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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
ONE PAUL KAYSER CENTER
100 NORTH STANTON STREET, EL PASO, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
74-0608280
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
79901
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (915) 541-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $3 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
9.45% Notes due 1999
8 5/8% Debentures due 2012
THE ABOVE SECURITIES ARE REGISTERED ON THE NEW YORK STOCK EXCHANGE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) 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 .
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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. / /
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
Aggregate market value of the voting stock (which consists solely of shares
of common stock) held by non-affiliates of the registrant as of February 29,
1996, computed by reference to the closing sale price of the registrant's common
stock on the New York Stock Exchange on such date: $1,190,527,503.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Class: common stock, par value $3 per share. Shares outstanding on February
29, 1996: 35,274,889
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: El Paso Natural Gas Company's definitive Proxy Statement for the
1996 Annual Meeting of Stockholders, to be filed not later than 120 days after
the end of the fiscal year covered by this report, is incorporated by reference
into Part III.
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EL PASO NATURAL GAS COMPANY
TABLE OF CONTENTS
ITEM NO. CAPTION PAGE
- -------- ------- ----
Glossary................................................................................. ii
PART I
1. and 2. Business and Properties.................................................... 1
3. Legal Proceedings.......................................................... 12
4. Submission of Matters to a Vote of Security Holders........................ 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...... 13
6. Selected Financial Data.................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
(a) Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995................. 24
8. Financial Statements and Supplementary Data................................ 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 54
PART III
10. Directors and Executive Officers of the Registrant......................... 54
11. Executive Compensation..................................................... 54
12. Security Ownership of Certain Beneficial Owners and Management............. 54
13. Certain Relationships and Related Transactions............................. 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 55
Signatures................................................................. 60
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-K are defined below:
ABBREVIATIONS,
ACRONYMS, OR DEFINED TERMS TERMS
-------------------------- -----
Amoco........................................ Amoco Production Company
APB.......................................... Accounting Principles Board Opinion
Bcf.......................................... Billion cubic feet
Bcf/d........................................ Billion cubic feet per day
Board........................................ Board of directors of El Paso Natural Gas
Company
BR........................................... Burlington Resources Inc.
CAAA......................................... Clean Air Act Amendments of 1990
CFE.......................................... Comision Federal de Electricidad, the Mexican
government-owned electric utility
Company...................................... El Paso Natural Gas Company and its
subsidiaries
Court of Appeals............................. United States Court of Appeals for the
District of Columbia Circuit
CPUC......................................... California Public Utilities Commission
Dth.......................................... Decatherm
Eastex....................................... Eastex Energy Inc., a wholly owned subsidiary
of El Paso Natural Gas Company
EIS/EIR...................................... Environmental Impact Statement/Environmental
Impact Report
EPA.......................................... United States Environmental Protection Agency
EPED......................................... El Paso Energy Development Company, a wholly
owned subsidiary of El Paso Natural Gas
Company
EPFS......................................... El Paso Field Services Company, a wholly
owned subsidiary of El Paso Natural Gas
Company
EPG.......................................... El Paso Natural Gas Company, unless the
context otherwise requires
EPGM......................................... El Paso Gas Marketing Company, a wholly owned
subsidiary of El Paso Natural Gas Company
EPNC......................................... El Paso New Chaco Company, a wholly owned
subsidiary of El Paso Natural Gas Company
FERC......................................... Federal Energy Regulatory Commission
Holding Company.............................. A new Delaware corporation, which is proposed
to be formed to become the holding company
parent of the Company
ICA.......................................... Empresas ICA Sociedad Controladora, S.A. de
C.V.
IRS.......................................... Internal Revenue Service
Merger....................................... Proposed merger of El Paso Natural Gas
Company with a direct subsidiary of Holding
Company to implement the reorganization of
the Company into a holding company structure
MFV.......................................... Modified Fixed Variable
MMbtu........................................ Million British thermal units
MMcf/d....................................... Million cubic feet per day
MPC.......................................... Mojave Pipeline Company, a wholly owned
subsidiary of El Paso Natural Gas Company
MPOC......................................... Mojave Pipeline Operating Company, a wholly
owned subsidiary of Mojave Pipeline Company
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ABBREVIATIONS,
ACRONYMS, OR DEFINED TERMS TERMS
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MSG.......................................... Merchant Services Group, comprised of Eastex
Energy Inc. and subsidiaries, and El Paso Gas
Marketing Company
NGL.......................................... Natural gas liquids
NOx.......................................... Nitrogen oxides
NYMEX........................................ New York Mercantile Exchange
Odd-Lot Holders.............................. Shareholders of El Paso Natural Gas Company
owning beneficially fewer than 100 shares of
El Paso Natural Gas Company's common stock
OPEB......................................... Other Postretirement Employee Benefits
OTC.......................................... Over-The-Counter
PCB.......................................... Polychlorinated biphenyl
PG&E......................................... Pacific Gas & Electric Company
Plan......................................... Dividend Reinvestment and Common Stock
Purchase Plan
Premier...................................... Premier Gas Company, a wholly owned
subsidiary of Eastex Energy Inc.
Program...................................... Continuous Odd-Lot Stock Sales Program
PRP(s)....................................... Potentially Responsible Party(ies)
Restructuring Rules.......................... A series of orders directing a number of
significant changes to the structure of the
services provided by interstate natural gas
pipelines
RI/FS........................................ Remedial Investigation/Feasibility Study
SAR(s)....................................... Stock Appreciation Right(s)
SEC.......................................... Securities and Exchange Commission
SFAS......................................... Statement of Financial Accounting Standards
SFV.......................................... Straight Fixed Variable
SoCal........................................ Southern California Gas Company
SOP.......................................... Statement of Position
Tcf.......................................... Trillion cubic feet
TEPCO........................................ The El Paso Company, formerly the parent
company of El Paso Natural Gas Company
Transwestern................................. Transwestern Pipeline Company
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
EL PASO NATURAL GAS COMPANY
Business
EPG, incorporated in Delaware in 1928, owns and operates one of the
nation's largest mainline natural gas transmission and gathering systems,
connecting natural gas supply regions in New Mexico, Texas, Oklahoma, and
Colorado to markets in California, Nevada, Arizona, New Mexico, Texas, and
northern Mexico. At December 31, 1991, EPG was a wholly owned subsidiary of BR.
In March 1992, EPG completed an initial public offering of approximately 15
percent of its common stock in the form of newly issued shares. In June 1992, BR
distributed all of the EPG common shares it held to BR shareholders, the effect
of which was to place all of EPG's common stock in public ownership.
EPG's natural gas transmission system consists of approximately 17,000
miles of pipeline. In 1995, EPG transported 1.3 Tcf of gas, equivalent to
roughly 6 percent of the nation's total gas consumption. California is the
largest single market served by EPG and is the second largest natural gas market
in the nation. EPG is also the primary transporter to the growing
East-of-California markets in Arizona (particularly Phoenix and Tucson); Las
Vegas, Nevada; New Mexico; and El Paso, Texas.
EPG's natural gas transmission system is connected to one of the most
prolific supply basins in the nation, the San Juan Basin of northern New Mexico
and southern Colorado. Since 1992, production of gas from the San Juan Basin has
more than doubled. EPG added 1 Bcf/d of capacity out of the San Juan Basin
between December 1991 and April 1992. In December 1995, EPG added an additional
300 MMcf/d of new capacity which brought its total capacity out of the San Juan
Basin to 2.9 Bcf/d. The expansion virtually eliminated the capacity constraints
on EPG's San Juan Triangle facilities that were experienced during 1995. The
dramatic growth of production in the San Juan Basin, combined with the decrease
in demand for San Juan Basin supplies in California, has caused San Juan Basin
producers to seek new markets off the east end of EPG's natural gas transmission
system. EPG has been accommodating such off-system demand through displacement
transportation, as well as through the redirection of gas flow over a
bi-directional portion of the pipeline. In addition to having access to
substantial gas supplies, EPG is uniquely positioned to serve developing markets
along the northern border of Mexico including Ciudad Juarez, Cananea, and
Hermosillo.
In addition to its own pipeline operations, the Company has a one-third
interest in the TransColorado Gas Transmission Company. For a further discussion
see Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Regulatory Environment
EPG's pipeline facilities, services, and rates are regulated by FERC in
accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978. The primary change in EPG's operating environment is due to FERC's
increasing reliance on market forces as a substitute for cost-of-service
regulation. This change in policy has allowed the construction of significant
excess pipeline capacity into California.
In the mid-1980's, FERC began a series of actions designed to replace
strict cost-of-service regulation with market forces. The first significant
change was to eliminate a pipeline's obligation to hold supply and to allow
shippers to transport their own gas across an interstate pipeline system rather
than depend on the pipeline's merchant function. One of the obstacles to this
transition was the renegotiation of gas purchase contracts between pipelines and
producers. These negotiations reduced the pipeline's purchase obligations,
reformed the contract pricing provisions, and/or settled take-or-pay claims. EPG
has completed the renegotiation of its purchase contracts and expects no further
significant liability in this area. For a further
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discussion of EPG's take-or-pay matters see, Note 5 of Item 8, Financial
Statements and Supplementary Data.
The second effort, which began in April 1992, was a series of orders
commonly known as the Restructuring Rules. These rules mandated significant
changes to the structure of the services provided by interstate natural gas
pipelines and were intended principally to assure "comparability" (i.e., that
pipeline and non-pipeline gas merchants were placed on an equal footing in
competing for sales), to provide a mechanism for the allocation of pipeline
capacity, and to eliminate competitive distortions arising from rate design
differences between United States and Canadian pipelines. The most significant
of these rules for EPG was the rate design change. Under the Restructuring Rules
SFV rate design, all fixed pipeline costs (including return on equity and
related income taxes) are recovered through reservation charges which do not
vary with actual throughput. Under the previously required MFV rate design,
return on equity and related taxes were excluded from reservation charges but
were recovered along with variable costs through volumetric rates (rates
collected based on the actual volumes transported on the pipeline). Generally,
under SFV rate design, volumetric rates are considerably lower than under MFV
rate design and pipeline earnings are less sensitive to variations in actual
throughput; however, as discussed in the following sections, it is anticipated
that EPG's future rates will be more sensitive to pipeline throughput.
California Markets
EPG maintains a strong competitive position in the California market by
virtue of the fact that its pipeline is currently the lowest-cost transporter
of, and the principal means of moving, natural gas from the San Juan Basin to
the California border. EPG's current capacity to deliver natural gas to
California is approximately 3.3 Bcf/d. EPG currently delivers about 48 percent
of the total interstate pipeline capacity serving that state. In addition, gas
shipped to California across the EPG system represented about 36 percent of the
gas consumed in the state in 1995.
Interstate pipeline capacity utilization to California is currently about
65 percent and is not expected to reach 100 percent until sometime in the next
decade, assuming no new interstate pipeline construction. Currently, EPG has
firm transportation contracts covering 89 percent of its 3.3 Bcf/d of capacity
to California. By 1998, that figure has the potential to drop to approximately
53 percent. EPG's largest contracts for interstate capacity to California are
with SoCal and PG&E. Both SoCal and PG&E have exercised options in their
contracts to relinquish certain capacity rights. For a further discussion of the
SoCal and PG&E capacity relinquishments, see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
EPG is seeking to offset the effects of these and other future reductions
in existing firm capacity commitments by actively seeking new markets, pursuing
attractive opportunities to increase traditional market share, and controlling
costs.(1) The new markets EPG has targeted include various natural gas users in
California who are now served indirectly through SoCal and PG&E, as well as new
markets off the east end of its system. EPG's efforts to obtain new markets in
California at full tariff rates is adversely impacted by the current excess
interstate pipeline capacity to California.
East-of-California Markets
EPG's current delivery capacity to East-of-California markets is
approximately 1.3 Bcf/d. EPG is the principal interstate natural gas
transmission system serving Arizona, including the cities of Phoenix and Tucson;
southern Nevada, including Las Vegas; New Mexico; and El Paso, Texas. EPG also
serves the cities of Ciudad Juarez, Cananea, and Hermosillo in northern Mexico.
In addition, EPG has filed an application with FERC to expand its system in
order to provide natural gas service to the proposed Samalayuca II Power Plant
near Ciudad Juarez. For a further discussion of the Samalayuca II Power Plant,
see Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the
important factors that may affect actual results.
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Markets off the East End of EPG's System
Since the late 1980's, in response to changing market demands, EPG has been
delivering substantial quantities of gas from the San Juan, Permian, and
Anadarko Basins to interconnecting pipelines for re-delivery to off-system
markets on the Gulf Coast and in the Midwest.
The alternate routing of the San Juan Basin gas was originally effectuated
by back-hauls between EPG's system and an interconnecting pipeline. Volumes of
gas, which the interconnecting pipeline is otherwise scheduled to deliver to EPG
for re-delivery in EPG's traditional markets, are traded for like volumes of San
Juan Basin gas which EPG has accepted for delivery to the interconnecting
pipeline. With EPG's 1992 completion of a system modification, which made an
existing pipeline segment linking the San Juan Basin and Permian Basin
bi-directional, physical forward-haul deliveries are also being made.
Permian Basin and Anadarko Basin gas is delivered to these new markets both
by displacement and through forward-haul transactions. A segment of pipeline in
the Texas panhandle that has been modified to allow for re-directed gas flow
allows EPG to physically transport San Juan Basin or Permian Basin gas to
delivery points in the Anadarko Basin. New interconnects were constructed with
NorAm Gas Transmission Company and TransOK Inc. to exploit this additional
capability. Similarly, a segment of pipeline between the Cornudas and Waha
stations in Texas has been modified to allow for additional capacity to move gas
to the Texas intrastate pipelines in the Permian Basin. As a result of these
system modifications, total deliveries to off-system markets east of EPG's
system were as high as 1.5 Bcf/d during 1995.
Although the contributions to revenues and earnings are still comparatively
small, off-system deliveries represent a strategic long-term diversification of
EPG's market base. Presently, EPG is the largest provider of access to
off-system markets for San Juan Basin producers. To maintain this position,
during 1995 EPG constructed a new interconnect with Transwestern near Window
Rock, Arizona that allows EPG to move an additional 300 MMcf/d of San Juan Basin
gas to Transwestern for re-delivery to these new markets.
In addition, based on the results of an "open season" which concluded on
February 29, 1996, EPG believes that sufficient market demand exists to support
the addition of new capacity to move additional San Juan Basin gas to east end
markets. For a further discussion of EPG's proposed expansion, see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Summary of Historical Throughput
Set forth below is a breakdown of EPG's natural gas deliveries by market
area for the years ended December 31:
1995 1994 1993
----- ----- -----
(MMCF/D)
California.................................................. 1,791 2,257 2,288
East-of-California.......................................... 550 630 599
Off-system.................................................. 1,103 747 691
----- ----- -----
Total Throughput.................................. 3,444 3,634 3,578
===== ===== =====
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Competition
EPG faces significant competition from three other companies which
transport natural gas to the California market. Competition generally occurs on
the basis of delivered price. The combined capacity of the four pipelines
transporting natural gas to the California market is 6.9 Bcf/d. In 1995, the
demand for interstate pipeline capacity to California averaged 5.0 Bcf/d. EPG's
California competitors can be summarized as follows:
Transwestern -- has the capacity to deliver approximately 1.1 Bcf/d to
California from Permian, Anadarko, and San Juan Basin supply sources.
Kern River Gas Transmission -- has the capacity to deliver approximately
700 MMcf/d to California from Rocky Mountain supply sources. In 1992, Kern River
Gas Transmission applied to FERC for permission to expand its system capacity by
452 MMcf/d and held an open season to solicit market support for that effort.
Market demand will determine whether or not the project will be built.
Pacific Gas Transmission Company -- has the capacity to deliver
approximately 1.8 Bcf/d to California from Canadian gas supply sources after
completion, in November 1993, of its 755 MMcf/d expansion. This project was
supported by Canadian marketers and producers seeking a new market for their
supplies. While the impact of the expansion project on EPG's operating revenues
was minimal in 1994 due to an overall increase in demand for natural gas in the
California market, which occurred due to a decrease in the availability of
hydroelectric power, the impact of the expansion project on EPG's operating
revenues has been more significant in 1995. See Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
EPG faces varying degrees of competition from alternative energy sources,
such as electricity, hydroelectric power, coal, and oil. The potential
consequences of the proposed restructuring of the electric power industry, which
both the CPUC and FERC are supporting, are currently unclear. It may benefit the
natural gas industry by creating more demand for gas turbine generated electric
power, or it may hamper demand by allowing more effective use of surplus
electric capacity through increased wheeling as a result of open access. At this
time, EPG is not projecting a significant increase in gas demand as a result of
such restructuring, particularly in the California market.
Future Outlook
In June 1995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. In July 1995, FERC
accepted and suspended EPG's filing to be effective January 1, 1996, subject to
refund and certain other conditions. FERC also set EPG's rates for hearing.
In March 1996, EPG filed a comprehensive offer of settlement which, if
approved by FERC, would resolve issues related to the above mentioned rate case
and issues surrounding certain contract reductions and expirations which occur
from January 1, 1996, through December 31, 1997. For a further discussion of the
settlement, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This settlement would mitigate the revenue reductions expected as a
consequence of the various contract demand step-downs and the PG&E contract
termination at year-end 1997.
MOJAVE PIPELINE COMPANY
Business
On June 1, 1993, the Company acquired from a wholly owned subsidiary of
Enron Corp., that subsidiary's 50 percent interest in MPC, a general
partnership. This acquisition gave the Company 100 percent ownership of MPC. MPC
is a general partnership formed pursuant to the Uniform Partnership Act of the
State of Texas
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for the purpose of constructing, owning, and operating a federally regulated
interstate natural gas pipeline to serve the enhanced oil recovery operations
and associated cogeneration projects in the heavy oil fields in central
California. MPOC, a wholly owned subsidiary of MPC, is a Texas corporation,
which serves as MPC's agent in the management of MPC's pipeline facilities and
the design and construction of future MPC pipeline expansions.
MPC's pipeline facilities, services, and rates are regulated by FERC in
accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978. MPC's system connects at Topock, Arizona with EPG's and Transwestern's
interstate pipeline systems. MPC's only business is natural gas transportation
and related hub services.
Set forth below are MPC's natural gas deliveries for the years ended
December 31:
1995 1994 1993
---- ---- ----
(MMCF/D)
Total MPC Throughput............................................ 328 247 231
=== === ===
Regulatory Environment
MPC filed a service and rate design restructuring plan in November 1992
which was essentially approved by FERC in March 1993. Several of MPC's customers
have filed petitions with the Court of Appeals for review of the March 1993
order and certain other FERC orders. These petitions are currently pending
before the Court of Appeals. The primary issues on appeal pertain to FERC's
requirement that MPC's rates for firm transportation service be based upon SFV
rate design rather than MFV rate design. Management believes the Court of
Appeals will uphold SFV rates as applied to MPC.(1)
In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates. In March 1995, FERC accepted the filing and allowed
the rates to become effective as of March 30, 1995, subject to refund. In
September 1995, MPC filed a settlement agreement supported by FERC and the
majority of MPC's firm shippers which would continue rates at existing levels
for a 5-year period. In December 1995, FERC approved the settlement agreement as
it relates to the supporting parties. Contested issues applicable solely to the
minority customer group not supporting the settlement will be resolved following
a hearing before FERC.
System Expansion
In March 1993, MPC filed an application, which was amended in November 1993
and April 1994, for a certificate of public convenience and necessity to build
and operate a 475 MMcf/d expansion of its existing system. The proposed
expansion was estimated to cost approximately $500 million. For a further
discussion of the proposed expansion see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
EL PASO FIELD SERVICES COMPANY
Business
EPFS, incorporated in June 1993, was formed for the purpose of owning,
operating, acquiring, and constructing natural gas gathering, processing, and
other related field facilities. In January 1994 and in May 1995, EPG filed
applications with FERC seeking orders that would terminate, effective January 1,
1996, certificates applicable to certain gathering and processing facilities
owned by EPG on the basis that such facilities are not subject to FERC
jurisdiction. In September 1995, FERC granted the abandonments requested in the
applications, subject to certain conditions, and determined that the facilities
would be exempt from FERC jurisdiction upon transfer to EPFS. In November 1995,
FERC denied rehearing petitions on the
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(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
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September 1995 order. Certain parties have filed petitions for review of the
September 1995 and November 1995 FERC orders with the United States Court of
Appeals for the Fifth Circuit.
Effective January 1, 1996, EPG transferred to EPFS the gathering and
processing facilities which were subject to the January 1994 and May 1995 orders
together with its non-certificated gathering facilities. The following table
provides information concerning the gathering and processing facilities at
January 1, 1996:
GAS PRODUCTS
MILES OF INSTALLED GATHERING EXTRACTION
SYSTEM PIPELINE HORSEPOWER CAPACITY CAPACITY
------ -------- ---------- --------- ----------
(MMCF/D)
San Juan Basin............................... 5,500 42,721 1,180 590(a)
Anadarko Basin............................... 667 11,705 425 --
Permian Basin
Carlsbad................................... 800 6,144 150 8
Waha....................................... 160 3,609 250 --
----- ------ ----- ---
Total.............................. 7,127 64,179 2,005 598
===== ====== ===== ===
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(a) This capacity represents the existing lean oil processing plant which will
be partially replaced by the completion of the 600 MMcf/d cryogenic plant
discussed below. EPFS will retain approximately 325 MMcf/d of lean oil
processing capacity.
EPFS focuses on providing its customers innovative, reliable, competitively
priced wellhead-to-mainline field services including gathering, products
extraction, dehydration, purification, and compression. With the formation of
MSG, EPFS is able to offer its customers fully bundled natural gas services with
a broad range of pricing options including innovative financial risk management
products. EPFS also provides well tie-ins and state-of-the-art, cost effective,
near real-time information services including electronic wellhead gas flow
measurement.
EPFS provides services on a variety of fee structures including fixed fee
per Dth, floating fee per Dth indexed to the applicable local area price of gas,
or by taking NGL in kind. EPFS's leverage to gas and liquid prices increased in
1995 as a result of the completion of numerous long-term gathering, processing,
and compression contracts for services in the San Juan Basin. These contracts
represent approximately 77 percent of EPFS's San Juan Basin throughput which
totaled 1,012 MMcf/d in 1995 and include dedication of gas production and
drilling acreage with gathering fees indexed to the San Juan Basin price of gas,
and product extraction fees based on a percentage of NGL extracted. The Company
believes that low California gas demand, excess interstate pipeline capacity to
California, continued increases in gas supply availability, and pipeline
constraints to move gas to eastern markets were significant factors that caused
San Juan Basin gas prices to average $1.18 in 1995, the lowest in over 7 years.
EPFS believes it is well positioned to benefit from upswings in gas and NGL
prices. In January and February of 1996, EPFS implemented a hedging strategy
through MSG. This strategy retains upside potential for gas and NGL indexed fees
while mitigating the financial impact should lower gas or NGL prices occur
during 1996.
In 1995 EPFS's gathering throughput was depressed due in large part to low
gas prices, which dampened overall drilling and workover activity, and to
pipeline curtailments on EPG's mainline. The pipeline curtailments resulted from
mainline capacity constraints in the San Juan Basin. In late 1995, EPG
eliminated the constraints by expanding San Juan Basin mainline capacity by 300
MMcf/d and putting into service a 300 MMcf/d interconnect with Transwestern. As
a result, pipeline curtailments in the San Juan Basin are not expected to
negatively impact gathering throughput in 1996.
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Set forth below are the gathered and products extraction volumes for the
years ended December 31:
1995 1994 1993
----- ----- -----
(MMCF/D)
Gathered Volumes............................................ 1,284 1,314 1,304
===== ===== =====
Products Extraction Volumes................................. 436 458 446
===== ===== =====
EPFS plans to increase gathering and processing volumes and profits through
a strategy of project development, acquisitions, and joint ventures.(1) EPFS's
strategies are focused on increasing its ability to offer gathering and
processing services in its traditional services areas, as well as in other
active gas producing areas. EPFS has made significant progress in implementing
these strategies. In September 1995, EPFS acquired the Burton Flats cryogenic
products extraction plant from Amoco for approximately $5.6 million. The plant
and related 14 mile gathering system has a capacity of 7.5 MMcf/d and at year
end 1995 had throughput of about 6.0 MMcf/d. The Burton Flats plant and
gathering system is located in Eddy County, New Mexico and is adjacent to EPFS's
Carlsbad gathering system. This facility will enable EPFS to offer products
extraction services to its existing customers in the Carlsbad gathering system,
as well as to new gas suppliers.
The Hart Canyon compression project was completed in November 1995 and
consists of three field compressor sites with combined horsepower of 7,675 and
loops several sections of gathering lines in the San Juan Basin. The effect of
this project has been to lower gathering line pressures from an average of 280
pounds per square inch gauge to 120 pounds per square inch gauge resulting in
increased production of up to 20 MMcf/d from approximately 280 wells connected
to the system. EPFS charges a compression fee on approximately 80 MMcf/d
compressed by this new horsepower. EPFS believes that similar compression
projects throughout its system hold significant potential as a new revenue
source for EPFS in the future.(1)
In February 1996, EPFS, through its wholly owned subsidiary El Paso
Intrastate Company, acquired the Linc and Pandale gathering systems from Tejas
Power Corporation. For a further discussion of the gathering systems see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EPFS is constructing a new 600 MMcf/d cryogenic gas processing plant at its
existing Chaco Plant facility which is expected to cost approximately $80
million. The first 400 MMcf/d of capacity at the Chaco Plant facility is
scheduled to be in service during the first quarter of 1996, with the remaining
200 MMcf/d of capacity expected to be available in the second quarter of 1996.
The efficiency of the plant's high natural gas liquids extraction capability of
50,000 barrels of NGL per day is expected to increase the profitability to the
customers of EPFS, thereby increasing the profit contribution of EPFS's NGL
processing activities. For information on the lease for the plant, which is
unconditionally guaranteed by EPG, see Note 5 of Item 8, Financial Statements
and Supplementary Data.
Competition
EPFS operates in a highly competitive environment that includes independent
gathering and processing companies, interstate and intrastate pipeline
companies, gas marketers, and oil and gas producers. EPFS competes for
throughput primarily based on price, efficiency of facilities, gathering system
line pressures, availability of facilities near drilling activity, service, and
access to favorable downstream markets.
Future Outlook
EPFS is the primary vehicle by which EPG plans to grow its non-regulated
domestic natural gas gathering and processing business. EPFS expects to increase
the profitability of its existing business through aggressive cost control and
expand by adding to its current service offerings through synergies with MSG.(1)
To accelerate that process EPFS will relocate its headquarters to Houston, Texas
during the second quarter of
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
7
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1996. Furthermore, aided by the free cash flow generated by EPG, EPFS plans to
aggressively pursue growth opportunities through acquisition and development of
assets in and outside of its current service area.(1)
MERCHANT SERVICES GROUP
Business
The Company significantly increased its non-regulated natural gas activity
in 1995 through the formation of MSG which consists of Eastex, its subsidiaries,
and EPGM. EPGM was incorporated and commenced operations in late 1992 for the
purpose of conducting all of EPG's new gas marketing business, while also acting
as EPG's agent in winding down its remaining role as a natural gas merchant
predominately in the southwestern region of the United States. Due to the
emerging market for natural gas sales and services in recent years and the
Company's emphasis on developing its non-regulated business, the Company sought
to expand the size and geographical scope of its gas marketing activities to
become a national gas merchant through the acquisition of Eastex, effective
September 1, 1995.
Eastex is a full service natural gas merchant which conducts wholesale gas
marketing and related services on a national basis. To complement its business,
Eastex offers storage and hub services at its Rotherwood Storage Field and
Houston Hub pipeline facility, located in Texas, and direct end user sales in
the eastern United States, principally through Heath Petra Resources, a wholly
owned subsidiary of Eastex. Subsequent to the acquisition by EPG, the operations
of Eastex and EPGM were integrated. On December 7, 1995, Eastex purchased all of
the outstanding stock of Premier, a gas marketing company located in Tulsa,
Oklahoma, specializing in long-term sales to utilities in the Great Lakes region
and industrial and commercial sales to end users in the Mid-continent region.
The consolidation of these regional gas marketing entities into MSG, with
headquarters in Houston, Texas and sales offices throughout the United States,
has created one of the industry's leading natural gas services providers with
year end 1995 sales level exceeding 2 Bcf/d. MSG provides a broad range of
energy products and services to its customers including supply aggregation,
transportation management, integrated price risk management, and storage
inventory optimization services. Due to the emerging deregulation of the
electric power industry, MSG recently formed a power marketing subsidiary to
participate in wholesale power trading and to offer similar products and
services to industrial and commercial end users of electricity.
MSG maintains a diverse natural gas supplier and customer base serving
producers, utilities (including local distribution companies and power plants),
municipalities, and a variety of industrial and commercial end users. In 1995,
MSG served approximately 325 producer/suppliers and 692 sales customers in 37
states with transportation of gas supplies on 45 pipelines.
Set forth below are marketed gas volumes for the years ended December 31:
1995 1994(A) 1993(A)
---- ------- -------
(MMCF/D)
Marketed Gas Volumes....................................... 750 345 362
=== === ===
- ---------------
(a) Volumes represent EPGM activity only.
Demand for natural gas products and services has primarily resulted from
the deregulation effects of FERC Order 636, the commercialization of natural
gas, and the intense gas-to-gas competition within the industry. Volatility in
the physical and financial gas markets has compounded the effects of these
changes creating greater service opportunities. MSG's marketing strategy is to
focus on customer driven solutions for fully bundled natural gas services
through its capability to provide reliable physical deliveries and innovative
financial risk management products. MSG expects to benefit from a lower cost
structure through the consolidation of operations, price competitive supplies
due to its expanded nationwide scope, lower credit costs
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
8
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due to the financial strength of its parent, and new customers and business
opportunities through its relationships with EPFS and EPED.(1)
In the course of its business, MSG trades and develops a market in natural
gas in both the physical and financial markets, and purchases or sells swaps and
options in the OTC markets with major gas merchants. MSG seeks to maintain a
balanced portfolio of supply and demand contracts and utilizes the NYMEX and OTC
financial markets to hedge against price and basis risk which may affect those
obligations. To support these activities, MSG employs centralized corporate risk
management and hedging strategies. See Note 4 of Item 8, Financial Statements
and Supplementary Data.
Competition
MSG's primary competitors include: (i) marketing affiliates of major oil
and gas producers, (ii) marketing affiliates of large local distribution
companies, (iii) marketing affiliates of other interstate and intrastate
pipelines, and (iv) independent natural gas marketers with varying scopes of
operations and financial resources. To effectively compete, MSG must expand
existing customer relationships as market conditions change, develop new
customers in emerging markets, and remain a low cost provider of a broad array
of natural gas and other energy related services.
Future Outlook
MSG believes there is opportunity for significant growth from its gas
marketing activities and expansion into related business lines such as power
marketing, producer settlement services, small end user sales, and demand side
management. Average daily volumes for 1996 are projected to be over 2.5 Bcf/d.
Further, MSG is expected to add value to EPG through its earnings contributions,
from synergies with the Company's natural gas transmission business, and by
benefiting EPFS through greater producer services and expanded gathering and
processing opportunities.(1) As the deregulation of the electric power industry
and the expansion of business opportunities in Mexico and Latin America
continues, MSG will seek opportunities to work with EPED in the joint
development of natural gas and energy related projects.
EL PASO ENERGY DEVELOPMENT
Business
EPED was incorporated in June 1991 for the purpose of investing in energy
projects with an emphasis on projects involving the development of
infrastructure to gather, transport, and utilize natural gas in northern Mexico
and Latin America. EPED is especially interested in those projects in northern
Mexico that present opportunities to utilize EPG's existing mainline
transmission system. EPED invests in projects outside of the United States which
possess a higher potential rate of return, as well as a higher degree of risk,
than similar projects in the United States.
Future Outlook
Currently, EPED is actively working on two projects: the Samalayuca II
Power Plant and the Aguaytia Energy Project and is evaluating several other
projects. For a further discussion of the current projects see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
GAS SUPPLY
During 1995, approximately 188 wells first delivered gas into the Company's
system. The total gas well availability physically connected to the Company's
gathering systems was approximately 1.4 Bcf/d, with total reserves estimated at
11.2 Tcf. During 1995, an average of 2.8 Bcf/d was received from physical points
interconnected with other pipelines or from receipt points pursuant to
transportation and exchange
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
9
14
agreements. EPG's maximum mainline system capacity is 4.7 Bcf, and MPC's
designed mainline system capacity is 400 MMcf/d.
SIGNIFICANT CUSTOMERS
In 1995, natural gas deliveries to SoCal and PG&E accounted for 17 percent
and 12 percent, respectively, of the Company's consolidated operating revenues.
No other customer accounted for 10 percent or more of the Company's consolidated
operating revenues.
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 ongoing and
former operating sites. As of December 31, 1995, EPG had a reserve of
approximately $35 million to cover these remediation activities. EPG estimates
that it will have capital expenditures for environmental matters of
approximately $10 million from 1996 through 2005. EPG has spent approximately
$33 million through 1995 for remediation projects of a capital nature. Details
regarding specific environmental contingencies are presented in Note 5 of Item
8, Financial Statements and Supplementary Data.
ENCUMBRANCES
Substantial portions of the Company's pipeline systems are constructed and
maintained pursuant to rights-of-way, easements, permits, and licenses or
consents on and across properties owned by others. Compressor stations, related
facilities, storage facilities, and two NGL extraction plants are located in
whole or in part upon land owned by the Company or upon sites held under leases
or under permits issued or approved by public authorities.
COMPANY RESTRUCTURING
In response to changes in the natural gas industry, increased competition,
recent and future firm capacity contract step-downs and terminations, the
Company has initiated an extensive review of its business processes. As a result
of this review, the Company has adopted a program to restructure its businesses
and reduce operating costs through work force reductions and improved work
processes.
In addition, the Company intends to realign itself into a holding company
structure. For a further discussion of the company restructuring and holding
company structure see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
EMPLOYEES
The Company had 2,393 and 2,403 full-time employees on December 31, 1995,
and 1994, respectively. The Company has no collective bargaining arrangements.
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15
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of EPG as of February 29, 1996, were as follows:
OFFICER
NAME OFFICE SINCE AGE
---- ------ ------- ---
William A. Wise Chairman of the Board, President, and 1983 50
Chief Executive Officer
H. Brent Austin Executive Vice President and Chief 1992 41
Financial Officer
Richard Owen Baish Executive Vice President 1987 49
Michael C. Holland Senior Vice President 1982 54
Robert G. Phillips Senior Vice President 1995 41
Joel Richards III Senior Vice President 1990 49
John W. Somerhalder II Senior Vice President 1990 40
Larry R. Tarver Senior Vice President 1988 52
Britton White, Jr. Senior Vice President and General 1991 52
Counsel
Mr. Wise has been Chairman of the Board of EPG since January 1994. He has
been Chief Executive Officer since January 1990 and President since April 1989.
From March 1987 until April 1989, Mr. Wise was an Executive Vice President of
EPG. From January 1984 to February 1987, he was a Senior Vice President of EPG.
Mr. Wise is a member of the Board of Directors of Battle Mountain Gold Company.
Mr. Austin has been Executive Vice President of EPG since May 1995. He has
been Chief Financial Officer of EPG since April 1992. He was Senior Vice
President of EPG from April 1992 to April 1995. He was Vice President, Planning
and Treasurer of BR from November 1990 to March 1992 and Assistant Vice
President, Planning of BR from January 1989 to October 1990.
Mr. Baish has been Executive Vice President of EPG since September 1994. He
was Senior Vice President from November 1990 to August 1994. He was General
Counsel and Corporate Secretary from November 1990 to December 1990 and Vice
President and Associate General Counsel from March 1987 to October 1990.
Mr. Holland has been Senior Vice President of EPG since January 1991. He
was a Vice President from June 1982 to December 1990. He has also been President
and Chief Executive Officer of MPOC since October 1989. Mr. Holland has
announced his intention to retire in 1996.
Mr. Phillips has been Senior Vice President of EPG since September 1995. He
has been Chief Executive Officer of Eastex since March 1983.
Mr. Richards has been Senior Vice President of EPG since January 1991. He
was Vice President from June 1990 to December 1990. He was Senior Vice
President, Finance and Human Resources of Meridian Minerals Company, a wholly
owned subsidiary of BR, from October 1988 to June 1990.
Mr. Somerhalder has been Senior Vice President of EPG since August 1992. He
was Vice President from January 1990 to July 1992.
Mr. Tarver has been Senior Vice President of EPG since September 1994. He
was Vice President from December 1988 to August 1994. Mr. Tarver has announced
his intention to retire in 1996.
Mr. White has been Senior Vice President and General Counsel of EPG since
March 1991. From March 1991 to April 1992, he was also Corporate Secretary of
EPG. For more than five years prior to that time, Mr. White was a partner in the
law firm of Holland & Hart.
11
16
Luino Dell'Osso, Jr. retired in May 1995 as Vice-Chairman, Chief Operating
Officer, and a Director of EPG after 22 years of service with EPG, BR, and
Burlington Northern Inc.
Executive officers hold offices until their successors are elected and
qualified, subject to their earlier removal.
ITEM 3. LEGAL PROCEEDINGS
In November 1993, TransAmerican Natural Gas Corporation filed a complaint
in a Texas state court against various parties, including EPG, alleging fraud,
tortious interference with contractual relationships, economic duress, civil
conspiracy, and violation of state antitrust laws arising from a settlement
agreement entered into by EPG, TransAmerican Natural Gas Corporation and others
in 1990 to settle litigation then pending and other potential claims. The
complaint, as amended, seeks unspecified actual and exemplary damages. EPG is
defending the matter, and the parties have stipulated to transfer this case to
the State District Court of Dallas County, Texas. Based on information available
at this time, management believes that the claims made by TransAmerican Natural
Gas Corporation have no factual or legal basis and that the ultimate resolution
of this matter will not have a materially adverse effect on the Company's
financial condition.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995 no matters were submitted to a vote of
security holders.
12
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
EPG's common stock is traded on the New York Stock Exchange. As of February
29, 1996, the approximate number of holders of record of common stock was
19,843. This does not include individual participants on whose behalf a clearing
agency or its nominee holds EPG's common stock.
The following table reflects the high and low sales prices for, and cash
dividends declared on, EPG's common stock based on the daily composite listing
of stock transactions for the New York Stock Exchange.
HIGH LOW DIVIDENDS
------- ------- ---------
(PER SHARE)
1995
First Quarter............................... $32.500 $28.000 $0.3300
Second Quarter.............................. $29.875 $26.875 $0.3300
Third Quarter............................... $29.500 $24.750 $0.3300
Fourth Quarter.............................. $31.625 $26.500 $0.3300
1994
First Quarter............................... $41.875 $35.250 $0.3025
Second Quarter.............................. $39.000 $31.500 $0.3025
Third Quarter............................... $35.375 $31.625 $0.3025
Fourth Quarter.............................. $34.750 $29.875 $0.3025
In January 1996, the Board declared a quarterly dividend of $0.3475 per
share on EPG's common stock, payable on April 1, 1996, to shareholders of record
on March 8, 1996. The declaration of future dividends will be dependent upon
business conditions, earnings, the cash requirements of EPG, and other relevant
factors.
EPG has made available the Program, in which Odd-lot Holders are offered a
convenient method of disposing of all their shares without incurring the
customary brokerage costs associated with the sale of an odd-lot. Only Odd-lot
Holders are eligible to participate in the Program. The Program is strictly
voluntary, and no Odd-lot Holder is obligated to sell pursuant to the Program. A
brochure and related materials describing the Program were sent to Odd-lot
Holders in February 1994. The Program currently does not have a termination
date, but EPG may suspend the Program at any time. Inquiries regarding the
Program should be directed to The First National Bank of Boston.
EPG has made available the Plan, which provides all shareholders of record
a convenient and economical means of increasing their holdings in EPG's common
stock. A shareholder who owns shares of common stock in street name or broker
name and who wishes to participate in the Plan will need to have his or her
broker or nominee transfer the shares into the shareholder's name. The Plan is
strictly voluntary, and no shareholder of record is obligated to participate in
the Plan. A brochure and related materials describing the Plan were sent to
shareholders of record in November 1994. The Plan currently does not have a
termination date, but EPG may suspend the Plan at any time. Inquiries regarding
the Plan should be directed to The First National Bank of Boston.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993(E) 1992 1991
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
OPERATING RESULTS
Operating revenues.............. $1,037,997 $869,872 $908,928 $802,812 $735,196
Depreciation, depletion, and
amortization................. 72,077 65,037 54,051 73,229 61,300
Litigation special charge(a).... -- 15,062 -- -- --
Operating income................ 212,411 222,295 229,245 184,910 184,919
Income from continuing
operations before income
taxes........................ 132,976 148,076 150,826 123,289 140,500
Income taxes.................... 47,613 58,463 59,153 46,963 51,956
Income from continuing
operations................... 85,363 89,613 91,673 76,326 88,544
Earnings per common share --
continuing operations........ 2.47 2.45 2.46 2.12 2.82
Cash dividends declared per
common share(b).............. 1.32 1.21 1.10 0.75 --
Average common shares
outstanding.................. 34,495 36,632 37,212 36,049 31,422
DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993(E) 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL POSITION
Total assets................... $2,434,625 $2,331,771 $2,269,663 $2,050,729 $2,301,932
Payable to BR, including
current portion............. -- -- -- -- 624,804
Long-term debt(c).............. 771,892 779,097 795,783 637,074 249,942
Stockholders' equity(d)........ 712,155 709,636 707,548 668,992 814,878
- ------------
(a) Charge related to the Amoco litigation (see Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations). The
settlement payment was made in the first quarter of 1995.
(b) Represents dividends declared subsequent to the Company's March 1992
initial public offering.
(c ) Excludes current maturities.
(d) In May 1991, EPG declared and paid a dividend of $175 million to TEPCO. In
September 1991, EPG declared a dividend of all its Oil and Gas Operations
Segment to TEPCO. The total amount of that dividend was $925 million. In
addition, EPG declared and paid dividends to BR totaling $55 million in
1991 and $274 million prior to the Company's March 1992 initial public
offering.
(e) MPC was consolidated for May 1993 through December 1993.
14
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Operating revenues for the year ended December 31, 1995, were $168 million
higher than for the same period of 1994. The consolidation of Eastex and net
reserve reversals contributed $257 million and $12 million to the increase,
respectively. Higher gathering and processing rates and return on take-or-pay
receivables of $3 million, and $2 million, respectively, also contributed to the
increase. Partially offsetting the increase in operating revenues were lower gas
sales volumes, gas sales rates, transportation rates, transportation volumes,
gathering and processing volumes, and reservation revenues of $46 million, $33
million, $10 million, $6 million, $2 million, and $3 million, respectively.
Operating charges for the year ended December 31, 1995, were $178 million
higher than for the same period of 1994. The consolidation of Eastex, increases
in operation and maintenance expense, and depreciation contributed $247 million,
$16 million, and $7 million, respectively, to the increase in operating charges.
The increase in operation and maintenance expense was due primarily to higher
stock related benefits, higher consultant fees, and higher severance accruals.
Offsetting the increase in operating charges were lower gas purchase volumes,
lower average cost of gas, a 1994 litigation special charge, and net reserve
reversals of $48 million, $29 million, $15 million, and $5 million,
respectively.
Interest and debt expense for the year ended December 31, 1995, was $7
million higher than for the same period of 1994 due to increased short-term
borrowings.
Allowance for funds used during construction was $2 million higher for the
year ended December 31, 1995, than for the same period of 1994 due primarily to
an increase in the average construction work in progress balance.
EPG's mainline throughput for the year ended December 31, 1995, was 1,257
Bcf compared to 1,326 Bcf for the same period of 1994. The lower throughput was
primarily due to a decrease in deliveries to the California market resulting
from an increase in the availability of hydroelectric power. The decrease in
California deliveries was partially offset by higher off-system deliveries,
resulting from producers and marketers seeking alternative markets for their
gas.
Year Ended December 31, 1994, Compared to Year Ended December 31, 1993
Operating revenues for the year ended December 31, 1994, were $39 million
lower than for the same period of 1993. New system rates that became effective
January 1, 1994, resulted in lower reservation revenues of $28 million and lower
transportation revenues of $28 million. Additionally, lower gas sales rates,
lower gas sales volumes, and the 1993 sale of gas in storage contributed $25
million, $12 million, and $18 million, respectively, to the decrease to
operating revenues. The decrease due to the 1993 sale of gas in storage is
offset in operating charges. Lower accruals for regulatory issues, the
consolidation of MPC, and higher rates for gathering and processing offset the
decrease in operating revenues by $41 million, $18 million, and $15 million,
respectively.
Operating charges were $32 million lower for the year ended December 31,
1994, than for the same period of 1993. Lower gas purchase volumes and the 1993
sale of gas in storage contributed $11 million and $18 million, respectively, to
the decrease in operating charges. The decrease due to the 1993 sale of gas in
storage is offset in operating revenues. Additionally, operation and maintenance
expense decreased primarily due to a 1993 accrual for estimated take-or-pay
undercollections, a 1993 litigation settlement, lower plant and pipeline
maintenance, 1994 adjustments to the 1993 take-or-pay undercollections accrual,
and lower environmental cleanup expenses. Offsetting the decrease in operating
charges was a litigation special charge of $15 million related to the litigation
brought by Amoco, alleging breaches of certain gas purchase, gathering
15
20
and transportation agreements. In addition, higher average cost of gas, an
increase in depreciation expense, and the consolidation of MPC further offset
the decrease in operating charges by $15 million, $8 million, and $9 million,
respectively.
Interest and debt expense for the year ended December 31, 1994, was $3
million higher than for the same period of 1993 due primarily to the
consolidation of MPC.
Allowance for funds used during construction was $5 million lower for the
year ended December 31, 1994, than for 1993 due primarily to a decrease in the
average construction work in progress balance.
Other -- net income was $13 million higher for the year ended December 31,
1994, than for the same period of 1993. Contributing to the higher other income
in 1994 were $14 million related to the recovery of EPG's investment in its
underground storage facility and lower environmental cleanup expenses. The
increase in other income was partially offset by interest expense related to the
Amoco litigation special charge of approximately $4 million, and a reduction in
partnership earnings due to the consolidation of MPC.
EPG's mainline throughput for the year ended December 31, 1994, was 1,326
Bcf compared to 1,306 Bcf for the same period of 1993. Throughput was higher due
to an increase in deliveries to off-system and East-of-California markets. The
increase in throughput was partially offset by lower deliveries to the
California market due to higher storage withdrawals and increased competition.
Gathered volumes for the year ended December 31, 1994, were relatively unchanged
compared to the same period of 1993.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
Net cash provided by operating activities was $203 million for 1995,
compared with $253 million for the same period of 1994. The decrease from the
previous year was primarily due to lower net insurance reimbursements, the Amoco
litigation payment, the timing of insurance premium payments, lower cash
received on gas imbalance settlements, lower net tax refunds, higher interest
payments, and timing differences in other working capital disbursements. The
decrease was partially offset by 1994 take-or-pay refunds to customers, lower
net tax payments, lower take-or-pay payments, and timing differences in other
working capital receipts.
Net cash provided by operating activities was $253 million for 1994,
compared with $236 million for the same period of 1993. The increase from the
previous year was primarily due to net insurance reimbursements, lower net tax
payments, lower insurance prepayments, higher collections of EPG's investment in
its underground storage facility, and timing differences in working capital
receipts and disbursements, partially offset by lower reserves for regulatory
issues and take-or-pay refunds to customers.
Rates and Regulatory Matters
EPG -- On January 1, 1996, SoCal exercised an option in its contract to
relinquish 300 MMcf/d of capacity. SoCal's demand quantity will remain at the
1,150 MMcf/d level for a primary term ending August 31, 2006. In addition, PG&E
has a contract for 1,140 MMcf/d of firm capacity rights on EPG's system with a
primary term ending December 31, 1997. In June 1995, PG&E notified EPG that it
intends to terminate the contract as of December 31, 1997. EPG's reservation
revenues from PG&E during 1995 were approximately $128 million. At February 29,
1996, known reductions in existing firm capacity commitments totaled
approximately 1,614 MMcf/d.
EPG is seeking to offset the effects of these reductions in existing firm
capacity commitments by actively seeking new markets, pursuing attractive
opportunities to increase traditional market share, and controlling costs.(1)
The new markets EPG has targeted include various natural gas users in California
who are now served indirectly through SoCal and PG&E, as well as new markets off
the east end of its system. EPG's efforts to obtain new markets in California at
full tariff rates is adversely impacted by the current excess interstate
pipeline capacity to California, which is estimated to continue into the next
decade.
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
16
21
In June 1995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. In July 1995, FERC
accepted and suspended EPG's filing to be effective January 1, 1996, subject to
refund and certain other conditions. FERC also set EPG's rates for hearing.
In March 1996, EPG filed a comprehensive offer of settlement which, if
approved by FERC, would resolve issues related to the above mentioned rate case
and issues surrounding certain contract reductions and expirations which occur
from January 1, 1996 through December 31, 1997. The settlement provides for,
among other things: (i) a long term rate stability plan which establishes base
rates, for a 10-year period from January 1, 1996, through December 31, 2005,
subject to annual escalation after 1997; (ii) payments, over 8 years, or less,
to EPG by its customers totaling $255 million prior to interest, representing
approximately 35 percent of the revenues associated with the contract reductions
and expirations; (iii) the sharing between EPG (65 percent) and its customers
(35 percent) of revenues in excess of a threshold which are attributable to
unsubscribed capacity sales during the period 1996 through 2003; and (iv) a
mechanism to reflect in the base rate increases or decreases resulting from laws
or regulations which impact costs at a level in excess of $10 million a year.
In January 1994, EPG filed an application with FERC seeking an order that
would terminate, effective January 1, 1996, certificates applicable to certain
gathering and processing facilities owned by EPG on the basis that such
facilities are not subject to FERC jurisdiction. In May 1995, EPG filed an
application with FERC seeking an order that would terminate, effective January
1, 1996, certificates applicable to certain offshore gathering facilities owned
by EPG on the basis that such facilities are not subject to FERC jurisdiction.
In September 1995, FERC granted the abandonments requested in the January 1994
and May 1995 applications, subject to certain conditions, and determined that
the facilities would be exempt from FERC jurisdiction upon transfer to EPFS. In
November 1995, FERC denied rehearing petitions on the September 1995 order.
Certain parties have filed petitions for review of the September 1995 and
November 1995 FERC order with the United States Court of Appeals for the Fifth
Circuit.
Effective January 1, 1996, EPG transferred to EPFS the gathering and
processing facilities which were subject to the January 1994 and May 1995 orders
together with its non-certificated gathering facilities. The net assets
transferred to EPFS totaled approximately $236 million.
EPG has filed to recover $1.1 billion of its buy-out and buy-down costs
under FERC cost recovery procedures. The collection period for such costs
extends through March 1996. Through December 31, 1995, EPG recovered
substantially all of the $1.1 billion. EPG has established a reserve, based on
throughput projections, for that portion of the receivables balance which is
unlikely to be collected over the period through March 1996. The balances of
this reserve were $1 million and $9 million at December 31, 1995, and 1994,
respectively. Under FERC procedures, take-or-pay cost recovery filings may be
challenged by pipeline customers on prudence and certain other grounds. In
October 1992, FERC issued an order resolving all but one of the outstanding
issues regarding EPG's take-or-pay proceedings. The issue unresolved by FERC
involved the claim by several customers that EPG sought to recover an excessive
amount for the value of certain production properties which were transferred to
a producer as part of a 1989 take-or-pay settlement. Following a hearing on this
issue, in June 1994, FERC affirmed a decision of an Administrative Law Judge
which found that the valuation proposed by EPG was excessive and required EPG to
refund to its customers the costs found to be ineligible for take-or-pay
recovery. In accordance with FERC decision, EPG refunded $34 million, inclusive
of interest, to its customers in September 1994. In December 1994, EPG filed a
petition with the Court of Appeals for review of FERC decision, which petition
is currently pending. In addition, certain of EPG's customers sought review of
certain aspects of the October 1992 order in the Court of Appeals. In January
1996, the Court of Appeals remanded the order to FERC with a direction to
clarify the distinction between take-or-pay buydown or buyout costs which were
ineligible for recovery and those which were imprudently incurred and,
therefore, not recoverable. FERC has not yet taken action on the Court of
Appeals remand.
17
22
MPC -- MPC filed a service and rate design restructuring plan in November
1992 which was essentially approved by FERC in March 1993. Several of MPC's
customers have filed petitions with the Court of Appeals for review of the March
1993 order and certain other FERC orders. These petitions are currently pending
before the Court of Appeals. The primary issues on appeal pertain to FERC's
requirement that MPC's rates for firm transportation service be based upon SFV
rate design rather than MFV rate design. Management believes the Court of
Appeals will uphold SFV rates as applied to MPC.(1)
In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates. In March 1995, FERC accepted the filing and allowed
the rates to become effective as of March 30, 1995, subject to refund. In
September 1995, MPC filed a settlement agreement supported by FERC and the
majority of MPC's firm shippers which would continue rates at existing levels
for a 5-year period. In December 1995, FERC approved the settlement agreement as
it relates to the supporting parties. Contested issues applicable solely to the
minority customer group not supporting the settlement will be resolved following
a hearing before FERC.
Environmental Matters
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 ongoing and
former operating sites. As of December 31, 1995, the Company had a reserve of
approximately $35 million for the following environmental contingencies: (i) PCB
remediation costs estimated to range between $3 million and $4 million over the
next 4 years and (ii) remediation of groundwater and soil contamination costs
estimated to range between $30 million and $43 million over a 30-year period.
Management believes the amount reserved as of December 31, 1995, is sufficient
to cover these and other small environmental assessments and remediation
activities.(1)
EPG has analyzed the CAAA and believes the impact to the Company's
operations will be primarily in the following areas: (i) potential required
reductions in the emissions of NOx in non-attainment areas, (ii) the requirement
for air emissions permitting of existing facilities, and (iii) compliance
assurance monitoring of air emissions. EPG anticipates capitalizing the
equipment costs associated with complying with CAAA and estimates that
approximately $10 million will be spent from 1996 through 2005. However, EPA
proposed compliance assurance monitoring rules, when finalized, could
potentially impose greater costs on the Company than currently estimated.
Additionally, EPG has spent approximately $33 million through 1995 for
additional remediation projects of a capital nature. For a further discussion of
specific environmental matters see Note 5 of Item 8, Financial Statements and
Supplementary Data.
Legal Proceedings
See Item 3, Legal Proceedings.
Derivative Financial Instruments
See Note 4 of Item 8, Financial Statements and Supplementary Data for
information regarding the Company's use of derivatives and risks associated
therewith.
Acquisitions
In connection with the September 1995 acquisition of Eastex, Eastex
shareholders received either $4.50 in cash or .1601 shares of EPG common stock
for each share of Eastex common stock. The purchase price of approximately $32
million, exclusive of acquisition costs, was financed by the Company through
approximately $13 million of available cash and the issuance of approximately
0.7 million shares of treasury stock at a market value of approximately $19
million. Acquisition costs of approximately $2 million have been
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the
important factors that may affect actual results.
18
23
capitalized. Total cash consideration paid, net of cash received, was
approximately $3 million. In December 1995, Eastex acquired all of the issued
and outstanding capital stock of Premier for approximately $20 million. The
acquisition was funded by the Company through internally generated funds and
short-term borrowings. The cost of each acquisition has been allocated on the
basis of the estimated fair market value of the assets acquired and the
liabilities assumed. These allocations resulted in goodwill of approximately $17
million and $19 million related to the Eastex and Premier acquisitions,
respectively, and will be amortized over 40 years using the straight-line
method. The acquisitions have each been individually accounted for as a
purchase, and the Company has utilized the "push down" method of accounting. For
a further discussion of the Eastex and Premier acquisitions, see Note 6 of Item
8, Financial Statements and Supplementary Data.
Project Investments
Samalayuca II Power Plant (Mexico)
The Company is a member of a consortium that plans to build the proposed
Samalayuca II Power Plant near Ciudad Juarez, Chihuahua, Mexico. In December
1992, an award for construction was granted to the consortium by the CFE. The
consortium will construct the plant, which is projected to cost approximately
$645 million, and lease it to CFE for a term of 20 years. The Company presently
has a 20 percent interest in the consortium and plant and will make an initial
equity investment of approximately $26 million.
CFE and the consortium are negotiating a trust agreement, which is
substantially complete. The consortium has recently received approval for
non-recourse senior debt funding of up to 80 percent of the capital requirements
from the United States Export/Import Bank and Inter-American Development Bank.
The project is expected to reach financial close and construction is expected to
begin in the first half of 1996.(1)
Aguaytia Energy Project (Peru)
In August 1995, the Company became a member of a consortium that plans to
build a $200 million integrated gas and power project near Pucallpa, in central
Peru, called the Aguaytia Energy Project. The Company presently has a 24 percent
interest in the project, and its equity investment is estimated to be $35
million. The consortium will sell electricity, propane, and natural gas to meet
the growing demand for energy in Peru. Initially, the project will be funded 65
percent with equity. Negotiations are currently underway with a major lender to
provide non-recourse senior debt financing for 35 percent of the project during
construction and operation. Additional debt funding is anticipated. In December
1995, the project received approval from the Overseas Private Investment
Corporation for full political risk insurance coverage for the project.
Construction is expected to begin in the first half of 1996, and operations are
expected to commence in late 1997.(1)
ICA Agreement
In July 1995, the Company entered into an agreement with ICA for the joint
development, construction, operation, and ownership of natural gas pipelines and
other infrastructure projects in Mexico and Latin America. Management believes
that ICA's international engineering and construction experience, combined with
the Company's energy, natural gas marketing, and operating experience enables
the two companies to offer a uniquely qualified partnership for Latin American
development.
TransColorado Pipeline Project
In the third quarter of 1995, the Company purchased a one-third interest in
TransColorado Gas Transmission Company from Public Service Company of Colorado
for approximately $4 million. The Company paid approximately $2 million in cash.
The balance of approximately $2 million is due upon
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
19
24
commencement of the pipeline project. KN Energy, Inc. and Questar Pipeline
Company also each own a one-third interest in TransColorado Gas Transmission
Company.
In November 1994, TransColorado Gas Transmission Company received FERC
authorization to build a 292 mile pipeline with a capacity of 300 MMcf/d, from
northwest Colorado to the Blanco Hub area in the San Juan Basin. The project is
estimated to cost approximately $194 million. The proposed pipeline will provide
an alternative outlet for natural gas produced in the Rocky Mountain region and
is expected to enhance the Company's overall flexibility to meet market demands.
Construction of the proposed pipeline has not yet begun.
Common Stock and Other Stockholders' Equity
For the years ended December 31, 1995, 1994, and 1993, EPG paid
approximately $45 million, $43 million, and $40 million in dividends. In January
1996, the Board declared a quarterly dividend of $0.3475 per share on EPG's
common stock, payable on April 1, 1996, to shareholders of record on March 8,
1996.
In November 1994, the Board authorized the repurchase of up to 3.5 million
shares of EPG's outstanding common stock from time to time in the open market.
This authorization is in addition to a 2 million share authorization received in
October 1992. Shares repurchased are held in EPG's treasury and are expected to
be used in conjunction with EPG stock option compensation plans and for other
corporate purposes. Pursuant to the foregoing authorizations, the Company has
purchased 4.7 million shares as of December 31, 1995. On September 20, 1995, EPG
issued approximately 0.7 million shares of treasury stock in connection with the
Eastex acquisition. See Note 8 of Item 8, Financial Statements and Supplementary
Data.
Financing Facilities
As of December 31, 1995, and 1994, approximately $203 million and $107
million, respectively, of commercial paper was outstanding. As of December 31,
1995, there was $75 million outstanding under the Company's $400 million
revolving credit facility, which is considered support for commercial paper
borrowings. As of December 31, 1994, there were no borrowings outstanding under
this facility. As of December 31, 1995, and 1994, there were no borrowings
outstanding under an additional $30 million line of credit facility established
in October 1994. On January 19, 1996, the Board increased short-term borrowing
limits from $400 million to $500 million.
Eastex's credit facility of approximately $20 million expired October 31,
1995. On September 12, 1995, EPG retired $9 million of Eastex long-term debt.
In January 1992, EPG completed a sale of substantially all of its remaining
take-or-pay buy-out and buy-down receivables. In the third quarter of 1995, EPG
prepaid the outstanding $17 million take-or-pay financing liability.
EPG filed a shelf registration statement in August 1994, pursuant to which
EPG may offer up to $400 million of unsecured debt securities, preferred stock,
and common stock from time to time as determined by market conditions. On March
10, 1995, the registration statement was declared effective by the SEC. There
were no securities issued pursuant to the shelf registration statement as of
December 31, 1995, and 1994.
20
25
EPG's available shelf registration and lines of credit as of December 31,
1995, as discussed above, are summarized as follows:
(IN THOUSANDS)
--------------
Short-term borrowings.......................... $121,800
Shelf registration............................. 400,000
--------
Available Financing Facilities............... $521,800
========
Capital Expenditures
The Company's planned capital expenditures for 1996 of $175 million are
primarily for maintenance of business, system expansion, and system enhancement.
Capital expenditures for 1995 were $166 million compared to $173 million for
1994. The decrease was due primarily to lower maintenance offset by a system
expansion in the San Juan Basin, installation of various compression projects,
including the Hart Canyon compression project, and the purchase of the Burton
Flats cryogenic processing plant and related gathering system.
On February 29, 1996, an open season for shippers interested in EPG's
proposed 180 MMcf/d expansion of the Havasu Crossover Line concluded. EPG has
sent transportation service agreements to those shippers who expressed an
interest in the expansion for the purpose of securing definitive contracts. The
expansion would involve the construction of additional compression on the Havasu
Crossover Line at an estimated cost of approximately $17 million. EPG
anticipates that, in the near future, it will be seeking FERC certificate
authority for the proposed expansion.(1)
In June 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to expand its existing mainline system in the
San Juan Basin by approximately 300 MMcf/d at a cost of about $29 million. In
August 1995, FERC authorized the expansion project, conditioned on EPG's
compliance with various environmental conditions. In addition, FERC authorized
the inclusion of the project costs in EPG's rates. EPG commenced construction in
October 1995, and the project was completed and placed into service in December
1995.
In April 1994, EPG filed an application with FERC for a certificate of
public convenience and necessity to build the North/South Transfer Project. The
proposed pipeline would allow for the transfer of 468 MMcf/d of San Juan Basin
gas to EPG's south system and would enhance EPG's overall system flexibility to
meet market demands and to move gas to markets off the east end of the system.
The project was expected to cost approximately $62 million. In January 1996, EPG
filed a letter and notice of withdrawal of its application, stating that it had
reviewed the timing and necessary activities related to the completion of the
project and had determined that the North/South Transfer Project should be
withdrawn without prejudice to EPG for future refiling.
In March 1993, EPG filed an application with FERC to expand its system in
order to provide natural gas service to the proposed Samalayuca II Power Plant.
The proposed expansion, as filed, would provide an additional 300 MMcf/d of
capacity at a cost of approximately $57 million. In November 1993, FERC issued
an order that approved the proposed border crossing facility south of Clint,
Texas that would connect EPG's facilities with facilities in Mexico. In December
1993, PG&E, SoCal, and the CPUC jointly filed a motion with FERC seeking
clarification or rehearing of the November 1993 order, which motion is currently
pending. In November 1994, FERC required EPG to provide the executed long-term
contracts or binding agreements for a substantial amount of the firm capacity of
the proposed facilities by January 1995. EPG advised FERC that although there
were presently no such contracts or agreements, EPG believed the project
remained viable and that the application should therefore not be dismissed. EPG
is in the process of evaluating the project and its related capital costs.
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
21
26
In March 1993, MPC filed an application, which was amended in November 1993
and April 1994, for a certificate of public convenience and necessity to build
and operate a 475 MMcf/d expansion of its existing system at an estimated cost
of approximately $500 million. FERC issued a series of orders from 1994 to 1995
related to the proposed expansion and, in December 1995, issued a final order
which denied rehearing on certain remaining issues. In February 1996, MPC filed
a notice to decline acceptance of the certificate of public convenience and
necessity issued by FERC stating that it had determined that the proposed
expansion was economically infeasible under current market circumstances.
In February 1996, EPFS, through its wholly owned subsidiary El Paso
Intrastate Company, acquired the Linc gathering system and the Pandale gathering
system from Tejas Power Corporation for approximately $12 million. The combined
throughput of the two systems is expected to contribute 45 MMcf/d on an annual
basis to EPFS's total throughput. The Linc gathering system is located in the
Waha area of the Permian Basin and should increase EPFS's market share in that
area. The Pandale gathering system is located in the Texas counties of Crockett
and Val Verde, and should give EPFS a base from which to grow in this active
drilling area.(1)
Financing Requirements
Future funding for capital expenditures, acquisitions, long-term debt
retirements, dividends, and other expenditures will be provided by internally
generated funds, debt/equity issuances, and/or available credit facilities.
OTHER
Company Restructuring
In response to changes in the natural gas industry, increased competition,
recent and future firm capacity contract step-downs and terminations, the
Company has initiated an extensive review of its business processes. As a result
of this review, the Company has adopted a program to restructure its businesses
and reduce operating costs through work force reductions and improved work
processes.
On January 12, 1996, the Company announced a reduction of its work force.
The reduction is expected to be accomplished through a voluntary early
retirement incentive program, a voluntary severance program, and an involuntary
reduction in work force program. The Company, which had 2,393 employees at
December 31, 1995, expects to reduce its total work force by approximately 600
to 800 employees.
The Company expects that a majority of the work force reductions will occur
by the end of the first quarter of 1996. In addition, the Company is initiating
changes to the pension plan and other benefit plans by January 1997. The details
of the changes have not yet been finalized; however, it is expected that these
changes will result in lower operating charges. The Company anticipates
recording a charge between $34 million and $37 million, net of income taxes.
These restructuring efforts should position the Company to more effectively
address the changes occurring in the natural gas industry.
Change in Corporate Structure
The Board has approved, subject to certain conditions, the adoption of a
holding company structure whereby the Company would become direct and indirect
subsidiaries of a Holding Company. Holders of shares of common stock of EPG
would become, by virtue of the Merger, holders on a share-for-share basis, of
shares of common stock of Holding Company with the result that Holding Company
would replace EPG as the publicly-held corporation, and all stockholders of EPG
immediately prior to the Merger would own the same number of shares of Holding
Company common stock immediately after the Merger as the EPG common stock held
immediately before the Merger. The change to a holding company structure would
be tax
- ---------------
(1) The previous statement(s) may be considered forward-looking. See
page 24 for a description of the important factors that may affect
actual results.
22
27
free for federal income tax purposes to stockholders of EPG. The change to a
holding company structure may be effected without a vote of stockholders under
applicable Delaware law.
At the time of the Merger, EPG would assign all of its rights under its
shareholder rights agreement to Holding Company, and Holding Company would
assume and agree to perform EPG's obligations thereunder. The presently
outstanding rights to purchase Company preferred stock, provided for by the
shareholders rights agreement, would, upon effectiveness of the Merger, be
converted to rights to purchase, in accordance with and subject to the terms and
provisions of the shareholder rights agreement, shares of the preferred stock of
Holding Company. The designation, rights and preferences of the preferred stock
of Holding Company would be identical to the preferred stock of EPG. The Holding
Company preferred stock purchase rights would, after the Merger, be deemed to be
attached to the Holding Company common stock certificates.
Immediately prior to the effectiveness of the Merger, EPG intends, subject
to receipt of a favorable IRS ruling and SEC no-action response, to transfer and
contribute to Holding Company as a capital contribution all of the outstanding
capital stock of the principal non-regulated subsidiaries of EPG. The
subsidiaries would be transferred as part of the planned separation of the
present regulated and non-regulated businesses of EPG under the holding company
structure. Following the Merger, EPG would continue to hold all of the assets of
EPG held immediately prior to the Merger, except for the stock of the
subsidiaries transferred to the Holding Company and certain other assets, not
material in amount, held immediately prior to the Merger.
All business and operations conducted by the Company prior to the Merger
would, after the Merger, continue to be conducted by the Company as direct and
indirect subsidiaries of Holding Company, and the consolidated assets and
liabilities of Holding Company and subsidiaries immediately after the Merger
would be the same as the consolidated assets and liabilities of the Company
immediately before the Merger.
The directors of the Holding Company immediately after the Merger would be
those persons who are the directors of EPG immediately prior to the Merger. All
officers of Holding Company would consist of persons who are currently officers
of EPG. In addition, the restated certificate of incorporation and by-laws of
EPG immediately prior to the Merger and the certificate of incorporation and
by-laws of the Holding Company immediately after the Merger would be identical,
with the exception that Holding Company's name would be different than EPG.
EPG expects to complete the restructuring by early 1997, subject to the
satisfaction of certain conditions, including among other things: (i) approval
of Holding Company common stock and preferred stock purchase rights for trading
on the New York Stock Exchange, (ii) a favorable no-action ruling from the SEC
concerning the absence of requirement for registration under the Securities Act
of 1933 of the Holding Company common stock to be issued in the Merger and
certain other securities law issues, (iii) a favorable private letter ruling
from the IRS, and (iv) consents from certain third parties. The Company
believes, but there can be no assurance, that the conditions to forming the
holding company structure will be satisfied. It is possible that certain of the
terms of the structure described above may be modified or dispensed with and
additional new terms of structure may be adopted, in response to conditions
imposed by IRS and SEC in their rulings or otherwise adopted by the Board in
on-going consideration of the holding company structure.
Management believes that the holding company structure will provide the
framework that allows for and accommodates future growth from internal
operations (including the separation of regulated and non-regulated businesses),
acquisitions, and joint ventures. This structure will also broaden the
alternatives available for future financing, as well as generally provide for
greater administrative and operational flexibility.
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation
EPG and MPC are subject to the regulations and accounting of FERC, and
therefore continue to follow the reporting and accounting requirements of SFAS
No. 71. The Consolidated Balance Sheets contain assets and liabilities related
to operations which have been recorded pursuant to SFAS No. 71. If these
accounting
23
28
principles should no longer be applied, an amount would be charged to earnings
as an extraordinary item. At December 31, 1995, this amount was estimated to be
approximately $46 million, net of income taxes. While management believes that
EPG and MPC remain "regulated" as the term is used in the relevant accounting
literature, changes in the regulatory and economic environment may, at some
point in the future, create circumstances in which the application of regulatory
accounting principles is no longer appropriate. Any potential charge would be
non-cash and would have no direct effect on EPG's and MPC's ability to seek
recovery of the underlying deferred costs in their future rate proceedings or on
their ability to collect the rates set thereby. For a further discussion of SFAS
No. 71 issues see Note 1 of Item 8, Financial Statements and Supplementary Data.
Effective January 1, 1996, EPG transferred certain gathering and processing
facilities to EPFS. FERC had determined that, upon the transfer to EPFS, the
facilities would be exempt from FERC jurisdiction. Accordingly, the provisions
of SFAS No. 71 do not apply to EPFS's transactions and balances effective
January 1, 1996. The discontinuance of the application of SFAS No. 71 to EPFS
will not have a material impact on the Company's financial condition or results
of operations.
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be
Disposed Of
The Company anticipates adopting SFAS No. 121 in the first quarter of 1996.
As a result of the adoption, the Company will reduce property, plant, and
equipment by a charge to earnings of approximately $19 million, net of income
taxes. In addition, management expects to write-off an impaired regulatory asset
of approximately $5 million, net of income taxes, in the first quarter of 1996.
See Note 2 of Item 8, Financial Statements and Supplementary Data.
SFAS No. 123, Accounting for Stock-Based Compensation
The Company adopted SFAS No. 123 in the first quarter of 1996, and elected
to continue to apply the accounting rules contained in APB No. 25. This election
requires the Company to disclose pro forma net income and earnings per share
based on the fair value methodology in SFAS No. 123; however, there is no impact
to the Company's financial condition or results of operations.
SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties
The Company adopted SOP 94-6 effective January 1, 1995. There is no impact
to the Company's financial condition or results of operations.
For a further discussion of SFAS No. 121, SFAS No. 123, and SOP 94-6 see
Note 14 of Item 8, Financial Statements and Supplementary Data.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
EPG is including the following cautionary statement in this Annual Report
on Form 10-K to make applicable and take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statement made by, or on behalf of, the Company. The factors
identified in this cautionary statement are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company. Forward-looking statements are identified with a
footnote on the page in which they appear.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the
24
29
circumstances. Where, in any forward-looking statement, the Company, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
1 -- The ability to increase transmission, gathering, processing, and
sales volumes can be subject to the impact of future weather conditions,
including those that favor hydroelectric generation; price; drilling
activity; and service competition, especially due to excess pipeline
capacity into California.
2 -- Growth strategies through acquisitions and investments in joint
ventures may face legal and regulatory delays and other unforeseeable
obstacles beyond the Company's control.
3 -- Future profitability will be effected by the Company's ability to
compete with the services offered by other energy enterprises which may be
larger, offer more services, and possess greater resources.
4 -- Cost control efforts may be effected by the timing of related
work force reductions and might be further offset by unusual and unexpected
items resulting from such events as, but not limited to, litigation
settlements, adverse rulings or judgments, and unexpected environmental
remediation costs in excess of reserves.
5 -- Rates for certain services are related to natural gas prices such
that variations in natural gas prices may result in corresponding variances
in operating revenues.
6 -- Future operating results and success of business ventures in the
United States, Mexico, and Latin America may be subject to the effects of
and changes in United States and foreign trade and monetary policies, laws
and regulations, political and governmental changes, inflation and exchange
rates, taxes, and operating conditions.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- -------- --------
Operating revenues
Reservation............................................. $ 503,455 $506,122 $483,471
Transportation.......................................... 23,262 41,102 59,631
Natural gas and liquids................................. 403,428 225,857 280,839
Gathering and processing................................ 72,477 66,581 51,427
Other................................................... 35,375 30,210 33,560
---------- -------- --------
1,037,997 869,872 908,928
---------- -------- --------
Operating charges
Operation and maintenance............................... 311,639 295,182 340,818
Natural gas and liquids................................. 402,279 233,823 249,484
Depreciation, depletion, and amortization............... 72,077 65,037 54,051
Litigation special charge............................... -- 15,062 --
Taxes, other than income taxes.......................... 39,591 38,473 35,330
---------- -------- --------
825,586 647,577 679,683
---------- -------- --------
Operating income.......................................... 212,411 222,295 229,245
---------- -------- --------
Other (income) and income deductions
Interest and debt expense............................... 86,297 78,850 75,429
Allowance for funds used during construction............ (2,419) (485) (5,438)
Other, net.............................................. (4,443) (4,146) 8,428
---------- -------- --------
79,435 74,219 78,419
---------- -------- --------
Income before income taxes................................ 132,976 148,076 150,826
Income taxes.............................................. 47,613 58,463 59,153
---------- -------- --------
Net income................................................ $ 85,363 $ 89,613 $ 91,673
========== ======== ========
Earnings per common share................................. $ 2.47 $ 2.45 $ 2.46
========== ======== ========
Average common shares outstanding......................... 34,495 36,632 37,212
========== ======== ========
The accompanying Notes and Supplemental Schedules are an integral part of
these Consolidated Financial Statements.
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EL PASO NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNT)
ASSETS
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Current assets
Cash and temporary investments................................... $ 39,373 $ 27,636
Accounts and notes receivable, net............................... 214,796 131,650
Inventories...................................................... 37,108 34,666
Take-or-pay buy-outs, buy-downs, and prepayments, net............ 10,477 33,356
Other regulatory assets.......................................... 11,740 12,000
Deferred income tax benefit...................................... 22,631 41,257
Other............................................................ 32,467 18,594
----------- -----------
Total current assets..................................... 368,592 299,159
----------- -----------
Property, plant, and equipment, net................................ 1,977,624 1,861,589
Intangible assets, net............................................. 47,878 4,308
Take-or-pay buy-outs, buy-downs, and prepayments, net.............. 1,017 14,502
Other regulatory assets............................................ 51,878 59,021
Other.............................................................. 87,636 93,192
----------- -----------
2,166,033 2,032,612
----------- -----------
Total assets............................................. $ 2,534,