................... 115 (72)
Other..................................................... (7) (20)
----- -----
Cash provided by (used in) continuing operations....... 141 (56)
Cash provided by discontinued operations............... -- 166
----- -----
Net cash provided by operating activities......... 141 110
----- -----
Cash flows from investing activities
Capital expenditures...................................... (5) (4)
Net change in advances to EPEC............................ (219) (152)
Cash used in investing activities by discontinued
operations............................................. -- (162)
----- -----
Net cash used in investing activities............. (224) (318)
----- -----
Cash flows from financing activities
Net commercial paper borrowings (repayments).............. 20 (72)
Other credit facilities borrowings........................ 165 --
Other credit facilities repayments........................ (95) (45)
Long-term debt retirements................................ (5) (21)
Net proceeds from an affiliated note issuance............. -- 335
Dividends paid on common stock............................ -- (22)
Other..................................................... -- 8
Cash used in financing activities by discontinued
operations............................................. -- (18)
----- -----
Net cash provided by financing activities......... 85 165
----- -----
Increase (decrease) in cash and temporary investments....... 2 (43)
Less decrease in cash and temporary investments related to
discontinued operations................................ -- (14)
----- -----
Increase (decrease) in cash and temporary investments from
continuing operations..................................... 2 (29)
Cash and temporary investments
Beginning of period....................................... 9 62
----- -----
End of period............................................. $ 11 $ 33
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
3
<PAGE> 6
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 March 31, 1999, and for the quarters ended March 31,
1999, and 1998, are unaudited. The condensed balance sheet at December 31, 1998,
is derived from audited financial statements. 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, except for those relating to discounted 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 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 ended March 31, 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 $1,504 million for the quarter ended March 31, 1998.
2. FINANCING TRANSACTIONS
The average interest rate of short-term borrowings was 5.0% and 5.8% at
March 31, 1999, and December 31, 1998, respectively. The Company had short-term
borrowings, including current maturities of long term debt, at March 31, 1999,
and December 31, 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $170 $150
Other credit facilities..................................... 130 60
Current maturities of long-term debt........................ 58 58
---- ----
$358 $268
==== ====
</TABLE>
During the first quarter of 1999, the Company accrued $7 million in
dividends payable on its 8% preferred stock.
In May 1999, EPEC issued $500 million aggregate principal amount of 6.75%
Senior Notes due 2009. Approximately $70 million of the proceeds were used to
repay a portion of EPNG's outstanding commercial paper.
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
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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. 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 originally filed rates, subject to refund, and EPNG continues to provide a
reserve for such potential refunds.
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. EPNG cannot predict the outcome with certainty, but it believes that
FERC will ultimately approve the settlement.
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 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 March 31, 1999, approximately $231 million
of the risk sharing obligation had been paid, and the remaining balance of $64
million will be collected by the end of 2003. At March 31, 1999, the balance of
the unearned risk sharing revenue was $215 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 three contracts
with Dynegy Inc. ("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. EPNG realized
$11 million in revenue in the first quarter of 1999 and anticipates realizing at
least $32 million in revenues during the remainder of 1999. Such revenue is
subject to the revenue sharing provisions of the rate settlement. 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. 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
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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 which becomes available in the
future. 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. The issue is pending before FERC.
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 March 31, 1999, EPNG
had a reserve of $4 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
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 its 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.
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 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 Natural Gas Corporation ("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
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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 fraud, tortious interference
and civil conspiracy. The motion is currently set for hearing in June 1999. The
TransAmerican trial is set to commence in September 1999. 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. 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.
EPNG has been named a defendant 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 does not intend to intervene in these
actions. The Company believes the complaint to be without merit.
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.
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 March 31, 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 and, to a lesser extent, control of water
discharges.
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.
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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 reserve is 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.
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,412 $2,417
Less accumulated depreciation and depletion................. 961 961
------ ------
1,451 1,456
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 80 81
------ ------
Total property, plant, and equipment, net......... $1,531 $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 is effective for all
quarters in fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of this pronouncement.
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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>
FIRST QUARTER
ENDED
MARCH 31,
-------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $118 $115
Operating expenses.......................................... (62) (65)
Other -- net................................................ -- 2
---- ----
EBIT...................................................... $ 56 $ 52
==== ====
</TABLE>
Operating revenues for the quarter ended March 31, 1999, were $3 million
higher than for the same period of 1998 primarily due to an increase in
non-traditional revenues, including revenues from the sale of capacity to
Dynegy.
Operating expenses for the quarter ended March 31, 1999, were $3 million
lower than for the same period of 1998 primarily due to lower fuel costs,
partially offset by an increase in operation and maintenance expenses.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the quarter ended March 31,
1999, was $5 million lower than for the same period of 1998 primarily due to
lower average principal balances on commercial paper and other credit facilities
in 1999.
AFFILIATED INTEREST INCOME, NET
Affiliated interest income, net for the quarter ended March 31, 1999, was
$2 million higher than for the same period of 1998 primarily due to increased
advances to EPEC.
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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.
The Company is participating in EPEC's Year 2000 project. Accordingly, the
Company is taking steps to mitigate any adverse effects of the Year 2000 date
change on our customers and business operations including the assessment,
remediation, testing of our applications, hardware and software, and the
implementation of necessary changes. Nevertheless, our failure, or the failure
of third-parties with whom we deal, to achieve Year 2000 compliance may
adversely affect our business. For more information regarding the Year 2000
compliance project, see EPEC's Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
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.
10
<PAGE> 13
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>
3.A -- Restated Certificate of Incorporation of EPNG, dated May
11, 1999.
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
EPNG filed a report under Item 2 on Form 8-K, dated January 14, 1999,
with respect to the tax-free internal reorganization.
11
<PAGE> 14
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: May 13, 1999 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 13, 1999 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.A -- Restated Certificate of Incorporation of EPNG, dated May
11, 1999.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.A
RESTATED
CERTIFICATE OF INCORPORATION
OF
EL PASO NATURAL GAS COMPANY
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
E1 Paso Natural Gas Company, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is E1 Paso Natural Gas Company (the
"Corporation"). The Corporation was originally incorporated under the name E1
Paso Natural Gas Company. The original certificate of incorporation was filed
with the Secretary of State of the State of Delaware on November 28, 1928.
2. This Restated Certificate of Incorporation restates and further
amends the Certificate of Incorporation of the Corporation and has been adopted
and approved in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware. Stockholder approval of this Restated Certificate
of Incorporation was given by unanimous written consent of the stockholders of
the Corporation in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
3. The text of the Certificate of Incorporation, as heretofore amended,
is hereby amended and restated to read in its entirety as follows:
ARTICLE 1
NAME
The name of this corporation is El Paso Natural Gas Company.
ARTICLE 2
REGISTERED OFFICE AND AGENT
The address of the registered office of this corporation is Corporation
Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle,
State of Delaware 19801, and the name of its registered agent at such address is
The Corporation Trust Company.
<PAGE> 2
ARTICLE 3
PURPOSES
The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE 4
SHARES
The total number of authorized shares of all classes of stock of this
corporation shall consist of 1,000 shares of common stock having a par value of
$1.00 per share and 1,000,000 shares of preferred stock having a par value of
$0.01 per share. Authority is hereby expressly granted to the Board of Directors
to fix by resolution or resolutions any of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
which are permitted by the General Corporation Law of the State of Delaware in
respect of any class or classes of stock or any series of any class of stock of
the corporation.
PREFERRED STOCK DESIGNATED "8% PREFERRED STOCK"
- -----------------------------------------------
Pursuant to the authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation, as amended (as such may be
further amended from time to time, the "Certificate of Incorporation"), a series
of Preferred Stock, par value $0.01 per share, of the Corporation (the
"Preferred Stock") be, and hereby is, created to be designated "8% Preferred
Stock" (hereinafter referred to as the "8% Preferred Stock"), consisting of
500,000 shares, and the designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions of the 8%
Preferred Stock are hereby fixed and stated to be as follows (all terms used
herein that are defined in the Certificate of Incorporation shall be deemed to
have the meanings provided therein):
SECTION 1. Dividends. (a) The dividend rate on the 8%
Preferred Stock shall be 8% of $700 per share of Preferred Stock per
annum. Dividends on shares of the 8% Preferred Stock shall be
cumulative and shall accrue from the date of issuance of such shares,
whether or not declared by the Board of Directors of the Corporation
(or a duly authorized committee thereof). Accrued but unpaid dividends
shall not bear interest.
(b) Dividends on the 8% Preferred Stock shall be payable when,
as, and if declared by the Board of Directors of the Corporation (or a
duly authorized committee thereof) out of assets legally available
therefor, annually on the last day of November in each year (each, a
"Dividend Payment Date"), with the first dividend payment date being
the next Dividend Payment Date following the date of issuance.
Dividends on each Dividend Payment Date will be payable to holders
-2-
<PAGE> 3
of record of the 8% Preferred Stock as they appear on the records of
the Corporation on a record date, not more than 60 days preceding such
Dividend Payment Date, fixed for such purpose by the Board of Directors
(or a duly authorized committee thereof) in advance of such Dividend
Payment Date. Accrued dividends not paid on a Dividend Payment Date may
be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the holders of record on such record date,
not more than 60 days preceding the payment date thereof, as may be
fixed by the Board of Directors (or a duly authorized committee
thereof). Dividends payable on shares of 8% Preferred Stock for the
initial dividend period following issuance of such shares or any other
dividend period shorter than a year shall be computed on the basis of a
360-day year of twelve 30-day months. The 8% Preferred Stock shall rank
on a parity with each other series of Preferred Stock as to the payment
of dividends, except to the extent otherwise provided in the resolution
or resolutions of the Board of Directors of the Corporation fixing the
designations and the powers, preferences, and rights, and the
qualifications, limitations, and restrictions in respect of such other
series of Preferred Stock.
SECTION 2. Voting. The 8% Preferred Stock shall not have any
voting rights except as required by law or the Certificate of
Incorporation.
SECTION 3. Redemption. (a) At any time or from time to time,
on or after January 1, 2003, the shares of the 8% Preferred Stock shall
be redeemable at the option of the corporation (by resolution of the
Board of Directors or a duly authorized committee thereof), in whole or
in part, out of funds legally available therefor, at a redemption price
equal to $700.00 per share, plus an amount equal to all accrued and
unpaid dividends, if any, to but excluding the date fixed for
redemption. If fewer than all outstanding shares of 8% Preferred Stock
are to be redeemed, the Corporation will select those shares to be
redeemed pro rata, by lot, or by a substantially equivalent method.
(b) Notice of redemption pursuant to paragraph (a) of this
Section 3 shall be given by mail, not less than 30 days prior to the
date fixed for redemption, to each record holder of the shares of 8%
Preferred Stock to be redeemed at the address of such holder on the
records of the Corporation. If a notice of redemption has been given
pursuant to this subsection (b) and if, on or before the date fixed for
redemption, the funds necessary for such redemption shall have been
irrevocably deposited or set aside by the Corporation, separate and
apart from its other funds, to pay the redemption price to the holders
of the shares of 8% Preferred Stock so called for redemption upon
surrender of the certificates therefor, then, notwithstanding that any
certificates for such shares have not been surrendered for
cancellation, from and after the date fixed for redemption, dividends
on the shares of 8% Preferred Stock so called for redemption will cease
to accrue, such shares will no longer be deemed outstanding, and all
rights of the holders thereof as stockholders of the Corporation
(except the right to receive
-3-
<PAGE> 4
payment of the redemption price) will cease. Subject to applicable
escheat and similar abandoned property laws, any moneys so deposited or
set aside by the Corporation for such redemption and unclaimed at the
end of six months from the date fixed for redemption shall revert to
the general funds of the Corporation, after which reversion the holders
of such shares so called for redemption shall look only to the general
funds of the Corporation for payment of the amounts payable upon such
redemption. Any interest accrued on funds so deposited or set aside
shall be paid to the Corporation from time to time.
SECTION 4. Liquidation Rights. (a) The shares of 8% Preferred
Stock shall rank, as to distributions upon dissolution, liquidation,
and winding up of the Corporation, prior to the shares of Common Stock
and on parity with each other series of Preferred Stock, except to the
extent otherwise provided in the resolution or resolutions of the Board
of Directors of the Corporation fixing the designations and the powers,
preferences, and rights, and the qualifications, limitations, and
restrictions in respect of such other series of Preferred Stock.
Subject to subsection (b) of this Section 4, the amount that the
holders of 8% Preferred Stock shall be entitled to receive in the event
of any dissolution, liquidation, or winding up of the affairs of the
Corporation, whether voluntary or involuntary, shall be $700.00 per
share, plus an amount equal to all accrued and unpaid dividends, if
any, to the date of dissolution or liquidation. After such amount is
paid in full, no further distributions or payments shall be made in
respect of shares of 8% Preferred Stock, such shares of 8% Preferred
Stock shall no longer be deemed to be outstanding or be entitled to any
powers, preferences, rights, or privileges, and certificates
representing such shares of 8% Preferred Stock shall be surrendered for
cancellation to the Corporation.
(b) In the event of any dissolution, liquidation, or winding
up of the Corporation, then, before any distribution or payment shall
be made to the holders of Common Stock or any other class or series of
stock of the Corporation ranking junior to the 8% Preferred Stock with
respect to distributions upon dissolution, liquidation, or winding up,
the holders of the 8% Preferred Stock (subject to the rights of the
holders of any class or series of stock ranking prior to the 8%
Preferred Stock with respect to distributions upon dissolution,
liquidation, or winding up) shall be entitled to be paid in full the
amounts set forth in subsection (a) of this Section 4. After such
payment shall have been made in full to the holders of the 8% Preferred
Stock, the remaining assets and funds of the Corporation shall be
distributed to the holders of the stock of the Corporation ranking
junior to the 8% Preferred Stock with respect to distributions upon
dissolution, liquidation, or winding up according to their respective
rights. In the event that the assets of the Corporation available for
distribution to the holders of 8% Preferred Stock shall not be
sufficient to pay in full the preferential payment herein required to
be paid to the holders of shares of 8% Preferred Stock and to pay in
full the liquidation preference on all other shares of stock of the
Corporation ranking on parity with the 8% Preferred Stock with respect
to
-4-
<PAGE> 5
distributions upon dissolution, liquidation, and winding up of the
Corporation, then such assets shall be distributed to the holders of
shares of 8% Preferred Stock and any such other parity stock ratably in
proportion to the full amounts to which they otherwise would be
respectively entitled if all amounts payable thereon were paid in full.
SECTION 5. Maturity. Unless otherwise redeemed as provided
herein, the term of the 8% Preferred Stock shall be perpetual.
ARTICLE 5
BY-LAWS
The Board of Directors shall have the power to adopt, amend or repeal
the By-laws of this corporation, subject to the power of the stockholders to
amend or repeal such By-laws. The stockholders having voting power shall also
have the power to adopt, amend or repeal the By-laws of this corporation.
ARTICLE 6
ELECTION OF DIRECTORS
Except as may be otherwise required by the By-laws, written ballots are
not required in the election of Directors.
ARTICLE 7
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall indemnify its officers and directors to the full
extent permitted by the General Corporation Law of the State of Delaware, as
amended from time to time.
ARTICLE 8
LIMITATION OF DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, for any act or omission, except that a director may be
liable (i) for breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
General Corporation Law of the State of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors shall be eliminated or limited to
the fullest extent
-5-
<PAGE> 6
permitted by the General Corporation Law of the State of Delaware, as so
amended. The elimination and limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to acts or
omissions occurring during such director's term or terms of office. Any
amendment, repeal or modification of this Article 8 shall not adversely affect
any right of protection of a director of the Corporation existing at the time of
such repeal or modification.
IN WITNESS WHEREOF, the undersigned has caused this Restated
Certificate of Incorporation to be executed by a duly authorized officer this
11th day of May 1999.
El Paso Natural Gas Company
/s/ JEFFREY I. BEASON
----------------------------------------
Jeffrey I. Beason
Vice President and Controller
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 1236
<ALLOWANCES> 0<F1>
<INVENTORY> 28
<CURRENT-ASSETS> 1281
<PP&E> 1531
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 2907
<CURRENT-LIABILITIES> 540
<BONDS> 975
0
350
<COMMON> 0
<OTHER-SE> 713
<TOTAL-LIABILITY-AND-EQUITY> 2907
<SALES> 0
<TOTAL-REVENUES> 118
<CGS> 0
<TOTAL-COSTS> 62
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 42
<INCOME-TAX> 16
<INCOME-CONTINUING> 26
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
