Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
---------------
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 November 12,
2004: 1,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 4. Controls and Procedures..................................... 15
PART II -- Other Information
Item 1. Legal Proceedings........................................... 16
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................. 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits.................................................... 16
Signatures.................................................. 17
- ---------------
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -----------------
2004 2003 2004 2003
---- ---- ----- -----
Operating revenues...................................... $64 $54 $204 $204
--- --- ---- ----
Operating expenses
Operation and maintenance............................. 36 18 91 63
(Gain) loss on long-lived assets...................... 1 1 -- (6)
Depreciation, depletion and amortization.............. 8 5 22 16
Taxes, other than income taxes........................ 2 3 10 9
--- --- ---- ----
47 27 123 82
--- --- ---- ----
Operating income........................................ 17 27 81 122
Other income............................................ -- 1 1 1
Interest and debt expense............................... (6) (6) (19) (18)
Affiliated interest income, net......................... 5 3 12 5
--- --- ---- ----
Income before income taxes.............................. 16 25 75 110
Income taxes............................................ 6 10 28 42
--- --- ---- ----
Income from continuing operations....................... 10 15 47 68
Discontinued operations, net of income taxes............ -- -- -- 8
--- --- ---- ----
Net income.............................................. $10 $15 $ 47 $ 76
=== === ==== ====
See accompanying notes.
1
COLORADO INTERSTATE GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 11 $ 4
Accounts and notes receivable
Customer, net of allowance of $2 in 2004 and 2003...... 23 27
Affiliates............................................. 7 1
Other.................................................. -- 1
Materials and supplies.................................... 3 4
Deferred income taxes..................................... 3 7
Other..................................................... 6 8
------ ------
Total current assets.............................. 53 52
------ ------
Property, plant and equipment, at cost...................... 1,177 1,157
Less accumulated depreciation, depletion and
amortization........................................... 368 372
------ ------
Total property, plant and equipment, net.......... 809 785
------ ------
Other assets
Notes receivable from affiliates.......................... 616 569
Other..................................................... 17 18
------ ------
633 587
------ ------
Total assets...................................... $1,495 $1,424
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable
Trade.................................................. $ 6 $ 2
Affiliates............................................. 12 10
Other.................................................. 6 9
Short-term borrowings, including maturities of long-term
debt................................................... 180 --
Accrued liabilities....................................... 12 14
Taxes payable............................................. 85 69
Contractual deposits...................................... 7 9
Other..................................................... 1 3
------ ------
Total current liabilities......................... 309 116
------ ------
Long-term debt.............................................. 100 280
------ ------
Other liabilities
Deferred income taxes..................................... 166 162
Other..................................................... 14 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......................................... 859 812
------ ------
Total stockholder's equity........................ 906 859
------ ------
Total liabilities and stockholder's equity........ $1,495 $1,424
====== ======
See accompanying notes.
2
COLORADO INTERSTATE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2004 2003
----- ------
Cash flows from operating activities
Net income................................................ $ 47 $ 76
Less income from discontinued operations, net of income
taxes................................................. -- 8
---- -----
Net income from continuing operations..................... 47 68
Adjustments to reconcile net income from continuing
operations to net cash from operating activities
Depreciation, depletion and amortization............... 22 16
Deferred income tax expense............................ 7 17
Gain on long-lived assets.............................. -- (6)
Asset and liability changes............................ 19 55
---- -----
Cash provided by continuing operations................. 95 150
Cash used in discontinued operations................... -- (4)
---- -----
Net cash provided by operating activities....... 95 146
---- -----
Cash flows from investing activities
Additions to property, plant and equipment................ (33) (41)
Proceeds from the sale of assets.......................... 1 8
Net change in affiliate advances.......................... (53) (155)
Net change in restricted cash............................. -- (2)
Other..................................................... (3) --
---- -----
Cash used in continuing operations..................... (88) (190)
Cash provided by discontinued operations............... -- 74
---- -----
Net cash used in investing activities........... (88) (116)
---- -----
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 change in cash and cash equivalents from continuing
operations................................................ 7 (11)
Cash and cash equivalents
Beginning of period....................................... 4 11
---- -----
End of period............................................. $ 11 $ --
==== =====
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 September 30, 2004, and for the
quarters and nine months ended September 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.
In addition, 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
El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program whereby, 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 and as of September 30, 2004, we had a cash advance receivable from El Paso
of $616 million, $610 million of which is classified as a non-current asset in
our balance sheet. The remaining $6 million is classified as a current asset. We
believe that our cash flows from operating activities along with the current
notes receivables from El Paso under the cash management program 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, if demanded. 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 have entered into an agreement with El Paso in which we temporarily
suspended advancing cash to El Paso under its cash management program. We have
$180 million of senior 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, on that date, the maturity of El
Paso's revolving credit facility (under which we are a borrower) has not been
extended beyond December 31, 2005.
During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and for changes in the manner in which it accounted for certain
derivative contracts, primarily those related to the hedging of its natural gas
production. El Paso believes the restatement of its historical financial
statements would have constituted events of default under its revolving credit
facility, under which we are eligible to borrow, and various other financings;
specifically under the provisions of those agreements related to representations
and warranties on the accuracy of its historical
4
financial statements and on El Paso's debt to total capitalization ratio. During
2004, El Paso received a series of waivers on its revolving credit facility and
these other financing transactions to address these issues. These waivers
continue to be in effect. El Paso also received an extension of time from
various lenders until November 30, 2004 to file its second quarter 2004 Form
10-Q which it expects to meet. If El Paso is unable to file its second quarter
2004 Form 10-Q by that date and is not able to negotiate an additional extension
of the filing deadline, its revolving credit facility and various other
financings could be accelerated. As part of obtaining the waivers, El Paso
amended various provisions of the revolving credit facility, including
provisions related to events of default and limitations on the ability of El
Paso, as well as its subsidiaries, to prepay debt that matures after June 30,
2005. Although we are a party to El Paso's revolving credit facility, we do not
have any borrowings or letters of credit outstanding under that facility. See
Note 4 below for a further discussion of the revolving credit facility and the
potential refinancing of this facility.
Based upon a review of the covenants contained in our long-term debt
agreements, we believe that a default on El Paso's revolving credit facility
would not result in an event of default under our debt agreements.
El Paso's ownership in us serves as collateral under El Paso's 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.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
Discontinued Operations
In 2003, we accounted for our midstream business as a discontinued
operation. During 2003, we completed the sale of this business. The summarized
financial results of our discontinued operations are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2003
------------------
(IN MILLIONS)
Operating Results:
Operating revenues........................................ $ 67
Operating expenses........................................ (67)
Gain on long-lived assets................................. 12
----
Operating income....................................... 12
Income taxes.............................................. (4)
----
Income from discontinued operations, net of income
taxes................................................. $ 8
====
Divestitures
During 2003, we sold assets with a combined net book value of less than $1
million. We received proceeds of approximately $8 million, including $6 million
related to the buyout of a natural gas purchase contract, and recorded a gain on
sale of long-lived assets of approximately $6 million.
5
4. DEBT AND CREDIT FACILITIES
Debt
As of September 30, 2004, we classified $180 million of senior debentures
due in June 2005 as current liabilities. Although we intend to refinance the
senior debentures on a long-term basis, we have not yet entered into a financing
agreement.
Credit Facilities
El Paso maintains a revolving credit facility, with a $1.5 billion letter
of credit sublimit, which matures on June 30, 2005. The 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 revolving credit facility. El Paso liquidated a portion of
the collateral that supported the revolving credit facility, which reduced the
overall borrowing availability from $3 billion to $2.5 billion in October 2004.
We are only liable for amounts we directly borrow under the revolving credit
facility. As of September 30, 2004, there were no borrowings and $1.1 billion in
letters of credit were issued under the revolving credit facility, none of which
were issued on our behalf. See Note 2 for a discussion regarding El Paso's
waivers on the revolving credit facility.
El Paso's equity in several of its subsidiaries, including its equity in
us, collateralizes the revolving credit facility and other financing
arrangements including leases, letters of credit and other credit facilities.
El Paso is in the process of negotiating the refinancing of this facility
as the combination of a three year revolving credit facility and a five year
term loan and currently expects to be successful in this refinancing by December
31, 2004.
Under the 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.
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
6
measured, analyzed, calculated and reported, together with prejudgment and post
judgment 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 in April 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, we believe our current reserves are adequate. As of
September 30, 2004, we had less than $1 million accrued 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 September
30, 2004, we had accrued approximately $13 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 was based on the most likely outcome
that can be reasonably estimated. Below is a reconciliation of our accrued
liability as of September 30, 2004 (in millions):
Balance as of January 1, 2004............................... $14
Additions/adjustments for remediation activities............ 2
Payments for remediation activities......................... (3)
---
Balance as of September 30, 2004............................ $13
===
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.
Natural Buttes. On May 19, 2004, we met with the Environmental Protection
Agency (EPA) to discuss potential "prevention of significant deterioration"
violations of the Clean Air Act due to a de-bottlenecking modification at our
facility. The EPA issued an Administrative Compliance Order and we are in
negotiations with the EPA as to the appropriate penalty.
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 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.
7
Rates and Regulatory Matters
FERC Audit of Capacity Release Transactions. In December 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. In October 2004, we received a final audit report in which
the FERC staff recommended we make some tariff and other changes. We have filed
the tariff changes with the FERC, implemented the other recommendations, and
received FERC approval of our actions. We do not anticipate any material impact
from these changes.
Accounting for Pipeline Assessment Costs. In November 2004, the FERC
issued an industry-wide Proposed Accounting Release that, if enacted as written,
will disallow the capitalization of certain costs that are part of our pipeline
integrity program. The accounting release is proposed to be effective January
2005 following a period of public comment on the release. We are currently
reviewing the release and have not determined what impact this release will have
on our consolidated financial statements.
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.
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. On August 30, 2004, the CFTC announced
they had completed the investigation and found no evidence of wrongdoing.
6. 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 September 30, 2004 and December 31,
2003, we had advanced to El Paso $616 million and $563 million. The interest
rate at September 30, 2004 was 2.7% and at December 31, 2003 was 2.8%. These
receivables are due upon demand; however, as of September 30, 2004 and December
31, 2003, we have classified $610 million and $563 million of these advances as
non-current notes receivable from affiliates because we do not anticipate
settlement of these amounts within the next twelve months. In addition, at
September 30, 2004, the remaining balance of $6 million is included in our
balance sheet as current accounts receivable from affiliates. See Note 2 for a
discussion regarding our participation in the program and the collectibility of
these receivables.
At September 30, 2004 and December 31, 2003, we had other accounts
receivable from affiliates of $1 million. In addition, at September 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 September 30, 2004 and December 31, 2003. These balances arose in the
normal course of business. We also received $5 million and $3 million in
deposits related to our transportation contracts with our affiliates which are
included in our balance sheet as other current liabilities as of September 30,
2004 and December 31, 2003.
In the third quarter of 2004, we acquired assets from our affiliate with a
net book value of $3 million.
8
The following table shows revenues and charges from our affiliates for the
periods ended September 30:
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------
2004 2003 2004 2003
----- ----- ---- ----
(IN MILLIONS)
Revenues from affiliates.................................... $11 $ 8 $27 $23
Operations and maintenance expenses from affiliates......... 14 15 39 50
Reimbursements of operating expenses charged to
affiliates................................................ 3 2 7 7
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 Annual Report on Form
10-K and the financial statements and notes presented in Item 1 of this
Quarterly Report on 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 EBIT to net income.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
2004 2003 2004 2003
------ ------ ------- -------
(IN MILLIONS, EXCEPT VOLUME AMOUNTS)
Operating revenues...................................... $ 64 $ 54 $ 204 $ 204
Operating expenses...................................... (47) (27) (123) (82)
------ ------ ------ ------
Operating income...................................... 17 27 81 122
Other income............................................ -- 1 1 1
------ ------ ------ ------
EBIT.................................................. 17 28 82 123
Interest and debt expense............................... (6) (6) (19) (18)
Affiliated interest income, net......................... 5 3 12 5
Income taxes............................................ (6) (10) (28) (42)
------ ------ ------ ------
Income from continuing operations..................... 10 15 47 68
Discontinued operations, net of income taxes(1)......... -- -- -- 8
------ ------ ------ ------
Net income............................................ $ 10 $ 15 $ 47 $ 76
====== ====== ====== ======
Throughput volumes (BBtu/d)(2).......................... 1,645 1,605 1,721 1,661
====== ====== ====== ======
- ---------------
(1) During 2003, we reclassified our field services business as a discontinued
operation. 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)
Third Quarter 2004 Compared to Third Quarter 2003
The following factors contributed to our overall EBIT decrease of $11
million for the three months ended September 30, 2004 as compared to the same
period in 2003:
REVENUE EXPENSE OTHER EBIT
IMPACT IMPACT IMPACT IMPACT
------- ------- ------ ------
FAVORABLE/(UNFAVORABLE)
(IN MILLIONS)
Fuel recoveries, net of system gas supply costs............. $10 $ (9) $ -- $ 1
Impact of change to regulated depreciation method........... -- (2) -- (2)
Storage facility gas loss replacement in 2004............... -- (5) -- (5)
Increase in overhead costs allocated from affiliates........ -- (2) -- (2)
Other items................................................. -- (2) (1) (3)
--- ---- ------ ----
Total............................................. $10 $(20) $ (1) $(11)
=== ==== ====== ====
Nine Months Ended 2004 Compared to Nine Months Ended 2003
The following factors contributed to our overall EBIT decrease of $41
million, for the nine months ended September 30, 2004 as compared to the same
period in 2003:
REVENUE EXPENSE OTHER EBIT
IMPACT IMPACT IMPACT IMPACT
------- ------- ------ ------
FAVORABLE/(UNFAVORABLE)
(IN)MILLIONS
Fuel recoveries, net of system gas supply costs............. $ 4 $ (6) $ -- $ (2)
Impact of the finalization of rate case settlement in
2003...................................................... (4) -- -- (4)
Impact of Table Rock facility sold in 2003.................. -- (6) -- (6)
Impact of net gas imbalance price revaluation............... -- (4) -- (4)
Impact of change to regulated depreciation method........... -- (7) -- (7)
Environmental reserve accrual in 2004....................... -- (2) -- (2)
Storage facility gas loss replacement in 2004............... -- (6) -- (6)
Increase in overhead costs allocated from affiliates........ -- (2) -- (2)
Other items................................................. -- (8) -- (8)
------ ---- ------ ----
Total............................................. $ -- $(41) $ -- $(41)
====== ==== ====== ====
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.
In November 2004, the FERC issued an industry-wide Proposed Accounting
Release that, if enacted as written, will disallow the capitalization of certain
costs that are part of our pipeline integrity program. The accounting release is
proposed to be effective January 2005 following a period of public comment on
the release. We are currently reviewing the release and have not determined what
impact this release will have on our consolidated financial statements.
AFFILIATED INTEREST INCOME, NET
Third Quarter 2004 Compared to Third Quarter 2003
Affiliated interest income, net for the quarter ended September 30, 2004,
was $2 million higher than the same period in 2003, due to higher average
advances to El Paso under our cash management program in 2004
11
and an increase in short-term interest rates in 2004. The average advance
balance due from El Paso of $565 million for third quarter 2003 increased to
$638 million in 2004. The average short-term interest rates for the third
quarter increased from 1.9% in 2003 to 2.5% during the same period in 2004.
Nine Months Ended 2004 Compared to Nine Months Ended 2003
Affiliated interest income, net for nine months ended September 30, 2004,
was $7 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 $479 million for the nine months of 2003 increased to $602 million in 2004.
The average short-term interest rates increased from 1.6% in 2003 to 2.5% during
the same period in 2004.
INCOME TAXES
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ----- -----
(IN MILLIONS, EXCEPT FOR RATES)
Income taxes................................................ $ 6 $10 $28 $42
Effective tax rate.......................................... 38% 40% 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.
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 as of
September 30, 2004, we had receivables from El Paso of $616 million. Of these
receivables, $610 million were classified as a non-current asset in our balance
sheet because we do not anticipate settlement on this amount within the next
twelve months. We believe that cash flows from operating activities, along with
the current notes receivable from El Paso under the cash management program 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 if demanded. 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 have entered into an agreement with El Paso in which we temporarily
suspended advancing cash to El Paso under its cash management program. We have
$180 million of senior 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, on that date, the maturity of its
revolving credit facility (under which we are a borrower) has not been extended
beyond December 31, 2005.
12
During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and for changes in the manner in which it accounted for certain
derivative contracts, primarily those related to the hedging of its natural gas
production. El Paso believes the restatement of its historical financial
statements would have constituted events of default under its revolving credit
facility, under which we are eligible to borrow, 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. During 2004, El Paso received a
series of waivers on its revolving credit facility and these other financing
transactions to address these issues. These waivers continue to be in effect. El
Paso also received an extension of time from various lenders until November 30,
2004 to file its second quarter 2004 Form 10-Q which it expects to meet. If El
Paso is unable to file its second quarter 2004 Form 10-Q by that date and is not
able to negotiate an additional extension of the filing deadline, its revolving
credit facility and various other financings could be accelerated. As part of
obtaining the waivers, El Paso amended various provisions of the revolving
credit facility, including provisions related to events of default and
limitations on the ability of El Paso, as well as its subsidiaries, to prepay
debt that matures after June 30, 2005. Although we are a party to El Paso's
revolving credit facility, we do not have any borrowings or letters of credit
outstanding under that facility. See Item 1, Financial Statements, Note 4, for a
further discussion of the revolving credit facility and the potential
refinancing of this facility.
Based upon a review of the covenants contained in our long-term debt
agreements, we believe that a default on El Paso's revolving credit facility
would not result in an event of default under our debt agreements.
El Paso's ownership in us serves as collateral under El Paso's 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.
Our cash flows from continuing operations for the nine months ended
September 30 were as follows:
2004 2003
----- -----
(IN MILLIONS)
Cash flows from operating activities........................ $ 95 $150
Cash flows from investing activities........................ (88) (190)
Cash flows from financing activities........................ -- 29
Cash Flows from Operating Activities
Net cash provided by operating activities was $95 million for the first
nine months of 2004 versus $150 million in the same period of 2003. This
decrease is primarily due to lower income in 2004 as discussed in our Results of
Operations above, as well as timing of settlements of assets and liabilities in
2004 versus 2003.
Cash Flows from Investing Activities
Net cash used in investing activities was $88 million for the first nine
months of 2004 and consisted primarily of a $53 million increase in advances to
El Paso under its cash management program as well as capital expenditures.
13
CAPITAL EXPENDITURES
Our capital expenditures for the nine months ended September 30, 2004, were
approximately $33 million. We expect to spend approximately $27 million for the
remainder of 2004 consisting of approximately $4 million to expand the capacity
on our system and $23 million for maintenance capital. We expect to fund capital
expenditures through a combination of internally generated funds and/or by
recovering amounts advanced to El Paso under its cash management program.
COMMITMENTS AND CONTINGENCIES
See Item 1, Financial Statements, Note 5, which is incorporated herein by
reference.
14
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.
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
During 2003, we initiated a project to ensure compliance with Section 404
of the Sarbanes-Oxley Act of 2002 (SOX), which will apply to us at December 31,
2005. This project entailed a detailed review and documentation of the processes
that impact the preparation of our financial statements, an assessment of the
risks that could adversely affect the accurate and timely preparation of those
financial statements, and the identification of the controls in place to
mitigate the risks of untimely or inaccurate preparation of those financial
statements. Following the documentation of these processes, we initiated an
internal review or "walk-through" of these financial processes by the financial
management responsible for those processes to evaluate the design effectiveness
of the controls identified to mitigate the risk of material misstatements
occurring in our financial statements. We also initiated a detailed process to
evaluate the operating effectiveness of our controls over financial reporting.
This process involves testing the controls for effectiveness, including a review
and inspection of the documentary evidence supporting the operation of the
controls on which we are placing reliance. While we have identified areas where
our processes and internal controls can be improved, we have not identified any
deficiencies we believe, individually or in the aggregate, would constitute a
material weakness in our internal controls over financial reporting. As we
continue our SOX 404 compliance efforts, we may identify matters which may need
to be reported or which may constitute material weaknesses in our internal
controls over financial reporting.
We did not make any changes to our internal controls over financial
reporting during the quarter ended September 30, 2004, that have had a material
adverse effect or are reasonably likely to have a material adverse effect on our
internal controls over financial reporting. However, we have made changes to
improve our internal controls during the quarter ended September 30, 2004.
We also undertook a review of our overall disclosure controls and
procedures. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on
our evaluation, we have concluded that our disclosure controls and procedures
were effective at September 30, 2004.
15
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 AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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
- ------- -----------
*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.
16
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: November 12, 2004 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)
Date: November 12, 2004 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting
Officer)
17
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
- ------- -----------
*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.