<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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
EL PASO NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 74-0608280
(State or Other Jurisdiction of (I.R.S. Employer
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT...........................................................NONE
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common Stock, par value $1 per share. Shares outstanding on March 3, 2000:
1,000
EL PASO NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
I(1)(a) AND (b) TO FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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EL PASO NATURAL GAS COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
------- ----
<S> <C> <C>
Glossary.............................................................. ii
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 3
Item 3. Legal Proceedings........................................... 3
Item 4. Submission of Matters to a Vote of Security Holders......... *
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 4
Item 6. Selected Financial Data..................................... *
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................. 5
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions
of the Private Securities Litigation Reform Act of 1995... 6
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 7
Item 8. Financial Statements and Supplementary Data................. 8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......... *
Item 11. Executive Compensation...................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ *
Item 13. Certain Relationships and Related Transactions.............. *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 28
Signatures.................................................. 31
</TABLE>
- ---------------
* No response to this item is included herein for the reason that no response is
required pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
i
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-K are defined below:
<TABLE>
<S> <C>
Bcf(/d)........................... Billion cubic feet (per day)
Company........................... El Paso Natural Gas Company and its subsidiaries
Court of Appeals.................. United States Court of Appeals for the District of Columbia Circuit
Dynegy............................ Dynegy Inc., formerly known as NGC Corporation
Edison............................ Southern California Edison Company
El Paso........................... El Paso Energy Corporation, the parent company of El Paso Natural
Gas Company
EPNG.............................. El Paso Natural Gas Company, a wholly owned subsidiary of El Paso
Energy Corporation
FERC.............................. Federal Energy Regulatory Commission
Field Services.................... El Paso Field Services Company, a wholly owned subsidiary of El
Paso Tennessee Pipeline Co.
Merchant Energy................... El Paso Merchant Energy Group, LLC, a wholly owned subsidiary of El
Paso Tennessee Pipeline Co.
MMcf(/d).......................... Million cubic feet (per day)
MPC............................... Mojave Pipeline Company, a wholly owned indirect partnership of El
Paso Natural Gas Company
Pemex............................. Pemex Gas y Petroquimica Basica, a Mexican state-owned company
PRP(s)............................ Potentially responsible party(ies)
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
EPNG, a Delaware Corporation incorporated in 1928, is a wholly owned
subsidiary of El Paso. The major business of the Company is the interstate
transportation of natural gas. It conducts its business activities through two
primary pipeline systems and an interconnect into northern Mexico, each of which
is discussed below:
The EPNG system. The EPNG system consists of approximately 9,800 miles of
pipeline with a design capacity of 4,744 MMcf/d. During 1999, EPNG transported
natural gas volumes averaging approximately 75 percent of its capacity. The EPNG
system serves California, which is its single largest market, and also serves
markets in Nevada, Arizona, New Mexico, Texas, Oklahoma, and northern Mexico.
The EPNG system delivers natural gas from the San Juan Basin of northern New
Mexico and southern Colorado, and also accesses natural gas supplies in the
Permian and Anadarko Basins of west Texas.
The MPC system. The MPC system consists of approximately 400 miles of
pipeline with a design capacity of approximately 400 MMcf/d. During 1999, MPC
transported natural gas volumes averaging approximately 98 percent of its
capacity. The MPC system is connected with the EPNG transmission system at
Topock, Arizona and Kern River Gas Transmission Company in California and
extends to customers in the vicinity of Bakersfield, California.
Samalayuca Pipeline -- The system is a 45 mile, 212 MMcf/d pipeline which
delivers natural gas to the Samalayuca Power plant from EPNG's existing pipeline
system in west Texas and Pemex's pipeline system in northern Mexico. The system
consists of 22 miles of pipeline in the United States and 23 miles of pipeline
in Mexico. The Company has a 100 percent interest in the United States segment.
During 1999, the Company transferred its 10 percent interest in the Mexico
segment to El Paso Energy International Company, a wholly owned subsidiary of El
Paso.
REGULATORY ENVIRONMENT
EPNG and MPC are subject to the jurisdiction of FERC in accordance with the
Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Each operates
under separate FERC approved tariffs. These FERC approved tariffs establish
rates, terms, and conditions under which each system provides services to its
customers.
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. On
February 9, 2000, the FERC issued a final ruling in response to the NOPR. Among
other things, the rule (i) allows pipelines to file to implement peak and
off-peak rates; (ii) removes the price cap for released capacity; (iii) requires
pipelines to make changes to their tariffs regarding customer imbalances,
penalties and pipeline operations; and (iv) increases the amount and type of
information that pipelines must make available to the FERC and its customers.
In June 1995, EPNG filed with FERC new system rates for mainline
transportation. In April 1997, FERC approved 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, and determined that only the
contesting party, Edison, should be severed for separate determination of the
rates it directly pays EPNG. The settlement was effective as of January 1, 1996.
In August 1999, EPNG and Edison filed a joint settlement with FERC resolving all
issues related to EPNG's June 1995 rate filing. The joint settlement provides
for Edison to pay EPNG the maximum tariff rate provided for under the settlement
for transportation service to California from July 1, 1999, through the end of
the term of the rate settlement and for EPNG to pay Edison $32 million plus
accrued interest to resolve all claims raised by Edison. In November 1999, FERC
approved the joint settlement between EPNG and Edison and reapproved the rate
settlement, subject to implementation of a fuel adjustment to reflect certain
facility functionalization changes ordered by FERC. In December 1999, FERC
delayed the implementation of the fuel adjustment pending its review of request
for rehearing.
1
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The Company's interstate systems are also subject to the Natural Gas
Pipeline Safety Act of 1968, as amended, which establishes pipeline and
liquified natural gas plant safety requirements, and the National Environmental
Policy Act and other environmental legislation. Each of the systems has a
continuing program of inspection designed to keep all of the facilities in
compliance with pollution control and pipeline safety requirements, and the
Company believes that its systems are in substantial compliance with applicable
requirements.
MARKETS AND COMPETITION
The Company's interstate systems face varying degrees of competition from
alternative energy sources, such as electricity, hydroelectric power, coal, and
fuel oil. Also, the potential consequences of proposed and ongoing restructuring
and deregulation of the electric power industry are currently unclear. Such
restructuring and deregulation may benefit the natural gas industry by creating
more demand for natural gas turbine generated electric power, or it may hamper
demand by allowing a more effective use of surplus electric capacity through
increased wheeling as a result of open access.
EPNG faces significant competition from other pipeline companies that
transport natural gas to the California market. EPNG's current capacity to
deliver natural gas to California is approximately 3.3 Bcf/d, and the combined
capacity of all pipeline companies serving the California market is
approximately 6.9 Bcf/d. In 1999, the demand for interstate pipeline capacity to
California averaged 5.0 Bcf/d, equivalent to approximately 73 percent of the
total interstate pipeline capacity serving that state. Natural gas shipped to
California across the EPNG system represented approximately 33 percent of the
natural gas consumed in the state in 1999. The significant customers served by
EPNG in California during 1999 included Southern California Gas Company, with
capacity of 1,150 MMcf/d under contract until August 2006, and Dynegy, with
capacity of 1,311 MMcf/d under contract through December 1999.
Interstate pipeline capacity utilization to California is not expected to
reach 100 percent for three to five years, based on expected demand growth and
assuming no new interstate pipeline capacity is added. EPNG remarketed the
capacity relinquished by Pacific Gas and Electric Company at the end of 1997, by
entering into three contracts with Dynegy for the sale of all of its then
available firm capacity for a two-year period ending December 31, 1999, at rates
negotiated pursuant to EPNG's tariff provisions and FERC policies. In December
1999, EPNG remarketed this capacity to Enron North America Corp. ("Enron") for a
one-year period ending December 31, 2000. Effective January 31, 2000, the
Company and Enron mutually agreed to terminate the contracts due to a FERC
ruling modifying certain delivery rights. In February 2000, EPNG commenced an
open posting to sell this capacity and awarded it to Merchant Energy. The
contract is effective from March 2000 through May 2001.
ENVIRONMENTAL
A description of the Company's environmental activities is included in Item
8, Financial Statements and Supplementary Data, Note 6, which is incorporated
herein by reference.
EMPLOYEES
The Company had approximately 700 full-time employees on December 31, 1999.
The Company has no collective bargaining arrangements, and no significant
changes in the workforce have occurred since December 31, 1999.
2
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ITEM 2. PROPERTIES
A description of the Company's properties is included in Item 1, Business
and is incorporated herein by reference.
The Company is of the opinion that it has satisfactory title to the
properties owned and used in its businesses, subject to liens for current taxes,
liens incident to minor encumbrances, and easements and restrictions that do not
materially detract from the value of such property or the interests therein or
the use of such properties in its businesses. The Company believes that its
physical properties are adequate and suitable for the conduct of its business in
the future.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, Financial Statements and Supplementary Data, Note 6, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4, Submission of Matters to a Vote of Security Holders, has been
omitted from this report pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.
3
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of EPNG's common stock, par value $1 per share (the "Common Stock"), is
owned by El Paso and, accordingly, there is no public trading market for such
securities.
Dividends in such amounts as may be determined by the Board of Directors of
EPNG may be declared and paid on the Common Stock from time to time out of any
funds legally available therefore. On December 31, 1998, in connection with the
tax-free internal reorganization described in Item 8, Financial Statements and
Supplementary Data, Note 1, the Company declared and paid to El Paso a non-cash
dividend of its investment in subsidiaries in the amount of $1,864 million. On
December 31, 1999, the Company declared and paid a non-cash dividend to El Paso
of its investment in a non-regulated pipeline in the amount of $2 million.
ITEM 6. SELECTED FINANCIAL DATA
Item 6, Selected Financial Data, has been omitted from this report pursuant
to the reduced disclosure format permitted by General Instruction I to Form
10-K.
4
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This item is presented pursuant to the reduced disclosure format permitted
by General Instruction I to Form 10-K.
RESULTS OF OPERATIONS
The Company evaluates performance based on earnings before interest expense
and income taxes, excluding affiliated interest income ("EBIT"). Accordingly,
results of operations presented herein are on that basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $ 479 $ 475
Operating expenses.......................................... (265) (262)
Other income, net........................................... 1 3
----- -----
EBIT...................................................... $ 215 $ 216
===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Operating revenues for the year ended December 31, 1999, were $4 million
higher than 1998, primarily due to higher revenues from increased long-term
transportation and the sale of capacity to Dynegy. These increases were
partially offset by the favorable resolution in 1998 of a contested rate matter
on the MPC system related to its rate methodology.
Operating expenses for the year ended December 31, 1999, were $3 million
higher than 1998. This increase was primarily due to the effect of EPNG's
regulatory settlement with Edison, higher general and administrative costs, and
higher operating and maintenance costs. Partially offsetting these increases
were revised estimates of rate recoveries on items included in EPNG's cost of
service and lower fuel costs resulting from lower throughput in 1999.
INTEREST AND DEBT EXPENSE
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Non-affiliated Interest and Debt Expense
Non-affiliated interest and debt expense for the year ended December 31,
1999 was $16 million lower than 1998 primarily due to lower average balances in
1999 of commercial paper and other credit facilities.
Affiliated Interest Income, Net
Affiliated interest income, net for the year ended December 31, 1999 was
higher than 1998 primarily due to the transfer of EPNG's $325 million obligation
under its Trust Preferred Securities to El Paso in August 1998.
COMMITMENTS AND CONTINGENCIES
See Item 8, Financial Statements and Supplementary Data, Note 6, for a
discussion of the Company's Commitments and Contingencies, which is incorporated
herein by reference.
OTHER
In February 2000, EPNG entered into an agreement to purchase for $129
million a portion of the All American Pipeline, a crude oil transportation
system. EPNG will purchase a 1,088 mile portion of the pipeline that runs from
McCamey, Texas to Emidio Station near Bakersfield, California. The acquisition
is subject to Federal Trade Commission approval. EPNG plans to convert the oil
pipeline to a natural gas pipeline at an estimated cost of $75 million pending
FERC approval.
5
<PAGE> 9
Year 2000
To coordinate the phases of the Year 2000 project, El Paso established an
executive steering committee and a project team. The phases of the project were:
(i) awareness; (ii) assessment; (iii) remediation; (iv) testing; (v)
implementation of the necessary modifications, and (vi) contingency planning.
The Company participated in El Paso's Year 2000 project as described below. The
goal of the Year 2000 project was to ensure that all of the critical systems and
processes under the Company's direct control remained functional. As of December
31, 1999, the Company had substantially completed the above phases for all
critical systems. While the Year 2000 rollover date has passed with no apparent
disruptions experienced by the Company's systems and processes, it remains
possible that third parties may have experienced disruptions which have not yet
manifested any impact on the Company, but could in the future. Accordingly, the
Company is prepared to implement any contingency plans should a disruption
occur. While the total cost of the Company's Year 2000 project continues to be
accumulated, the Company does not expect to incur any remaining material costs
in 2000. As of December 31, 1999, the Company has incurred expenses of
approximately $3 million and has capitalized costs of approximately $1 million.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE." 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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be 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, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.
6
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is exposure to changing interest rates.
The table below presents the weighted average interest rates by expected
maturity date of those instruments that present interest rate risk to the
Company. As of December 31, 1999 and 1998, the carrying amounts of short-term
borrowings are representative of fair value because of the short-term maturity
of these instruments. The fair value of long-term debt with variable interest
rates is the carrying value because of the variable nature of the respective
debt's interest rates. The fair value of fixed rate long-term debt has been
estimated based on quoted market prices for the same or similar issues. At
December 31, 1998, the Company maintained an interest rate swap on debt held by
MPC. In October 1999, that swap was terminated at a cost of approximately $5
million.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------------------------- ---------------------
EXPECTED FISCAL YEAR OF MATURITY
-------------------------------------------------------------------------- CARRYING
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE AMOUNTS FAIR VALUE
------ ----- ----- ---- ---- ---------- ------ ------------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Short-term debt -- variable
rate....................... $ 567 $ 567 $ 567 $ 210 $ 210
Average interest
rate................. 6.3%
Long-term debt, including
current portion -- fixed
rate..................... $ 215 $200 $ 460 $ 875 $ 871 $ 921 $1,010
Average interest
rate................. 7.8% 6.8% 8.1%
Project financing debt..... $ 117 $ 117
OTHER FINANCIAL INSTRUMENTS:
Interest rate swap......... $ -- $ (9)
</TABLE>
7
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Operating revenues
Transportation........................ $459 $452 $499
Other................................. 20 23 22
---- ---- ----
479 475 521
---- ---- ----
Operating expenses
Operation and maintenance............. 173 172 196
Depreciation, depletion, and
amortization....................... 63 61 57
Taxes, other than income taxes........ 29 29 28
---- ---- ----
265 262 281
---- ---- ----
Operating income........................ 214 213 240
---- ---- ----
Other income, net....................... 1 3 4
---- ---- ----
Income before interest and income
taxes................................. 215 216 244
---- ---- ----
Non-affiliated interest and debt
expense............................... 107 123 103
Affiliated interest income, net......... (62) (57) (8)
Income tax expense...................... 64 58 60
---- ---- ----
109 124 155
---- ---- ----
Income before discontinued operations... 106 92 89
Discontinued operations, net of income
taxes................................. -- 158 97
---- ---- ----
Net income.............................. $106 $250 $186
==== ==== ====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
8
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Current assets
Cash and cash equivalents............. $ -- $ 9
Accounts and notes receivable, net
Customer........................... 66 53
Affiliated companies............... 1,343 1,051
Other.............................. 5 11
Materials and supplies................ 28 28
Other................................. 9 6
------ ------
Total current assets.......... 1,451 1,158
Property, plant, and equipment, net..... 1,532 1,537
Other................................... 117 98
------ ------
Total assets.................. $3,100 $2,793
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts and notes payable
Trade.............................. $ 59 $ 30
Affiliated companies............... 3 8
Other.............................. 3 4
Short-term borrowings (including
current maturities of long-term
debt).............................. 567 268
Taxes payable......................... 77 38
Other................................. 67 79
------ ------
Total current liabilities..... 776 427
------ ------
Long-term debt, less current
maturities............................ 873 980
------ ------
Deferred income taxes................... 172 173
------ ------
Other................................... 153 169
------ ------
Commitments and contingencies (See Note
6)
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 and issued 1,000
shares............................. -- --
Additional paid-in capital............ 700 694
Retained earnings..................... 76 --
------ ------
Total stockholder's equity.... 1,126 1,044
------ ------
Total liabilities and
stockholder's equity......... $3,100 $2,793
====== ======
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
9
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ------- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................. $ 106 $ 250 $ 186
Less income from discontinued
operations, net of income tax....... -- 158 97
----- ------- -----
Income from continuing operations....... 106 92 89
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation, depletion, and
amortization...................... 63 61 57
Deferred income taxes (benefit)..... -- 42 (11)
Unearned risk-sharing revenue....... (31) (31) --
Working capital changes, net of
non-cash transactions
Accounts receivable.............. 33 (138) 131
Accounts and notes payable....... 27 (16) (36)
Taxes payable.................... 39 (3) 12
Other working capital changes.... (28) -- 103
Other............................... (3) 10 (154)
----- ------- -----
Cash provided by continuing
operations....................... 206 17 191
Cash provided by discontinued
operations....................... -- 616 380
----- ------- -----
Net cash provided by operating
activities................... 206 633 571
----- ------- -----
Cash flows from investing activities
Capital expenditures.................. (51) (31) (84)
Proceeds from sales of assets......... 6 3 10
Net change in other affiliated
advances............................ (341) (512) (635)
Other................................. 5 -- 29
Cash used in investing activities by
discontinued operations............. -- (632) (26)
----- ------- -----
Net cash used in investing
activities................... (381) (1,172) (706)
----- ------- -----
Cash flows from financing activities
Net commercial paper borrowings
(repayments)........................ 416 (176) 326
Revolving credit borrowings........... 693 1,149 525
Revolving credit repayments........... (753) (1,159) (472)
Long-term debt retirements............ (164) (26) (108)
Dividends paid........................ (26) (68) (77)
Net proceeds from issuance of common
stock............................... -- 645 176
Other................................. -- 91 --
Cash provided by (used in) financing
activities by discontinued
operations.......................... -- 28 (319)
----- ------- -----
Net cash provided by financing
activities................... 166 484 51
----- ------- -----
Decrease in cash and cash equivalents... (9) (55) (84)
Less increase (decrease) in cash and
cash equivalents related to
discontinued operations............. -- (2) 16
----- ------- -----
Decrease in cash and cash equivalents
from continuing operations............ (9) (53) (100)
Cash and cash equivalents
Beginning of period................... 9 62 162
----- ------- -----
End of period......................... $ -- $ 9 $ 62
===== ======= =====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
10
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK 8% ADDITIONAL TREASURY STOCK TOTAL
--------------- PREFERRED PAID-IN RETAINED --------------- STOCKHOLDER'S
SHARES AMOUNT STOCK CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ --------- ---------- -------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997................... 113 $ 340 $ -- $ 1,185 $227 (3) $(45) $ 1,707
Net income...................... 186 186
Common stock dividend ($.730 per
share)....................... (86) (86)
Issuance of common stock, net of
related costs................ 7 20 152 172
Restricted stock issuances...... 1 4 20 1 25
Restricted stock forfeitures.... (3) (3)
Options exercised............... 2 4 21 25
Tax benefit of equity plans..... 11 11
---- ----- ---- ------- ---- --- ---- -------
December 31, 1997................. 123 368 -- 1,389 327 (3) (47) 2,037
Net income...................... 250 250
Common stock dividend ($.383 per
share)....................... (46) (46)
Issuance of common stock, net of
related costs................ 1 6 7
Purchase of treasury stock...... (1) (33) (33)
Restricted stock issuances...... 1 11 12
Restricted stock forfeitures.... (4) (4)
Options exercised............... 1 2 9 (1) 10
Corporate restructuring......... (124) (372) 612 4 85 325
Issuance of 8% Preferred
Stock........................ 350 350
Distribution relating to
Reorganization............... (1,333) (531) (1,864)
---- ----- ---- ------- ---- --- ---- -------
December 31, 1998................. -- -- 350 694 -- -- -- 1,044
Net income...................... 106 106
Preferred stock dividends....... (28) (28)
Allocated tax benefit of El Paso
equity plans................. 6 6
Dividends....................... (2) (2)
---- ----- ---- ------- ---- --- ---- -------
December 31, 1999................. -- $ -- $350 $ 700 $ 76 $-- $ -- $ 1,126
==== ===== ==== ======= ==== === ==== =======
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
11
<PAGE> 15
EL PASO NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of all majority-owned, controlled subsidiaries after the elimination of all
significant intercompany accounts and transactions. Investments in companies
where the Company has the ability to exert significant influence over, but not
control operating and financial policies are accounted for using the equity
method. The consolidated financial statements for previous periods include
certain reclassifications that were made to conform to the current year
presentation. Such reclassifications have no impact on reported net income or
stockholder's equity.
Holding Company Reorganization
Effective August 1, 1998, the Company reorganized into a holding company
organizational structure, whereby El Paso became the parent holding company. In
the reorganization, a wholly owned subsidiary of El Paso merged with and into
EPNG, with EPNG as the surviving corporation. By virtue of the reorganization,
EPNG became a direct, wholly owned subsidiary of El Paso, and all of EPNG's
outstanding $3 par value common stock was converted, on a share for share basis,
into one share of $3 par value common stock of El Paso. In addition, each
one-half outstanding preferred stock purchase right of EPNG was converted into
one preferred stock purchase right of El Paso common stock, with such right
representing the right to purchase one two-hundredth (subject to adjustment) of
a share of Series A Junior Participating Preferred Stock of El Paso. El Paso
also assumed all obligations on EPNG's outstanding Trust Preferred Securities.
Also, as part of the reorganization, $66 million in cash and certain assets and
liabilities associated with EPNG's equity compensation programs were transferred
to El Paso, and El Paso became the successor to EPNG's previous shelf
registration in the amount of $565 million.
The December 31, 1998, stockholders' equity reflects the change in the
number of shares outstanding, other reorganization related reclassifications,
the transfer of ownership of the Trust, and the transfer of certain assets and
liabilities as discussed above.
Tax-free Internal Reorganization (Discontinued Operations)
On December 31, 1998, El Paso effected an internal reorganization of its
assets and operations and those of a majority of its subsidiaries in accordance
with a private letter ruling received from the IRS. In the reorganization, a
substantial number of subsidiaries (and their assets, liabilities and
operations) were transferred to El Paso or other entities owned by El Paso.
After giving effect to the reorganization, the Company's primary assets are its
interstate pipeline systems known as the EPNG System and the MPC System. In the
reorganization, EPNG or its subsidiaries transferred the following assets,
liabilities, and operations to El Paso or other El Paso subsidiaries, and
eliminated them from its consolidated financial statements: (i) its trading and
marketing operations; (ii) its international operations; (iii) its field
services operations; (iv) the interstate pipeline systems known as the Tennessee
Gas Pipelines ("TGP") System, Midwestern System, and East Tennessee System; and
(v) all subsidiaries with corporate operations. The total value of the assets,
liabilities, and operations transferred was $1,864 million.
The Company accomplished the reorganization primarily through a series of
intercompany transactions, including a dividend of its interests in those
subsidiaries transferred in the reorganization. The Company has treated the
effect of the transfers as though they were discontinued operations as of
December 31, 1998, and accordingly has reclassified all prior periods to reflect
this treatment. Revenues related to those items treated as discontinued
operations were $5,307 million and $5,117 million for the years ended December
31, 1998 and 1997, respectively.
12
<PAGE> 16
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities that exist at
the date of the financial statements. Actual results are likely to differ from
those estimates.
Accounting for Regulated Operations
The Company's interstate natural gas systems are subject to the
jurisdiction of FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. Each system operates under separate FERC
approved tariffs which establish rates, terms and conditions under which each
system provides services to its customers. The Company's businesses that are
subject to the regulations and accounting requirements of FERC have followed the
accounting requirements of Statement of Financial Accounting Standards ("SFAS")
No. 71, Accounting for the Effects of Certain Types of Regulation, which may
differ from the accounting requirements of non-regulated entities. Transactions
that have been recorded differently as a result of regulatory accounting
requirements include: the capitalization of an equity return component on
regulated capital projects and certain benefits and other costs and taxes
included in or expected to be included in future rates, including costs to
refinance debt. When the accounting method followed is prescribed by or allowed
by the regulatory authority for rate-making purposes, such method conforms to
the generally accepted accounting principle of matching costs with the revenues
to which they apply.
Changes in the regulatory and economic environment may create, at some
point in the future, circumstances in which the application of regulatory
accounting principles will no longer be appropriate. Factors which could impact
this assessment include an inability to recover cost increases under rate caps
or rate case moratoriums, an inability to recover capitalized costs, including
an adequate return on those costs through the ratemaking process, excess
capacity or significant discounting of rates in the markets served by the
Company, and the impacts of ongoing initiatives in and deregulation of the
natural gas industry. Should these factors cause regulatory accounting
principles to no longer be applied, an amount would be charged to earnings as an
extraordinary item. At December 31, 1999, this amount was estimated to be
approximately $34 million, net of income taxes. Any potential charge would be
non-cash and would have no direct effect on the regulated companies' ability to
seek recovery of the underlying deferred costs in their future rate proceedings
or on their ability to collect the rates set thereby.
Cash and Cash Equivalents
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts and Notes Receivable
The Company establishes provisions for losses on accounts and notes
receivable, which may become uncollectible. Collectibility is reviewed
regularly, and the allowance is adjusted as necessary primarily under the
specific identification method. The Company had less than $1 million in its
allowance for losses on accounts and notes receivable at December 31, 1999 and
1998.
Gas Imbalances
The Company values gas imbalances due to or due from shippers and operators
at the appropriate index price. Gas imbalances represent the difference between
gas receipts from and gas deliveries to the Company's transportation customers.
Gas imbalances arise when these customers deliver more or less gas into the
pipeline than they take out. Natural gas imbalances are settled in cash or made
up in-kind subject to the pipelines' various terms. At December 31, 1999 and
1998 the allowance for losses on gas imbalance receivables was $1 million and $2
million, respectively.
13
<PAGE> 17
Materials and Supplies
Materials and supplies are valued at the lower of cost or market with cost
determined using the average cost method.
Property, Plant, and Equipment
The Company's regulated property, plant, and equipment is subject to
oversight by the FERC. The objectives of this regulation are to ensure the
proper recovery of capital investments in rates. Such recovery is generally
accomplished by allowing a return of that investment through inclusion of
depreciation expense in the cost of service. Rates also allow for a return on
the net unrecovered rate base. Specific procedures are prescribed by FERC to
control capitalized costs, depreciation, and the disposal of assets. SFAS No. 71
specifically acknowledges the obligation of regulated companies to comply with
regulated accounting procedures, even when they conflict with other generally
accepted accounting principle pronouncements.
Regulated property, plant, and equipment is recorded at original cost of
construction or, on acquisition, the cost to the first party committing the
asset to utility services. Construction cost includes direct labor and
materials, as well as indirect charges such as overhead and an allowance for
both debt and equity funds used during construction. Replacements or betterments
of major units of property are capitalized, while replacements or additions of
minor units of property are expensed.
Depreciation for regulated property, plant, and equipment is calculated
using the composite method, except in the case of MPC which uses rates that
reflect a levelized cost of service for a life of 25 years. The composite method
groups assets with similar economic characteristics. The depreciation rate
prescribed in the rate settlement is applied to the gross investment for the
group until net book value of the group is equal to the salvage value.
Currently, depreciation rates vary from 2 percent to 33 percent. This results in
remaining economic lives of groups ranging from 2 to 35 years. Depreciation
rates are reevaluated in conjunction with the rate making process.
When regulated property, plant, and equipment is retired, due to
abandonment or replacement, the original cost, plus the cost of retirement, less
salvage, is charged to accumulated depreciation. No gain or loss is recognized
unless an entire operating unit, as defined by FERC, has been retired. Gains or
losses on dispositions of operating units are included in income.
Additional acquisition cost assigned to utility plant represents the excess
of allocated purchase costs over historical costs that resulted from the 1983
acquisition of EPNG by Burlington Northern Inc. These costs are being amortized
over a remaining life of 35 years.
Included in the Company's property, plant, and equipment is construction
work in progress of approximately $16 million and $18 million at December 31,
1999, and 1998, respectively.
The Company evaluates impairment of its property, plant, and equipment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
Revenue Recognition
The Company recognizes revenue from natural gas transportation in the
period the service is provided. Reserves are provided on revenues collected
subject to refund when appropriate.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other societal and economic factors, and
include estimates of associated legal costs. These amounts also consider
14
<PAGE> 18
prior experience in remediating contaminated sites, other companies' clean-up
experience and data released by the EPA or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new circumstances, and are included in the balance sheets at their undiscounted
amounts. Recoveries are evaluated separately from the liability and, when
recovery is assured, are recorded and reported separately from the associated
liability in the consolidated financial statements as an asset.
Income Taxes
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of those
assets will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
El Paso maintains a tax sharing policy which provides, among other things,
that (i) each company in a taxable income position will be currently charged
with an amount equivalent to its federal income tax computed on a separate
return basis, and (ii) each company in a tax loss position will be reimbursed
currently to the extent its deductions, including general business credits, were
utilized in the consolidated return. Under the policy, El Paso pays all federal
income taxes directly to the IRS and will bill or refund, as applicable, its
subsidiaries for their applicable portion of such income tax payments.
New Accounting Pronouncements Not Yet Adopted
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. 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, 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. Under SFAS No. 133, accounting for the changes in the fair value of
a derivative depends on the intended use and its resulting designation. The
standard was amended by SFAS 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.
15
<PAGE> 19
2. INCOME TAXES
The following table reflects the components of income tax expense from
continuing operations for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal................................................... $ 58 $ 13 $ 57
State..................................................... 6 3 14
---- ---- ----
64 16 71
---- ---- ----
Deferred
Federal................................................... (4) 37 (7)
State..................................................... 4 5 (4)
---- ---- ----
-- 42 (11)
---- ---- ----
Total income tax expense.......................... $ 64 $ 58 $ 60
==== ==== ====
</TABLE>
Income tax expense of the Company from continuing operations differs from
the amount computed by applying the statutory federal income tax rate (35
percent) to income before taxes. The following table outlines the reasons for
the differences for the periods ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Income tax expense at the statutory federal rate of 35%.... $59 $52 $52
Increase (decrease)
State income tax, net of federal income tax benefit...... 7 5 6
Other.................................................... (2) 1 2
--- --- ---
Income tax expense......................................... $64 $58 $60
=== === ===
Effective tax rate......................................... 38% 39% 40%
=== === ===
</TABLE>
Income tax expense related to those assets, liabilities, and operations
treated as discontinued operations as a result of the tax-free internal
reorganization was $74 million and $69 million for the years ended December 31,
1998 and 1997, respectively.
The following table reflects the components of the net deferred tax
liability from continuing operations at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities
Property, plant, and equipment............................ $421 $394
Regulatory and other assets............................... 147 131
---- ----
Total deferred tax liability...................... 568 525
---- ----
Deferred tax assets
Accrual for regulatory issues............................. 170 157
U.S. tax credit carryovers................................ 24 1
Other liabilities......................................... 203 195
---- ----
Total deferred tax asset.......................... 397 353
---- ----
Net deferred tax liability(a)............................... $171 $172
==== ====
</TABLE>
- ---------------
(a) As of December 31, 1999 and 1998, $1 million of current deferred income
taxes are included in current assets -- other in the Consolidated Balance
Sheets.
16
<PAGE> 20
Under the Company's tax sharing agreement with El Paso, the Company is
allocated the tax benefit associated with its employees' exercise of
non-qualified stock options and the vesting of restricted stock as well as
restricted stock dividends. This allocation reduced taxes payable by $6 million
and $11 million in 1999 and 1997, respectively. Such benefits are included in
additional paid-in capital in the Consolidated Balance Sheets.
As of December 31, 1999, approximately $24 million of alternative minimum
tax credits were available to offset future regular tax liabilities. These
alternative minimum tax credit carryovers have no expiration date.
Prior to 1999, El Paso Tennessee Pipeline Company ("EPTPC") and its
subsidiaries filed a consolidated federal income tax return and El Paso and its
subsidiaries, including EPNG and its subsidiaries, filed a separate consolidated
federal income tax return. As a result of the tax-free reorganization described
in Note 1, El Paso and its subsidiaries, including EPTPC and its subsidiaries,
will file one consolidated federal income tax return.
3. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the requirements of SFAS No. 107 and
SFAS No. 119. The estimated fair value amounts have been determined by the
Company using available market information and valuation methodologies.
As of December 31, 1999, and 1998, the carrying amounts of certain
financial instruments held by the Company, including cash, cash equivalents,
short-term borrowings, and trade receivables and payables are representative of
fair value because of the short-term maturity of these instruments. The fair
value of long-term debt with variable interest rates is the carrying value
because of the variable nature of the respective debt's interest rate. The fair
value of debt with fixed interest rates has been estimated based on quoted
market prices for the same or similar issues. The fair value of all derivative
financial instruments is the estimated amount at which management believes the
instruments could be liquidated over a reasonable period of time, based on
quoted market prices, current market conditions, or other estimates obtained
from third-party brokers or dealers.
The following table reflects the carrying amount and estimated fair value
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
Long-term debt, excluding project financing........ $873 $871 $921 $1,010
Project financing debt............................. -- -- 117 117
Other financial instruments:
Interest rate swap agreements...................... $ -- $ -- $ -- $ (9)
</TABLE>
MPC Swaps
At December 31, 1998, MPC was a party to two interest rate swap agreements
which effectively converted $114 million of floating-rate debt to fixed-rate
debt. MPC made payments to counterparties at fixed rates and in return received
payments at floating rates. In October 1999, MPC terminated these interest rate
swaps at a cost of approximately $5 million. This $5 million was capitalized and
will be amortized ratably over the remaining life of the original debt. Interest
expense and cash requirements were $3 million higher in 1999, 1998, and 1997,
respectively, as a result of these swaps.
17
<PAGE> 21
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,448 $2,417
Less accumulated depreciation............................... 994 961
------ ------
1,454 1,456
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 78 81
------ ------
Total property, plant, and equipment, net......... $1,532 $1,537
====== ======
</TABLE>
During 1999, El Paso formed Sabine River Investors, L.L.C., a wholly owned
limited liability company, and other separate legal entities, for the purpose of
generating funds for El Paso to invest in capital projects and other assets. The
proceeds are collateralized by certain assets of El Paso, including the assets
of MPC which had a net book value of $168 million at December 31, 1999.
5. DEBT AND OTHER CREDIT FACILITIES
The average interest rate of short-term borrowings at December 31, 1999 and
1998, was 6.6% and 5.8%, respectively. The Company had the following short-term
borrowings, including current maturities of long-term debt, at December 31:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $567 $150
Other credit facilities..................................... -- 60
Current maturities of other long-term debt.................. -- 58
---- ----
$567 $268
==== ====
</TABLE>
Long-term debt outstanding consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
EPNG
9.45% Note due 1999.................................... $ -- $ 48
7.75% Note due 2002.................................... 215 215
6.75% Note due 2003.................................... 200 200
8.63% Debenture due 2022............................... 260 260
7.50% Debenture due 2026............................... 200 200
MPC
Variable rate project financing loan, due 1999 through
2007, average interest rate 7.8% for 1999 and 9.7% for
1998.................................................. -- 117
------ ------
875 1,040
Less: Unamortized discount................................ 2 2
Current maturities................................... -- 58
------ ------
Total long-term debt, less current maturities..... $ 873 $ 980
====== ======
</TABLE>
18
<PAGE> 22
The following are aggregate maturities of long-term debt for the next 5
years and in total thereafter:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ 215
2003........................................................ 200
2004........................................................ --
Thereafter.................................................. 460
----
Total long-term debt, including current
maturities....................................... $875
====
</TABLE>
Other Financing Arrangements
EPNG is designated as a borrower under El Paso's $1,250 million, 364-day
and $750 million, five-year revolving credit facilities (collectively the
"Revolving Credit Facility"). The $1,250 million 364-day renewable revolving
credit and competitive advance facility was established in August 1999 and
replaced El Paso's 1998 $750 million, 364-day renewable revolving credit and
competitive advance facility. The $750 million, five-year revolving credit and
competitive advance facility was established in October 1997. The rate for the
Revolving Credit Facility varies based on El Paso's unsecured debt rating. As of
December 31, 1999, the interest rate for borrowings under the Revolving Credit
Facility was equal to LIBOR plus 50 basis points and no amounts were
outstanding.
The availability of borrowings under the Revolving Credit Facility is
subject to specified conditions, which management believes the Company currently
meets. These conditions include compliance with the financial covenants and
ratios required by such agreements, absence of default under such agreements,
and continued accuracy of the representations and warranties contained in such
agreements (including the absence of any material adverse changes since the
specified dates).
In September 1999, EPNG retired its outstanding 9.45% note in the principal
amount of $47 million. In October 1999, MPC retired its variable rate
non-recourse project financing in the principal amount of $107 million.
Concurrently, MPC also terminated its associated interest rate swap at a cost of
approximately $5 million.
At December 31, 1999, the Company had accrued $2 million in dividends
payable on its 8% preferred stock.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's minimum annual rental commitments at December 31, 1999, were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, OPERATING LEASES
- ------------------------------------------------------------ ----------------
(IN MILLIONS)
<S> <C>
2000..................................................... $ 11
2001..................................................... 11
2002..................................................... 12
2003..................................................... 12
2004..................................................... 13
Thereafter............................................... 34
----
Total............................................. $ 93
====
</TABLE>
Aggregate minimum commitments have not been reduced by minimum sublease
rentals of approximately $12 million due in the future under noncancelable
subleases.
19
<PAGE> 23
Rental expense for operating leases for the years ended December 31, 1999,
1998, and 1997 was $12 million, $12 million, and $11 million, respectively.
Guarantees
At December 31, 1999, EPNG had guarantees of $335 million. Additionally,
the Company had letters of credit of approximately $3 million outstanding.
Rates and Regulatory Matters
The Company's interstate natural gas pipeline companies are subject to the
regulatory jurisdiction of the FERC with respect to rates, terms and conditions
of service, accounts and records, the addition of facilities, the abandonment of
services and facilities, the curtailment of gas deliveries and other matters.
In June 1995, EPNG filed with FERC new system rates for mainline
transportation. In April 1997, FERC approved a comprehensive offer of settlement
to resolve this proceeding as well as issues surrounding certain contract
reductions and expirations that were to occur from January 1, 1996 through
December 31, 1997. It also determined that only one contesting party, Edison,
should be severed for separate determination of the rates it ultimately pays
EPNG. The settlement was effective as of January 1, 1996.
In August 1999, EPNG and Edison filed a joint settlement with FERC
resolving all issues related to EPNG's June 1995 rate filing. The joint
settlement provides for Edison to pay EPNG the maximum tariff rate provided for
under the settlement for transportation service to California from July 1, 1999
through 2005 and for EPNG to pay Edison $32 million plus accrued interest to
resolve all claims raised by Edison. The settlement amount to Edison exceeded
the reserve previously provided by EPNG by approximately $14 million, and the
difference has been reflected in results of operations for the year ended
December 31, 1999.
In November 1999, FERC approved the joint settlement between EPNG and
Edison and reapproved EPNG's rate settlement conditioned upon the immediate
adjustment of EPNG's fuel charges with respect to certain facilities
refunctionalized as gathering (see discussion below). Following FERC's action,
EPNG and certain others filed for rehearing of FERC's fuel adjustment
requirement. In December 1999, FERC delayed the implementation of the fuel
adjustment pending its review of requests for rehearing.
EPNG's rate settlement establishes, among other things, base rates through
December 31, 2005. According to the settlement, EPNG's base rates began
escalating annually in 1998. Additionally, EPNG has the right to increase or
decrease base rates if certain changes in laws or regulations result in
increased or decreased costs in excess of $10 million a year. In addition, all
of EPNG's settling customers, except Edison, participate in "risk sharing
provisions" under EPNG's rate case settlement. Under these provisions, EPNG
received and continues to receive cash payments totaling $295 million for a
portion of the risk it assumed from certain capacity relinquishments by its
customers at the end of 1997. The cash received is deferred, and EPNG recognizes
this deferral in revenues ratably over the risk sharing period. As of December
31, 1999, the Company had unearned risk sharing revenues of approximately $127
million and had $54 million remaining to be collected from customers under this
provision. If EPNG remarkets its relinquished capacity to customers above
certain dollar levels specified in the risk sharing agreement, it may be
obligated to refund 35 percent of the excess to customers. For the year ended
December 31, 1999, EPNG refunded approximately $8 million to customers under
this provision, and has accrued approximately $7 million for refunds to be made
in 2000. The risk sharing provisions of the rate settlement extend through 2003,
at which time EPNG will be at risk for all unsubscribed, excess capacity on its
system.
In January 1998, EPNG entered into two year contracts with Dynegy for the
sale of substantially all of its turned back firm capacity available to
California (approximately 1.3 billion cubic feet) at rates negotiated pursuant
to EPNG's tariff provisions and FERC policies. EPNG's filing to implement the
contracts was protested by several parties. In a series of orders, FERC
generally denied the protests, but required certain modifications to the
contracts. EPNG realized $43 million in revenue in the twelve months ended 1999
for this capacity. In December 1999, EPNG remarketed this firm capacity to
Enron. EPNG also entered into a
20
<PAGE> 24
contract with Williams Energy Marketing and Trading Company ("Williams") for
delivery of firm transportation capacity through 2004. The Williams contract was
substantially approved by FERC in January 2000. However, due to FERC's
modification of certain delivery point rights on one of the Enron contracts,
Enron and EPNG mutually agreed to terminate the Enron contracts effective
January 31, 2000. EPNG reposted the capacity covered by these contracts for
competitive bidding in February 2000 and has awarded the capacity to Merchant
Energy. The contract is effective from March 1, 2000 through May 31, 2001. EPNG
expects to realize approximately $39 million over the contract term, which will
be subject to the revenue sharing provisions of the settlement.
In 1998, EPNG transferred its Chaco Station to Field Services to comply
with a FERC ruling that this asset should be functionalized as a gathering
versus a transmission facility. In October 1999, the Court of Appeals sustained
FERC's determination, but remanded to FERC issues relating to the appropriate
fuel and rate treatment resulting from its refunctionalization. In August 1999,
a complaint was filed seeking a determination that EPNG's Blanco Compressor
Station is a non-jurisdictional gathering facility rather than a jurisdictional
transmission facility. In a November 1999 order, FERC ruled that two of the
three Blanco compressor facilities were nonjurisdictional gathering facilities,
and that an immediate adjustment of EPNG's fuel charges to eliminate the effects
of the refunctionalized facilities was appropriate, but that no change should be
made to EPNG's base rates as a result of refunctionalization. EPNG and other
parties have sought rehearing of the November 1999 order and any fuel
adjustments are stayed pending the outcome of these requests. In addition,
certain of EPNG's customers have taken the position that FERC's fuel adjustment
requirement, if sustained on rehearing, will comprise a modification to EPNG's
rate settlement that may allow any adversely affected party to withdraw from the
settlement.
In September 1999, a "Fast Track" complaint was filed requesting that FERC
order the Company to cease and desist selling primary firm delivery point
capacity at the Southern California Gas Company Topock Delivery point in excess
of the downstream capacity available at that point. On November 10, 1999, FERC
issued an order finding that EPNG's delivery and receipt point allocation
methodology may be unjust and unreasonable, and ordered EPNG to file a new
methodology regarding receipt and delivery point allocation rights within 60
days of the date of the order. Various parties have requested rehearing or
clarification of the November 10, 1999 order. EPNG was granted an extension of
time to comply with this directive. On February 9, 2000, EPNG filed a proposal
to change its current capacity allocation methods. FERC has set a technical
conference on this matter to be held March 9, 2000.
In December 1999, a complaint was filed requesting that EPNG cease and
desist overselling firm mainline capacity on the east-end of EPNG's mainline
system. The complaint requested that this issue be addressed along with El
Paso's capacity allocation proposal discussed above. In February 2000, FERC
issued an order consolidating these complaints.
In January 2000, Northwest Pipeline Corporation ("Northwest") filed a
complaint alleging that EPNG's scheduling procedures applicable to the Ignacio,
Colorado interconnect between EPNG and Northwest are inconsistent with
applicable general industry standards and have resulted in excessive imbalances
on Northwest's system. EPNG answered the complaint on February 14, 2000.
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. On
February 9, 2000, the FERC issued a final ruling in response to the NOPR. Among
other things, the rule (i) allows pipelines to file to implement peak and
off-peak rates; (ii) removes the price cap for released capacity; (iii) requires
pipelines to make changes to its tariffs regarding customer imbalances,
penalties and pipeline operations; and (iv) increases the amount and type of
information that pipelines must make available to the FERC and its customers.
As an interstate pipeline system, 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 2000. As part
of an industry-wide initiative, EPNG's property retirements are currently under
review by the FERC audit staff.
21
<PAGE> 25
As the Company's 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. While management
cannot predict with certainty the final outcome, or timing, of the final
resolution of rates and regulatory matters, the outcome of its capacity
subscription efforts, or the outcome of industry trends and initiatives,
management believes, based upon its experience to date and after considering
appropriate reserves that have been established, that the ultimate resolution of
these pending rate and regulatory matters 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 which, as amended, seeks approximately
$7.5 billion in actual and punitive damages related to a 1990 settlement
agreement between EPNG, TransAmerican, and others. TransAmerican's complaint, as
amended, advanced ten causes of action against defendants, which include EPNG
and certain of its present and former officers and directors. As a result of
orders by the court on various motions for summary judgment, six causes of
action have been dismissed in their entirety and one has been partially
dismissed. The partially dismissed claim alleges fraud, and the other claims
that remain pending allege breach of contract, bad faith and violation of the
Texas Antitrust Act. With respect to the fraud claim, the court dismissed
TransAmerican's claim that it was fraudulently induced to enter into the
settlement transaction, but refused to dismiss the remainder of the fraud claim,
in which TransAmerican alleges misrepresentations in the settlement documents.
Motions for summary judgment on TransAmerican's other remaining claims are
expected to be heard and decided by the court prior to the current trial setting
of April 24, 2000. Additionally, EPNG has filed a breach of contract
counterclaim against TransAmerican seeking to recover EPNG's expenses incurred
in connection with the lawsuit. TransAmerican's motion for summary judgment on
this counterclaim was denied by the court. 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. ("Stone"), seeking other damages in unspecified
amounts related to litigation consulting work allegedly performed for various
entities, including EPNG, in cases involving TransAmerican. In June 1998, the
court granted EPNG's motion for summary judgment and dismissed all 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.
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 United States Government of royalties. The Company
believes the complaint to be without merit.
EPNG has been named a defendant in a class action suit, Quinque Operating
Company v. Gas Pipelines. The Plaintiff alleges that the defendants have
mismeasured natural gas volumes and heating content of natural gas on
non-federal and non-Native American lands. This suit is similar to the action
brought by Jack Grynberg on behalf of the United States Government. The Company
believes the complaint to be without merit.
The Company is also a named defendant in numerous lawsuits and a named
party in numerous governmental proceedings arising in the ordinary course of its
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, management currently does not expect the ultimate resolution of these
matters to have a material adverse effect on the Company's financial position,
its results of operations, or cash flows.
22
<PAGE> 26
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 December 31, 1999, the Company had a reserve of
approximately $22 million for expected remediation costs, including
approximately $21 million for associated onsite, offsite and groundwater
technical studies, and approximately $1 million for other costs which the
Company anticipates incurring through 2027.
In addition, the Company estimates it will make capital expenditures for
environmental matters of approximately $9 million for the years 2001 through
2007. These expenditures primarily relate to compliance with air regulations.
EPNG has been designated, has 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. As of December 31, 1999, the Company has estimated its share
of the remediation costs at these sites to be between $15 million and $20
million and has provided reserves that it believes are adequate for such 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 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 of this
matter.
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.
Management is not aware of other commitments or contingent liabilities
which would have a materially adverse effect on the Company's financial
condition, results of operations, or cash flows.
23
<PAGE> 27
7. RETIREMENT BENEFITS
Pension and Retirement Benefits
Prior to January 1, 1997, El Paso maintained a defined benefit pension plan
covering substantially all employees of EPNG. Pension benefits were based on
years of credited service and final five year average compensation, subject to
maximum limitations as defined in the pension plan. Effective January 1, 1997,
the plan was amended to provide benefits determined by a cash balance formula.
Employees who were pension plan participants on December 31, 1996, receive the
greater of cash balance benefits or prior plan benefits accrued through December
31, 2001. In addition, El Paso maintains a defined contribution plan covering
all employees of El Paso, including the employees of the Company. El Paso
matches 75 percent of participant basic contributions of up to 6 percent, with
the matching contribution being made in El Paso stock. El Paso is responsible
for benefits accrued under its plans and allocates the related costs to its
affiliates. See Note 10 for a summary of transactions with affiliates.
Other Postretirement Benefits
EPNG provides postretirement medical benefits for a closed group of
employees who retired on or before March 1, 1986, and limited postretirement
life insurance for employees who retired after January 1, 1985. The medical
benefits are pre-funded to the extent employer contributions are recoverable
through rates. In accordance with FERC policy, EPNG records the difference
between actual costs and the amounts recovered in rates as a regulatory asset or
liability.
The following table sets forth the change in benefit obligation, change in
plan assets, funded status, the components of net periodic benefit cost, and the
assumptions used in determining the amount of other postretirement employment
benefits as of and for the twelve month periods ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of period................. $ 89 $ 67
Interest cost............................................. 6 6
Plan amendments........................................... -- (9)
Actuarial (gain) or loss.................................. 2 29
Benefits paid............................................. (7) (4)
---- ----
Benefit obligation at end of period....................... $ 90 $ 89
==== ====
Change in plan assets
Fair value of plan assets at beginning period............. $ 55 $ 48
Actual return on plan assets.............................. 8 3
Employer contributions.................................... 11 8
Benefits paid............................................. (7) (4)
---- ----
Fair value of plan assets at end of period................ $ 67 $ 55
==== ====
Reconciliation of funded status
Funded status at end of period............................ $(23) $(34)
Fourth quarter contributions.............................. 3 3
Unrecognized net actuarial gain........................... (16) (14)
Unrecognized net transition obligation.................... 46 54
---- ----
Net accrued benefit cost at December 31................... $ 10 $ 9
==== ====
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Benefit cost for the plans includes the following components
Interest cost............................................. $ 6 $ 6 $ 4
Expected return on plan assets............................ (4) (3) (2)
Amortization of net actuarial gain........................ (1) -- (4)
Amortization of transition obligation..................... 8 7 9
--- ---- ----
Net benefit cost.......................................... $ 9 $ 10 $ 7
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Weighted average assumptions
Discount rate............................................. 7.50% 6.75%
Expected return on plan assets............................ 7.50% 7.50%
</TABLE>
Actuarial estimates for the Company's postretirement benefits plans assumed
a weighted average annual rate of increase in the per capita costs of covered
health care benefits of 10 percent through 2000, gradually decreasing to 6
percent by the year 2008. Assumed health care cost trends have a significant
effect on the amounts reported for other postretirement benefit plans. A
one-percentage point change in assumed health care cost trends would have the
following effects:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
One Percentage Point Increase
Aggregate of Service Cost and Interest Cost............... $ 0.6 $ 0.5
Accumulated Postretirement Benefit Obligation............. $ 8.0 $ 7.3
One Percentage Point Decrease
Aggregate of Service Cost and Interest Cost............... $(0.6) $(0.4)
Accumulated Postretirement Benefit Obligation............. $(7.4) $(6.7)
</TABLE>
8. TRUST PREFERRED SECURITIES
In March 1998, El Paso Energy Capital Trust I (the "Trust"), issued 6.5
million of 4 3/4% trust convertible preferred securities (the "Trust Preferred
Securities") for $325 million ($317 million, net of issuance costs). The net
proceeds to EPNG were used to pay down commercial paper. At the time of the
issuance, the Trust was a wholly owned consolidated subsidiary of EPNG. As a
result of the holding company reorganization, El Paso assumed the ownership of
the Trust and its related obligations.
9. PREFERRED STOCK
In December 1998, the Company issued 500,000 shares of 8% Cumulative
Preferred Stock to El Paso. The proceeds of $350 million were used to reduce
outstanding debt of the Company. El Paso is entitled to receive dividends at the
rate of 8% on the liquidation value of $700 per share annually. On or after
January 1, 2003, the shares of the 8% Preferred Stock shall be redeemable at the
option of the Company, in whole or in part, upon not less than 30 days' notice
at a redemption price of $700 per share, plus unpaid dividends.
For the twelve month period ended December 31, 1999, the Company accrued
$28 million in dividends payable on its preferred stock.
10. TRANSACTIONS WITH AFFILIATES
The Company enters into transactions with other El Paso subsidiaries and
unconsolidated affiliates in the normal course of business to transport, sell
and purchase natural gas. Services provided by these affiliates for the benefit
of the Company are based on the same terms as nonaffiliates.
25
<PAGE> 29
The following table shows revenues and charges from EPNG's affiliates:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues from affiliates.................................... $ 2 $ 1 $ 1
Charges from affiliates..................................... 70 84 51
</TABLE>
On December 31, 1999, the Company declared and paid a non-cash dividend to
El Paso of its investment in a non-regulated pipeline in the amount of $2
million.
11. TRANSACTIONS WITH MAJOR CUSTOMERS
The following table shows revenues from major customers for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Southern California Gas Company........................... $131 $129 $127
Pacific Gas and Electric Company.......................... --(a) --(a) 123
</TABLE>
- ---------------
(a) Less than 10 percent of consolidated operating revenues.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest payments......................................... $112 $138 $129
Income tax payments....................................... 26 20 54
</TABLE>
13. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING OPERATING NET
QUARTER REVENUES INCOME INCOME
------- --------- --------- ------
(IN MILLIONS)
<S> <C> <C> <C>
1999 1st............................................. $118 $ 56 $ 26
2nd............................................ 121 54 25
3rd............................................ 120 53 29
4th............................................ 120 51 26
---- ---- ----
$479 $214 $106
==== ==== ====
1998 1st............................................. $115 $ 50 $ 58
2nd............................................ 124 57 55
3rd............................................ 118 57 60
4th............................................ 118 49 77
---- ---- ----
$475 $213 $250
==== ==== ====
</TABLE>
26
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
El Paso Natural Gas Company:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14. (a) 1. present fairly, in all material respects, the
consolidated financial position of El Paso Natural Gas Company as of December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
February 16, 2000
27
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10, "Directors and Executive Officers of the Registrant;" Item 11,
"Executive Compensation;" Item 12, "Security Ownership of Certain Beneficial
Owners and Management;" and Item 13, "Certain Relationships and Related
Transaction," have been omitted from this report pursuant to the reduced
disclosure format permitted by General Instruction I to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial statements.
The following consolidated financial statements of the Company are included
in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Income...................... 8
Consolidated Balance Sheets............................ 9
Consolidated Statements of Cash Flows.................. 10
Consolidated Statements of Stockholder's Equity........ 11
Notes to Consolidated Financial Statements............. 12
Report of Independent Accountants...................... 27
2. Financial statement schedules and supplementary information
required to be submitted.
Financial statement schedules have been omitted as not
being applicable or because the subject matter is
either not present or is not present in amounts
sufficient to require submission of the schedule, in
accordance with the instructions contained in
Regulation S-X, or the required information is
included in the financial statements or notes thereto.
3. Exhibit list............................................. 29
</TABLE>
(b) REPORTS ON FORM 8-K:
None.
28
<PAGE> 32
EL PASO NATURAL GAS COMPANY
EXHIBIT LIST
DECEMBER 31, 1999
Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 -- Amended and Restated Merger Agreement dated as of June
19, 1996 by and among EPNG, El Paso Merger Company and
EPTPC (Exhibit 2.A to EPNG's Registration Statement on
Form S-4, filed August 27, 1996, File No. 333-10911).
3.A -- Restated Certificate of Incorporation of EPNG dated May
11, 1999 (Exhibit 3.A to EPNG's Form 10-Q filed, May 13,
1999, File No. 1-2700 ("EPNG's" 1999 First Quarter
10-Q)).
3.B -- By-laws of EPNG, as amended October 22, 1997 (Exhibit 3.B
to EPNG's Form 10-Q, filed November 13, 1997, File No.
1-2700 ("EPNG's" 1999 Third Quarter 10-Q)).
4.A -- Indenture dated as of January 1, 1992, between EPNG and
Citibank, N.A., Trustee with respect to 7 3/4% Notes due
2002 and 8 5/8% Debentures due 2022 (Exhibit 4.A to
EPNG's 1998 Form 10-K).
4.B -- Indenture dated as of November 13, 1996, between EPNG and
The Chase Manhattan Bank, as Trustee, (Exhibit 4.1 to
EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700); Form of 6 3/4% Notes Due 2003, (Exhibit 4.2 to
EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700); Form of 7 1/2% Debentures Due 2026 (Exhibit 4.2
to EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700).
10.A -- $1,250,000,000 364-Day Revolving Credit and Competitive
Advance Facility ("CAF") Agreement dated as of August 16,
1999, by and among El Paso, EPNG, TGP, the several banks
and other financial institutions from time to time
parties to the Agreement, The Chase Manhattan Bank, as
administrative agent and as CAF Advance Agent for the
Lenders thereunder, Citibank N.A. and ABN Amro Bank, N.V.
as co-documentation agents for the Lenders and Bank of
America, N.A. as syndication agent for the Lenders.
(Exhibit 10.A to the EPNG 1999 Third Quarter 10-Q).
10.B -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (Exhibit 10.D to the El
Paso 1998 Third Quarter 10-Q); First Amendment to the
$750 million 5-Year Revolving Credit and Competitive
Advance Facility dated as of October 9, 1998, among EPNG,
TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan
Guaranty Trust Company of New York, and certain other
banks (Exhibit 10.E to the El Paso 1998 Third Quarter
10-Q).
21 -- Omitted pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
*27 -- Financial Data Schedule.
</TABLE>
29
<PAGE> 33
UNDERTAKING.
The undersigned Registrant hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of Registrant 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 Registrant and its consolidated subsidiaries.
30
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, El Paso Natural Gas Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 3rd day of March 2000.
EL PASO NATURAL GAS COMPANY
Registrant
By /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, this report has been signed below by the following persons on behalf of
El Paso Natural Gas Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. SOMERHALDER II Chairman of the Board and March 3, 2000
- ----------------------------------------------------- Director
(John W. Somerhalder II)
/s/ PATRICIA A. SHELTON President and Director March 3, 2000
- -----------------------------------------------------
(Patricia A. Shelton)
/s/ H. BRENT AUSTIN Executive Vice President, Chief March 3, 2000
- ----------------------------------------------------- Financial Officer and Director
(H. Brent Austin)
/s/ JEFFREY I. BEASON Senior Vice President and March 3, 2000
- ----------------------------------------------------- Controller (Chief Accounting
(Jeffrey I. Beason) Officer)
</TABLE>
31
<PAGE> 35
EXHIBIT INDEX
Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 -- Amended and Restated Merger Agreement dated as of June
19, 1996 by and among EPNG, El Paso Merger Company and
EPTPC (Exhibit 2.A to EPNG's Registration Statement on
Form S-4, filed August 27, 1996, File No. 333-10911).
3.A -- Restated Certificate of Incorporation of EPNG dated May
11, 1999 (Exhibit 3.A to EPNG's Form 10-Q filed, May 13,
1999, File No. 1-2700 ("EPNG's" 1999 First Quarter
10-Q)).
3.B -- By-laws of EPNG, as amended October 22, 1997 (Exhibit 3.B
to EPNG's Form 10-Q, filed November 13, 1997, File No.
1-2700 ("EPNG's" 1999 Third Quarter 10-Q)).
4.A -- Indenture dated as of January 1, 1992, between EPNG and
Citibank, N.A., Trustee with respect to 7 3/4% Notes due
2002 and 8 5/8% Debentures due 2022 (Exhibit 4.A to
EPNG's 1998 Form 10-K.
4.B -- Indenture dated as of November 13, 1996, between EPNG and
The Chase Manhattan Bank, as Trustee, (Exhibit 4.1 to
EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700); Form of 6 3/4% Notes Due 2003, (Exhibit 4.2 to
EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700); Form of 7 1/2% Debentures Due 2026 (Exhibit 4.2
to EPNG's Form 8-K, filed November 13, 1996, File No.
1-2700).
10.A -- $1,250,000,000 364-Day Revolving Credit and Competitive
Advance Facility ("CAF") Agreement dated as of August 16,
1999, by and among El Paso, EPNG, TGP, the several banks
and other financial institutions from time to time
parties to the Agreement, The Chase Manhattan Bank, as
administrative agent and as CAF Advance Agent for the
Lenders thereunder, Citibank N.A. and ABN Amro Bank, N.V.
as co-documentation agents for the Lenders and Bank of
America, N.A. as syndication agent for the Lenders.
(Exhibit 10.A to the EPNG 1999 Third Quarter 10-Q).
10.B -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (Exhibit 10.D to the El
Paso 1998 Third Quarter 10-Q); First Amendment to the
$750 million 5-Year Revolving Credit and Competitive
Advance Facility dated as of October 9, 1998, among EPNG,
TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan
Guaranty Trust Company of New York, and certain other
banks (Exhibit 10.E to the El Paso 1998 Third Quarter
10-Q).
21 -- Omitted pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
*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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,414
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 1,451
<PP&E> 1,532
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 3,100
<CURRENT-LIABILITIES> 776
<BONDS> 873
0
350
<COMMON> 0
<OTHER-SE> 776
<TOTAL-LIABILITY-AND-EQUITY> 3,100
<SALES> 0
<TOTAL-REVENUES> 479
<CGS> 0
<TOTAL-COSTS> 265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 170
<INCOME-TAX> 64
<INCOME-CONTINUING> 106
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Not separately identified in the consolidated financial statements or
accompanying notes thereto.
</FN>
</TABLE>
