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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4874
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COLORADO INTERSTATE GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-0173305
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Telephone Number: (713) 420-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $1 per share. Shares outstanding on August 13,
2004: 1,000
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COLORADO INTERSTATE GAS COMPANY
TABLE OF CONTENTS
CAPTION PAGE
------- ----
PART I -- Financial Information
Item 1. Financial Statements........................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Risk Factors and Cautionary Statements Regarding
Forward-Looking Statements................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 4. Controls and Procedures..................................... 15
PART II -- Other Information
Item 1. Legal Proceedings........................................... 17
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and
Issuer Purchases of Equity Securities..................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures.................................................. 19
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Below is a list of terms that are common to our industry and used
throughout this document:
/d = per day
BBtu = billion British thermal units
When we refer to "us", "we", "our", or "ours", we are describing Colorado
Interstate Gas Company and/or our subsidiaries.
i
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLORADO INTERSTATE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- ----------------
2004 2003 2004 2003
---- ---- ----- -----
Operating revenues....................................... $65 $68 $140 $150
--- --- ---- ----
Operating expenses
Operation and maintenance.............................. 30 26 55 45
Gain on long-lived assets.............................. (1) (7) (1) (7)
Depreciation, depletion and amortization............... 7 5 14 11
Taxes, other than income taxes......................... 4 3 8 6
--- --- ---- ----
40 27 76 55
--- --- ---- ----
Operating income......................................... 25 41 64 95
Other income............................................. 1 -- 1 --
Interest and debt expense................................ (7) (6) (13) (12)
Affiliated interest income, net.......................... 3 -- 7 2
--- --- ---- ----
Income before income taxes............................... 22 35 59 85
Income taxes............................................. 8 13 22 32
--- --- ---- ----
Income from continuing operations........................ 14 22 37 53
Discontinued operations, net of income taxes............. -- 7 -- 8
--- --- ---- ----
Net income............................................... $14 $29 $ 37 $ 61
=== === ==== ====
See accompanying notes.
1
COLORADO INTERSTATE GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ 4
Accounts and notes receivable
Customer, net of allowance of $2 in 2004 and 2003...... 23 27
Affiliates............................................. 4 1
Other.................................................. -- 1
Materials and supplies.................................... 4 4
Deferred income taxes..................................... 3 7
Other..................................................... 6 8
------ ------
Total current assets.............................. 40 52
------ ------
Property, plant and equipment, at cost...................... 1,160 1,157
Less accumulated depreciation, depletion and
amortization........................................... 365 372
------ ------
Total property, plant and equipment, net.......... 795 785
------ ------
Other assets
Notes receivable from affiliates.......................... 625 569
Other..................................................... 17 18
------ ------
642 587
------ ------
Total assets...................................... $1,477 $1,424
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable
Trade.................................................. $ 4 $ 2
Affiliates............................................. 12 10
Other.................................................. 6 9
Short-term borrowings, including maturities of long-term
debt................................................... 180 --
Accrued liabilities....................................... 5 14
Taxes payable............................................. 81 69
Contractual deposits...................................... 11 9
Other..................................................... 2 3
------ ------
Total current liabilities......................... 301 116
------ ------
Long-term debt.............................................. 100 280
------ ------
Other liabilities
Deferred income taxes..................................... 164 162
Other..................................................... 16 7
------ ------
180 169
------ ------
Commitments and contingencies
Stockholder's equity
Common stock, par value $1 per share; 1,000 shares
authorized, issued and outstanding .................... -- --
Additional paid-in capital................................ 47 47
Retained earnings......................................... 849 812
------ ------
Total stockholder's equity........................ 896 859
------ ------
Total liabilities and stockholder's equity........ $1,477 $1,424
====== ======
See accompanying notes.
2
COLORADO INTERSTATE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------
2004 2003
----- -----
Cash flows from operating activities
Net income................................................ $ 37 $ 61
Less income from discontinued operations, net of income
taxes................................................. -- 8
---- ----
Net income from continuing operations..................... 37 53
Adjustments to reconcile net income from continuing
operations to net cash from operating activities
Depreciation, depletion and amortization............... 14 11
Deferred income tax expense............................ 5 30
Other non-cash income items............................ -- (8)
Asset and liability changes............................ 11 12
---- ----
Cash provided by continuing operations................. 67 98
Cash used in discontinued operations................... -- (4)
---- ----
Net cash provided by operating activities....... 67 94
---- ----
Cash flows from investing activities
Additions to property, plant and equipment................ (16) (24)
Proceeds from the sale of assets.......................... 1 9
Net increase in affiliate advances........................ (56) (121)
Other..................................................... -- (1)
---- ----
Cash used in continuing operations..................... (71) (137)
Cash provided by discontinued operations............... -- 74
---- ----
Net cash used in investing activities........... (71) (63)
---- ----
Cash flows from financing activities
Dividends paid............................................ -- (41)
Contributions from discontinued operations................ -- 70
---- ----
Cash provided by continuing operations................. -- 29
Cash used in discontinued operations................... -- (70)
---- ----
Net cash used in financing activities........... -- (41)
---- ----
Net decrease in cash and cash equivalents from continuing
operations................................................ (4) (10)
Cash and cash equivalents
Beginning of period....................................... 4 11
---- ----
End of period............................................. $ -- $ 1
==== ====
See accompanying notes.
3
COLORADO INTERSTATE GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are an indirect wholly owned subsidiary of El Paso Corporation (El
Paso). We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States Securities and Exchange Commission. Because
this is an interim period filing presented using a condensed format, it does not
include all of the disclosures required by generally accepted accounting
principles. You should read it along with our 2003 Annual Report on Form 10-K,
which includes a summary of our significant accounting policies and other
disclosures. The financial statements as of June 30, 2004, and for the quarters
and six months ended June 30, 2004 and 2003, are unaudited. We derived the
balance sheet as of December 31, 2003, from the audited balance sheet filed in
our 2003 Form 10-K. In our opinion, we have made all adjustments which are of a
normal, recurring nature to fairly present our interim period results. Due to
the seasonal nature of our business, information for interim periods may not be
indicative of our results of operations for the entire year. Prior period
information presented in these financial statements includes reclassifications
which were made to conform to the current period presentation. These
reclassifications had no effect on our previously reported net income or
stockholder's equity.
Our accounting policies are consistent with those discussed in our 2003
Form 10-K.
2. LIQUIDITY
In May 2004, El Paso announced that the results of an independent
investigation confirmed that its historical financial statements should be
restated to reflect previously announced revisions to its natural gas and oil
reserve estimates. El Paso believes that a material restatement of its financial
statements would have constituted an event of default under its $3 billion
revolving credit facility, under which we are eligible to borrow (see Note 4),
and various other financings; specifically under the provisions of those
agreements related to representations and warranties on the accuracy of its
historical financial statements and on El Paso's debt to total capitalization
ratio. Beginning in March 2004, El Paso received a series of waivers on its $3
billion revolving credit facility and these other financing transactions to
address these issues. In August 2004, El Paso announced that its financial
statements would likely be further restated for an issue related to the manner
in which it historically accounted for hedges of its natural gas production. To
address the issues relating to the further restatement, on August 6, 2004, El
Paso received a third waiver on its $3 billion revolving credit facility which
waived any defaults related to representations and warranties of the accuracy of
its historical statements, amended its debt to capitalization ratio, extended
the filing deadline for its December 31, 2003 annual financial statements until
September 30, 2004, and extended the filing deadline for its March 31, 2004 and
June 30, 2004 quarterly financial statements until November 30, 2004. The August
waiver to the $3 billion revolving credit facility also placed restrictions on
the voluntary prepayment of El Paso's and its subsidiaries debt that matures
after June 30, 2005, amended one of the defined event of default provisions and
also provided that if El Paso or any of its significant subsidiaries receives or
is required to provide a notice of default on any other debt or guaranty of debt
that in the aggregate exceeds $100 million, El Paso will have 29 days to file
its financial statements (not to go beyond September 30, 2004, in the case of
its December 31, 2003 financial statements, and November 30, 2004, in the case
of its March 31, 2004 and June 30, 2004 financial statements). If El Paso does
not file its financial statements by these required dates, El Paso would need to
obtain additional waivers to avoid an event of default. Although we are a party
to El Paso's $3 billion revolving credit facility, we do not have any borrowings
or letters of credit outstanding under that facility. Based upon a review of our
financing transactions, we believe that a default on El Paso's $3 billion
revolving credit facility would not constitute an event of default on our other
debt agreements.
El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program. Under this program, depending
on whether we have short-term cash surpluses or requirements, we either provide
cash to El Paso or El Paso provides cash to us. We have historically provided
cash to El Paso
4
under this program, and as of June 30, 2004, we had a cash advance receivable
from El Paso of $619 million, classified as a non-current asset in our balance
sheet. If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables. Although increases in our debt to EBITDA (as defined in our
agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from
incurring additional debt, the equity reduction that would result if we wrote
off these receivables would not result in an event of default under our existing
debt agreements. We do not believe we will need to seek repayment of all or part
of these advances in the next twelve months and have entered into an agreement
with El Paso in which we will temporarily suspend advancing cash to El Paso
under its cash management program. We have $180 million of debentures due in
June 2005 which we intend to refinance prior to maturity. We have the ability to
complete this refinancing transaction, but in the event that we are unable to do
so at terms acceptable to us, El Paso has agreed that funds would be made
available to us through El Paso's cash management program by December 31, 2004
if the maturity of its $3 billion revolving credit facility (under which we are
a borrower) has not been extended beyond December 31, 2005 by that time.
El Paso's ownership in us serves as collateral under El Paso's $3 billion
revolving credit facility and other of El Paso's financing transactions. If El
Paso's lenders under these facilities were to exercise their rights to this
collateral, our ownership could change. This change of control would not
constitute an event of default under our existing debt agreements. However, if
the rating of our debt were downgraded by the rating agencies by "one full
grade" within 60 days after a change of control, we would be required to give
some of our bondholders the option to tender their debt.
If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.
Finally, we have cross-acceleration provisions in our long-term debt
agreements that state that should we incur an event of default under which
borrowings in excess of $5 million are accelerated, our long-term debt could
also be accelerated. The acceleration of our long-term debt would adversely
affect our liquidity position and, in turn, our financial condition.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
Discontinued Operations
In 2003, we accounted for our production and midstream businesses as
discontinued operations. During 2003, we completed the sales of these
businesses. The summarized financial results of our discontinued operations are
as follows:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- ----------------
(IN MILLIONS)
Operating Results:
Operating revenues.................................... $ 20 $ 67
Operating expenses.................................... (10) (55)
---- ----
Operating income................................... 10 12
Income taxes.......................................... (3) (4)
---- ----
Income from discontinued operations, net of income
taxes............................................ $ 7 $ 8
==== ====
5
Divestitures
During the second quarter of 2003, we sold assets with a combined net book
value of less than $1 million. We received proceeds of approximately $9 million,
including $6 million related to the buyout of a gas purchase contract, net of $2
million related to an environmental liability. We recorded a gain on sale of
long-lived assets of approximately $7 million.
4. DEBT AND CREDIT FACILITIES
Debt
As of June 30, 2004, we classified $180 million of debentures due in 2005
as current liabilities. Although we intend to refinance the debentures on a
long-term basis, we have not, as of the date of this report, entered into a
financing agreement to do so.
Credit Facilities
El Paso maintains a $3 billion revolving credit facility, with a $1.5
billion letter of credit sublimit, which matures on June 30, 2005. The $3
billion revolving credit facility has a borrowing cost of LIBOR plus 350 basis
points, letter of credit fees of 350 basis points and a commitment fee of 75
basis points on the unused portion of the facility. We, along with El Paso and
our affiliates, ANR Pipeline Company, Tennessee Gas Pipeline Company and El Paso
Natural Gas Company, are borrowers under the $3 billion revolving credit
facility. We are only liable for amounts we directly borrow under the $3 billion
revolving credit facility. As of June 30, 2004, $600 million was outstanding and
$1.1 billion in letters of credit were issued under the $3 billion revolving
credit facility, none of which was borrowed by or issued on our behalf. During
the fourth quarter of 2003 and the first quarter of 2004, El Paso liquidated a
portion of the collateral that supported the $3 billion revolving credit
facility, which reduced the borrowing availability by $42 million. See Note 2
for a discussion regarding El Paso's waivers on the $3 billion revolving credit
facility.
El Paso's equity in several of its subsidiaries, including its equity in
us, collateralizes the $3 billion revolving credit facility and $303 million of
other financing arrangements including leases, letters of credit and other
credit facilities.
Under the $3 billion revolving credit facility and other financing
agreements, we are subject to a number of restrictions and covenants. The most
restrictive of these include (i) limitations on the incurrence of additional
debt, based on a ratio of debt to EBITDA (as defined in the agreements), the
most restrictive of which shall not exceed 5 to 1; (ii) limitations on the use
of proceeds from borrowings; (iii) limitations, in some cases, on transactions
with our affiliates; (iv) limitations on the incurrence of liens; and (v)
potential limitations on our ability to declare and pay dividends.
5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Grynberg. In 1997, we and a number of our affiliates were named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, these complaints allege an industry-wide conspiracy
to underreport the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and heating value
been differently measured, analyzed, calculated and reported, together with
interest, treble damages, civil penalties, expenses and future injunctive relief
to require the defendants to adopt allegedly appropriate gas measurement
practices. No monetary relief has been specified in this case. These matters
have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui
Tam Litigation, U.S. District Court for the District of Wyoming, filed June
1997). Discovery is proceeding. Our costs and legal exposure related to these
lawsuits and claims are not currently determinable.
6
Will Price (formerly Quinque). We and a number of our affiliates are named
defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et
al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and heating content
of natural gas on non-federal and non-Native American lands and seek to recover
royalties that they contend they should have received had the volume and heating
value of natural gas produced from their properties been differently measured,
analyzed, calculated and reported, together with prejudgment and postjudgment
interest, punitive damages, treble damages, attorneys' fees, costs and expenses,
and future injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has been specified in
this case. Plaintiffs' motion for class certification of a nationwide class of
natural gas working interest owners and natural gas royalty owners was denied on
April 10, 2003. Plaintiffs were granted leave to file a Fourth Amended Petition,
which narrows the proposed class to royalty owners in wells in Kansas, Wyoming
and Colorado and removes claims as to heating content. A second class action has
since been filed as to the heating content claim. Our costs and legal exposure
related to these lawsuits and claims are not currently determinable.
In addition to the above matters, we and our subsidiaries and affiliates
are named defendants in numerous lawsuits and governmental proceedings that
arise in the ordinary course of our business.
For each of our outstanding legal matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
As this information becomes available, or other relevant developments occur, we
will adjust our accrual amounts accordingly. While there are still uncertainties
related to the ultimate costs we may incur, based upon our evaluation and
experience to date, as of June 30, 2004, we had no accruals for our outstanding
legal matters.
Environmental Matters
We are subject to federal, state and local laws and regulations governing
environmental quality and pollution control. These laws and regulations require
us to remove or remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites. As of June 30,
2004, we had accrued approximately $14 million for expected remediation costs
and associated onsite, offsite and groundwater technical studies. This accrual
includes $9 million for environmental contingencies related to properties we
previously owned. Our accrual at June 30, 2004, was based on the most likely
outcome that can be reasonably estimated. Below is a reconciliation of our
accrued liability as of June 30, 2004 (in millions):
Balance as of January 1, 2004............................... $14
Additions/adjustments for remediation activities............ 2
Payments for remediation activities......................... (2)
---
Balance as of June 30, 2004................................. $14
===
For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $2 million, which primarily will be expended
under government directed clean-up plans. In addition, we expect to make capital
expenditures for environmental matters of approximately $2 million in the
aggregate for the years 2004 through 2008. These expenditures primarily relate
to compliance with clean air regulations. Lastly, we have received a Compliance
Order from the federal EPA relating to alleged violations of a Title V air
permit in effect at our Natural Buttes Compressor Station. We are in settlement
negotiations regarding this matter.
It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws and regulations and claims for
damages to property, employees, other persons and the environment resulting from
our current or past operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will
7
adjust our accrual amounts accordingly. While there are still uncertainties
relating to the ultimate costs we may incur, based upon our evaluation and
experience to date, we believe our reserves are adequate.
Rates and Regulatory Matters
FERC Audit of Capacity Release Transactions. On December 1, 2003, the
Federal Energy Regulatory Commission (FERC's) Office of Market Oversight and
Investigations (OMOI) sent us a data request related to capacity release
transactions. We responded in January 2004. The FERC staff conducted an on-site
audit in March 2004. We expect to receive a draft report on the matter for our
review and comments within several months. Our costs and legal exposure, if any,
related to this matter are not currently determinable.
We have various other regulatory rules and orders in various stages of
adoption, review and/or implementation, none of which we believe will have a
material impact on us.
While the outcome of our outstanding rates and regulatory matters cannot be
predicted with certainty, based on current information, we do not expect the
ultimate resolution of these matters to have a material adverse effect on our
financial position, operating results or cash flows. However, it is possible
that new information or future developments could require us to reassess our
potential exposure related to these matters, which could have a material effect
on our results of operations, our financial position, and on our cash flows.
Other
CFTC Investigation. In April 2004, we elected to voluntarily cooperate
with the Commodity Futures Trading Commission (CFTC) in connection with the
CFTC's industry-wide investigation of activities affecting the price of natural
gas in the fall of 2003. Specifically, we provided information relating to
storage reports provided to the Energy Information Administration for the period
of October 2003 through December 2003.
While the outcome of this matter cannot be predicted with certainty, based
on current information, we do not expect the ultimate resolution to have a
material adverse effect on our financial position, operating results or cash
flows. However, it is possible that new information or future developments could
require us to reassess our potential exposure related to this matter, which
could have a material effect on our results of operations, our financial
position, and our cash flows.
6. RETIREMENT BENEFITS
Our postretirement benefit costs for the quarters and six months ended June
30, 2004 and 2003 were less than $1 million.
7. TRANSACTIONS WITH AFFILIATES
We participate in El Paso's cash management program which matches
short-term cash surpluses and needs of participating affiliates, thus minimizing
total borrowings from outside sources. As of June 30, 2004 and December 31,
2003, we had advanced to El Paso $619 million and $563 million. The interest
rate at June 30, 2004 was 2.4% and at December 31, 2003 was 2.8%. These
receivables are due upon demand; however, as of June 30, 2004 and December 31,
2003, we have classified these advances as non-current notes receivable from
affiliates because we do not anticipate settlement within the next twelve
months. See Note 2 for a discussion regarding our participation in and the
collectibility of these receivables.
At June 30, 2004 and December 31, 2003, we had accounts receivables from
affiliates of $4 million and $1 million. In addition, at June 30, 2004 and
December 31, 2003, we had a $6 million non-current note receivable from our
parent company. We had accounts payable to affiliates of $12 million and $10
million at June 30, 2004 and December 31, 2003. These balances arose in the
normal course of our business.
8
The following table shows revenues and charges from our affiliates for the
periods ended June 30:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -----------------
2004 2003 2004 2003
----- ----- ----- -----
(IN MILLIONS)
Revenues from affiliates.................................... $ 8 $ 9 $16 $15
Operations and maintenance expenses from affiliates......... 13 14 25 35
Reimbursements of operating expenses charged to
affiliates................................................ 2 3 4 5
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, the information disclosed in our 2003 Form 10-K and the
financial statements and notes presented in Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
Our management, as well as El Paso's management, uses earnings before
interest expense and income taxes (EBIT) to assess the operating results and
effectiveness of our business. We define EBIT as net income adjusted for (i)
items that do not impact our income from continuing operations, such as the
impact of accounting changes, (ii) income taxes, (iii) interest and debt expense
and (iv) affiliated interest income. We exclude interest and debt expense from
this measure so that our management can evaluate our operating results without
regard to our financing methods. We believe the discussion of our results of
operations based on EBIT is useful to our investors because it allows them to
more effectively evaluate the operating performance of our business using the
same performance measure analyzed internally by our management. EBIT may not be
comparable to measurements used by other companies. Additionally, EBIT should be
considered in conjunction with net income and other performance measures such as
operating income or operating cash flow.
The following is a reconciliation of our operating income to our EBIT and
our EBIT to our net income for the periods ended June 30:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
(IN MILLIONS, EXCEPT VOLUME AMOUNTS)
Operating revenues...................................... $ 65 $ 68 $ 140 $ 150
Operating expenses...................................... (40) (27) (76) (55)
------ ------ ------ ------
Operating income...................................... 25 41 64 95
------ ------ ------ ------
Other income............................................ 1 -- 1 --
------ ------ ------ ------
EBIT.................................................. 26 41 65 95
Interest and debt expense............................... (7) (6) (13) (12)
Affiliated interest income, net......................... 3 -- 7 2
Income taxes............................................ (8) (13) (22) (32)
------ ------ ------ ------
Income from continuing operations..................... 14 22 37 53
Discontinued operations, net of income taxes(1)......... -- 7 -- 8
------ ------ ------ ------
Net income............................................ $ 14 $ 29 $ 37 $ 61
====== ====== ====== ======
Throughput volumes (BBtu/d)(2).......................... 1,743 1,612 1,759 1,690
====== ====== ====== ======
- ---------------
(1) During 2003, we reclassified our field services and production businesses as
discontinued operations. As of June 30, 2003, all assets classified as
discontinued operations had been sold.
(2) Throughput volumes include billable transportation throughput volume for
storage activities.
10
OPERATING RESULTS (EBIT)
The following factors contributed to our overall EBIT reduction of $15
million and $30 million for the three months and six months ended June 30, 2004
as compared to the same periods in 2003:
EBIT IMPACT
--------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------- ----------------
(IN MILLIONS)
INCREASE/(DECREASE)
Operating revenue items:
Lower fuel recoveries in excess of fuel costs......... $ (3) $ (6)
Impact of the finalization of rate case settlement in
2003............................................... -- (4)
Impact of lower gas storage sales..................... (1) (3)
Other revenue items impacting EBIT.................... 1 3
Operating expense and other items:
Impact of Table Rock facility sold in 2003............ (6) (6)
Impact of net imbalance price revaluation............. (2) (4)
Impact of change to regulated depreciation method..... (2) (4)
Environmental reserve accrual in 2004................. (2) (2)
Other items impacting EBIT............................ -- (4)
---- ----
Total decrease in EBIT........................... $(15) $(30)
==== ====
In December 2003, we re-applied the provisions of Statements of Financial
Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types
of Regulation. At that time, and consistent with our regulated accounting
requirements, we also adopted the composite method of depreciation. Overall, we
anticipate higher depreciation from this change to be approximately $9 million
annually.
AFFILIATED INTEREST INCOME, NET
Second Quarter 2004 Compared to Second Quarter 2003
Affiliated interest income, net for the quarter ended June 30, 2004, was $3
million higher than the same period in 2003, due to higher average advances to
El Paso under our cash management program in 2004 and an increase in short-term
interest rates in 2004. The average advance balance due from El Paso of $392
million for second quarter 2003 increased to $604 million in 2004. The average
short-term interest rates for the second quarter increased from 1.3% in 2003 to
2.3% in 2004.
Six Months Ended 2004 Compared to Six Months Ended 2003
Affiliated interest income, net for six months ended June 30, 2004, was $5
million higher than the same period in 2003 due to higher average advances to El
Paso under our cash management program in 2004 and higher short-term interest
rates in 2004. The average advance balance due from El Paso of $417 million for
the six months of 2003 increased to $580 million in 2004. The average short-term
interest rates increased from 1.4% in 2003 to 2.5% in 2004.
INCOME TAXES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -----------------
2004 2003 2004 2003
---- ---- ----- -----
(IN MILLIONS, EXCEPT FOR RATES)
Income taxes................................................ $ 8 $13 $22 $32
Effective tax rate.......................................... 36% 37% 37% 38%
Our effective tax rates were different than the statutory rate of 35
percent in all periods, primarily due to the effect of state income taxes.
11
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Our liquidity needs have historically been provided through cash flows from
operating activities and the use of El Paso's cash management program. Under El
Paso's cash management program, depending on whether we have short-term cash
surpluses or requirements, we either provide cash to El Paso or El Paso provides
cash to us. We have historically provided cash advances to El Paso, and we
reflect these net advances as investing activities in our statement of cash
flows. As of June 30, 2004, we had receivables from El Paso of $619 million as a
result of this program. These receivables are due upon demand; however, we do
not anticipate settlement within the next twelve months. As of June 30, 2004,
these receivables were classified as non-current notes receivable from
affiliates in our balance sheet. We also had $6 million in other notes
receivable from our parent company. We believe that cash flows from operating
activities will be adequate to meet our short-term capital and debt service
requirements for our existing operations.
If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables. Although increases in our debt to EBITDA (as defined in our
agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from
incurring additional debt, the equity reduction that would result if we wrote
off these receivables would not result in a default under our existing debt
agreements. We do not believe we will need to seek repayment of all or part of
these advances in the next twelve months and have entered into an agreement with
El Paso in which we will temporarily suspend advancing cash to El Paso under its
cash management program. We have $180 million of debentures due in June 2005
which we intend to refinance prior to maturity. We have the ability to complete
this refinancing transaction, but in the event that we are unable to do so at
terms acceptable to us, El Paso has agreed that funds would be made available to
us through El Paso's cash management program by December 31, 2004 if the
maturity of its $3 billion revolving credit facility (under which we are a
borrower) has not been extended beyond December 31, 2005 by that time.
El Paso's ownership in us serves as collateral under El Paso's $3 billion
revolving credit facility and other of El Paso's financing transactions. If El
Paso's lenders under these facilities were to exercise their rights to this
collateral, our ownership could change. This change of control would not
constitute an event of default under our existing debt agreements. However, if
the rating of our debt were downgraded by the rating agencies by "one full
grade" within 60 days after a change of control, we would be required to give
some of our bondholders the option to tender their debt.
If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.
Additionally, we have cross-acceleration provisions in our long-term debt
agreements that state that should we incur an event of default under which
borrowings in excess of $5 million are accelerated, our long-term debt could
also be accelerated. The acceleration of our long-term debt would adversely
affect our liquidity position and, in turn, our financial condition.
12
Our cash flows from continuing operations for the six months ended June 30
were as follows:
2004 2003
----- -----
(IN MILLIONS)
Cash flows from operating activities........................ $ 67 $ 98
Cash flows from investing activities........................ (71) (137)
Cash flows from financing activities........................ -- 29
Cash Flows from Operating Activities
Net cash provided by operating activities was $67 million for the first six
months of 2004 versus $98 million in the same period of 2003. This decrease is
primarily due to changes in net income.
Cash Flows from Investing Activities
Net cash used in investing activities was $71 million for the first six
months of 2004 and consisted primarily of a $56 million increase in advances to
El Paso under its cash management program.
CAPITAL EXPENDITURES
Our capital expenditures for the six months ended June 30, 2004, were
approximately $16 million. Under our current plan, we expect to spend
approximately $70 million during 2004 for capital expenditures, consisting of
approximately $15 million to expand the capacity on our system and $55 million
for maintenance capital. We expect to fund capital expenditures through
internally generated funds.
COMMITMENTS AND CONTINGENCIES
See Item 1, Financial Statements, Note 5, which is incorporated herein by
reference.
13
RISK FACTORS AND CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.
With this in mind, you should consider the risks discussed elsewhere in
this report and other documents we file with the Securities and Exchange
Commission from time to time, and the following important factors that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf.
OUR RELATIONSHIP WITH EL PASO AND ITS FINANCIAL CONDITION SUBJECTS US TO
POTENTIAL RISKS THAT ARE BEYOND OUR CONTROL.
Due to our relationship with El Paso, adverse developments or announcements
concerning El Paso could adversely affect our financial condition, even if we
have not suffered any similar development. The senior unsecured indebtedness of
El Paso is currently rated Caa1 by Moody's (with a negative outlook and under
review for a possible downgrade) and CCC+ by Standard & Poor's (with a negative
outlook), which are below investment grade ratings. Our senior unsecured
indebtedness is currently rated B1 by Moody's (with a negative outlook and under
review for a possible downgrade) and B- by Standard & Poor's (with a negative
outlook). Further downgrades of our credit ratings would increase our cost of
capital and collateral requirements, and could impede our access to capital
markets. As a result of its downgrades over the last two years, El Paso has
realized substantial demands on its liquidity. These downgrades are a result, at
least in part, of the outlook generally for the consolidated businesses of El
Paso and its needs for liquidity.
El Paso has a long-range plan that, among other things, defines its future
businesses, targets significant debt reduction and establishes financial goals.
An inability to meet these objectives could adversely affect El Paso's liquidity
position, and in turn affect our financial condition.
Pursuant to El Paso's cash management program, surplus cash is made
available to El Paso in exchange for an affiliated receivable. In addition, we
conduct commercial transactions with some of our affiliates. As of June 30,
2004, we have net receivables of approximately $617 million from El Paso and its
affiliates. El Paso provides cash management and other corporate services to us.
If El Paso is unable to meet its liquidity needs, there can be no assurance that
we will be able to access cash under the cash management program, or that our
affiliates would pay their obligations to us. However, we would still be
required to satisfy affiliated company payables. Our inability to recover any
intercompany receivables owed to us could adversely affect our ability to repay
our outstanding indebtedness. For a further discussion of these matters, see
Item 1, Financial Statements, Note 7.
In May 2004, El Paso announced that an independent review of its natural
gas and oil reserves confirmed its previous assessment that the financial
statements of El Paso and certain of its subsidiaries should be restated. In
August 2004, El Paso announced it would likely be required to further restate
its financial statements for adjustments related to the manner in which it
historically accounted for hedges of its natural gas production. At this time,
El Paso's December 31, 2003 restated financial statements have not been filed,
nor has it filed quarterly reports for March 31, 2004 or June 30, 2004. Also, as
a result of its reserve revisions, several class action lawsuits have been filed
against El Paso and several of its subsidiaries, but not against us. The reserve
revisions have also become the subject of an SEC investigation and may become
the subject of separate inquiries by other governmental regulatory agencies.
These investigations and lawsuits may further
14
negatively impact El Paso's credit ratings and place further demands on its
liquidity. See Item 1, Financial Statements, Note 2 for a further discussion of
these matters.
A DEFAULT UNDER EL PASO'S $3 BILLION REVOLVING CREDIT FACILITY BY ANY PARTY
COULD ACCELERATE OUR FUTURE BORROWINGS, IF ANY, UNDER THE $3 BILLION REVOLVING
CREDIT FACILITY AND OUR LONG-TERM DEBT, WHICH COULD ADVERSELY AFFECT OUR
LIQUIDITY POSITION.
We are a party to El Paso's $3 billion revolving credit facility. We are
only liable, however, for our borrowings under the $3 billion revolving credit
facility, which were zero as of June 30, 2004. Under the $3 billion revolving
credit facility, a default by El Paso, or any other party, could result in the
acceleration of all outstanding borrowings under the $3 billion revolving credit
facility, including the borrowings of any non-defaulting party, and could
preclude us from borrowing under the $3 billion revolving credit facility in the
future. We believe El Paso's announced restatements of its prior period
financial statements would have constituted an event of default under the $3
billion revolving credit facility; however, El Paso received waivers of the
potential defaults on its $3 billion revolving credit facility, which continue
to be effective. See Item 1, Financial Statements, Note 2, for additional
information regarding these matters. The acceleration of our future borrowings,
if any, under the $3 billion revolving credit facility, or the inability to
borrow under the $3 billion revolving credit facility, could adversely affect
our liquidity position and, in turn, our financial condition.
Furthermore, the indentures governing our long-term debt include
cross-acceleration provisions. Therefore, if we borrow $5 million or more under
the $3 billion revolving credit facility and such borrowings are accelerated for
any reason, including the default of another party, our long-term debt could
also be accelerated. The acceleration of our long-term debt could also adversely
affect our liquidity position and, in turn, our financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 2003, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.
There are no material changes in our quantitative and qualitative
disclosures about market risks from those reported in our Annual Report on Form
10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures and the internal controls over financial reporting as of
the end of the period covered by this Quarterly Report pursuant to Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934 (Exchange Act). Based on
our controls evaluation, our principal executive officer and principal financial
officer have concluded that the disclosure controls are effective.
We strive to maintain disclosure controls and procedures and internal
controls over financial reporting that are designed to ensure that the
information required to be disclosed in our Exchange Act filings is recorded,
processed, summarized and reported within the required time frames, and that
this information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate,
to allow for timely decisions regarding required disclosure. In doing so, we
recognize that the effectiveness of our or any system of controls and procedures
is subject to limitations, including the exercise of judgment in the design,
implementation and evaluation of controls and procedures, the assumptions used
in identifying future events and the ability to completely eliminate misconduct.
As a result, there is no assurance that our or any controls and procedures will
prevent all errors and all fraud. By their nature, controls and procedures can
provide only reasonable assurance regarding our control objectives.
15
We are currently documenting and reviewing our internal controls to ensure
compliance with Section 404 of the Sarbanes Oxley Act of 2002 by December 31,
2004. While we are not aware of any items at this time that constitute material
weaknesses, as that term is defined in Auditing Standards (AU) Section 325, we
are identifying areas where our processes can be improved, and are actively
working to implement those improvements. Furthermore, as we continue our
compliance review, we may identify additional matters which may need to be
reported or which may constitute material weaknesses in our internal controls
over financial reporting. Although we have identified deficiencies in our system
of internal controls over financial reporting, we do not believe these
deficiencies have had, or are reasonably likely to have, a material impact on
our financial statements. In addition, there have been no changes during the
period in our internal controls over financial reporting that would adversely
affect our ability to provide, with reasonable assurance, reliable information
required in our reports submitted under the Securities Exchange Act of 1934.
16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, Financial Statements, Note 5, which is incorporated
herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.A.2 Second Waiver to the $3,000,000,000 Revolving Credit
Agreement dated as of June 15, 2004 among El Paso
Corporation, El Paso Natural Gas Company, Tennessee Gas
Pipeline Company, ANR Pipeline Company and Colorado
Interstate Gas Company, as Borrowers, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent,
ABN AMRO Bank N.V. and Citicorp North America, Inc., as
Co-Documentation Agents, Bank of America, N.A. and Credit
Suisse First Boston, as Co-Syndication Agents.
10.A.3 Second Amendment to the $3,000,000,000 Revolving Credit
Agreement and Third Waiver dated as of August 6, 2004 among
El Paso Corporation, El Paso Natural Gas Company, Tennessee
Gas Pipeline Company, ANR Pipeline Company and Colorado
Interstate Gas Company, as Borrowers, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent,
ABN AMRO Bank N.V. and Citicorp North America, Inc., as
Co-Documentation Agents, Bank of America, N.A. and Credit
Suisse First Boston, as Co-Syndication Agents (Exhibit 99.B
to our Form 8-K filed August 10, 2004).
*31.A Certification of Chief Executive Officer pursuant to
sec. 302 of the Sarbanes-Oxley Act of 2002.
*31.B Certification of Chief Financial Officer pursuant to
sec. 302 of the Sarbanes-Oxley Act of 2002.
*32.A Certification of Chief Executive Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.
*32.B Certification of Chief Financial Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.
Undertaking
We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the
rights of holders of our long-term debt not filed herewith for the
reason that the total amount of securities authorized under any of such
instruments does not exceed 10 percent of our total consolidated assets.
17
b. Reports on Form 8-K
June 17, 2004........ Our parent company, El Paso
Corporation, announced that it
had received waivers on its $3
billion revolving credit
facility and certain other
financings.
August 10, 2004...... Our parent company, El Paso
Corporation, announced that it
had received waivers on its $3
billion revolving credit
facility and certain other
financings.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLORADO INTERSTATE GAS COMPANY
Date: August 13, 2004 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)
Date: August 13, 2004 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting
Officer)
19
COLORADO INTERSTATE GAS COMPANY
EXHIBIT INDEX
Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.A.2 Second Waiver to the $3,000,000,000 Revolving Credit
Agreement dated as of June 15, 2004 among El Paso
Corporation, El Paso Natural Gas Company, Tennessee Gas
Pipeline Company, ANR Pipeline Company and Colorado
Interstate Gas Company, as Borrowers, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent,
ABN AMRO Bank N.V. and Citicorp North America, Inc., as
Co-Documentation Agents, Bank of America, N.A. and Credit
Suisse First Boston, as Co-Syndication Agents.
10.A.3 Second Amendment to the $3,000,000,000 Revolving Credit
Agreement and Third Waiver dated as of August 6, 2004 among
El Paso Corporation, El Paso Natural Gas Company, Tennessee
Gas Pipeline Company, ANR Pipeline Company and Colorado
Interstate Gas Company, as Borrowers, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent,
ABN AMRO Bank N.V. and Citicorp North America, Inc., as
Co-Documentation Agents, Bank of America, N.A. and Credit
Suisse First Boston, as Co-Syndication Agents (Exhibit 99.B
to our Form 8-K filed August 10, 2004).
*31.A Certification of Chief Executive Officer pursuant to
sec. 302 of the Sarbanes-Oxley Act of 2002.
*31.B Certification of Chief Financial Officer pursuant to
sec. 302 of the Sarbanes-Oxley Act of 2002.
*32.A Certification of Chief Executive Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.
*32.B Certification of Chief Financial Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.