-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LXOHB5pw4kzw1DJE9OjQpBU7obsfIfm2x5IOEuHLtLIMIpiAWad8ZxIRP/EWhnLB RNDwHR8J3cIhHTdKBcJK4A== 0000950129-99-000910.txt : 19990311 0000950129-99-000910.hdr.sgml : 19990311 ACCESSION NUMBER: 0000950129-99-000910 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EL PASO ENERGY CORP/DE CENTRAL INDEX KEY: 0001066107 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 760568816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14365 FILM NUMBER: 99562159 BUSINESS ADDRESS: STREET 1: 1001 LOUISIANA ST CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7134202131 MAIL ADDRESS: STREET 1: 1001 LOUISIANA ST CITY: HOUSTON STATE: TX ZIP: 77002 10-K405 1 EL PASO ENERGY CORPORATION - DATED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 1-14365 EL PASO ENERGY CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 76-0568816 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) EL PASO ENERGY BUILDING 1001 LOUISIANA STREET HOUSTON, TEXAS 77002 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 420-2131 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, par value $3 per New York Stock Exchange share............................... Preferred Stock Purchase Rights....... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. Aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of March 5, 1999, computed by reference to the closing sale price of the registrant's common stock on the New York Stock Exchange on such date: $4,340,497,918 INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $3 per share. Shares outstanding on March 5, 1999: 120,989,489 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: Portions of El Paso Energy Corporation's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EL PASO ENERGY CORPORATION TABLE OF CONTENTS
CAPTION PAGE ------- ---- Glossary.............................................................. ii PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 14 Item 6. Selected Financial Data..................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 Risk Factors -- Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995... 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 39 Item 8. Financial Statements and Supplementary Data................. 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 78 PART III Item 10. Directors and Executive Officers of the Registrant.......... 78 Item 11. Executive Compensation...................................... 78 Item 12. Security Ownership of a Certain Beneficial Owner and Management................................................ 78 Item 13. Certain Relationships and Related Transactions.............. 78 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 78 Signatures.................................................. 82
i 3 GLOSSARY The following abbreviations, acronyms, or defined terms used in this Form 10-K are defined below: ALJ............................... Administrative Law Judge BBtu(/d).......................... Billion British thermal units (per day) Bcf(/d)........................... Billion cubic feet (per day) Board............................. Board of directors of El Paso Energy Corporation CAPSA............................. Companias Asociadas Petroleras SA, a privately held integrated energy company in Argentina Company........................... El Paso Energy Corporation and its subsidiaries which, on August 1, 1998, became the successor company to El Paso Natural Gas Company Court of Appeals.................. United States Court of Appeals for the District of Columbia Circuit DeepTech.......................... DeepTech International Inc., a wholly owned subsidiary of El Paso Energy Corporation Distributions..................... Various intercompany transfers and distributions which restructured, divided and separated the business, assets and liabilities of Old Tenneco and its subsidiaries so that all the assets, liabilities and operations related to the automotive parts, packaging and administrative services businesses and the shipbuilding business were spun-off to Old Tenneco's then existing common stockholders Dynegy............................ Dynegy Inc., formerly known as NGC Corporation EBIT.............................. Earnings before interest expense and income taxes, excluding affiliated interest income East Tennessee.................... East Tennessee Natural Gas Company, a wholly owned subsidiary of El Paso Tennessee Pipeline Co. Edison............................ Southern California Edison Company EPA............................... United States Environmental Protection Agency EPEC.............................. El Paso Energy Corporation, unless the context otherwise requires EPEI.............................. El Paso Energy International Company, a wholly owned subsidiary of El Paso Tennessee Pipeline Co. EPEM.............................. El Paso Energy Marketing Company, a wholly owned indirect subsidiary of El Paso Tennessee Pipeline Co. EPFS.............................. El Paso Field Services Company, a wholly owned subsidiary of El Paso Tennessee Pipeline Co. EPNG.............................. El Paso Natural Gas Company, a wholly owned subsidiary of El Paso Energy Corporation subsequent to August 1, 1998 EPTPC............................. El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), a direct subsidiary of El Paso Energy Corporation FERC.............................. Federal Energy Regulatory Commission GSR............................... Gas supply realignment IRS............................... Internal Revenue Service Leviathan......................... Leviathan Gas Pipeline Partners, L.P., a publicly held Delaware limited partnership MBbls............................. Thousand barrels Merger............................ The acquisition of El Paso Tennessee Pipeline Co. by El Paso Natural Gas Company in December 1996 Mgal/d............................ Thousand gallons per day Midwestern........................ Midwestern Gas Transmission Company, a wholly owned subsidiary of El Paso Tennessee Pipeline Co.
ii 4 MMcf/d............................ Million cubic feet per day Mdth/d............................ Thousand decatherms per day MPC............................... Mojave Pipeline Company, a wholly owned indirect partnership of El Paso Natural Gas Company MW(s)............................. Megawatt(s) New Tenneco....................... Tenneco Inc., subsequent to the Merger and Distributions, consisting of the automotive parts, packaging and administrative services businesses Old Tenneco....................... Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior to its acquisition by the Company PCB(s)............................ Polychlorinated biphenyl(s) PG&E.............................. Pacific Gas & Electric Company PLN............................... Perusahaan Listrik Negara, the Indonesian government owned electric utility Program........................... Continuous Odd-Lot Stock Sales Program PRP(s)............................ Potentially Responsible Party(ies) SFAS.............................. Statement of Financial Accounting Standards SoCal............................. Southern California Gas Company TGP............................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of El Paso Tennessee Pipeline Co.
iii 5 PART I ITEM 1. BUSINESS GENERAL On August 1, 1998, EPEC succeeded EPNG as the publicly traded parent corporation in a holding company reorganization. In the reorganization, EPNG, a Delaware corporation formed in 1928, and its subsidiaries became direct and indirect subsidiaries of the Company. EPEC, also a Delaware corporation, was incorporated in 1998. The New York Stock Exchange ticker symbol used by EPEC following the reorganization remains unchanged as "EPG." The Company's principal operations include the interstate and intrastate transportation, gathering and processing of natural gas; the marketing of natural gas, power, and other commodities; and the development and operation of energy infrastructure facilities worldwide. The Company owns or has interests in over 28,000 miles of interstate and intrastate pipeline connecting the nation's principal natural gas supply regions to the four largest consuming regions in the United States, namely the Gulf Coast, California, the Northeast and the Midwest. The Company's natural gas transmission operations include one of the nation's largest mainline natural gas transmission systems which is comprised of five interstate pipeline systems: the El Paso Natural Gas pipeline, the Tennessee Gas pipeline, the Midwestern Gas Transmission pipeline, the East Tennessee Natural Gas pipeline, and the Mojave Pipeline. In addition to its interstate transmission services, the Company provides related services, including natural gas gathering, products extraction, dehydration, purification, compression, and intrastate transmission. These services include gathering of natural gas from more than 10,000 natural gas wells with approximately 11,000 miles of gathering lines, and 23 natural gas processing and treating facilities located in some of the most prolific and active production areas of the United States, including the San Juan and Permian Basins and in east Texas, south Texas, Louisiana, and the Gulf of Mexico. The Company conducts intrastate transmission operations through its interests in four Texas intrastate systems, which include the Oasis Pipeline running from west Texas to Katy, Texas, the Channel Pipeline extending from south Texas to the Houston Ship Channel, and the Shoreline and Tomcat gathering systems which gather gas from offshore Texas. The Company's marketing activities include the marketing and trading of natural gas, power, and petroleum products, as well as providing integrated price risk management services associated with these commodities. The Company also participates in the development and ownership of domestic power generation facilities, and other power-related assets and joint ventures. The Company's international activities focus on the development and operation of international energy infrastructure projects and include ownership interests in three major operating natural gas transmission systems in Australia and natural gas transmission systems and power generation facilities currently in operation or under construction in Argentina, Bolivia, Brazil, Chile, the Czech Republic, Hungary, Indonesia, Mexico, Pakistan, Peru, the United Kingdom, Bangladesh, the Philippines and China. The Company also has an interest in three operating domestic power generation plants. In August 1998, the Company completed the acquisition of DeepTech by merging DeepTech with a subsidiary of the Company. As a result of the acquisition, the Company owns 100 percent of the general partner of Leviathan, and a 27.3 percent effective ownership interest in Leviathan, with the remaining interest held publicly. The acquisition was accounted for as a purchase with a total purchase price of approximately $422 million, net of cash acquired. Leviathan is the largest independent gatherer of natural gas in the Gulf of Mexico and owns interests in pipeline systems which transported an average of approximately 3.1 Bcf/d in 1998. These pipeline systems serve a large portion of the outer continental shelf and provide access to the prolific deepwater trend of the Gulf of Mexico. Leviathan has ownership interests in the High Island Offshore system, the U-T Offshore system, the Stingray Pipeline system, the Nautilus/Manta Ray Offshore system, the Viosca Knoll Gathering system and the Poseidon Oil Pipeline system. 1 6 In December 1996, the Company completed its $4 billion acquisition of EPTPC in a transaction accounted for as a purchase. In the Merger, Old Tenneco changed its name to EPTPC. Prior to the Merger, Old Tenneco and its subsidiaries effected various intercompany transfers and restructurings so that in the Distributions all the assets, liabilities and operations related to their automotive parts, packaging, and administrative services businesses (collectively, the "Industrial Business") and their shipbuilding business (the "Shipbuilding Business") were spun-off to Old Tenneco's then existing common stockholders. Following the Distributions, EPTPC's business consisted principally of the regulated energy operations, including the interstate transportation of natural gas, as well as non-regulated energy operations such as gas marketing, intrastate pipelines, international pipelines and power generation, and domestic power generation. This acquisition created the nation's first coast-to-coast natural gas pipeline system and furthered the Company's efforts to expand its presence in non-regulated portions of the energy industry. EPEC owns 100 percent of the common equity and greater than 80 percent of the combined equity value of EPTPC. The remaining combined equity of EPTPC consists of $300 million of preferred stock issued in a public offering by Old Tenneco in November 1996, which remains outstanding. For a further discussion of these acquisitions, see Item 8, Financial Statements and Supplementary Data, Note 2. SEGMENTS Beginning in 1998, the Company segregated its business activities into five segments: Tennessee Gas Pipeline segment, El Paso Natural Gas segment, El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso Energy International segment. These segments are strategic business units that offer a variety of different energy products and services. They are managed separately, as each business unit requires different technology and marketing strategies. For information relating to operating revenues, operating income, EBIT, and identifiable assets attributable to each segment, see Item 8, Financial Statements and Supplementary Data, Note 13. Set forth below is a description of the principal business activities conducted by each of the Company's segments:
Tennessee Gas Pipeline Provides interstate natural gas pipeline transportation to the northeast, midwest and mid-Atlantic sections of the U.S., including the states of Tennessee and Virginia as well as the New York City, Chicago and Boston metropolitan areas. Such transportation is conducted through the interstate pipeline systems of TGP, Midwestern and East Tennessee. El Paso Natural Gas Provides interstate natural gas pipeline transportation primarily to the California market. Such transportation is conducted by the EPNG and MPC interstate pipeline systems. El Paso Field Services Provides natural gas gathering, products extraction, dehydration, purification, compression and intrastate natural gas transmission services. El Paso Energy Marketing Markets and trades natural gas, power and petroleum products and provides integrated risk management services. El Paso Energy International Develops and operates energy infrastructure facilities worldwide.
In addition, the Company participates in the development and ownership of domestic power generation projects. 2 7 TENNESSEE GAS PIPELINE The TGP system. The TGP system consists of approximately 14,700 miles of pipeline with a design capacity of 5,512 MMcf/d. During 1998, TGP transported natural gas volumes averaging approximately 80 percent of its capacity. The TGP system serves the northeast section of the U.S., including the New York City and Boston metropolitan areas. The multiple-line system begins in the gas-producing regions of south Texas and Louisiana, including the Gulf of Mexico. The Midwestern system. The Midwestern system consists of approximately 400 miles of pipeline with a design capacity of 785 MMcf/d. During 1998, Midwestern transported natural gas volumes averaging approximately 35 percent of its capacity. The Midwestern system extends from a connection with the TGP system at Portland, Tennessee, to Chicago and principally serves the Chicago metropolitan area. The East Tennessee system. The East Tennessee system consists of approximately 1,100 miles of pipeline with a design capacity of 675 MMcf/d. During 1998, East Tennessee transported natural gas volumes averaging approximately 45 percent of its capacity. The East Tennessee system serves the states of Tennessee, Virginia and Georgia and connects with the TGP system in Springfield and Lobelville, Tennessee. Other. The Company increased its ownership interest in the Portland Natural Gas Transmission ("Portland") system from 17.8 percent to approximately 19 percent in April 1998. Portland is a 292-mile interstate natural gas pipeline with initial capacity of 178 MMcf/d extending from the Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. In April 1998, Portland secured $256 million in non-recourse project financing. Construction started in June 1998, with an estimated total cost of $423 million. Portland commenced commercial operations in March of 1999. From time to time, the Company holds open seasons in an effort to capitalize on pipeline expansion opportunities. Currently, TGP has completed an open season for the Eastern Express Project 2000 to provide gas transportation for the growing markets in the northeast. As a result, TGP will be filing an application before FERC for the expansion in the first quarter of 1999 to begin service in 2000. TGP has also filed an application with FERC to construct an international border crossing at Reynosa, Tamaulipas, Mexico, and interconnect with Pemex Gas y Petroquimica Basica, a Mexican state-owned company ("Pemex") to provide the import of gas from Mexico. The border crossing service is expected to begin in 1999. EL PASO NATURAL GAS The EPNG system. The EPNG system consists of approximately 9,800 miles of pipeline with a design capacity of 4,744 MMcf/d. During 1998, EPNG transported natural gas volumes averaging approximately 77 percent of its capacity. The EPNG system serves California, which is its single largest market, and also serves markets in Nevada, Arizona, New Mexico, Texas, Oklahoma, and northern Mexico. The EPNG system delivers natural gas from the San Juan Basin of northern New Mexico and southern Colorado, and also accesses natural gas supplies in the Permian and Anadarko Basins of West Texas. The MPC system. The MPC system consists of approximately 400 miles of pipeline with a design capacity of approximately 400 MMcf/d. During 1998, MPC transported natural gas volumes averaging approximately 81 percent of its capacity. The MPC system is connected with the EPNG transmission system at Topock, Arizona and Kern River Gas Transmission Company in California and extends to customers in the vicinity of Bakersfield, California. REGULATORY ENVIRONMENT The interstate systems are subject to the jurisdiction of FERC in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Industry Restructuring. In the mid-1980s, FERC initiated a series of actions which ultimately had the effect of substantially removing interstate pipelines from the gas purchase and resale business and confining their role to transportation of gas owned by others. In Order No. 436, issued in 1985, FERC began this transition by requiring interstate pipelines to provide non-discriminatory access to their facilities for all 3 8 transporters of natural gas. This requirement enabled consumers to purchase their own gas and have it transported on the interstate pipeline system, rather than purchase gas from the pipelines. The transition was completed with Order No. 636, issued in 1992, in which FERC required all interstate pipelines to "unbundle" their sales and transportation services so that the transportation services they provided to third parties would be "comparable" to the transportation services provided to gas owned by the pipeline. FERC's stated purpose was to ensure that the pipelines' monopoly over the transportation of natural gas did not distort the competition in the gas producer sales market, which had, by then, been essentially deregulated. One of the obstacles to this transition was the existence of long-term gas purchase contracts between pipelines and producers which required the pipelines to take or pay for a significant percentage of the gas the producer was capable of delivering. While FERC did not deal with this issue initially, it eventually adopted rate recovery procedures which facilitated negotiations between pipelines and producers to address take-or-pay issues. Such procedures were established in Order Nos. 500, 528 and 636, in the last of which FERC provided that pipelines could recover 100 percent of the costs prudently incurred to terminate their gas purchase obligations. In July 1996, the Court of Appeals issued its decision upholding, in large part, Order No. 636. TGP. In December 1994, TGP filed for a general rate increase with FERC and in October 1996, FERC approved the settlement resolving that proceeding. The settlement included a structural rate design change that resulted in a larger portion of TGP's transportation revenues being dependent upon throughput. One party, a competitor of TGP, filed a petition for review of the FERC orders with the Court of Appeals. The Court of Appeals remanded the case to FERC to respond to the competitor's argument that TGP's cost allocation methodology deterred the development of market centers (centralized locations where buyers and sellers can physically exchange gas) and, at FERC's request, comments were filed in January 1999. EPNG. In June 1995, EPNG filed with FERC for approval of new system rates for mainline transportation to be effective January 1, 1996. In March 1996, EPNG filed a comprehensive offer of settlement to resolve that proceeding as well as issues surrounding certain contract reductions and expirations that were to occur from January 1, 1996 through December 31, 1997. In April 1997, FERC approved EPNG's settlement as filed and determined that only the contesting party, Edison, should be severed for separate determination of the rates it directly pays EPNG. In July 1997, FERC issued an order denying requests for rehearing of the April 1997 order, and the settlement was implemented effective July 1, 1997. Hearings to determine Edison's rates were completed in May 1998, and an initial decision was issued by the presiding ALJ in July 1998. EPNG and Edison have filed exceptions to the decision with FERC. If the ALJ's decision is affirmed by FERC, EPNG believes that the resulting rates to Edison would be such that no significant, if any, refunds in excess of the amounts reserved would be required. Pending the final outcome, Edison continues to pay the filed rates, subject to refund, and EPNG continues to provide a reserve for such potential refunds. Edison filed with the Court of Appeals a petition for review of FERC's April 1997 and July 1997 orders, in which it challenged the propriety of FERC's approving the settlement over Edison's objections to the settlement in its capacity as a customer of SoCal. In December 1998, the Court of Appeals issued its decision vacating and remanding FERC's order. EPNG will file a motion with FERC proposing procedures for FERC to address deficiencies which the Court of Appeals found in FERC's earlier orders. EPNG cannot predict the outcome with certainty but it believes that FERC will ultimately approve the settlement. For a further discussion of regulatory matters related to TGP and EPNG, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. MARKETS AND COMPETITION The Interstate Systems face varying degrees of competition from alternative energy sources, such as electricity, hydroelectric power, coal, and fuel oil. The potential consequences of proposed and ongoing restructuring and deregulation of the electric power industry are currently unclear. It may benefit the natural gas industry by creating more demand for natural gas turbine generated electric power, or it may hamper demand by allowing more effective use of surplus electric capacity through increased wheeling as a result of open access. At this time, the Company is not projecting a significant change in natural gas demand as a result of such restructuring. 4 9 The TGP System. Customers of TGP include natural gas producers, marketers and end-users, as well as other gas transmission and distribution companies, none of which individually represents more than 10 percent of the revenues on TGP's system. Substantially all of the revenues of TGP are generated under long-term natural gas transmission contracts. Contracts representing approximately 70 percent of TGP's firm transportation capacity will be expiring over the next two years, principally in November 2000. Although TGP cannot predict how much capacity will be resubscribed, a majority of the expiring contracts cover service to northeastern markets, where there is currently little excess capacity. Several projects, however, have been proposed to deliver incremental volumes to these markets. Although TGP is actively pursuing the renegotiation, extension and/or replacement of these contracts, TGP cannot give any assurance that it will be able to extend or replace these contracts (or a substantial portion thereof) or that the terms of any renegotiated contracts will be as favorable to TGP as the existing contracts. In a number of key markets, TGP faces competitive pressure from other major pipeline systems, enabling local distribution companies and end-users to choose a supplier or switch suppliers based on the short-term price of natural gas and the cost of transportation. Competition among pipelines is particularly intense in TGP's supply areas, Louisiana and Texas. In some instances, TGP has had to discount its transportation rates in order to maintain market share. The renegotiation of TGP's expiring contracts may be adversely affected by the foregoing competitive factors. The EPNG System. EPNG faces significant competition from three other companies -- Transwestern Pipeline Company, Kern River Gas Transmission Company, and PG&E -- all of which transport natural gas to the California market. The combined capacity of these three companies and EPNG to the California market is approximately 6.9 Bcf/d. In 1998, the demand for interstate pipeline capacity to California averaged 5.1 Bcf/d. Competition generally occurs on the basis of the delivered cost of natural gas, including transportation costs, into the SoCal and PG&E distribution systems. In addition to being the principal transporter to certain markets east of California, EPNG maintains a significant competitive position in the California market because its pipeline is currently the lowest-cost transporter of, and the principal means of moving, natural gas from the San Juan Basin to the California border. EPNG's current capacity to deliver natural gas to California is approximately 3.3 Bcf/d, equivalent to approximately 48 percent of the total interstate pipeline capacity serving that state. Natural gas shipped to California across the EPNG System represented approximately 33 percent of the natural gas consumed in the state in 1998. The significant customers served by EPNG in California during 1998 include SoCal, with capacity of 1,150 MMcf/d under contract until August 2006, and Dynegy, with capacity of 1,311 MMcf/d under contract until December 1999. Interstate pipeline capacity utilization to California is currently approximately 74 percent and is not expected to reach 100 percent until sometime in the next decade, assuming no new interstate pipeline construction. Currently, EPNG has firm transportation contracts covering all of its available capacity to California. As a part of its effort to remarket capacity relinquished by PG&E at the end of 1997, EPNG entered into three contracts with Dynegy for the sale of all of its then available firm capacity for a two-year period beginning January 1, 1998 at rates negotiated pursuant to EPNG's tariff provisions and FERC policies. For a further discussion of capacity relinquishments, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. EL PASO FIELD SERVICES EPFS was formed for the purpose of owning, operating, acquiring and constructing natural gas gathering, processing and other related facilities. Effective January 1, 1996, EPNG transferred its non-regulated assets to EPFS. These assets included major natural gas gathering systems in the San Juan and Permian Basins. From this initial asset base, EPFS began to implement plans to increase natural gas gathering and processing volumes through a strategy of project development, acquisitions, and joint ventures. EPFS provides its customers with wellhead-to-mainline field services, including natural gas gathering and transportation, products extraction, dehydration, purification and compression. EPFS also provides intrastate natural gas transmission services. EPFS, together with EPEM, provides fully bundled natural gas services with a broad range of pricing options as well as financial risk management products. EPFS also provides well-ties 5 10 and offers real-time information services, including electronic wellhead gas flow measurement. EPFS services are provided under a variety of fee structures including fixed fee per decatherm, floating fee per decatherm indexed to the applicable local area price of gas, or percentage of products sold. In August 1998, the Company completed the acquisition of DeepTech by merging it with a subsidiary of EPEC. DeepTech's assets included a combined 27.3 percent ownership interest in Leviathan, a publicly traded master limited partnership. The acquisition, valued at approximately $422 million, net of cash acquired, was accounted for as a purchase. The Leviathan assets include interests in eight natural gas pipeline systems with 1,167 miles of pipeline capable of moving 6.5 Bcf/d, 316 miles of crude oil pipelines, five multi-purpose platforms with processing capabilities, and four producing oil and gas properties. Additionally, in August 1998, the Company completed the expansion of the Coyote Gulch Treating Plant which increased capacity from 120 MMcf/d to 240 MMcf/d, providing an additional outlet for coal seam gas production in southwestern Colorado. In September 1998, the Company completed the Global Compression project, a $45 million capital investment that consists of 40,000 horsepower of compression, gas dehydration facilities, and 54 miles of pipeline looping. The project lowered wellhead pressures and increased production rates for 70 percent of the wells from which EPFS gathers in the San Juan Basin. In September 1998, EPFS sold its natural gas gathering, treating, and processing assets in the Anadarko Basin to Midcoast Energy Resources, Inc. for $35 million. The following table provides information as of December 31, 1998, concerning the natural gas gathering and transportation facilities, as well as natural gas gathered/transported for the three years ended December 31:
AVERAGE THROUGHPUT MILES THROUGHPUT (BBTU/D) OF CAPACITY --------------------- GATHERING & TREATING PIPELINE(1) (MMCF/D)(2) 1998 1997 1996 -------------------- ----------- ----------- ----- ----- ----- Western Division...................... 5,555 1,200 1,191 1,167 1,139 Eastern Division...................... 955 910 282 252 149 Central Division...................... 1,266 933 427 408 373 Offshore Division..................... 410 2,040 780 314 -- Joint Owned Division.................. 750 900 564 6 --
The following table provides information concerning the processing facilities for the three years ended December 31:
AVG INLET VOLUME AVERAGE NGLS SALES (BBTU/D) (MGAL/D) INLET ------------------ ------------------ PROCESSING PLANTS CAPACITY(2) 1998 1997 1996 1998 1997 1996 ----------------- ----------- ---- ---- ---- ---- ---- ---- Western Division..................... 600 586 551 557 370 505 352 Eastern Division..................... 207 109 126 75 275 229 115 Central Division..................... 278 269 58 19 208 94 39 Joint Owned Division................. 199 51 102 -- 74 167 --
6 11 The following table provides information concerning natural gas gathering and transportation facilities in which EPFS owns a minority interest and accounts for under the equity method:
AVERAGE AVERAGE THROUGHPUT THROUGHPUT THROUGHPUT PERCENT OF MILES THROUGHPUT (BBTU/D) CAPACITY MBBLS OWNERSHIP OF CAPACITY ------------------- MBBLS OIL OIL/D INTEREST PIPELINE(1) (MMCF/D)(2) 1998(3) 1997(4) PER DAY(2) 1998(3) ---------- ----------- ----------- -------- -------- ---------- ---------- Leviathan............ 27.3 1,358 1,198 593 -- 58 17 Oasis................ 35.0 608 350 289 338 -- -- Coyote Gulch......... 50.0 -- 120 69 42 -- -- Viosca Knoll......... 50.0 125 500 287 205 -- --
- ------------ (1) Mileage amounts are approximate for the total systems and have not been reduced to reflect EPFS's net ownership. (2) All capacity information reflects EPFS's net interest and is subject to increases or decreases depending on operating pressures and point of delivery into or out of the system. (3) Throughput for Leviathan is averaged since its acquisition on August 14, 1998. (4) Throughput for Oasis was in El Paso Energy Marketing segment in 1997. In January 1999, the Company and Leviathan entered into an agreement where the Company will sell, for approximately $85 million, all of its interest in Viosca Knoll Gathering Company to Leviathan except for a 1 percent interest in profits and capital. The transaction was approved by Leviathan's board of directors in January 1999, and at a special meeting held March 5, 1999, the Leviathan unitholders approved an increase in the authorized number of common units required to complete the acquisition. The transaction is expected to close in the second quarter of 1999. As a result of this transaction, the Company's combined ownership interest in Leviathan will increase to approximately 35 percent. Competition EPFS operates in a highly competitive environment that includes independent natural gas gathering and processing companies, intrastate pipeline companies, natural gas marketers, and oil and gas producers. EPFS competes for throughput primarily based on price, efficiency of facilities, gathering system line pressures, availability of facilities near drilling activity, service, and access to favorable downstream markets. EL PASO ENERGY MARKETING EPEM, the Company's merchant services and trading business, utilizes its extensive knowledge of the marketplace, natural gas pipeline and power transmission infrastructure, supply aggregation, transportation management and valuation, storage and integrated price risk management to provide customers with flexible solutions to meet their energy supply and financial risk management requirements. EPEM markets and trades natural gas, power, and petroleum products in the United States, Canada and Mexico. EPEM has emerged as one of North America's largest energy marketing and trading companies. EPEM contracts to purchase specific natural gas volumes from suppliers at various times and points of receipt, arranges for the aggregation and transportation of such natural gas, and negotiates the sale of these volumes to utilities (including local distribution companies and power plants), municipalities, and a variety of industrial and commercial end users. EPEM seeks to maintain a balanced portfolio of supply and demand contracts and a diverse natural gas supplier and customer base. During 1998, it served over 400 producers/suppliers and approximately 2,000 sales customers in 26 states and shipped natural gas supplies on 65 pipelines. EPEM utilizes a broad range of risk management instruments to manage its fixed-price purchase and sales commitments and reduce its exposure to market price volatility. EPEM trades futures contracts and options on the New York Mercantile Exchange and trades swaps and options in over-the-counter financial markets with other major energy merchants. Market risks are managed on a portfolio basis, subject to parameters established by a risk control committee that operates independently from commercial operations 7 12 and reports directly to the Board. Market risk in EPEM's commodity derivative portfolio is measured on a daily basis utilizing a Value-at-Risk (VAR) model to determine the maximum potential one-day unfavorable impact on its earnings. For additional information regarding the use of financial instruments, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Item 8, Financial Statements and Supplementary Data, Note 5. Set forth below are the marketed gas, power and petroleum volumes for the years ended December 31:
1998 1997 1996(1) ------ ------ ------- Natural gas volumes marketed (Bbtu/d)(2)................... 11,540 6,969 4,568 Power volumes marketed (Thousand MW hours)................. 44,677 12,969 3,878 Petroleum volumes marketed (MBbls per year)(2)............. 21,717 80,641 54,913
- --------------- (1) Average daily volumes for the gas marketing activities of EPTPC, acquired in December 1996, are reflected from the date of acquisition in 1996 and for the full year of 1997 and 1998. (2) Includes financial trades. Competition EPEM operates in a highly competitive environment. Its primary competitors include: (i) marketing affiliates of major oil and gas producers; (ii) marketing affiliates of large local distribution companies; (iii) marketing affiliates of other interstate and intrastate pipelines; and (iv) independent energy marketers with varying scopes of operations and financial resources. EPEM competes on the basis of price, access to production, understanding of pipeline and transmission networks, imbalance management, and experience in the marketplace. EL PASO ENERGY INTERNATIONAL EPEI was formed for the purpose of investing in integrated energy projects with an emphasis on developing infrastructure to gather, transport and use natural gas in northern Mexico and certain Latin American countries. With the combination of EPTPC's international activities, the focus of international project pursuit has expanded to include power generation and to include investments located in Australia, Asia, Europe and other Latin American countries. Set forth below are brief descriptions, by region, of the projects that are either operational or in various stages of development. Acquisitions and greenfield development projects are subject to a higher level of commercial and financial risk in foreign countries. Accordingly, EPEI has adopted a risk mitigation strategy to reduce risks to more acceptable and manageable levels. EPEI's practice is to select experienced partners with a history of success in commercial operations. Individual partners are generally chosen based on the complementary competencies which they offer to the various joint ventures formed or to be formed. EPEI designs and implements a formal due diligence plan on every project it pursues, and contracts are negotiated to secure fuel supply, manage operating and maintenance costs and, when possible, index revenues and denominate transactions in U.S. dollars. EPEI also obtains political risk insurance when deemed appropriate, through the Overseas Private Investment Corporation, the Multilateral Investment Guarantee Agency, or a private insurer. Latin America and Mexico Samalayuca Power Project -- The Company owns a 30 percent interest in a 700 MW combined cycle gas fired power plant in Samalayuca, Mexico. The first, second, and third units commenced commercial operations in May, September, and December 1998, respectively. Comision Federal de Electricidad, the Mexican government-owned electric utility ("CFE") operates the plant under a 20-year lease. Upon expiration of the lease term, ownership of the plant will be transferred to CFE. Samalayuca Pipeline -- This 45-mile 212 MMcf/d pipeline system commenced gas deliveries in December 1997. The pipeline delivers natural gas to the Samalayuca Power Project from EPNG's existing pipeline system in West Texas and Pemex's pipeline system in northern Mexico. This system consists of 8 13 22 miles of pipeline in the U.S. (currently owned by EPNG) and 23 miles of pipeline in Mexico (currently 50 percent owned by the Company). Aguaytia Project -- The Company owns a 24 percent interest in an integrated natural gas and power generation project near Pucallpa, located in central Peru. The project consists of a 302 Bcf natural gas field, a natural gas processing facility, a 71-mile natural gas liquids pipeline to a fractionation facility, a 126-mile natural gas pipeline to a 155 MW simple cycle power plant, and a 250-mile 220 KV power transmission line interconnecting with the Peruvian grid at Paramonga. The project began operations in July 1998. CAPSA -- The Company has an effective 45 percent interest in CAPSA, a privately held integrated energy company in Argentina. CAPSA was incorporated in 1977 for the purpose of producing, selling and exploring for liquid hydrocarbons. CAPSA's assets include a 100 percent ownership interest in the Diadema Oil Field and a 55 percent ownership interest in CAPEX, a publicly traded company on the Argentine and Luxembourg stock exchanges that owns the 382 MW (currently being expanded to 650 MW) Agua del Cajon gas fired power plant in western Argentina. This plant has been fully operational since 1995 and buys natural gas from CAPEX's Agua del Cajon gas field. CAPEX also owns a 24 percent interest in the 76 MW Energia del Sur gas fired power plant in southern Argentina. Triunion Energy Company -- In January 1998, the Company, CAPEX and InterEnergy formed a new development company named Triunion Energy Company ("Triunion Energy") to identify and develop new energy related projects in Latin America. Triunion Energy currently owns a 20 percent interest in an exploration and production project in Charagua, Bolivia, as well as a 22 percent interest in an approved project to build a $380 million, 325 mile, natural gas pipeline that will cross the Andes Mountains connecting natural gas production in Argentina's Neuquen Basin to customers in Concepcion, Chile. Construction of the pipeline commenced in early 1998 and is expected to be completed in late 1999. Manaus Power Project -- The Company owns 100 percent of a 250 MW power plant in Manaus, the capital city of the state of Amazonas in northern Brazil. Power from the plant is currently sold under a four-year contract to Electronorte, the local electric company. The first phase of the project commenced operations in February 1998. The second phase commenced operations in March 1998 and the third phase commenced operations in June 1998. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion of the Manaus power project. Bolivia to Brazil Pipeline -- The Company is part of a consortium that is constructing a 2,000 mile pipeline from Santa Cruz, Bolivia to Sao Paulo, Brazil, with a southern lateral to Porto Alegre, Brazil. The pipeline will transport natural gas to the largest unserved market in the western hemisphere (approximately 100 million people). The pipeline is expected to be in service in early 1999. The Company's interest in the project is approximately 8 percent. Parana Power Project -- The Company has an approximate 30 percent interest in a consortium to build a 480 MW natural gas fired power plant in the state of Parana, in southern Brazil. The power plant will be located in Araucaria, Brazil. The electricity will be purchased by Companhia Paranaense de Energia, an integrated electric utility providing generation, transmission, and distribution of electricity to all regions of the state of Parana. The plant will be fueled by natural gas provided from the Bolivia to Brazil pipeline. Final negotiation and signing of a power purchase agreement will take place in early 1999 with financial close expected in the fourth quarter of 1999. Commercial operations are expected to commence in late 2000. Costanera -- In July 1998, the Company acquired 100 percent of KLT Power, Inc., the international business unit of Kansas City Power and Light Company. KLT Power, was established in 1993, to develop, finance, own, and operate independent power projects in selected markets worldwide. KLT Power owns a 12 percent interest in Central Costanera, the largest thermal-power plant in Argentina consisting of 2,167 MW of power generation and a 7.8 percent interest in Central Termoelectrica Buenos Aires, S.A., a 328 MW combined cycle power plant in Buenos Aires. 9 14 Europe EMA Power -- The Company owns a 50 percent controlling interest in a 70 MW power plant located in Dunaujvaros, Hungary. The electricity generated at the plant is consumed by Dunaferr Kft., the largest steel mill in Hungary. Approval has been given to expand the capacity of the electric generating plant to 140 MW and construction is scheduled to commence in late 1999. Kladno Power -- In May 1997, the Company acquired a 31 percent interest in a 338 MW natural gas and coal fired expansion and upgrade of an existing 25 MW cogeneration facility located approximately 19 miles northwest of Prague, in the Czech Republic. The Company sold a 13 percent interest in the project to one of the original partners under a buy back option granted by the Company in June 1997. The Company expects to purchase a similar amount in 1999 from another partner under a similar option agreement. Non-recourse project financing was finalized in June 1997, and commercial operations are expected to commence in the fourth quarter of 1999. Fife Power -- In September 1998, the Company acquired a 50 percent interest in the first Scottish independent power project located in Fife. The existing plant consists of a simple cycle natural gas fired turbine generating 75 MW, which commenced operations in the fourth quarter of 1998. Under Phase II, a steam turbine will be added to produce a total combined-cycle generating capacity of 115 MW. Financial close for Phase II is expected to occur in early 1999, and commercial operation is expected to commence in early 2001. Enfield -- In December 1998, the Company acquired a 25 percent interest in Enfield Energy Center Limited. The 396 MW combined cycle natural gas turbine power plant is under construction near London, England and is expected to be operational by October 1999. Asia Pacific Australian Pipelines -- The Company owns a 30 percent interest in the Moomba to Adelaide pipeline system, a 488-mile natural gas pipeline in southern Australia and the Ballera to Wallumbilla pipeline system, a 470-mile natural gas pipeline in southwestern Queensland. In March 1998, the Company, through its 33.3 percent interest in Epic Energy (WA) Pipeline Trust venture, purchased the 925-mile Dampier-to-Bunbury natural gas pipeline in western Australia. This 550 MMcf/d pipeline system serves a number of western Australian markets, including industrial end-users. An expansion of the Dampier-to-Bunbury pipeline is currently underway to supply additional natural gas to Alcoa, Worsley and Wesfarmers. The expansion, scheduled for completion in fourth quarter of 1999, will expand the pipeline capacity to 635 MMcf/d. Sengkang Project -- The Company has a 50 percent interest in a producing natural gas field with proven reserves of 533 Bcf and a 47.5 percent interest in a 135 MW power plant in Sengkang, South Sulawesi, Indonesia. The electricity produced by the power plant is sold to PLN, the national electric utility, under a long-term power purchase agreement. The power plant began simple cycle commercial operation in September 1997, making it one of the first independent power plants to operate in Indonesia. Combined cycle completion was in September 1998. For a discussion related to the effects on the project of the devaluation of the Indonesian rupiah, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Kabirwala Power -- The Company owns a 42 percent interest in a 151 MW natural gas fired power plant currently under construction in Kabirwala, Pakistan. Commercial operation is expected to commence in the second quarter of 1999. The power plant will sell electricity to the State Water and Power Development Authority. Haripur -- The Company owns a 50 percent interest in a consortium formed to construct a 115 MW oil and gas-fired power generation facility in Haripur, Bangladesh. The plant will sell power to the Bangladesh Power Development Board under a 15-year power purchase agreement. The plant is expected to be in service by the end of May 1999. 10 15 East Asia Power -- In 1998, the Company executed agreements to acquire a 46 percent interest in East Asia Power Resources Corporation ("EAPRC"), a publicly traded company in the Philippines. EAPRC owns and operates three power generation facilities in the Philippines and owns an interest in one power generation facility in China, with a total generating capacity of 289 MW. EAPRC also has options to acquire two additional power generation facilities in the Philippines with an aggregate generating capacity of 123 MW. Electric power generated by the facilities is supplied to a diversified base of customers including NPC, the state-owned utility, private distribution companies and industrial users. This acquisition was completed in February 1999. Other Projects The Company owns interests in three operating domestic power generation plants consisting of a 17.5 percent interest in a 240 MW power plant in Springfield, Massachusetts and a 50 percent interest in two additional cogeneration projects in Florida with a combined generating capacity of 220 MW. CORPORATE AND OTHER OPERATIONS In February 1998, El Paso Power Services ("EPPS") was formed to manage, acquire, and develop power-related assets and joint ventures. EPPS participates in the development, construction, and operation of domestic power generation projects as well as provides restructuring services to electric utilities, non-utility and merchant generators, fuel suppliers, and large industrial concerns to achieve lower costs in the transition to a more competitive business environment. EPPS has a 56 percent interest in a 270 MW natural gas-fired combined cycle power generation facility under construction in Agawam, Massachusetts ("Berkshire") which is expected to commence commercial operation in December 1999. Berkshire has entered into a fuel management agreement to purchase all natural gas and fuel oil used to operate the facility at market rates from EPEM through December 2019. In addition, Berkshire has entered into a power marketing agreement to sell all power produced by the facility to EPPS at market rates through December 2019. In December 1998, EPPS purchased a 100 percent interest in a 150 MW natural gas-fired combined cycle electric generation facility in Brush, Colorado ("Brush I"). Brush I consists of two natural gas turbines, which currently operate alternately, and a steam turbine. The gas and steam turbines together generate electricity and provide radiant heating for a greenhouse complex. During 1998, EPPS activities were included with Corporate operations. As EPPS operations increase, they may be reported as a separate business segment or combined with El Paso Energy Marketing segment. As a result of the Merger, the Company holds certain limited assets and is responsible for certain liabilities of EPTPC's existing and discontinued operations and businesses. In addition, the Company, through its corporate and other segment, performs management, legal, financial, tax, consultative, administrative and other services for the operating business segments of the Company. ENVIRONMENTAL A description of the Company's environmental activities is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated by reference herein. EMPLOYEES The Company had approximately 3,600 full-time employees on December 31, 1998. The Company has no collective bargaining arrangements and no significant changes in the workforce have occurred since December 31, 1998. During 1997, the Company reduced its workforce by approximately 800 employees as a result of a program to streamline operations and reduce operating costs in connection with the acquisition of EPTPC. 11 16 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of EPEC as of March 10, 1999, are set forth below. For dates prior to August 1, 1998 (the date of the holding company reorganization), references to positions held with EPEC refer instead to positions held with EPNG.
OFFICER NAME OFFICE SINCE AGE ---- ------ ------- --- William A. Wise.............. Chairman of the Board, President, and Chief 1983 53 Executive Officer of EPEC H. Brent Austin.............. Executive Vice President and Chief Financial 1992 44 Officer of EPEC Joel Richards III............ Executive Vice President of EPEC 1990 52 Britton White, Jr............ Executive Vice President and General Counsel 1991 55 of EPEC Mark A. Searles.............. Senior Vice President of EPEC 1995 42 Richard Owen Baish........... President of EPNG 1987 52 John D. Hushon............... President of EPEI 1996 53 Greg G. Jenkins.............. President of EPEM 1996 41 Robert G. Phillips........... President of EPFS 1995 44 John W. Somerhalder II....... President of TGP 1990 43
Mr. Wise has been Chairman of the Board since January 1994 and Chief Executive Officer since January 1990. In July 1998, Mr. Wise also became the President of the Company. He was President of EPEC from April 1989 to April 1996. From March 1987 until April 1989, Mr. Wise was an Executive Vice President of EPEC. From January 1984 to February 1987, he was a Senior Vice President of EPEC. Mr. Wise is a member of the Board of Directors of Battle Mountain Gold Company and is the Chairman of the Board of EPNG, EPTPC, and Leviathan Gas Pipeline Company, the general partner of Leviathan. Mr. Austin has been Executive Vice President of EPEC since May 1995. He has been Chief Financial Officer of EPEC since April 1992. He was Senior Vice President of EPEC from April 1992 to April 1995. He was Vice President, Planning and Treasurer of Burlington Resources Inc. ("BR") from November 1990 to March 1992 and Assistant Vice President, Planning of BR from January 1989 to October 1990. Mr. Richards has been Executive Vice President of EPEC since December 1996. From January 1991 until December 1996, he was Senior Vice President of EPEC. He was Vice President from June 1990 to December 1990. He was Senior Vice President, Finance and Human Resources of Meridian Minerals Company, a wholly owned subsidiary of BR, from October 1988 to June 1990. Mr. White has been Executive Vice President of EPEC since December 1996 and General Counsel of EPEC since March 1991. He was Senior Vice President and General Counsel of EPEC from March 1991 until December 1996. From March 1991 to April 1992, he was also Corporate Secretary of EPEC. For more than five years prior to that time, Mr. White was a partner in the law firm of Holland & Hart. Mr. Searles has been Senior Vice President of EPEC since April 1998. He was Executive Vice President of EPEM from June 1997 to June 1998. He was President of EPFS from December 1996 to June 1997 and was President of EPEM from September 1995 to December 1996. From March 1994 to September 1995, Mr. Searles was President and Chief Operating Officer of Eastex Energy, Inc. For more than five years prior to that he held various management positions with Enron Corp. Mr. Baish has been President of EPNG since April 1996. From September 1994 until April 1996, he was Executive Vice President of EPNG and was Senior Vice President from November 1990 to August 1994. He was General Counsel and Corporate Secretary from November 1990 to December 1990 and Vice President and Associate General Counsel from March 1987 to October 1990. 12 17 Mr. Hushon has been President of EPEI since April 1996. He was Senior Vice President of EPEI from September 1995 to April 1996. For more than five years prior to that time, Mr. Hushon was a senior partner in the law firm of Arent Fox Kintner Plotkin & Kahn. Mr. Jenkins has been President of EPEM since December 1996. He was Senior Vice President and General Manager of Entergy Corp. from May 1996 to December 1996 and President and Chief Executive Officer of Hadson Gas Services Company from December 1993 to January 1996. For more than five years prior to that time, Mr. Jenkins was in various managerial positions with Santa Fe Energy Resources, Inc. Mr. Phillips has been President of EPFS since June 1997. He was President of El Paso Energy Resources Company from December 1996 to June 1997, President of EPFS from April 1996 to December 1996 and was a Senior Vice President of EPEC from September 1995 to April 1996. For more than five years prior to that time, Mr. Phillips was Chief Executive Officer of Eastex Energy, Inc. Mr. Somerhalder has been President of TGP since December 1996. He was President of El Paso Energy Resources Company from April 1996 to December 1996 and Senior Vice President of EPEC from August 1992 to April 1996. From January 1990 to July 1992, he was Vice President of EPEC. Executive officers hold offices until their successors are elected and qualified, subject to their earlier removal. ITEM 2. PROPERTIES A description of the Company's properties is included in Item 1, Business and is incorporated by reference herein. The Company is of the opinion that it has generally satisfactory title to the properties owned and used in its businesses, subject to the liens for current taxes, liens incident to minor encumbrances, and easements and restrictions that do not materially detract from the value of such property or the interests therein or the use of such properties in its businesses. The Company believes that its physical properties are adequate and suitable for the conduct of its business in the future. ITEM 3. LEGAL PROCEEDINGS See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Commitments and Contingencies, Legal Proceedings which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 13 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS EPEC's common stock is traded on the New York Stock Exchange. As of March 5, 1999, the number of holders of record of common stock was approximately 72,000. This does not include individual participants on whose behalf a clearing agency, or its nominee, holds EPEC's common stock. The following table reflects the high and low sales prices for EPEC's common stock for the periods indicated based on the daily composite listing of stock transactions for the New York Stock Exchange and cash dividends declared during those periods.
HIGH LOW DIVIDENDS -------- -------- --------- (PER SHARE) 1998 First Quarter....................................... $35.6250 $31.1250 $0.19125 Second Quarter...................................... 38.9375 35.4375 0.19125 Third Quarter....................................... 38.6250 24.6875 0.19125 Fourth Quarter...................................... 36.8125 30.1250 0.19125 1997 First Quarter....................................... $28.5000 $24.4375 $0.18250 Second Quarter...................................... 30.3125 27.1250 0.18250 Third Quarter....................................... 30.3436 26.5000 0.18250 Fourth Quarter...................................... 33.7500 28.8750 0.18250
In January 1999, the Board declared a quarterly dividend of $0.20 per share on EPEC's common stock, payable on April 1, 1999, to stockholders of record on March 5, 1999. The declaration of future dividends will be dependent upon business conditions, earnings, the cash requirements of EPEC, and other relevant factors. In January 1998, the Board declared a two-for-one stock split in the form of a 100 percent stock dividend (on a per share basis). In March 1998, the stockholders approved an increase in the Company's authorized common stock, which was necessary to effect the stock split. The stock dividend was paid on April 1, 1998 to stockholders of record on March 13, 1998. All presentations herein are made on a post-split basis. Separately, the Board also approved a new 10 million common stock repurchase authority that replaced the repurchase authority approved by the Board in November 1994. The timing and amount of additional share repurchases, if any, will depend upon the availability and alternate uses of capital, market conditions and other factors. EPEC has made available a continuous odd-lot stock sales program (the "Program"), in which stockholders of EPEC owning beneficially fewer than 100 shares of EPEC's common stock ("Odd-Lot-Holders") are offered a convenient method of disposing of all their shares without incurring any brokerage costs associated with the sale of an odd-lot. Only Odd-Lot Holders are eligible to participate in the Program. The Program is strictly voluntary, and no Odd-Lot Holder is obligated to sell pursuant to the Program. A brochure and related materials describing the Program were sent to Odd-Lot Holders in February 1994. The Program currently does not have a termination date, but EPEC may suspend the Program at any time. Inquiries regarding the Program should be directed to Boston EquiServe. EPEC has made available a dividend reinvestment and common stock purchase plan (the "Plan"), which provides all stockholders of record a convenient and economical means of increasing their holdings in EPEC's common stock. A stockholder who owns shares of common stock in street name or broker name and who wishes to participate in the Plan will need to have his or her broker or nominee transfer the shares into the stockholder's name. The Plan is strictly voluntary, and no stockholder of record is obligated to participate in the Plan. The Plan currently does not have a termination date, but EPEC may suspend the Plan at any time. Inquiries regarding the Plan should be directed to Boston EquiServe. 14 19 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------- -------- ------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) Operating Results Data(a): Operating revenues.................................. $5,782 $5,638 $3,012 $1,038 $ 870 Employee separation and asset impairment charge(b)........................................ -- -- 99 -- -- Net income.......................................... 225 186 38 85 90 Basic earnings per common share(b).................. 1.94 1.64 .53 1.24 1.23 Diluted earnings per common share................... 1.85 1.59 .52 1.24 1.23 Cash dividends declared per common share............ .76 .73 .70 .66 .61 Basic average common shares outstanding............. 116 114 72 69 73 Diluted average common shares outstanding........... 126 117 73 69 73
DECEMBER 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------- ------ ------ ------ ------ (IN MILLIONS) Financial Position Data(a): Total assets....................................... $10,069 $9,532 $8,843 $2,535 $2,332 Long-term debt..................................... 2,552 2,119 2,215 772 779 Preferred stock of subsidiary...................... 300 300 296 -- -- Other minority interest............................ 65 65 39 -- -- Stockholders' equity............................... 2,108 1,959 1,638 712 710
- --------------- (a) Reflects the acquisition in September 1995 of Eastex Energy, Inc., in December 1995 of Premier Gas Company, in June 1996 of Cornerstone Natural Gas, Inc., in December 1996 of EPTPC, and in August 1998 of DeepTech. All acquisitions were accounted for as purchases and therefore operating results are included prospectively from the date of acquisition. (b) Reflects a charge in 1996 of $99 million pre-tax ($60 million after tax) to reflect costs associated with the implementation of a workforce reduction plan and the impairment of certain long-lived assets. Basic earnings per common share for the year ended December 31, 1996 before giving effect to this charge and an $8 million pre-tax ($5 million after tax) charge taken in the fourth quarter for relocating the corporate headquarters from El Paso, Texas to Houston, Texas in connection with the acquisition of EPTPC, would have been $1.43 (compared to $0.53). 15 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For the past four years, the Company has engaged in numerous activities and transactions designed to significantly improve its ability to compete effectively in the rapidly evolving world energy industry. In late 1995, the Company acquired two energy marketing businesses, Eastex Energy Inc. and Premier Gas Company. During the first quarter of 1996, the Company completed its organizational review and workforce reduction program, reducing the total workforce from 2,400 to about 1,600. During May 1996, the Company completed and placed in service the Chaco Plant, the largest facility of its kind in the continental U.S. In June 1996, the Company acquired Cornerstone Natural Gas, Inc., expanding its gathering and processing operations into Louisiana and East Texas. The Company completed its $4 billion acquisition of EPTPC in December 1996, expanding its natural gas pipeline systems from coast to coast and continuing the expansion of the non-regulated business operations. In connection with the EPTPC acquisition, the Company completed a workforce reduction program in the first quarter of 1997, reducing the workforce of the combined companies by approximately 800 from about 4,300 following the acquisition of EPTPC to about 3,500. In late 1997, the Company acquired additional natural gas gathering and processing assets by completing the purchases of Gulf States Gas Pipeline Company and certain Texas Gulf Coast subsidiaries of PacifiCorp ("TPC"). In August 1998, the Company acquired DeepTech. Additionally, throughout 1996, 1997 and 1998, the Company's international operations were expanding into Latin and South America, the Asia Pacific region, Australia, and Europe. These changes in the make-up of the Company significantly increased the Company's operating results, its ability to generate operating cash flows and its needs for cash for investment opportunities. Consequently, the Company's credit facilities were substantially expanded during this period to meet those needs. The Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, effective January 1, 1998. Accordingly, the Company has segregated its business activities into five segments: Tennessee Gas Pipeline segment, El Paso Natural Gas segment, El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso Energy International segment. These segments are strategic business units that offer a variety of different energy products and services. They are managed separately as each business segment requires different technology and marketing strategies. Certain business segments' earnings are largely derived from the earnings of equity investments. Accordingly, the Company evaluates segment performance based on EBIT. HOLDING COMPANY REORGANIZATION AND TAX-FREE INTERNAL REORGANIZATION Effective August 1, 1998, the Company reorganized into a holding company organizational structure, whereby EPEC, a Delaware corporation, became the parent holding company. See Item 8, Financial Statements and Supplementary Data, Note 1, for further discussion of the holding company reorganization. On December 31, 1998, the Company completed a tax-free internal reorganization of its assets and operations and those of its subsidiaries in accordance with a private letter ruling received from the IRS. In the reorganization, a substantial number of subsidiaries were transferred to or from the Company and/or other entities owned by the Company. Neither the creation of the holding company structure nor the tax-free internal reorganization had any impact on the presentation herein. RESULTS OF OPERATIONS Consolidated EBIT for the year ended December 31, 1998, increased 11 percent to $644 million compared to $578 million in the year ago period. Consolidated EBIT for the year ended December 31, 1997, was $403 million higher than for the same period of 1996. Variances are discussed in the segment results below. 16 21 SEGMENT RESULTS To the extent practicable, results of operations for 1997 and 1996 have been reclassified to conform to the current business segment presentation, although such results are not necessarily indicative of the results which would have been achieved had the revised business segment structure been in effect during those periods. Operating revenues and expenses by segment include intersegment sales and expenses which are eliminated in consolidation. Because of energy commodity price volatility, the Company believes that gross margin (revenue less cost of sales), rather than operating revenue, provides a more accurate indicator for the El Paso Field Services and the El Paso Energy Marketing segments. For a further discussion of the individual segments, see Item 8, Financial Statements and Supplementary Data, Note 13.
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES Tennessee Gas Pipeline...................................... $ 358 $ 318 $ 16 El Paso Natural Gas......................................... 217 260 223 ----- ----- ----- Regulated segments........................................ 575 578 239 ----- ----- ----- El Paso Field Services...................................... 75 74 35 El Paso Energy Marketing.................................... 9 (28) 24 El Paso Energy International................................ 25 2 (4) ----- ----- ----- Non-regulated segments.................................... 109 48 55 ----- ----- ----- Corporate expenses, net..................................... (40) (48) (119) ----- ----- ----- Consolidated EBIT......................................... $ 644 $ 578 $ 175 ===== ===== =====
TENNESSEE GAS PIPELINE
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Operating revenues.......................................... $ 766 $ 798 $ 48 Operating expenses.......................................... (434) (494) (34) Other -- net................................................ 26 14 2 ----- ----- ----- EBIT...................................................... $ 358 $ 318 $ 16 ===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Operating revenues for the year ended December 31, 1998, were $32 million lower than for the same period of 1997 primarily because of lower throughput resulting from warmer average temperatures in the northeastern and midwestern markets and a downward revision in the amount of recoverable interest on GSR costs. Operating expenses for the year ended December 31, 1998, were $60 million lower than for the same period of 1997 primarily due to lower system fuel usage associated with operating efficiencies attained during the period of lower throughput, reduced operation and maintenance expenses largely due to lower payroll costs, and lower franchise taxes. Other -- net for the year ended December 31, 1998, was $12 million higher than for the same period of 1997 due to interest income on a favorable sales and use tax settlement and gains on the sale of assets. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 The results of operations for 1996 represents EPEC's ownership of this segment for 20 days after the EPTPC Merger in December 1996. Operating revenues for the year ended December 31, 1997, were $750 million higher than for the same period of 1996 due to the acquisition of EPTPC in December 1996. 17 22 Operating expenses for the year ended December 31, 1997, were $460 million higher than for the same period of 1996 due to the acquisition of EPTPC in December 1996. Other -- net for the year ended December 31, 1997, was $12 million higher than for the same period of 1996 due to the acquisition of EPTPC in December 1996. EL PASO NATURAL GAS
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Operating revenues.......................................... $ 475 $ 520 $ 511 Operating expenses.......................................... (260) (265) (302) Other -- net................................................ 2 5 14 ----- ----- ----- EBIT...................................................... $ 217 $ 260 $ 223 ===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Operating revenues for the year ended December 31, 1998, were $45 million lower than for the same period of 1997 primarily due to lower net revenues resulting from the PG&E contract expiration which was effective December 31, 1997. The decrease in revenues from the loss of the PG&E contract was significantly offset by risk sharing revenue, other non-traditional revenues including revenue from the sale of capacity to Dynegy, and the favorable resolution of a contested rate matter. (See Commitments and Contingencies, Rates and Regulatory Matters, below for a discussion of the Dynegy contracts.) Operating expenses for the year ended December 31, 1998, were $5 million lower than for the same period of 1997 primarily due to lower fuel costs and recovery of a receivable previously deemed uncollectible. Partially offsetting the decrease were higher operating and depreciation expenses. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Operating revenues for the year ended December 31, 1997, were $9 million higher than for the same period of 1996 primarily due to higher accruals for take-or-pay issues in 1996 and an increase in non-traditional revenues associated with a system expansion. This increase was partially offset by lower revenues resulting from contract expirations occurring in late 1996 and early 1997. Operating expenses for the year ended December 31, 1997, were $37 million lower than for the same period of 1996 primarily due to lower labor, benefits, and payroll tax expenses in 1997 which resulted from a reduction in staffing levels during 1996. Other -- net for the year ended December 31, 1997, was $9 million lower than for the same period of 1996 due to gains on the disposition of assets in 1996. EL PASO FIELD SERVICES
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Gathering and treating margin............................... $ 150 $ 119 $ 87 Processing margin........................................... 48 55 46 Other margin................................................ 3 6 1 ----- ----- ----- Total gross margin................................ 201 180 134 Operating expenses.......................................... (141) (114) (99) Other -- net................................................ 15 8 -- ----- ----- ----- EBIT...................................................... $ 75 $ 74 $ 35 ===== ===== =====
18 23 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Total gross margin for the year ended December 31, 1998, was $21 million higher than for the same period of 1997. The increase in the gathering and treating margin primarily resulted from higher gathering rates compared to 1997, an increase in gathering and treating volumes largely attributable to the acquisition of TPC in December 1997, and the inclusion of the results of operations of Channel Pipeline ("Channel"), in El Paso Field Services segment beginning January 1998 versus El Paso Energy Marketing segment. The decrease in the processing margin was largely attributable to lower liquids prices during 1998 compared to the same period of 1997. Liquids prices directly impact EPFS's processing revenues. During 1998, liquids prices were at their lowest level since 1990, and the Company expects this trend to continue through 1999. The Company attempts to mitigate the impact of lower liquids prices by utilizing hedging strategies where possible. Operating expenses for the year ended December 31, 1998, were $27 million higher than for the same period of 1997 primarily as a result of additional expenses associated with the addition of TPC and Channel as well as higher general and administrative expenses. Other -- net for the year ended December 31, 1998, was $7 million higher than for the same period of 1997 reflecting higher earnings from equity investments and higher capitalized interest. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total gross margin for the year ended December 31, 1997, was $46 million higher than for the same period of 1996. The increase in the gathering and treating margin and the processing margin was primarily the result of higher natural gas prices in the San Juan Basin and an increase in gathering and treating volumes due to the acquisitions of EPTPC in December 1996 and Cornerstone Natural Gas, Inc. in June 1996. Operating expenses for the year ended December 31, 1997, were $15 million higher than for the same period of 1996 primarily due to the acquisition of EPTPC and Cornerstone Natural Gas, Inc. Other -- net for the year ended December 31, 1997, was $8 million higher than for the same period of 1996 primarily due to the acquisition of EPTPC. EL PASO ENERGY MARKETING
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Natural gas margin.......................................... $ 26 $ 25 $ 46 Power margin................................................ 16 -- (3) Petroleum products margin................................... 1 (3) 3 ---- ---- ---- Total gross margin................................ 43 22 46 Operating expenses.......................................... (38) (53) (23) Other -- net................................................ 4 3 1 ---- ---- ---- EBIT...................................................... $ 9 $(28) $ 24 ==== ==== ====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Total gross margin for the year ended December 31, 1998, was $21 million higher than for the same period of 1997. Increases in total gross margin in 1998 reflect a fundamental shift in focus initiated by the energy marketing business segment from a short-term positional trading operation to a long-term, asset-based origination, trading, and risk management operation. In 1998, such energy activities emphasized long-term power and gas contract management and related energy services for power and natural gas customers, including independent power producers, utilities and end users. Trading activities, while substantially increasing in volume in 1998, are primarily used to manage risk in long-term contract positions. Partially offsetting the increase in gross margin was the impact of reporting the operations of Channel in El Paso Field Services segment versus El Paso Energy Marketing segment beginning in January 1998. 19 24 Operating expenses for the year ended December 31, 1998, were $15 million lower than for the same period of 1997. The decrease was attributable to the 1997 restructuring of the marketing organization following the EPTPC acquisition and the transfer of Channel operations as mentioned above. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total gross margin for the year ended December 31, 1997, was $24 million lower than for the same period of 1996. The decrease resulted from generally lower industry-wide gas marketing margins in the second quarter of 1997, as well as extreme market volatility which negatively impacted the Company's natural gas marketing activities and trading positions during the first quarter of 1997. Operating expenses for the year ended December 31, 1997, were $30 million higher than for the same period of 1996 primarily due to the costs associated with the marketing activities of EPTPC which were acquired in December 1996. EL PASO ENERGY INTERNATIONAL
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Operating revenues.......................................... $ 58 $ 13 $-- Operating expenses.......................................... (86) (37) (3) Other -- net................................................ 53 26 (1) ---- ---- --- EBIT...................................................... $ 25 $ 2 $(4) ==== ==== ===
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Operating revenues for the year ended December 31, 1998, were $45 million higher than for the same period of 1997 due to the consolidation for financial reporting purposes of the Manaus Power project in May 1998 after acquiring an additional ownership interest and an increase in revenue attributable to the EMA Power project which the Company began reporting on a consolidated basis in July 1997. Operating expenses for the year ended December 31, 1998, were $49 million higher than for the same period of 1997 primarily due to costs related to the consolidation of the EMA Power and Manaus Power projects and increased general and administrative expenses largely due to higher project development costs reflecting an increase in project-related activities in 1998. Other -- net for the year ended December 31, 1998, was $27 million higher than for the same period of 1997 primarily due to increased equity earnings, a gain on the sale of surplus power equipment, and the recognition of certain net gains from project-related activities. As EPEI's projects move from the development stage to the operational stage, it is common to recognize one-time gains and fees, which may include management fees, development fees, financing fees, and gains on the sell-down of ownership interests. The Company anticipates additional one-time events may result in the recognition of income or expense in the future. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 EBIT for the year ended December 31, 1997, was $6 million higher than for the same period of 1996. During 1997, EPEI completed its first full year of operations following the EPTPC acquisition, which represented a significant increase in international project development activities. Because of this increase in development activities, operating results likewise increased substantially over 1996. 20 25 CORPORATE EXPENSES, NET YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net corporate expenses for the year ended December 31, 1998, were $8 million lower than for the same period of 1997. The decrease results from lower benefits costs and non-recurring gains, partially offset by administrative costs associated with the formation and startup of EPPS, a power services group established in the first quarter of 1998, and costs associated with the Company's Year 2000 project. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net corporate expenses for the year ended December 31, 1997, were $71 million lower than for the same period of 1996 primarily as a result of a $99 million employee separation and asset impairment charge recorded in the first quarter of 1996 and an $8 million charge in the fourth quarter of 1996 for relocating the Company's headquarters from El Paso, Texas to Houston, Texas in connection with the acquisition of EPTPC. The decrease was partially offset by additional costs related to the discontinued operations assumed as part of the EPTPC acquisition. INTEREST AND DEBT EXPENSE YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Interest and debt expense for the year ended December 31, 1998, was $29 million higher than for the same period of 1997 primarily because of increased borrowings to fund capital expenditures, acquisitions, and other investing expenditures and a higher average effective interest rate during 1998 generally resulting from the higher rates associated with the March 1997 issuance of TGP long-term debt of approximately $883 million. These increases were partially offset by higher interest expense in 1997 incurred on rate refunds paid to EPNG's customers in 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Interest and debt expense for the year ended December 31, 1997, was $128 million higher than for the same period of 1996 due primarily to the level of debt assumed in connection with the acquisition of EPTPC and the Company's debt and capital realignment efforts. INCOME TAX EXPENSE The effective tax rate for 1998 was 34 percent compared to 38 percent in 1997 and 1996. The lower rate in 1998 is due to an increase in the level of foreign income in 1998, which is subject to foreign tax rates that differ from U.S. tax rates, increases in permanently reinvested equity income from unconsolidated foreign affiliates for which no provision for U.S. income tax is required, and lower state income taxes. LIQUIDITY AND CAPITAL RESOURCES CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $61 million lower for the year ended December 31, 1998, compared to the same period of 1997. The decrease was primarily attributable to working capital changes, a take-or-pay refund paid to EPNG's customers in February 1998, lower GSR collections in 1998, and prepayments of risk sharing revenues in 1997. The decrease was partially offset by higher net tax refunds in 1998 and rate refunds paid to TGP's customers in March 1997 and EPNG's customers in August 1997. CASH FROM INVESTING ACTIVITIES Net cash used in investing activities was approximately $1 billion for the year ended December 31, 1998. Investment activities included the August 1998 acquisition of DeepTech (see Item 8, Financial Statements and Supplementary Data, Note 2), as well as expenditures for joint ventures, equity investments, and 21 26 expansion and construction projects. Expenditures related to joint ventures and equity investments were primarily attributable to the EPEI segment. Internally generated funds, supplemented by other financing activities, were used to fund these expenditures. The Company's planned capital and investment expenditures for 1999 of approximately $900 million are primarily for expansion of international operations and domestic unregulated operations, pipeline systems activities and other facilities, and computer and communication system enhancements. Funding for capital expenditures, acquisitions, and other investing expenditures is expected to be provided by internally generated funds, commercial paper issuances, available capacity under existing credit facilities, and/or the issuance of other long-term debt, trust securities, or equity. CASH FROM FINANCING ACTIVITIES Net cash provided by financing activities was $463 million for the year ended December 31, 1998. In March 1998, Trust Convertible Preferred Securities were issued (see Item 8, Financial Statements and Supplementary Data, Note 3) for net proceeds of $317 million. In October 1998, TGP issued debentures due 2028 for net proceeds of $391 million. These proceeds, supplemented by internally generated funds, were used to retire long-term debt, pay dividends, acquire treasury stock, fund capital and equity investments, and for other corporate purposes. Since November 1994, the Company has been authorized by the Board to repurchase shares of its common stock. Shares repurchased are held in EPEC's treasury and are expected to be used in conjunction with EPEC stock compensation plans and for other corporate purposes. Pursuant to the November 1994 authorization, the Company had repurchased 9.4 million shares as of December 31, 1997. In January 1998, the Board approved a new 10 million common stock repurchase authority that replaced the November 1994 repurchase authority. The 10 million share repurchase authority reflects the two-for-one stock split as discussed in Item 5, Market for Registrant's Common Equity and Related Stockholder Matters. In 1998, the Company repurchased 995,600 common shares at a weighted average cost of $35.77 per share. The timing and amount of future share repurchases, if any, will depend upon the availability and alternate uses of capital, market conditions and other factors. Future funding for long-term debt retirements, dividends, and other financing expenditures is expected to be provided by internally generated funds, commercial paper issuances, available capacity under existing credit facilities, and/or the issuance of other long-term debt, trust securities, or equity. LIQUIDITY The Company relies on cash generated from internal operations as its primary source of liquidity, supplemented by its available credit facilities and commercial paper program. In October 1997, EPNG established a new $750 million five-year revolving credit and competitive advance facility and a new $750 million 364-day renewable revolving credit and competitive advance facility (collectively, the "Revolving Credit Facility"). In connection with the establishment of the Revolving Credit Facility, EPTPC's revolving credit facility was also terminated, and the outstanding balance of $417 million was financed under the five-year portion of the new Revolving Credit Facility with TGP designated as the borrower. The availability under the Revolving Credit Facility is expected to be used for general corporate purposes including, but not limited to, backstopping EPNG's and TGP's $1 billion commercial paper programs. In August 1998, EPEC became a guarantor of EPNG's Revolving Credit Facility. In October 1998, the $750 million 364-day portion of the Revolving Credit Facility was amended to extend the termination date to October 27, 1999. In addition, in October 1998, the Revolving Credit Facility was amended to permit TGP to issue commercial paper, provided that the total amount of commercial paper outstanding at EPNG and TGP is equal to or less than the unused capacity under the Revolving Credit Facility. In December 1998, EPEC became a borrower under the Revolving Credit Facility. The interest rate on the Revolving Credit Facility is 40 basis points above LIBOR, with the spread varying based on EPEC's long-term debt credit rating. The availability of borrowings under the Company's credit agreements is subject to specified conditions, which management believes the Company currently meets. These conditions include compliance with the 22 27 financial covenants and ratios required by such agreements, absence of default under such agreements, and continued accuracy of the representations and warranties contained in such agreements (including the absence of any material adverse changes since the specified dates). All of the Company's senior debt issues have been given investment grade ratings by Standard & Poors and Moody's. The Company must comply with various restrictive covenants contained in its debt agreements which include, among others, maintaining a consolidated debt and guarantees to capitalization ratio no greater than 70 percent. In addition, the Company's subsidiaries on a consolidated basis (as defined in the agreements) may not incur debt obligations which would exceed $300 million in the aggregate, excluding acquisition debt, project financing, and certain refinancings. As of December 31, 1998, EPEC's consolidated debt and guarantees to capitalization ratio (as defined in the agreements) was 55 percent and debt obligations of EPEC subsidiaries in excess of permitted debt did not exceed $300 million on a consolidated basis. In March 1997, TGP issued $300 million aggregate principal amount of 7 1/2% debentures due 2017, $300 million aggregate principal amount of 7% debentures due 2027, and $300 million aggregate principal amount of 7 5/8% debentures due 2037. Proceeds of approximately $883 million, net of issuance costs, were used to repay a portion of EPTPC's credit facility and for general corporate purposes. In December 1997, EPEC filed a shelf registration statement pursuant to which EPEC may offer up to $900 million (including $250 million transferred from prior shelf registrations) of common or preferred equities, various forms of debt securities (including convertible debt securities), and various types of trust securities from time to time as determined by market conditions. In March 1998, the El Paso Energy Capital Trust I, a Delaware business trust sponsored by the Company, issued 6.5 million 4 3/4% Trust Convertible Preferred Securities. The sole assets of the trust are approximately $335 million principal amount of 4 3/4% convertible subordinated debentures due 2028 of the Company. As a result of such offering, EPEC has approximately $565 million of capacity remaining under its existing shelf registration to issue public securities registered thereunder. In September 1998, TGP filed a shelf registration permitting TGP to offer up to $600 million (including $100 million carried forward from a prior shelf registration) of debt securities. In October 1998, TGP issued $400 million aggregate principal amount of 7% debentures due 2028. Proceeds to TGP were approximately $391 million, net of issuance cost. Approximately $300 million of the proceeds were used to repay TGP's short-term indebtedness under the Revolving Credit Facility and the remainder were used by TGP for general corporate purposes. After this issuance, TGP has $200 million of capacity remaining under its shelf registration. In March 1998, EPNG retired its outstanding 8 5/8% debentures in the amount of $17 million and in August 1998, EPTPC retired its outstanding 10% debentures in the amount of $38 million. In February 1999, DeepTech retired its 11% senior subordinated promissory note due 2000 in the amount of $16 million. COMMITMENTS AND CONTINGENCIES Indonesia The Company owns a 47.5 percent interest in a power generating plant in Sengkang, South Sulawesi, Indonesia. Under the terms of the project's power purchase agreement, PLN purchases power from the Company in Indonesian rupiah indexed to the U.S. dollar at the date of payment. Due to the devaluation of the rupiah, the cost of power to PLN has significantly increased. PLN is currently unable to pass this increase in cost on to its customers without creating further political instability. PLN has requested financial aid from the Minister of Finance to help ease the effects of the devaluation. PLN has been paying the Company in rupiah indexed to the U.S. dollar at the rate in effect prior to the rupiah devaluation, with a commitment to pay the balance when financial aid is received. The difference between the current and prior exchange rate has resulted in an outstanding balance due from PLN of $9.4 million at December 31, 1998. The Company continues to meet with PLN on a regular basis to resolve the payment in arrears issue but has been unsuccessful to date. Recently, the Company has met and discussed its situation and concerns with the World 23 28 Bank, the International Monetary Fund, the Overseas Private Investment Corporation, and the U.S. Treasury Department in an attempt to achieve a resolution through the Indonesian Minister of Finance. The Company will meet with PLN in April 1999 to discuss payments in arrear and the terms of a contract rationalization process proposed by PLN. The Company has informed PLN that all payments in arrear must first be received as a prerequisite to any further discussions on contract rationalization. The Company cannot predict with certainty the outcome of such discussions. The Company's total investment in the Sengkang project was approximately $25 million at December 31, 1998. Additionally, the Company has provided specific recourse guarantees of up to $6 million for loans from the project lenders. All other project debt is non-recourse. The Company has political risk insurance on the Sengkang project. The Company believes the current economic difficulties in Indonesia will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. Brazil The Company owns 100 percent of a 250 MW power plant in Manaus, Brazil. Power from the plant is currently sold under a four-year contract to Electronorte, denominated in Brazilian real. Due to the devaluation of the real in January 1999, Manaus suffered an $831,000 exchange loss on the December invoice. There is no provision in the contract to recover the effects of the devaluation on this invoice. However, future invoices are covered under a provision in the contract entitling the Company to recover a substantial portion of any future devaluation. The Company believes the current economic difficulties in Brazil will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. The contract for the Manaus power project provides for delay damages to be paid to Electronorte if the specified construction schedule was not met. Completion of the project was delayed beyond the originally scheduled completion dates provided in the contract and such delays have resulted in a claim by Electronorte for delay damages. The Company is in discussions with Electronorte regarding such claim. In any event, the Company has the right under its construction contract to assert claims against the construction contractor for such delay damages and believes that any such damages will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. Capital Commitments At December 31, 1998, the Company had capital and investment commitments of $245 million, which are expected to be funded through internally generated funds and/or incremental borrowings. The Company's other planned capital and investment projects are discretionary in nature, with no substantial capital commitments made in advance of the actual expenditures. Purchase Obligations In connection with the financing commitments of certain joint ventures, TGP has entered into unconditional purchase obligations for products and services totaling $77 million at December 31, 1998. TGP's annual obligations under these agreements are $21 million for the years 1999 and 2000, $11 million for the year 2001, $4 million for the years 2002 and 2003, and $16 million in total thereafter. Excluded from these amounts is TGP's obligation to purchase 30 percent of the output of the Great Plains coal gasification project's original design capacity through July 2009. In January 1997, TGP executed a settlement of this contract as part of its GSR negotiations, recorded the related liability, and, in the third quarter of 1997, purchased an annuity for $42 million to fund the expected remaining monthly demand requirements of the contract which, under the settlement, continue through January 2004. Operating Leases The Company leases certain property, facilities and equipment under various operating leases. In addition, in 1995, El Paso New Chaco Company ("EPNC") entered into an unconditional lease for the Chaco Plant. The lease term expires in 2002, at which time EPNC has an option, and an obligation upon the occurrence of certain events, to purchase the plant for a price sufficient to pay the amount of the $77 million 24 29 construction financing, plus interest and certain expenses. If EPNC does not purchase the plant at the end of the lease term, it has an obligation to pay a residual guaranty amount equal to approximately 87 percent of the amount financed, plus interest. The Company unconditionally guaranteed all obligations of EPNC under the lease. Minimum annual rental commitments at December 31, 1998, were as follows:
YEAR ENDING DECEMBER 31, OPERATING LEASES - ------------------------------------------------------------ ---------------- (IN MILLIONS) 1999..................................................... $ 18 2000..................................................... 18 2001..................................................... 18 2002..................................................... 17 2003..................................................... 13 Thereafter............................................... 56 ---- Total............................................. $140 ====
Aggregate minimum commitments have not been reduced by minimum sublease rentals of approximately $15 million due in the future under noncancelable subleases. Rental expense for operating leases for the years ended December 31, 1998, 1997, and 1996 was $27 million, $23 million, and $14 million, respectively. Guarantees At December 31, 1998, the Company had parental guarantees of up to $486 million in connection with its international development activities, as well as $181 million related to various other projects. The Company also had letters of credit of approximately $80 million outstanding at December 31, 1998. Rates and Regulatory Matters In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which it seeks comments on a wide range of initiatives to change the manner in which short-term (less than one year) transportation markets are regulated. Among other things, the NOPR proposes the following: (i) removing the price cap for the short-term capacity market; (ii) establishing procedures to make pipeline and shipper-owned capacity comparable; (iii) auctioning all available short-term pipeline capacity on a daily basis with the pipeline unable to set a reserve price above variable costs; (iv) changing policies or pipeline penalties, nomination procedures and services; (v) increasing pipeline reporting requirements; (vi) permitting the negotiation of terms and conditions of service; and (vii) potentially modifying the procedures for certificating new pipeline construction. Also in July 1998, FERC issued a Notice of Inquiry ("NOI") seeking comments on FERC's policy for pricing long-term capacity. Comments on the NOPR and NOI are due in April 1999, and it is unclear when and what action, if any, FERC will take in connection with the NOPR and NOI and the comments received in response to them. TGP -- In February 1997, TGP filed a settlement with FERC of all issues related to the recovery of its GSR and other transition costs and related proceedings (the "GSR Stipulation and Agreement"). In April 1997, FERC approved the settlement. Under the terms of the GSR Stipulation and Agreement, TGP is entitled to collect up to $770 million from its customers, $693 million through a demand surcharge and $77 million through an interruptible transportation surcharge. As of December 31, 1998, the demand portion had been fully collected and $41 million of the interruptible transportation portion had been collected. There is no time limit for collection of the interruptible transportation surcharge portion. The terms of the GSR Stipulation and Agreement also provide for a rate case moratorium through November 2000 (subject to certain limited exceptions) and an escalating rate cap, indexed to inflation, through October 2005, for certain 25 30 of TGP's customers. Under the terms of the GSR Stipulation and Agreement, TGP is required to refund to customers amounts collected in excess of each customer's share of transition costs. In December 1994, TGP filed for a general rate increase with FERC and in October 1996, FERC approved a settlement resolving that proceeding. The settlement included a structural rate design change that results in a larger portion of TGP's transportation revenues being dependent upon throughput. Under the stipulation, TGP's refund obligation was approximately $185 million, inclusive of interest, of which $161 million was refunded to customers in March 1997 and June 1997 with the remaining $24 million refund obligation offset against GSR recoveries in accordance with particular customer elections. TGP provided a reserve for these rate refunds as revenues were collected. One party, a competitor of TGP, filed a Petition for Review of the FERC orders with the Court of Appeals. The Court of Appeals remanded the case to FERC to respond to the competitor's argument that TGP's cost allocation methodology deterred the development of market centers (centralized locations where buyers and sellers can physically exchange gas). At FERC's request, comments were filed in January 1999. All cost of service issues related to TGP's 1991 general rate proceeding were resolved pursuant to a settlement agreement approved by FERC in an order which now has become final. However, cost allocation and rate design issues remained unresolved. In July 1996, following an ALJ's decision on these cost and design issues, FERC ruled on certain issues but remanded to the ALJ the issue of the proper allocation of TGP's New England lateral costs. In July 1997, FERC issued an order denying rehearing of its July 1996 order but clarifying that, among other things, although the ultimate resolution as to the proper allocation of costs would be applied retroactively to July 1, 1995, the cost of service settlement does not allow TGP to recover from other customers any amounts that TGP may ultimately be required to refund. In February 1999, petitions for review of the July 1996 and July 1997 FERC orders were denied by the Court of Appeals. In the remand proceeding, the ALJ issued his decision on the proper allocation of the New England lateral costs in December 1997. That decision adopts a methodology that, economically, approximates the one currently used by TGP. In October 1998, FERC issued an order affirming the ALJ's decision. Certain parties have requested rehearing of that order, and the matter is currently pending before FERC. TGP has filed cash out reports for the period September 1993 through August 1998. TGP's filings showed a cumulative loss through August of 1998 of $3 million. TGP has reached a settlement in principle with its customers to resolve outstanding FERC proceedings related to these filed cash out reports. The reports, as well as the accounting for customer imbalances, had been challenged by TGP's customers. Upon FERC's approval, the settlement will provide for a new mechanism for accounting for TGP's cash out program. Substantially all of the revenues of TGP are generated under long-term gas transmission contracts. Contracts representing approximately 70 percent of TGP's firm transportation capacity will be expiring over the next two years, principally in November 2000. Although TGP cannot predict how much capacity will be resubscribed, a majority of the expiring contracts cover service to northeastern markets, where there is currently little excess capacity. Several projects, however, have been proposed to deliver incremental volumes to these markets. Although TGP is actively pursuing the renegotiation, extension and/or replacement of these contracts, there can be no assurance as to whether TGP will be able to extend or replace these contracts (or a substantial portion thereof) or that the terms of any renegotiated contracts will be as favorable to TGP as the existing contracts. EPNG -- In June 1995, EPNG filed with FERC for approval of new system rates for mainline transportation to be effective January 1, 1996. In March 1996, EPNG filed a comprehensive offer of settlement to resolve that proceeding as well as issues surrounding certain contract reductions and expirations that were to occur from January 1, 1996, through December 31, 1997. In April 1997, FERC approved EPNG's settlement as filed and determined that only the contesting party, Edison, should be severed for separate determination of the rates it ultimately pays EPNG. In July 1997, FERC issued an order denying the requests for rehearing of the April 1997 order and the settlement was implemented effective July 1, 1997. Hearings to determine Edison's rates were completed in May 1998, and an initial decision was issued by the presiding ALJ in July 1998. EPNG and Edison have filed exceptions to the decision with FERC. If the ALJ's decision is affirmed by FERC, EPNG believes that the resulting rates to Edison would be such that no 26 31 significant, if any, refunds in excess of the amounts reserved would be required. Pending the final outcome, Edison continues to pay the originally filed rates, subject to refund, and EPNG continues to provide a reserve for such potential refunds. Edison filed with the Court of Appeals a petition for review of FERC's April 1997 and July 1997 orders, in which it challenged the propriety of FERC's approving the settlement over Edison's objections to the settlement as a customer of SoCal. In December 1998, the Court of Appeals issued its decision vacating and remanding FERC's order. EPNG will file a motion with FERC proposing procedures to address deficiencies which the Court of Appeals found in FERC's earlier orders. EPNG cannot predict the outcome with certainty, but it believes that FERC will ultimately approve the settlement. The rate settlement establishes, among other things, base rates through December 31, 2005. Such rates escalate annually beginning in 1998. In addition, the settlement provides for settling customers to (i) pay $295 million (including interest) as a risk sharing obligation, which approximates 35 percent of anticipated revenue shortfalls over an 8 year period, resulting from the contract reductions and expirations referred to above, (ii) receive 35 percent of additional revenues received by EPNG, above a threshold, for the same eight-year period, and (iii) have the base rates increase or decrease if certain changes in laws or regulations result in increased or decreased costs in excess of $10 million a year. In accordance with the terms of the rate settlement, EPNG's refund obligation (including interest) was approximately $194 million. EPNG refunded $61 million to customers in August 1997 and, in accordance with certain customers' elections, the remaining $133 million of refund obligation was applied towards their $295 million risk sharing obligation. Through December 31, 1998, an additional $94 million of the risk sharing obligation was paid and the remaining $68 million balance, including interest, will be collected by the end of 2003. From 1996 through December 31, 1998, $69 million of the risk sharing obligation had been recognized as revenue. The remaining unearned risk sharing amounts, totaling $226 million, excluding interest, will be recognized ratably through the year 2003. In addition to other arrangements to offset the effects of the reduction in firm capacity commitments referred to above, EPNG entered into three contracts with Dynegy for the sale of substantially all of its turned back firm capacity available to California as of January 1, 1998, (approximately 1.3 Bcf) for a two-year period beginning January 1, 1998, at rates negotiated pursuant to EPNG's tariff provisions and FERC policies. EPNG realized $29 million in revenue in 1998 and anticipates realizing at least $41 million in revenues in 1999 (which are and will be subject to the revenue sharing provisions of the rate settlement) for this capacity. The contracts have a transport-or-pay provision requiring Dynegy to pay a minimum charge equal to the reservation component of the contractual charge on at least 50 percent of the contracted volumes in each month in 1998 and on at least 72 percent of the contracted volumes each month in 1999. In the third quarter of 1999, EPNG intends to remarket this capacity pursuant to EPNG's tariff provisions and FERC regulations, subject to Dynegy's right of first refusal. In December 1997, EPNG filed to implement several negotiated rate contracts, including those with Dynegy. In a protest to this filing, three shippers (producers/marketers) requested that FERC require EPNG to eliminate certain provisions from the Dynegy contracts, to publicly disclose and repost the contracts for competitive bidding, and to suspend their effectiveness. In an order issued in January 1998, FERC rejected several of the arguments made in the protest and allowed the contracts to become effective as of January 1, 1998, subject to refund, and to the outcome of a technical conference, which was held in March 1998. In June 1998, FERC issued an order rejecting the protests to the Dynegy contracts, but required EPNG to file modifications with FERC to the contracts clarifying the credits under the reservation reduction mechanism and the recall rights of certain capacity. In addition, EPNG agreed to separately post capacity covered by the Dynegy contracts which becomes available in the future. Several parties have protested EPNG's compliance filing and/or requested rehearing of FERC's June 1998 order. In June 1998, EPNG filed a letter agreement in compliance with the June 1998 FERC order. In September 1998, FERC issued an order accepting the letter agreement subject to EPNG making additional modifications. The additional modifications to the letter agreement required further clarification of credits available to Dynegy under the reservation reduction mechanism and the recall rights of certain capacity. In October 1998, EPNG filed a revised letter agreement with FERC and requested rehearing of the September 1998 order. 27 32 Under the revenue sharing provisions of its rate case settlement, EPNG is obligated to return approximately $12 million of non-traditional revenues to certain customers. Approximately $5 million had been credited to such customers' transportation invoices at December 31, 1998, and the balance of the $7 million has been or will be credited ratably over January, February, and March 1999. At December 31, 1998, EPNG had a reserve for the $7 million. Under FERC procedures, take-or-pay cost recovery filings may be challenged by pipeline customers on prudence and certain other grounds. Certain parties sought review in the Court of Appeals of FERC's determination in an October 1992 order that certain buy-down/buy-out costs were eligible for recovery. In January 1996, the Court of Appeals remanded the order to FERC with direction to clarify the basis for its decision that the take-or-pay buy-down/buy-out costs were eligible for recovery. In March 1997, following a technical conference and the submission of statements of position and replies, FERC issued an order determining that the costs related to all but one of EPNG's disputed contracts were eligible for recovery. The costs ruled ineligible for recovery totaled approximately $3 million, including interest, and were refunded to customers in the second quarter of 1997. In October 1997, FERC issued an order denying the challenging parties' request for rehearing of the March 1997 order in most respects, but determined that the costs incurred pursuant to two additional EPNG contracts were ineligible for recovery. These costs, including interest, totaled approximately $9 million and were refunded to customers in February 1998. The challenging parties, which claim that EPNG should be required to refund up to an additional $31 million filed a petition for review of the FERC order in the Court of Appeals. In February 1999, the Court of Appeals affirmed FERC's October 1997 order. In November 1996, GPM Corporation filed a complaint, as amended, with FERC alleging that EPNG's South Carlsbad compression facilities were gathering facilities and were improperly functionalized by EPNG as transmission facilities. In accordance with the FERC orders, the South Carlsbad compressor facilities were transferred to EPFS in April 1998. In a November 1997 order, FERC reversed its previous decision and found that EPNG's Chaco Station should be functionalized as gathering, not transmission, facility and should be transferred to EPFS. FERC has denied all requests for rehearing. EPNG and two other parties filed petitions for review with the Court of Appeals. The matter has been briefed and will be argued in September 1999. In accordance with the FERC orders, the Chaco Station was transferred to EPFS in April 1998. FERC Compliance Audits TGP and EPNG, as interstate pipelines, are subject to FERC audits of their books and records. EPNG currently has an open audit covering the years 1990 through 1995. FERC is expected to issue its audit report in 1999. Both EPNG's and TGP's property retirements are currently under review by the FERC audit staff. Management believes the ultimate resolution of the aforementioned rate and regulatory matters, which are in various stages of finalization, will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. Legal Proceedings In November 1993, TransAmerican filed a complaint in a Texas state court, TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et al., alleging fraud, tortious interference with contractual relationships, negligent misrepresentation, economic duress, civil conspiracy, and violation of state antitrust laws arising from a settlement agreement entered into by EPNG, TransAmerican Natural Gas Corporation ("TransAmerican"), and others in 1990 to settle litigation then pending and other potential claims. The complaint, as amended, seeks actual damages of $1.5 billion and exemplary damages of $6 billion. EPNG is defending the matter in the State District Court of Dallas County, Texas. In April 1996, a former employee of TransAmerican filed a related case in Harris County, Texas, Vickroy E. Stone v. Godwin & Carlton, P.C., et al. (including EPNG), seeking indemnification and other damages in unspecified amounts relating to litigation consulting work allegedly performed for various entities, including EPNG, in cases involving TransAmerican. EPNG filed a motion for summary judgment in the TransAmerican case arguing that 28 33 plaintiff's claims are barred by a prior release executed by TransAmerican, by statutes of limitations, and by the final court judgment ending the original litigation in 1990. Following a hearing in January 1998, the court granted summary judgment in EPNG's favor on TransAmerican's claims based on economic duress and negligent misrepresentation, but denied the motion as to the remaining claims. In February 1998, EPNG filed a motion for summary judgment in the Stone litigation arguing that all claims are baseless, barred by statutes of limitations, subject to executed releases, or have been assigned to TransAmerican. In June 1998, the court granted EPNG's motion in its entirety and dismissed all the remaining claims in the Stone litigation. In August 1998, the court denied Stone's motion for a new trial seeking reconsideration of that ruling. Stone has appealed the court's ruling to the Texas Court of Appeals in Houston, Texas. The TransAmerican trial is set to commence in September 1999. Based on information available at this time, management believes that the claims asserted against it in both cases have no factual or legal basis and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. In February 1998, the United States and the State of Texas filed in a United States District Court a Comprehensive Environmental Response, Compensation and Liability Act cost recovery action, United States v. Atlantic Richfield Co., et al., against fourteen companies including the following affiliates of EPEC: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an unpermitted waste disposal site during the 1960s that accepted waste hauled from numerous Houston Ship Channel industries. The suit alleges that the former Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC Polymers, Inc. are alleged to be derivatively liable as successors or as parent corporations. The suit claims that the United States and the State of Texas have expended over $125 million in remediating the site, and seeks to recover that amount plus interest. Other companies named as defendants include Atlantic Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed their answers and third-party complaints seeking contribution from twelve other entities believed to be PRPs at Sikes. Although factual investigation relating to Sikes is in very preliminary stages, the Company believes that the amount of material, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or Petro-Tex Chemical Corporation facilities was small, possibly de minimis. However, the government plaintiffs have alleged that the defendants are each jointly and severally liable for the entire remediation costs and have also sought a declaration of liability for future response costs such as groundwater monitoring. While the outcome of this matter cannot be predicted with certainty, management does not expect this matter to have a material adverse effect on the Company's financial position, results of operations, or cash flows. TGP is a party in proceedings involving federal and state authorities regarding the past use by TGP of a lubricant containing PCBs in its starting air systems. TGP has executed a consent order with the EPA governing the remediation of certain of its compressor stations and is working with the relevant states regarding those remediation activities. TGP is also working with the Pennsylvania and New York environmental agencies to specify the remediation requirements at the Pennsylvania and New York stations. Remediation activities in Pennsylvania are complete with the exception of some long-term groundwater monitoring requirements. Remediation and characterization work at the compressor stations under its consent order with the EPA and the jurisdiction of the New York Department of Environmental Conservation is ongoing. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. In November 1988, the Kentucky environmental agency filed a complaint in a Kentucky state court, Commonwealth of Kentucky, Natural Resources and Environmental Protection Cabinet v. Tennessee Gas Pipeline Company, alleging that TGP discharged pollutants into the waters of the state without a permit and disposed of PCBs without a permit. The agency sought an injunction against future discharges, sought an order to remediate or remove PCBs, and sought a civil penalty. TGP has entered into agreed orders with the agency to resolve many of the issues raised in the original allegations, has received water discharge permits for 29 34 its Kentucky compressor stations from the agency, and continues to work to resolve the remaining issues. The relevant Kentucky compressor stations are scheduled to be characterized and remediated under the consent order with the EPA. Management believes that the resolution of this issue will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. A number of subsidiaries of EPEC, both wholly owned and partially owned, as well as Leviathan, have been named defendants in United States ex rel Grynberg v. El Paso Natural Gas Company, et al. Generally, the complaint in this motion alleges an industry-wide conspiracy to underreport the heating value as well as the volumes of the natural gas produced from federal and Indian lands, thereby depriving the U.S. government of royalties. The complaint remains sealed. The Company believes the complaint to be without merit. The Company is a named defendant in numerous lawsuits and a named party in numerous governmental proceedings arising in the ordinary course of business. While the outcome of such lawsuits or other proceedings against the Company cannot be predicted with certainty, management currently does not expect these matters to have a material adverse effect on the Company's financial position, results of operations, or cash flows. ENVIRONMENTAL The Company is subject to extensive federal, state, and local laws and regulations governing environmental quality and pollution control. These laws and regulations require the Company to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of December 31, 1998, the Company had a reserve of approximately $255 million for expected remediation costs and associated onsite, offsite and groundwater technical studies of approximately $239 million; and other costs of approximately $16 million which the Company anticipates incurring through 2027. In addition, the Company estimates that its subsidiaries will make capital expenditures for environmental matters of approximately $6 million in 1999. Capital expenditures will range from approximately $60 million to $85 million in the aggregate for the years 2000 through 2007. These expenditures primarily relate to compliance with air regulations and, to a lesser extent, control of water discharges. Since 1988, TGP has been engaged in an internal project to identify and deal with the presence of PCBs and other substances of concern, including substances on the EPA List of Hazardous Substances, at compressor stations and other facilities operated by both its interstate and intrastate natural gas pipeline systems. While conducting this project, TGP has been in frequent contact with federal and state regulatory agencies, both through informal negotiation and formal entry of consent orders, to assure that its efforts meet regulatory requirements. In May 1995, following negotiations with its customers, TGP filed with FERC a separate Stipulation and Agreement (the "Environmental Stipulation") that establishes a mechanism for recovering a substantial portion of the environmental costs identified in the internal project. In November 1995, FERC issued an order approving the Environmental Stipulation. Although one shipper filed for rehearing, FERC denied rehearing of its order in February 1996. The Environmental Stipulation was effective July 1, 1995. As of December 31, 1998, a balance of $2 million remains to be collected under the stipulation. The Company and certain of its subsidiaries have been designated, have received notice that they could be designated, or have been asked for information to determine whether they could be designated as a PRP with respect to 30 sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought to resolve its liability as a PRP with respect to these Superfund sites through indemnification by third parties and/or settlements which provide for payment of the Company's allocable share of remediation costs. As of December 31, 1998, the Company has estimated its share of the remediation costs at these sites to be between $62 million and $75 million and has provided reserves that it believes are adequate for such costs. Since the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and because in some cases the Company has asserted a defense to any liability, the Company's estimate of its 30 35 share of remediation costs could change. Moreover, liability under the federal Superfund statute is joint and several, meaning that the Company could be required to pay in excess of its pro rata share of remediation costs. The Company's understanding of the financial strength of other PRPs has been considered, where appropriate, in its determination of its estimated liability as described herein. The Company presently believes that the costs associated with the current status of such entities as PRPs at the Superfund sites referenced above will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company has initiated proceedings against its historic liability insurers seeking payment or reimbursement of costs and liabilities associated with environmental matters. In these proceedings, the Company contends that certain environmental costs and liabilities associated with various entities or sites, including costs associated with former operating sites, must be paid or reimbursed by certain of its historic insurers. The proceedings are in the discovery stage, and it is not yet possible to predict the outcome. It is possible that new information or future developments could require the Company to reassess its potential exposure related to environmental matters. The Company may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from current or discontinued operations, could result in substantial costs and liabilities in the future. As such information becomes available, or developments occur, related accrual amounts will be adjusted accordingly. While there are still uncertainties relating to the ultimate costs which may be incurred, based upon the Company's evaluation and experience to date, the Company believes the recorded reserve is adequate. For a further discussion of specific environmental matters, see Legal Proceedings above. OTHER Acquisition of CE Generation LLC In March 1999, EPPS purchased a 50 percent ownership interest in CE Generation LLC. The equity investment in CE Generation LLC of approximately $260 million, subject to certain adjustments, will be accounted for under the equity method. CE Generation LLC owns 12 power generation projects, which are qualifying facilities under the Public Utility Regulatory Policy Act, and two additional generating facilities currently under construction in southern California. Collectively, the 14 power projects have a combined electric generating capacity of approximately 896 MW and include ten geothermal projects near the Imperial Valley in southern California and four natural gas-fired cogeneration projects in New York, Pennsylvania, Texas and Arizona. PPN Power Project In March 1999, the Company signed a sale and purchase agreement to acquire a 26 percent interest in a $295 million power plant in Tamil Nadu, India. The project consists of a 346 MW combined cycle power plant which will serve as a base load facility and sell power to the state-owned Tamil Nadu Electricity Board under a thirty-year power purchase agreement. Construction began in January 1999, and operations are expected to commence in early 2001. Transfer of the funds to complete the acquisition is expected to be finalized by the end of March 1999. Acquisition of DeepTech In August 1998, the Company completed its acquisition of DeepTech by merging DeepTech with a subsidiary of EPEC. DeepTech's assets included a combined 27.3 percent ownership interest in Leviathan. The acquisition was accounted for as a purchase with a total purchase price, net of cash received, of approximately $422 million. The Company recorded $214 million of goodwill in connection with the acquisition which will be amortized using the straight-line method over a period of 40 years. The amount allocated to goodwill is based on the excess of the total purchase price over the estimated fair value of assets 31 36 and liabilities at the acquisition date. The amounts may be adjusted in the final purchase price allocation. Management does not expect the ultimate resolution of the purchase price allocation to materially impact the Company's financial position, results of operations, or cash flows. The operating results of DeepTech are included in the Company's Consolidated Statements of Income beginning on August 15, 1998. Year 2000 The Company has established an executive steering committee and a project team to coordinate the phases of its Year 2000 project to assure that the Company's key automated systems and related processes will remain functional through the year 2000. Those phases are: (i) awareness; (ii) assessment; (iii) remediation; (iv) testing; (v) implementation of the necessary modifications and (vi) contingency planning (which was previously included as a component of the Company's implementation phase). In recognition of the importance of Year 2000 issues and their potential impact to the Company, the initial phase of the Year 2000 project involved the establishment of a company-wide awareness program. The awareness program is directed by the executive steering committee and project team and includes participation of senior management in each core business area. The awareness phase is substantially completed, although the Company will continually update awareness efforts for the duration of the Year 2000 project. The Company's assessment phase consists of conducting a company-wide inventory of its key automated systems and related processes, analyzing and assigning levels of criticality to those systems and processes, identifying and prioritizing resource requirements, developing validation strategies and testing plans, and evaluating business partner relationships. The portion of the assessment phase related to internally developed computer applications, hardware and equipment, and embedded chips is substantially complete. The Company estimates that it has finished more than three-fourths of the portion of the assessment to determine the nature and impact of the Year 2000 date change for third-party-developed software. The assessment phase of the project, among other things, involves efforts to obtain representations and assurances from third parties, including third party vendors, that their hardware and equipment products, embedded chip systems, and software products being used by or impacting the Company are or will be modified to be Year 2000 compliant. To date, the responses from such third parties, although generally encouraging, are inconclusive. As a result, the Company cannot predict the potential consequences if these or other third parties or their products are not Year 2000 compliant. The Company is currently evaluating the exposure associated with such business partner relationships. The remediation phase involves converting, modifying, replacing or eliminating key automated systems identified in the assessment phase. The testing phase involves the validation of the identified key automated systems. The Company is utilizing test tools and written test procedures to document and validate, as necessary, its unit, system, integration, and acceptance testing. The Company estimates that approximately one-half of the work of these phases remains, and expects each to be substantially completed by mid-1999. The implementation phase involves placing the converted or replaced key automated systems into operation. In some cases, this phase will also involve the implementation of contingency plans needed to support business functions and processes that may be interrupted by Year 2000 failures that are outside of the Company's control. The Company has completed more than one-fourth of the implementation phase, which is expected to be substantially completed by mid-1999. The contingency planning phase consists of developing a risk profile of the Company's critical business processes and then providing for actions the Company will pursue to keep such processes operational in the event of Year 2000 disruptions. The focus of such contingency planning is on prompt response to any Year 2000 events, and a plan for subsequent resumption of normal operations. The plan is expected to assess the risk of a significant failure to critical processes performed by the Company, and to address the mitigation of those risks. The plan will also consider any significant failures related to the most reasonably likely worst case scenario, discussed below, as they may occur. In addition, the plan is expected to factor in the severity and duration of the impact of a significant failure. The Company plans to have its contingency plan completed by 32 37 mid-1999. The Year 2000 contingency plan will continue to be modified and adjusted throughout the year as additional information becomes available. The goal of the Year 2000 project is to ensure that all of the critical systems and processes which are under the Company's direct control remain functional. Certain systems and processes may be interrelated with or dependent upon systems outside the Company's control, however, and systems within the Company's control may have unpredicted problems. Accordingly, there can be no assurance that significant disruptions will be avoided. The Company's present analysis of its most reasonably likely worst case scenario for Year 2000 disruptions includes Year 2000 failures in the telecommunications and electricity industries, as well as interruptions from suppliers that might cause disruptions in the Company's operations, thus causing temporary financial losses and an inability to deliver products and services to customers. Virtually all of the natural gas transported through the Company's interstate pipelines is owned by third parties. Accordingly, failures of natural gas producers to be ready for the Year 2000 could significantly disrupt the flow of product to the Company's customers. In many cases, the producers have no direct contractual relationship with the Company, and the Company relies on its customers to verify the Year 2000 readiness of the producers from whom they purchase natural gas. Since most of the Company's revenues from the delivery of natural gas are based upon fees paid by its customers for the reservation of capacity, and not based upon the volume of actual deliveries, short term disruptions in deliveries caused by factors beyond the Company's control should not have a significant financial impact on the Company, although it could cause operational problems for the Company's customers. Longer-term disruptions, however, could materially impact the Company's results of operations, financial condition, and cash flows. While the Company owns or controls most of its domestic facilities and projects, nearly all of the Company's international investments have been made in conjunction with unrelated third parties. In many cases, the operators of such international facilities are not under the sole or direct control of the Company. As a consequence, the Year 2000 programs instituted at some of the international facilities may be different from the Year 2000 program implemented by the Company domestically, and the party responsible for the results of such program may not be under the direct or indirect control of the Company. In addition, the "non-controlled" programs may not provide the same degree of communication, documentation and coordination as the Company achieves in its domestic Year 2000 program. Moreover, the regulatory and legal environment in which such international facilities operate makes analysis of possible disruption and associated financial impact difficult. Many foreign countries appear to be substantially behind the United States in addressing potential Year 2000 disruption of critical infrastructure and in developing a framework governing the reporting requirements and relative liabilities of business entities. Accordingly, the Year 2000 risks posed by international operations as a whole are different than those presented domestically. As part of its Year 2000 effort, the Company is assessing the differences between the non-controlled programs and its domestic Year 2000 project, and has formulated and instituted a program for identifying such risks and preparing a response to such risks. While the Company believes that most of the international facilities in which it has significant investments are addressing Year 2000 issues in an adequate manner, it is possible that some of them may experience significant Year 2000 disruption, and that the aggregate effect of problems experienced at multiple international locations may be material and adverse. The Company intends to incorporate this possibility into the relevant contingency plans. While the total cost of the Company's Year 2000 project is still being evaluated, the Company estimates that the costs to be incurred in 1999 and 2000 associated with assessing, remediating and testing internally developed computer applications, hardware and equipment, embedded chip systems, and third-party-developed software will be between $14 million and $26 million. Of these estimated costs, the Company expects between $6 million and $14 million to be capitalized and the remainder to be expensed. As of December 31, 1998, the Company has incurred expenses of approximately $6 million. The Company has previously only traced incremental expenses related to its Year 2000 project. This means that the costs of the Year 2000 project related to salaried employees of the Company, including their direct salaries and benefits, are not available, and have not been included in the estimated costs of the project. Since the earlier phases of the project mostly involved work performed by such salaried employees, the costs expended to date do not reflect the percentage completion of the project. The Company anticipates that it will expend most of the costs 33 38 reported above in the remediation, implementation and contingency planning phases of the project. It is possible the Company may need to reassess its estimate of Year 2000 costs in the event the Company completes an acquisition of, or makes a material investment in, substantial facilities or another business entity. Although the Company does not expect the costs of its Year 2000 project to have a material adverse effect on its financial position, results of operations, or cash flows, based on information available at this time the Company cannot conclude that disruption caused by internal or external Year 2000 related failures will not have such an effect. Specific factors which might affect the success of the Company's Year 2000 efforts and the occurrence of Year 2000 disruption or expense include the failure of the Company of its outside consultants to properly identify deficient systems, the failure of the selected remedial action to adequately address the deficiencies, the failure of the Company's outside consultants to complete the remediation in a timely manner (due to shortages of qualified labor or other factors), unforeseen expenses related to the remediation of existing systems or the transition to replacement systems, the failure of third parties to become Year 2000 compliant or to adequately notify the Company of potential noncompliance and the effects of any significant disruption at international facilities in which the Company has significant investments. The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the intention to comply fully with the Year 2000 Information and Readiness Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law October 19, 1998. All statements made herein shall be construed within the confines of that Act. To the extent that any reader of the above Year 2000 Readiness Disclosure is other than an investor or potential investor in the Company's -- or an affiliate's -- equity or debt securities, this disclosure is made for the SOLE PURPOSE of communicating or disclosing information aimed at correcting, helping to correct and/or avoid Year 2000 failures. Employee Separation and Asset Impairment Charge During the first quarter of 1996, the Company adopted a program to reduce operating costs through work force reductions and improved work processes and adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. As a result of the workforce reduction program and the adoption of SFAS No. 121, the Company recorded a special charge of $99 million ($47 million for employee separation costs and $52 million for asset impairments) in the first quarter of 1996. For a further discussion, see Item 8, Financial Statements and Supplementary Data, Note 11. Management is not aware of other commitments or contingent liabilities which would have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED Accounting for the Costs of Computer Software Developed or Obtained for Internal Use In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement provides guidance on accounting for such costs, and also defines internal-use computer software. The statement is effective for fiscal years beginning after December 15, 1998. The application of this pronouncement will not have a material impact on the Company's financial position, results of operations, or cash flows. Reporting on the Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. The statement defines start-up activities and requires start-up and organization costs to be expensed as incurred. In addition, it requires that any such cost that exists on the balance sheet be expensed upon adoption of this pronouncement. The statement is effective for fiscal years beginning after December 15, 1998. The Company will adopt this pronouncement effective January 1, 1999, and expects to report a charge in the range of $7 million to $12 million, net of income taxes, in the first quarter of 1999 as a cumulative effect of a change in accounting principle. 34 39 Accounting for Derivative Instruments and Hedging Activities In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the Financial Accounting Standards Board to establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity classify all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (ii) a hedge of the exposure to variable cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The standard is effective for all quarters in fiscal years beginning after June 15, 1999. The Company is currently evaluating the effects of this pronouncement. Disclosure relating to Euro Conversion In July 1998, the Securities and Exchange Commission issued Staff Legal Bulletin No. 6 to provide guidance for disclosure related to the Euro Conversion. The guidance primarily focuses on disclosure in the Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as Description of Business. The Company currently has no investments in the countries affected by the Euro Conversion. Accounting for Contracts Involved in Energy Trading and Risk Management Activities In November 1998, the Emerging Issues Task Force reached a consensus on EITF 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. EITF 98-10 is effective for fiscal years beginning after December 15, 1998. The Company adopted the provisions of EITF 98-10 in January 1999. The application of this pronouncement did not have a material impact on the Company's financial position, results of operations, or cash flows. 35 40 RISK FACTORS -- CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while such assumptions or bases are believed to be reasonable and are made in good faith, assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, we or our management express an expectation or belief as to future results, such expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "anticipate" and similar expressions may identify forward-looking statements. With this in mind, you should consider 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 INDUSTRY IS HIGHLY COMPETITIVE The hydrocarbons that we transport, gather, process and store are owned by third parties. As a result, the volume of hydrocarbons involved in such activities is dependent upon the actions of those third parties, and are beyond our control. Further, our ability to maintain or increase current transmission, gathering, processing, and sales volumes or to remarket unsubscribed capacity, is subject to the impact of the following: - future weather conditions, including those that favor hydroelectric generation or other alternative energy sources; - price competition; - drilling activity and supply availability; - expiration of the Dynegy contracts at the end of 1999; and - service competition, especially due to current excess pipeline capacity into California. Our future profitability may be affected by our ability to compete with the services offered by other energy enterprises which may be larger, offer more services, and possess greater resources. Seventy percent of TGP's contracts are expiring over the next two years, principally in November 2000. Our ability to negotiate new contracts and to renegotiate existing contracts could be adversely affected by factors we cannot control, including: - the proposed construction by other companies of additional pipeline capacity in the markets served by TGP; - reduced demand due to higher gas prices; - the availability of alternative energy sources; and - the viability of our expansion projects. For a further discussion see Item 1, Business, Natural Gas Transmission, Markets and Competition. FLUCTUATIONS IN NATURAL GAS AND NATURAL GAS LIQUIDS PRICES COULD ADVERSELY AFFECT OUR BUSINESS Our ability to compete with other transporters is impacted by natural gas prices in the supply basins connected to our pipeline systems as compared to prices in other gas producing regions, especially Canada. Revenues generated by our gathering and processing contracts are dependent upon volumes and rates, both of which can be affected by the prices of natural gas and natural gas liquids. The success of our expanding gathering and processing operations in the offshore Gulf of Mexico is subject to continued development of 36 41 additional oil and gas reserves in the vicinity of our facilities and our ability to access such additional reserves to offset the natural decline from existing wells connected to our systems. A decline in energy prices could precipitate a decrease in such development activities and could cause a decrease in the volume of reserves available for gathering and processing through our offshore facilities. Fluctuations in energy prices, which may impact gathering rates and investments by third parties in the development of new oil and gas reserves connected to our gathering and processing facilities, are caused by a number of factors, including: - regional, domestic and international supply and demand; - availability and adequacy of transportation facilities; - energy legislation; - federal or state taxes, if any, on the sale or transportation of natural gas and natural gas liquids and the price; and - abundance of supplies of alternative energy sources. If there are reductions in the average volume of the natural gas we transport, gather and process for a prolonged period, our results of operations and financial position could be materially adversely affected. THE USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT IN FINANCIAL LOSSES Some of our non-regulated subsidiaries are engaged in the gathering, processing and marketing of natural gas and other energy commodities and utilize futures and option contracts traded on the New York Mercantile Exchange and over-the-counter options and price and basis swaps with other gas merchants and financial institutions. These instruments are intended to reduce our exposure to short-term volatility in changes in commodities prices. We could, however, incur financial losses in the future as a result of volatility in the market values of the underlying commodities or if one of our counterparties fails to perform under a contract. For additional information concerning our derivative financial instruments, see item 7A, Quantitative and Qualitative Disclosures About Market Risks and Item 8, Financial Statements and Supplementary Data, Note 5. ATTRACTIVE ACQUISITION AND INVESTMENT OPPORTUNITIES MAY NOT BE AVAILABLE Our ability to grow will depend, in part, upon our ability to identify and complete attractive acquisition and investment opportunities. Opportunities for growth through acquisitions and investments in joint ventures, and the future operating results and success of such acquisitions and joint ventures within and outside the U.S. may be subject to the effects of, and changes in the following: - U.S. and foreign trade and monetary policies; - laws and regulations; - political and economic developments; - inflation rates; - taxes; and - operating conditions. OUR FOREIGN INVESTMENTS INVOLVE SPECIAL RISKS Our activities in areas outside the U.S. are subject to the risks inherent in foreign operations, including: - loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, wars, insurrection and other political risks, and - the effects of currency fluctuations and exchange controls (such as the recent devaluation of the Indonesian and Brazilian currencies and other economic problems). 37 42 Such legal and regulatory events and other unforeseeable obstacles may be beyond our control or ability to manage. WE COULD INCUR SUBSTANTIAL ENVIRONMENTAL LIABILITIES 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, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from current or discontinued operations, could result in substantial costs and liabilities in the future. For additional information concerning the Company's environmental matters, see the section of this item entitled "Environmental." OUR ACTIVITIES INVOLVE OPERATING HAZARDS AND UNINSURED RISKS While we maintain insurance against certain of the risks normally associated with the transportation, gathering and processing of natural gas, including explosions, pollution and fires, the occurrence of a significant event that is not fully insured against could have a material adverse effect on our business. THERE REMAIN POTENTIAL LIABILITIES RELATED TO THE ACQUISITION OF EPTPC The amount of the actual and contingent liabilities of EPTPC, which remained the liabilities of EPNG after it acquired EPTPC, could vary materially from the amount we estimated, which was based upon assumptions which could prove to be inaccurate. If New Tenneco or Newport News Shipbuilding Inc. were unable or unwilling to pay their respective liabilities, a court could require us, under certain legal theories which may or may not be applicable to the situation, to assume responsibility for such obligations. If we were required to assume these obligations, it could have a material adverse effect on our financial condition, results of operations or cash flows. THERE REMAIN POTENTIAL FEDERAL INCOME TAX LIABILITIES RELATED TO THE ACQUISITION OF EPTPC In connection with the acquisition of EPTPC and the Distributions made by EPTPC prior to that acquisition, the IRS issued a private letter ruling to Old Tenneco, in which it ruled that for U.S. federal income tax purposes the Distributions would be tax-free to Old Tenneco and, except to the extent cash was received in lieu of fractional shares, to its then existing stockholders; the Merger would constitute a tax-free reorganization; and that certain other transactions effected in connection with the Merger and Distribution would be tax-free. If the Distributions were not to qualify as tax-free distributions, then a corporate level federal income tax would be assessed to the consolidated group of which Old Tenneco was the common parent. This corporate level federal income tax would be payable by EPTPC. Under certain limited circumstances, however, New Tenneco and Newport News Shipbuilding Inc. have agreed to indemnify EPTPC for a defined portion of such tax liabilities. WE ARE SUBJECT TO FINANCING AND INTEREST RATE EXPOSURE RISKS Our business and operating results can be adversely affected by factors such as the availability or cost of capital, changes in interest rates, changes in the tax rates due to new tax laws, market perceptions of the natural gas industry or EPEC, or credit ratings. WE ARE SUBJECT TO RISKS ASSOCIATED WITH YEAR 2000 ISSUES We are taking steps to mitigate any adverse effects of the Year 2000 date change on our customers and business operations including the assessment, remediation, testing of our applications, hardware and software, and the implementation of necessary change. Nevertheless, our failure, or the failure of third-parties with whom we deal, to achieve Year 2000 compliance may adversely affect our business. For additional information on our Year 2000 strategy and specific factors that may affect our ability to achieve Year 2000 compliance, see the section of this item entitled "Other -- Year 2000." 38 43 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company utilizes derivative financial instruments to manage market risks associated with certain energy commodities and interest and foreign currency exchange rates. The Company's primary market risk exposure is to changing commodity prices. Market risks are monitored by a corporate risk management committee that operates independently from the business segments that create or actively manage these risk exposures to ensure compliance with the Company's stated risk management policies as approved by the Board. These policies are set forth in Item 8, Financial Statements and Supplementary Data, Note 1. TRADING COMMODITY PRICE RISK EPEM is exposed to certain market risks inherent in its financial instruments entered into for trading purposes associated with natural gas, power and petroleum products. EPEM marks to market all energy trading activities, including transportation capacity and storage. EPEM's policy is to manage commodity price risks through a variety of financial instruments, including forward contracts involving cash settlements or physical delivery of an energy commodity, swap contracts which require payment to (or receipts from) counterparties based on the differential between a fixed and variable price for the commodity, exchange-traded options, over-the-counter options and other contractual arrangements. EPEM manages its markets risk on a portfolio basis, subject to parameters established by the risk management committee. Comprehensive risk management processes, policies, and procedures have been established to monitor and control its market risk. The Company's risk management committee also continually reviews these policies to ensure they are responsive to changing business conditions. EPEM measures the risk in its commodity and energy related contract portfolio on a daily basis utilizing a Value-at-Risk ("VAR") model to determine the maximum potential one-day unfavorable impact on its earnings from its existing portfolio due to normal market movements and monitors its risk in comparison to established thresholds. The VAR computations are based on historical simulation, which utilizes price movements over a specified period to simulate forward price curves in the energy markets, and several key assumptions, including the selection of a confidence level for expected losses and the holding period for liquidation. EPEM also utilizes other measures outside the VAR methodology to monitor the risk in its commodity and energy related contract portfolio on a monthly basis, including stress testing, position limit control and credit, liquidity and event risk management. EPEM previously utilized sensitivity analysis to report market risk based on a ten percent change in commodity prices. The uncertainty of the market place, increased trading of derivative instruments, and the complexity of these instruments created the demand for a more comprehensive portfolio level quantitative measure of market risk. Accordingly, EPEM converted from utilizing sensitivity analysis to the VAR model during 1998. Assuming a confidence level of 95 percent and a one-day holding period, EPEM's estimated potential one-day unfavorable impact on income before income taxes and minority interest, as measured by VAR, related to its commodity and energy related contracts held for trading purposes was approximately $3 million and $2 million at December 31, 1998, and 1997, respectively. VAR was implemented on April 1, 1998, therefore volatilities and correlations applicable on April 1, 1998, were used to provide comparative data for December 31, 1997. Actual losses could exceed those measured by VAR. NON-TRADING COMMODITY PRICE RISK The estimated potential one-day unfavorable impact on income before income taxes and minority interest, as measured by VAR, related to EPEM's non-trading commodity activities was immaterial at December 31, 1998, and 1997. INTEREST RATE RISK The Company's debt financial instruments are sensitive to market fluctuations in interest rates. The table below presents principal cash flows and related weighted average interest rates by expected maturity dates. As of December 31, 1998, and 1997, the carrying amounts of short-term borrowings are representative of fair 39 44 values because of the short-term maturity of these instruments. The fair value of the long-term debt has been estimated based on quoted market prices for the same or similar issues. The Company's non-trading derivative financial instruments, including interest rate and equity swaps are also sensitive to market fluctuations in interest rates. The interest rate swap agreements entered into by MPC effectively convert $114 million of floating-rate debt to fixed-rate debt (see Item 8, Financial Statements and Supplementary Data, Note 4). MPC makes payments to counterparties at fixed rates and in return receives payments at floating rates. The two swap agreements were entered into in March 1992 and have remaining terms of approximately 1 year and 3 years, respectively. This transaction is recorded using accrual accounting. In addition, in March 1997, the Company purchased a 10.5 percent interest in CAPSA for approximately $57 million. In connection with this acquisition, the Company entered into an equity swap transaction associated with an additional 18.5 percent of CAPSA's then outstanding stock. Under the equity swap, the Company pays interest to the counterparty, on a quarterly basis, on a notional amount of $100 million at a rate of LIBOR plus 0.85 percent. In exchange, the Company receives dividends on the CAPSA stock to the extent of the counterparty's equity interest of 18.5 percent. In February 1999, the Company extended the term of the swap for two and a half years. For the interest rate and equity swaps, the table below presents notional amounts and weighted average interest rates by expected or contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contact. The fair value of the derivative financial instruments is the estimated amount at which management believes they could be liquidated over a reasonable period of time, based on quoted market prices, current market conditions, or other estimates obtained from third-party dealers. The tabular presentation related to activities other than commodity trading, as of December 31, 1998, and 1997, is illustrated below:
DECEMBER 31, 1998 -------------------------------------------------------------------- EXPECTED FISCAL YEAR OF MATURITY -------------------------------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE ---- ----- ---- ---- ---- ---------- ------ ---------- (DOLLARS IN MILLIONS) LIABILITIES: Short-term debt -- variable rate.............................. $750 $ 750 $ 750 - ------------------------------------ Average interest rate........ 5.8% Long-term debt, including ----------------------------- current portion -- fixed rate......................... $ 62 $ 125 $ 52 $240 $215 $1,920 $2,614 $2,795 ---------------------------------- Average interest rate........ 8.0% 10.5% 7.3% 7.8% 7.8% 7.8% INTEREST RATE DERIVATIVES: Interest rate swap -------------------- Variable to fixed rate -- notional amounts..... $ 29 $ 85 $ 114 $ (9) Average interest rate........ 8.3% 8.4% 8.4% 8.4% Average received rate(a)..... 4.9% 5.0% 5.1% 5.1% Net cash flow effect......... $ (4) $ (3) $ (3) $ (3) Equity swap -------------- Interest to dividend -- notional amount....................... $100 $ 100 $ 3 Average interest rate(a)..... 6.5% Received dollars(b).......... -- Net cash flow effect......... (7)
40 45
DECEMBER 31, 1997 ---------------------- TOTAL FAIR VALUE ------ ---------- (DOLLARS IN MILLIONS) LIABILITIES: Short-term debt -- variable rate.......................... $ 813 $ 813 Average interest rate paid in 1998..................... 5.8% Long-term debt, including current portion -- fixed rate... $2,191 $2,334 Average interest rate paid in 1998................... 7.8% INTEREST RATE DERIVATIVES: Interest rate swap Variable to fixed rate -- notional amounts............. $ 114 $ (9) Average interest rate paid in 1998................... 8.3% Average received rate in 1998(a)..................... 5.8% Net cash flow effect for 1998........................ $ (3) Equity swap Interest to dividend -- notional amount................ $ 100 $ 8 Average interest rate paid in 1998(a)................ 6.6% Received dollars in 1998(b).......................... -- Net cash flow effect for 1998........................ $ (7)
- --------------- (a) The variable rates presented are the average forward rates for the remaining term of each contract. (b) The Company receives dividends, to the extent paid, on the CAPSA stock to the extent of the counterparty's equity interest of 18.5 percent. No dividends were received in 1998 and no dividends are expected for 1999. 41 46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EL PASO ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ Operating revenues Transportation............................................ $1,194 $1,200 $ 534 Natural gas, liquids and power............................ 4,370 4,110 2,359 Gathering and processing.................................. 141 204 85 Other..................................................... 77 124 34 ------ ------ ------ 5,782 5,638 3,012 ------ ------ ------ Operating expenses Cost of gas and other products............................ 4,212 4,125 2,277 Operation and maintenance................................. 707 664 322 Depreciation, depletion, and amortization................. 269 236 101 Employee separation and asset impairment charge........... -- -- 99 Taxes, other than income taxes............................ 88 92 43 ------ ------ ------ 5,276 5,117 2,842 ------ ------ ------ Operating income............................................ 506 521 170 ------ ------ ------ Other (income) and expense Interest and debt expense................................. 267 238 110 Other, net................................................ (138) (57) (5) ------ ------ ------ 129 181 105 ------ ------ ------ Income before income taxes and minority interest............ 377 340 65 Income tax expense.......................................... 127 129 25 ------ ------ ------ Income before minority interest............................. 250 211 40 Minority interest Preferred stock dividend of subsidiary.................... 25 25 2 ------ ------ ------ Net income.................................................. $ 225 $ 186 $ 38 ====== ====== ====== Basic earnings per common share............................. $ 1.94 $ 1.64 $ 0.53 ====== ====== ====== Diluted earnings per common share........................... $ 1.85 $ 1.59 $ 0.52 ====== ====== ====== Basic average common shares outstanding..................... 116 114 72 ====== ====== ====== Diluted average common shares outstanding................... 126 117 73 ====== ====== ======
The accompanying Notes are an integral part of these Consolidated Financial Statements. 42 47 EL PASO ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT COMMON SHARE AMOUNTS) ASSETS
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ Current assets Cash and temporary investments............................ $ 90 $ 116 Accounts and notes receivable, net Customer................................................ 557 737 Other................................................... 176 252 Inventories............................................... 49 68 Deferred income taxes..................................... 81 168 Assets from price risk management activities.............. 181 96 Regulatory assets......................................... 9 116 Prepaid expenses.......................................... 40 28 Other..................................................... 26 48 ------- ------ Total current assets............................... 1,209 1,629 ------- ------ Property, plant, and equipment, net......................... 7,341 7,116 Investments in unconsolidated affiliates.................... 600 373 Intangibles, net............................................ 537 117 Other....................................................... 382 297 ------- ------ Total assets....................................... $10,069 $9,532 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable Trade................................................... $ 547 $ 787 Other................................................... 177 99 Short-term borrowings (including current maturities of long-term debt)......................................... 812 885 Accrual for regulatory issues............................. 37 22 Liabilities from price risk management activities......... 127 73 Other..................................................... 462 598 ------- ------ Total current liabilities.......................... 2,162 2,464 ------- ------ Long-term debt, less current maturities..................... 2,552 2,119 ------- ------ Deferred income taxes....................................... 1,564 1,550 ------- ------ Postretirement benefits..................................... 248 285 ------- ------ Other....................................................... 745 790 ------- ------ Commitments and contingencies (See Note 6) Company-obligated mandatorily redeemable convertible preferred securities of El Paso Energy Capital Trust I.... 325 -- ------- ------ Minority interest Preferred stock of subsidiary............................. 300 300 ------- ------ Other minority interest................................... 65 65 ------- ------ Stockholders' equity Common stock, par value $3 per share; authorized 275,000,000 shares; issued 124,434,110 and 122,581,816 shares, respectively.................................... 373 368 Additional paid-in capital................................ 1,436 1,389 Retained earnings......................................... 460 327 Accumulated comprehensive income.......................... (14) (7) Treasury stock (at cost) 4,149,099 and 2,946,832 shares, respectively............................................ (90) (47) Deferred compensation..................................... (57) (71) ------- ------ Total stockholders' equity......................... 2,108 1,959 ------- ------ Total liabilities and stockholders' equity......... $10,069 $9,532 ======= ======
The accompanying Notes are an integral part of these Consolidated Financial Statements. 43 48 EL PASO ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ------- ------- Cash flows from operating activities Net income................................................ $ 225 $ 186 $ 38 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion, and amortization.............. 269 236 101 Deferred income taxes (benefit)........................ 128 195 (5) Gain on disposition of property........................ (20) (2) -- Undistributed earnings in equity investees............. (28) (3) 16 Amortization of deferred compensation.................. 24 19 5 Risk-sharing revenue................................... (31) -- -- Net employee separation and asset impairment charge.... -- -- 76 Working capital changes, net of non-cash transactions Accounts and notes receivable........................ 250 342 (168) Inventories.......................................... 19 16 (5) Net price risk management activities................. (32) 16 (39) Regulatory asset..................................... 124 19 -- Other current assets................................. 11 47 77 Accrual for regulatory issues........................ 16 (266) 135 Accounts payable..................................... (178) (249) 65 Other current liabilities............................ (143) 11 (8) Other..................................................... (124) 4 3 ----- ------- ------- Net cash provided by operating activities......... 510 571 291 ----- ------- ------- Cash flows from investing activities Capital expenditures...................................... (406) (293) (119) Investment in joint ventures and equity investees......... (447) (239) (24) Net cash flow impact of acquisitions...................... (373) (213) (35) Proceeds from disposal of property and investments........ 74 14 190 Proceeds from equity investment project financing......... 153 53 -- Other..................................................... -- (28) (17) ----- ------- ------- Net cash used in investing activities............. (999) (706) (5) ----- ------- ------- Cash flows from financing activities Net commercial paper borrowings (repayments).............. 14 326 (203) Revolving credit borrowings............................... 610 70 400 Revolving credit repayments............................... (687) (1,200) (1,022) Long-term debt retirements................................ (72) (124) (24) Long-term debt issuance, net.............................. 391 883 396 Proceeds from issuance of El Paso Energy Capital Trust I preferred securities, net of issuance costs............ 317 -- -- Acquisition of treasury stock............................. (36) -- -- Dividends paid............................................ (91) (77) (53) Proceeds from stock issuance, net of issuance costs....... -- 152 -- Proceeds from project financing........................... -- -- 310 Other..................................................... 17 21 71 ----- ------- ------- Net cash provided by (used in) financing activities...................................... 463 51 (125) ----- ------- ------- Increase (decrease) in cash and temporary investments....... (26) (84) 161 Cash and temporary investments Beginning of period....................................... 116 200 39 ----- ------- ------- End of period............................................. $ 90 $ 116 $ 200 ===== ======= =======
The accompanying Notes are an integral part of these Consolidated Financial Statements. 44 49 EL PASO ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK --------------- PAID-IN RETAINED COMPREHENSIVE --------------- DEFERRED SHARES AMOUNT CAPITAL EARNINGS INCOME SHARES AMOUNT COMPENSATION ------ ------ ---------- -------- ------------- ------ ------ ------------ January 1, 1996............. 75 $224 $ 343 $240 $ -- (6) $(95) $ -- Net income................ 38 Common stock dividend ($0.695 per share)...... (50) Issuance of common stock for acquisition of EPTPC................... 37 113 800 Restricted stock issuances............... 23 2 41 (74) Amortization of deferred compensation............ 5 Options exercised......... 1 3 18 (1) 1 9 Other..................... 1 --- ---- ------ ---- ---- -- ---- ---- December 31, 1996........... 113 340 1,185 227 -- (3) (45) (69) Net income................ 186 Common stock dividend ($0.730 per share)...... (86) Issuance of common stock, net of related costs.... 7 20 152 Restricted stock issuances............... 1 4 20 -- 1 (23) Restricted stock forfeitures............. -- (3) 2 Amortization of deferred compensation............ 19 Options exercised......... 2 4 21 Income tax benefit of stock-based compensation plans................... 11 Comprehensive income...... (7) --- ---- ------ ---- ---- -- ---- ---- December 31, 1997........... 123 368 1,389 327 (7) (3) (47) (71) Net income................ 225 Common stock dividend ($0.765 per share)...... (92) Issuance of common stock for acquisition of DeepTech................ -- -- 2 Restricted stock issuances............... -- 2 23 (14) Restricted stock forfeitures............. -- (4) 4 Restricted stock used for tax withholdings........ -- (1) Amortization of deferred compensation............ 24 Options exercised......... 1 3 13 -- (2) Income tax benefit of stock-based compensation plans................... 9 Open market stock repurchases............. (1) (36) Comprehensive income...... (7) --- ---- ------ ---- ---- -- ---- ---- December 31, 1998........... 124 $373 $1,436 $460 $(14) (4) $(90) $(57) === ==== ====== ==== ==== == ==== ==== TOTAL STOCKHOLDERS' EQUITY ------------- January 1, 1996............. $ 712 Net income................ 38 Common stock dividend ($0.695 per share)...... (50) Issuance of common stock for acquisition of EPTPC................... 913 Restricted stock issuances............... (10) Amortization of deferred compensation............ 5 Options exercised......... 29 Other..................... 1 ------ December 31, 1996........... 1,638 Net income................ 186 Common stock dividend ($0.730 per share)...... (86) Issuance of common stock, net of related costs.... 172 Restricted stock issuances............... 2 Restricted stock forfeitures............. (1) Amortization of deferred compensation............ 19 Options exercised......... 25 Income tax benefit of stock-based compensation plans................... 11 Comprehensive income...... (7) ------ December 31, 1997........... 1,959 Net income................ 225 Common stock dividend ($0.765 per share)...... (92) Issuance of common stock for acquisition of DeepTech................ 2 Restricted stock issuances............... 11 Restricted stock forfeitures............. -- Restricted stock used for tax withholdings........ (1) Amortization of deferred compensation............ 24 Options exercised......... 14 Income tax benefit of stock-based compensation plans................... 9 Open market stock repurchases............. (36) Comprehensive income...... (7) ------ December 31, 1998........... $2,108 ======
The accompanying Notes are an integral part of these Consolidated Financial Statements. 45 50 EL PASO ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ----- ----- ----- Net income.................................................. $225 $186 $38 Foreign currency translation adjustments.................... (7) (7) -- ---- ---- --- Comprehensive income........................................ $218 $179 $38 ==== ==== ===
The accompanying Notes are an integral part of these Consolidated Financial Statements. 46 51 EL PASO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of all majority-owned, controlled subsidiaries of the Company after the elimination of all significant intercompany accounts and transactions. Investments in companies where the Company has the ability to exert significant influence over, but not control operating and financial policies are accounted for using the equity method. The financial statements for previous periods include certain reclassifications that were made to conform to the current year presentation. Such reclassifications have no impact on reported net income or stockholders' equity. Holding Company Reorganization Effective August 1, 1998, the Company reorganized into a holding company organizational structure, whereby EPEC, a Delaware corporation, became the holding company. The holding company organizational structure was effected by a merger conducted pursuant to Section 251(g) of the Delaware General Corporation Law, which provides for the formation of a holding company structure without a vote of the stockholders of EPNG. In the merger, El Paso Energy Merger Company, a Delaware corporation and wholly owned subsidiary of EPEC, merged with and into EPNG, with EPNG as the surviving corporation. By virtue of the reorganization, EPNG became a direct, wholly owned subsidiary of EPEC, and all of EPNG's outstanding capital stock was converted, on a share for share basis, into capital stock of EPEC. As a result of such restructuring, each outstanding share of $3.00 par value common stock of EPNG was converted into one share of $3.00 par value common stock of EPEC, and each one-half outstanding preferred stock purchase right of EPNG was converted into one preferred stock purchase right of EPEC common stock, with such right representing the right to purchase one two-hundredth (subject to adjustment) of a share of Series A Junior Participating Preferred Stock of EPEC. Because the reorganization was with companies under common control, the stockholders' equity and components thereof of EPNG became the basis for EPEC stockholders' equity. In addition to the holding company formation, EPEC assumed ownership of the Trust (as defined in Note 3) as well as EPNG's obligations related to the Trust. See Note 3, Trust Preferred Securities for a further discussion. Finally, EPEC became the successor to EPNG's previous shelf registration in the amount of $565 million. The New York Stock Exchange ticker symbol used by EPEC following the reorganization remains unchanged as "EPG." Tax-free Internal Reorganization On December 31, 1998, the Company effected a tax-free internal reorganization of its assets and operations and those of a majority of its subsidiaries in accordance with a private letter ruling received from the IRS. In the internal reorganization, a substantial number of subsidiaries were transferred to or from the Company and/or other entities owned by the Company. The tax-free internal reorganization had no impact on the presentation herein. Stock Split On January 21, 1998, the Board approved a two-for-one stock split of EPNG's common stock (the "Stock Split"), subject to stockholder approval of an amendment to EPNG's Restated Certificate of Incorporation to increase the number of authorized shares of EPNG's common stock to 275,000,000 shares (the "Amendment"). EPNG's stockholders approved the Amendment on March 2, 1998. In connection with the Amendment, the Board increased the number of authorized shares of EPNG's preferred stock designated as Series A Junior Participating Preferred Stock to 1,375,000 shares. Prior to the holding company reorganization, the designated number of Series A Junior Participating Preferred Stock was increased to 2,750,000. The Stock Split was effected in the form of a stock dividend of an aggregate of 60,944,417 shares of 47 52 EPNG's common stock, which was paid on April 1,1998, to stockholders of record on March 13, 1998. All common shares and per common share amounts have been adjusted to give effect to the Stock Split. After giving effect to the Stock Split in accordance with the adjustment provisions of the Amended and Restated Shareholder Rights Agreement, dated as of July 23, 1997, between the Company and BankBoston, N.A. as Rights Agent, the number of rights to purchase one one-hundredth of a share of the Series A Junior Participating Preferred Stock associated with each share of common stock was adjusted to become one-half of such right (see Holding Company Reorganization above, for the impact of the holding company reorganization). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities that exist at the date of the financial statements. Actual results are likely to differ from those estimates. Accounting for Regulated Operations The Company's businesses that are subject to the regulations and accounting requirements of FERC have followed the accounting requirements of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, which may differ from the accounting requirements of the Company's non-regulated entities. Transactions that have been recorded differently as a result of regulatory accounting requirements include: GSR costs to be recovered under a demand and interruptible surcharge, environmental costs to be recovered under a demand surcharge, and certain benefits and other costs and taxes included in or expected to be included in future rates, including costs to refinance debt. When the accounting method followed is prescribed by or allowed by the regulatory authority for rate-making purposes, such method conforms to the generally accepted accounting principle of matching costs with the revenues to which they apply. Cash and Temporary Investments Short-term investments purchased with an original maturity of three months or less are considered cash equivalents. Allowance for Doubtful Accounts and Notes Receivable The Company has established a provision for losses on accounts and notes receivable, as well as for gas imbalances due from shippers and operators, which may become uncollectible. Collectibility is reviewed regularly, and the allowance is adjusted as necessary primarily under the specific identification method. The balances of this provision at December 31, 1998 and 1997, were $15 million and $17 million, respectively. Gas Imbalances The Company values gas imbalances due to or due from shippers and operators at the appropriate index price. Natural gas imbalances are settled in cash or made up in-kind. Inventories Inventories, consisting of materials and supplies and natural gas in storage, are valued at the lower of cost or market with cost determined using the average cost method. Property, Plant, and Equipment Included in the Company's property, plant, and equipment is construction work in progress of approximately $392 million and $276 million at December 31, 1998, and 1997, respectively. An allowance for both debt and equity funds used during construction of regulated projects is included in the cost of the Company's property, plant, and equipment. 48 53 Accounting for a substantial portion of property, plant, and equipment is subject to regulation by the FERC. The objectives of this regulation are to ensure the proper recovery of capital investments in rates. Such recovery is generally accomplished by allowing a return of the investment through inclusion of depreciation expense in the cost of service. Rates also allow for a return on the net unrecovered rate base. Specific procedures are prescribed by FERC to control capitalized costs, depreciation, and the disposal of assets. SFAS No. 71 specifically acknowledges the obligation of regulated companies to comply with regulated accounting procedures, even when they conflict with other generally accepted accounting principle pronouncements. Regulated property, plant, and equipment is recorded at original cost of construction or, on acquisition, the cost of first party committing the asset to utility services. Construction cost includes direct labor and materials, as well as indirect charges such as overheads and allowance for funds used during construction. Replacements or betterments of major units of property are capitalized. Replacements or additions of minor units of property are expensed. Depreciation for regulated property, plant, and equipment is calculated using the composite method. Assets with similar economic characteristics are grouped. The depreciation rate prescribed in the rate settlement is applied to the gross investment for the group until net book value of the group is equal to the salvage value. Currently, depreciation rates vary from 1 percent to 33 percent. This results in remaining economic lives of groups ranging from 2 to 36 years. Depreciation rates are reevaluated in conjunction with the rate making process. When regulated property, plant, and equipment is retired, due to abandonment or replacement, the original cost, plus the cost of retirement, less salvage, is charged to accumulated depreciation and amortization. No gain or loss is recognized unless an entire operating unit, as defined by FERC, has been retired. Gains or losses on dispositions of operating units are included in income. Additional acquisition cost assigned to utility plant primarily represents the excess of allocated purchase costs over historical costs that resulted from the December 1996 acquisition of EPTPC. These costs are being amortized on a straight-line basis using FERC approved rates. Depreciation of the Company's non-regulated properties is provided using the straight line or composite method which, in the opinion of management, is adequate to allocate the cost of properties over their estimated useful lives. Non-regulated properties have expected lives of 5 to 40 years. The Company evaluates impairment of its property, plant, and equipment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Intangible Assets Intangible assets are amortized using the straight-line method over periods ranging from 5 years to 40 years. Accumulated amortization of intangible assets was $24 million and $21 million for 1998 and 1997, respectively. The Company evaluates impairment of goodwill in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Environmental Costs Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs. All available evidence is considered including prior experience in remediation of contaminated sites, other companies' clean-up experience and data released by the EPA or other organizations. These estimated liabilities are subject to 49 54 revision in future periods based on actual costs or new circumstances. These liabilities are included in the balance sheets at their undiscounted amounts. Recoveries are evaluated separately from the liability and, when recovery is assured, are recorded and reported separately from the associated liability in the consolidated financial statements as an asset. Price Risk Management Activities The Company utilizes derivative financial instruments to manage market risks associated with certain energy commodities, and interest rates. In its commodity price risk management activities, the Company engages in both trading and non-trading activities. Activities for trading purposes consist of services provided to the energy sector, and all energy trading activities, including transportation capacity and storage, are accounted for using the mark-to-market method of accounting. Such trading activities are conducted through a variety of financial instruments, including forward contracts involving cash settlement or physical delivery of an energy commodity, swap contracts which require payments to (or receipts from) counterparties based on the differential between a fixed and variable price for the commodity, exchange-trade options, over-the-counter options, and other contractual arrangements. Under mark-to-market accounting, commodity and energy related contracts are reflected at estimated market value with resulting gains and losses recorded in operating income in the Consolidated Statements of Income. The net gains or losses recognized in the current period result primarily from transactions originating within the period and the impact of price movements on transactions originating in previous periods. The assets and liabilities resulting from mark-to-market accounting are presented as assets and liabilities from price risk management activities in the Consolidated Balance Sheets. Terms regarding cash settlement of the contracts vary with respect to the actual timing of cash receipts and payments. Receivables and payables resulting from these timing differences are presented in accounts receivable, and accounts payable in the Consolidated Balance Sheets. Cash inflows and outflows associated with these price risk management activities are recognized in operating cash flow as the settlements of transactions occur. The market value of these commodity and energy related contracts reflects management's best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the commitments. The values are adjusted to reflect the potential impact of liquidating the Company's position in an orderly manner over a reasonable period of time under present market conditions. Derivative and other financial instruments are also utilized in connection with non-trading activities. The Company enters into forwards, swaps, and other contracts to hedge the impact of market fluctuations on assets, liabilities, or other contractual commitments. Derivatives held for non-trading price risk management activities are not recorded on the balance sheet. Net periodic settlements are recorded as a gain or loss in operating income in the consolidated statements of income, and cash inflows and outflows are recognized in operating cash flow as the settlements of the transactions occur. See Note 5 for a further discussion of the Company's price risk management activities. In late 1998, the Emerging Issues Task Force reached a consensus which supported the Company's accounting policy as described above. Income Taxes Income taxes are based on income reported for tax return purposes along with a provision for deferred income taxes. Deferred income taxes are provided to reflect the tax consequences in future years of differences between the financial statement and tax bases of assets and liabilities at each year end. Tax credits are accounted for under the flow-through method, which reduces the provision for income taxes in the year the tax credits first become available. Deferred tax assets are reduced by a valuation allowance when, based upon management's estimates, it is more likely than not that a portion of the deferred tax assets will not be realized 50 55 in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. In connection with the Merger, EPTPC entered into a tax sharing agreement with Newport News Shipbuilding Inc., New Tenneco and the Company, as successor to EPNG. This tax sharing agreement provides, among other things, for the allocation among the parties of tax assets and liabilities arising prior to, as a result of, and subsequent to the Distributions. Generally, EPTPC will be liable for taxes imposed on itself. With respect to periods prior to the consummation of the Distributions, in the case of federal income taxes imposed on the combined activities of Old Tenneco and other members of its consolidated group prior to giving effect to the Distributions, New Tenneco and Newport News Shipbuilding Inc. will be liable to EPTPC for federal income taxes attributable to their activities, and each will be allocated an agreed-upon share of estimated tax payments made by EPTPC for Old Tenneco. Pursuant to the tax sharing agreement, EPTPC paid New Tenneco in 1997 for the tax benefits realized from the deduction of 1996 taxable losses generated by a debt realignment in accordance with the Merger. Treasury Stock Treasury stock is accounted for using the cost method and is shown as a reduction to stockholders' equity in the consolidated balance sheets. Treasury stock sold or issued is valued on a first-in, first-out basis. Included in treasury stock at December 31, 1998, and 1997, were 1,360,000 shares of common stock that were reserved for use under certain of the Company's benefit plans. Stock-Based Compensation As allowed under SFAS No. 123, the Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock compensation plans. The Company uses fixed and variable plan accounting for fixed and variable compensation plans, respectively. Accordingly, compensation expense is not recognized for stock options unless the options were granted at an exercise price lower than market on the grant date. New Accounting Pronouncements Not Yet Adopted See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, New Accounting Pronouncements Not Yet Adopted, which is incorporated herein by reference. 51 56 2. ACQUISITIONS DeepTech In August 1998, the Company completed its acquisition of DeepTech by merging DeepTech with a subsidiary of EPEC. DeepTech's assets include a 27.3 percent ownership interest in Leviathan. The acquisition was accounted for as a purchase with a total purchase price of approximately $422 million, net of cash acquired. The Company recorded $214 million of goodwill in connection with the acquisition which will be amortized using the straight-line method over a period of 40 years. The amount allocated to goodwill is based on an estimate of the excess of the total purchase price over the fair value of assets and liabilities at the acquisition date. The amounts may be adjusted in the final purchase price allocation. Management does not expect the ultimate resolution of the purchase price allocation to materially impact the Company's financial position, results of operations, or cash flows. The operating results of DeepTech are included in the Company's Consolidated Statements of Income beginning on August 15, 1998. The components of the purchase price are as follows:
(IN MILLIONS) Fair value of assets acquired............................... $ 338 Goodwill.................................................... 214 Fair value of liabilities assumed........................... (101) Cash acquired............................................... (29) ----- Purchase price, net of cash acquired.............. 422 Affiliated receivable extinguished.......................... (77) Issuance of common stock.................................... (2) ----- Net cash consideration paid....................... $ 343 =====
In accordance with the DeepTech merger agreement, the Company has executed a guarantee with regard to DeepTech's 12% senior notes due 2000. The following table contains summarized financial information of DeepTech. Information as of and for the twelve months ended June 30, 1998, 1997, and 1996 are for pre-merger periods. The information for December 31, 1998, is for the post-merger period and the information for the six months ended December 31, 1998, is part post-merger and part pre-merger.
FOR THE SIX FOR THE TWELVE MONTHS MONTHS ENDED ENDED JUNE 30, DECEMBER 31, --------------------- 1998(a) 1998 1997 1996 ------------ ------- ---- ---- (IN MILLIONS) Operating results data: Operating revenue......................................... $ 15 $ 69 $120 $ 55 Operating expenses........................................ $ 25 $ 74 $132 $ 50 Net income (loss)......................................... $ 11 $ (2) $(20) $ 4
JUNE 30, DECEMBER 31, --------------------- 1998(b) 1998 1997 1996 ------------ ------- ---- ---- (IN MILLIONS) Financial position data: Total assets.............................................. $551 $181 $228 $156 Short term debt (including current maturities of long-term debt).................................................. $ 17 $ 12 $ 25 $ 46 Long term debt............................................ $ 90 $ 96 $165 $ 98 Stockholder's equity...................................... $444 $ 47 $ 6 $ 12
- --------------- (a) Unaudited (b) Reflects the allocation of the purchase price to the assets acquired and liabilities assumed in connection with the Company's acquisition of DeepTech in August 1998. 52 57 TPC In December 1997, the Company completed its purchase of gathering facilities consisting of 360 miles of natural gas pipeline and a natural gas cryogenic processing plant through the acquisition of 100 percent of the stock of TPC at a cash price of approximately $195 million. This transaction was accounted for as a purchase. Gulf States In October 1997, the Company completed the acquisition of Gulf States Gas Pipeline Company. The assets purchased include a 175-mile natural gas gathering and intrastate transmission system in Northwest Louisiana with a capacity of 250 MMcf/d. The purchase price was approximately $39 million, which included the issuance of $21 million of common stock of the Company. This transaction was accounted for as a purchase. EPTPC On December 12, 1996, the Company completed the acquisition of EPTPC in a transaction accounted for as a purchase. The purchase price was assigned to the assets and liabilities acquired based upon the estimated fair value of those assets and liabilities as of the acquisition date. Substantially all of the excess of the total purchase price over historical carrying amounts of the net assets acquired was allocated to property, plant and equipment of EPTPC's interstate pipeline systems. Such allocation was confirmed by an independent appraisal of the property acquired. In the Merger, Old Tenneco changed its name to EPTPC. Prior to the Merger, Old Tenneco and its subsidiaries completed various intercompany transfers and distributions which restructured, divided and separated their businesses, assets and liabilities so that all the assets, liabilities and operations related to the Industrial Business and the Shipbuilding Business were spun-off to Old Tenneco's then existing common stockholders. The Distributions were effected on December 11, 1996 pursuant to the Distribution Agreement dated as of November 1, 1996. Following the Distributions, the remaining operations of Old Tenneco consisted primarily of activities related to the transmission and marketing of natural gas. Results of operations of EPTPC were included in the Company's Consolidated Statements of Income for the last 20 days of 1996. On October 30, 1996, the IRS issued a private letter ruling to Old Tenneco, in which it ruled that for U.S. federal income tax purposes the Distributions would be tax-free to Old Tenneco and, except to the extent cash is received in lieu of fractional shares, to its then existing stockholders; the Merger would constitute a tax-free reorganization; and certain other transactions effected in connection with the Merger and Distributions would be tax-free. If the Distributions were not to qualify as tax-free distributions, then a corporate level federal income tax would be assessed to the consolidated group of which Old Tenneco was the common parent. This corporate level federal income tax would be payable by EPTPC. Under certain limited circumstances, however, New Tenneco and Newport News Shipbuilding Inc. have agreed to indemnify EPTPC for a defined portion of such tax liabilities. The consideration paid by the Company in the Merger consisted of: - the retention after the Merger of approximately $2.6 billion of debt and preferred stock obligations of Old Tenneco, subject to certain adjustments (which consisted, in part, of (i) approximately $200 million of public debt of Old Tenneco outstanding at the effective time of the Merger, (ii) $2.1 billion of debt of Old Tenneco outstanding at the effective time of the Merger under a $3 billion Revolving Credit and Competitive Advance Facility Agreement, dated as of November 4, 1996 (the "Credit Facility"), among Old Tenneco, certain banks and other financial institutions and The Chase Manhattan Bank, as agent), and (iii) $300 million of Old Tenneco preferred stock); - the issuance of 37.6 million shares of common stock of the Company valued at approximately $913 million, based on a closing price per share of common stock on the New York Stock Exchange of $24.3125 on December 9, 1996, to Old Tenneco's then existing common and preferred stockholders; and 53 58 - the retention of approximately $600 million of estimated liabilities related to certain discontinued businesses of Old Tenneco. The number of shares of the Company's common stock issued in the Merger to stockholders of Old Tenneco was determined pursuant to formulas set forth in the Merger Agreement. In the Merger, (i) a holder of Old Tenneco's common stock received 0.186 of a share of the Company's common stock for each share of Tenneco common stock, (ii) a holder of Old Tenneco's $7.40 Cumulative Preferred Stock received 4.73 shares of the Company's common stock for each such share of $7.40 Cumulative Preferred Stock, and (iii) a holder of Old Tenneco's $4.50 Cumulative Preferred Stock received 4.73 shares of the Company's common stock for each such share of $4.50 Cumulative Preferred Stock. At December 31, 1998, the Company owns 100 percent of the common equity and more than 80 percent of the combined equity value of EPTPC. The remaining combined equity of EPTPC consists of $300 million of preferred stock issued in a public offering by Old Tenneco on November 18, 1996, which remains outstanding. Assets acquired, liabilities assumed, and consideration received are as follows:
(IN MILLIONS) Fair value of assets acquired............................... $ 6,649 Cash acquired............................................... (75) Fair value of liabilities assumed........................... (5,724) Issuance of common stock.................................... (913) ------- Net cash consideration received................... $ (63) =======
The following unaudited pro forma information presents a summary of what the consolidated results of operations would have been on a pro forma basis for the year ended December 31, 1996, assuming the EPTPC acquisition had been in effect throughout 1996:
1996 -------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Operating revenue........................................... $5,281 Net income.................................................. $ 183 Basic earnings per common share............................. $ 1.61
In December 1996, subsequent to the Merger, TGP sold 70 percent of its interests in two natural gas pipeline systems in Australia to CNGI Australia Pty. Limited, a wholly owned indirect subsidiary of Consolidated Natural Gas Company, and four Australian investors for approximately $400 million, inclusive of related debt financing, and completed the sale of its oil and gas exploration, production and financing unit, formerly known as Tenneco Ventures, for approximately $105 million. After consideration of the purchase price allocation adjustments, there was no gain or loss recognized on these transactions. Effective June 1996, the Company acquired Cornerstone Natural Gas, Inc. in a transaction accounted for as a purchase. The purchase price of approximately $94 million, exclusive of acquisition costs, was financed through internally generated funds and short-term borrowings. Acquisition costs of approximately $5 million were capitalized. The cost of the acquisition was allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed, resulting in goodwill of approximately $59 million which is being amortized over 40 years using the straight-line method. Results of operations of Cornerstone Natural Gas, Inc. are included in the Company's Consolidated Statements of Income beginning in June 1996. 3. TRUST PREFERRED SECURITIES In March 1998, El Paso Energy Capital Trust I (the "Trust") issued 6.5 million of 4 3/4% trust convertible preferred securities (the "Trust Preferred Securities") for $325 million ($317 million, net of issuance costs). 54 59 In addition, the Trust issued trust convertible common securities of approximately $10 million to EPNG. The net proceeds were used by EPNG to pay down commercial paper. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in 4 3/4% convertible subordinated debentures due 2028 (the "Trust Debentures") of EPNG, the Trust's sole asset. EPNG executed a guarantee with regard to the Trust Preferred Securities. The guarantee, when taken together with EPNG's obligations under the Trust Debentures, the indenture pursuant to which the Trust Debentures were issued, and the applicable trust document, provides a full and unconditional guarantee of the Trust's obligations under the Trust Preferred Securities. As a result of the holding company reorganization discussed in Note 1, EPEC assumed ownership of the Trust, as well as the obligations of the Trust Debentures, and the guarantee of the Trust's obligations under the Trust Preferred Securities. The results of the Trust are consolidated with those of the Company and, therefore, the Trust Debentures are eliminated and the Trust Preferred Securities are reflected as company-obligated mandatorily redeemable convertible preferred securities of El Paso Energy Capital Trust I in the Consolidated Balance Sheets. Distributions on the Trust Preferred Securities are included in interest and debt expense in the Consolidated Statements of Income. The Trust Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 4 3/4% commencing on June 30, 1998, carry a liquidation value of $50 per security plus accrued and unpaid distributions and are convertible into the Company's common shares at any time prior to the close of business on March 31, 2028, at the option of the holder at a rate of 1.2022 common shares for each Trust Preferred Security (equivalent to a conversion price of $41.59 per common share), subject to adjustment in certain circumstances. 4. FINANCING TRANSACTIONS The average interest rate of short-term borrowings was 5.8% and 5.9% at December 31, 1998, and 1997, respectively. The Company had short-term borrowings, including current maturities of long-term debt, at December 31, 1998 and December 31, 1997, as follows:
1998 1997 ------ ------ (IN MILLIONS) EPNG Revolving Credit Facility.............................. $ -- $ 45 EPNG Revolving Credit Facility with TGP designated as borrower.................................................. -- 417 EPNG Revolving Credit Facility with EPEC designated as borrower.................................................. 350 -- Commercial paper............................................ 340 326 Other credit facilities..................................... 60 25 Current maturities of other long-term debt.................. 62 72 ------ ------ $ 812 $ 885 ====== ======
55 60 Long-term debt outstanding at December 31, 1998 and 1997, consisted of the following:
1998 1997 ------ ------ (IN MILLIONS) Long-term debt TGP Debentures due 2011, average effective interest rates of 7.5% in 1998 and 7.9% in 1997, net of unamortized discount of $10.6 in 1998 ($11.1 in 1997)............. $ 75 $ 75 Debentures due 2017, average effective interest rates of 7.7% in 1998 and 7.8% in 1997, net of unamortized discount of $4.7 in 1998 ($5.0 in 1997)............... 295 295 Debentures due 2027, average effective interest rates of 7.1% in 1998 and 7.2% in 1997, net of unamortized discount of $3.6 in 1998 ($3.7 in 1997)............... 296 296 Debentures due 2028, average effective interest rate of 7.2% in 1998, net of unamortized discount of $8.9 in 1998.................................................. 391 -- Debentures due 2037, average effective interest rates of 7.8% in 1998 and 7.9% in 1997, net of unamortized discount of $6.3 in 1998 ($6.5 in 1997)............... 294 293 EPNG Debentures due 2012 through 2026, average effective interest rates of 8.4% in 1998 and 8.3% in 1997, net of unamortized discount of $1.3 in 1998 ($1.4 in 1997)................................................. 459 475 Notes due 1999 through 2003, average effective interest rates of 7.7% in 1998 and 7.6% in 1997, net of unamortized discount of $0.5 in 1998 ($0.7 in 1997)... 462 462 EPTPC Debentures due 2008 through 2025, average effective interest rates of 7.3% in 1998 and 7.2% in 1997, net of unamortized premium of $3.5 in 1998 ($4.0 in 1997)................................................. 54 55 Notes due 1998 through 2005, average effective interest rates of 6.5% in 1998 and 6.4% in 1997, net of unamortized premium of $2.3 in 1998 ($4.1 in 1997).... 48 87 EPEC Corporation, successor to El Paso Energy Credit Corporation Senior notes due 2001, average effective interest rates of 6.6% in 1998 and 6.0% in 1997, net of unamortized premium of $0.9 in 1998 ($1.2 in 1997)................ 14 15 Subordinated notes due 1998, average effective interest rate of 6.5% in 1997, net of unamortized premium of $0.2 in 1997.......................................... -- 7 MPC Project financing loan, due 1998 through March 2007, average effective interest rates of 9.7% in 1998 and 9.4% in 1997.......................................... 117 126 DeepTech Senior notes due 2000, average effective interest rate of 11% from merger date to December 31, 1998, net of unamortized premium of $6.7........................... 89 -- Senior subordinated promissory note due 2000, average effective interest rate of 10.3% from merger date to December 31, 1998, net of unamortized premium of $.8................................................... 16 --
56 61
1998 1997 ------ ------ (IN MILLIONS) Other Notes due 2000 through 2014, average effective interest rates of 7.5% in 1998 and 8.7% in 1997................ 4 5 ------ ------ 2,614 2,191 Less current maturities................................... 62 72 ------ ------ Long-term debt, less current maturities........... $2,552 $2,119 ====== ======
The following are aggregate maturities of long-term debt for the next 5 years and in total thereafter:
(IN MILLIONS) ------------- 1999........................................................ $ 62 2000........................................................ 125 2001........................................................ 52 2002........................................................ 240 2003........................................................ 215 Thereafter.................................................. 1,920 ------ Total long-term debt, including current maturities....................................... $2,614 ======
Other Financing Arrangements In October 1997, EPNG established a new $750 million five-year revolving credit and competitive advance facility and a new $750 million 364-day renewable revolving credit and competitive advance facility. In connection with the establishment of the Revolving Credit Facility, EPTPC's revolving credit facility was also terminated, and the outstanding balance of $417 million was financed under the five-year portion of the new Revolving Credit Facility with TGP designated as the borrower. The availability under the Revolving Credit Facility is expected to be used for general corporate purposes including, but not limited to, backstopping EPNG's and TGP's $1 billion commercial paper programs. In August 1998, EPEC became a guarantor of the Revolving Credit Facility. In October 1998, the $750 million 364-day portion of the Revolving Credit Facility was amended to extend the termination date to October 27, 1999. In addition, in October 1998, the Revolving Credit Facility was amended to permit TGP to issue commercial paper, provided that the total amount of commercial paper outstanding at EPNG and TGP is equal to or less than the unused capacity under the Revolving Credit Facility. In December 1998, EPEC became a borrower under the Revolving Credit Facility. The interest rate is 40 basis points above LIBOR, with the spread varying based on EPEC's long-term debt credit rating. The availability of borrowings under the Company's credit agreements is subject to specified conditions, which management believes the Company currently meets. These conditions include compliance with the financial covenants and ratios required by such agreements, absence of default under such agreements, and continued accuracy of the representations and warranties contained in such agreements (including the absence of any material adverse changes since the specified dates). All of the Company's senior debt issues have been given investment grade ratings by Standard & Poors and Moody's. The Company must comply with various restrictive covenants contained in its debt agreements which include, among others, maintaining a consolidated debt and guarantees to capitalization ratio no greater than 70 percent. In addition, the Company's subsidiaries on a consolidated basis (as defined in the agreements) may not incur debt obligations which would exceed $300 million in the aggregate, excluding acquisition debt, project financing, and certain refinancings. As of December 31, 1998, EPEC's consolidated debt and guarantees to capitalization ratio (as defined in the agreements) was 55 percent and debt obligations of EPEC subsidiaries in excess of permitted debt did not exceed $300 million on a consolidated basis. 57 62 In March 1997, TGP issued $300 million aggregate principal amount of 7 1/2% debentures due 2017, $300 million aggregate principal amount of 7% debentures due 2027, and $300 million aggregate principal amount of 7 5/8% debentures due 2037. Proceeds of approximately $883 million, net of issuance costs, were used to repay a portion of EPTPC's credit facility and for general corporate purposes. In December 1997, EPEC filed a shelf registration statement pursuant to which EPEC may offer up to $900 million (including $250 million transferred from prior shelf registrations) of common or preferred equities, various forms of debt securities (including convertible debt securities), and various types of trust securities from time to time as determined by market conditions. In March 1998, the El Paso Energy Capital Trust I, a Delaware business trust sponsored by the Company, issued 6.5 million 4 3/4% Trust Convertible Preferred Securities. The sole assets of the trust are approximately $335 million principal amount of 4 3/4% convertible subordinated debentures due 2028 of the Company. As a result of such offering, EPEC has approximately $565 million of capacity remaining under its existing shelf registration to issue public securities registered thereunder. In September 1998, TGP filed a shelf registration permitting TGP to offer up to $600 million (including $100 million carried forward from a prior shelf registration) of debt securities. In October 1998, TGP issued $400 million aggregate principal amount of 7% debentures due 2028. Proceeds to TGP were approximately $391 million, net of issuance cost. Approximately $300 million of the proceeds were used to repay TGP's short-term indebtedness under the Revolving Credit Facility and the remainder were used by TGP for general corporate purposes. After this issuance, TGP has $200 million of capacity remaining under its shelf registration. In March 1998, EPNG retired its outstanding 8 5/8% debentures in the amount of $17 million and in August 1998, EPTPC retired its outstanding 10% debentures in the amount of $38 million. In February 1999, DeepTech retired its 11% senior subordinated promissory note due 2000 in the amount of $16 million. 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT ACTIVITIES Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is presented in accordance with the requirements of SFAS No. 107. The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies. As of December 31, 1998, and 1997, the carrying amounts of certain financial instruments held by the Company, including cash, cash equivalents, short-term borrowings and investments, and trade receivables and payables are representative of fair value because of the short-term maturity of these instruments. The fair value of long-term debt with variable interest rates is the carrying value because of the variable nature of the respective debt's interest rate, and the fair value of debt with fixed interest rates has been estimated based on quoted market prices for the same or similar issues. The project financing debt is at market interest rates and therefore, the fair value of the project financing debt is representative of the carrying amount. The fair value of all derivative financial instruments is the estimated amount at which management believes the instruments could be liquidated over a reasonable period of time, based on quoted market prices, current market conditions, or other estimates obtained from third-party brokers or dealers. 58 63 The following table reflects the carrying amount and estimated fair value of the Company's financial instruments at December 31:
1998 1997 --------------------- --------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN MILLIONS) Balance sheet financial instruments: Long-term debt, excluding project financing.......... $2,497 $2,678 $2,065 $2,208 Project financing debt............................... 117 117 126 126 Other financial instruments: Trading Futures contracts................................. (4) (4) (3) (3) Option contracts.................................. 77 77 3 3 Swap and forward contracts........................ (28) (28) 23 23 Non-Trading Interest rate swap agreements..................... -- (9) -- (9) Equity swap....................................... 3 3 6 8 Commodity option contracts........................ -- 1 -- 1 Commodity swap and forward contracts.............. -- (14) -- 4
Trading Commodity Activities The Company, through its merchant services business, offers integrated price risk management services to the energy sector. These services primarily relate to energy related commodities including natural gas, power, and petroleum products. The Company provides these services through a variety of contracts entered into for trading purposes including forward contracts involving cash settlements or physical delivery of an energy commodity, swap contracts, which require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for the commodity, options and other contractual arrangements. The Company recognized gross margin of $40 million and $17 million during 1998 and 1997, respectively, arising from its trading activities. The fair value of commodity and energy related contracts entered into for trading purposes as of December 31, 1998, and 1997, and the average fair value of those instruments held during the years ended December 31, 1998, and 1997 are set forth below. At December 31, 1998, $92 million of assets from price risk management activities are included in other assets and $42 million of liabilities from price risk management activities are included in other liabilities in the Consolidated Balance Sheets.
AVERAGE FAIR VALUE FOR THE YEAR ENDED ASSETS LIABILITIES DECEMBER 31,(A) ------ ----------- --------------- (IN MILLIONS) 1998 Futures contracts................................. $ 2 $ (6) $ (5) Option contracts.................................. 153 (17) 30 Swap and forward contracts........................ 118 (146) (31) 1997 Futures contracts................................. $ 4 $ (7) $ -- Option contracts.................................. 15 (12) 2 Swap and forward contracts........................ 77 (54) 13
- --------------- (a) computed using the net asset balance at each month end. 59 64 Notional Amounts and Terms The notional amounts and terms of these financial instruments at December 31, 1998, and 1997 are set forth below (natural gas volumes in trillions of British thermal units, power volumes in millions of megawatt hours, petroleum products volumes in millions of British thermal units):
FIXED PRICE FIXED PRICE MAXIMUM PAYOR RECEIVER TERMS IN YEARS ----------- ----------- -------------- 1998 Energy Commodities: Natural gas.................................. 9,605 8,866 20 Power........................................ 22 28 20 Petroleum products........................... 67 72 2 1997 Energy Commodities: Natural gas.................................. 4,079 3,584 20 Power........................................ 12 13 1 Petroleum products........................... 197 195 2
Notional amounts reflect the volume of transactions but do not represent the amounts exchanged by the parties. Accordingly, notional amounts are an incomplete measure of the Company's exposure to market or credit risks. The maximum terms in years detailed above are not indicative of likely future cash flows as these positions may be offset or cashed-out in the markets at any time based on the Company's risk management needs and liquidity in the commodity markets. The weighted average maturity of the Company's entire portfolio of price risk management activities was approximately two years as of December 31, 1998 and 1997, respectively. Market and Credit Risks The Company serves a diverse customer group that includes independent power producers, industrial companies, gas and electric utilities, oil and gas producers, financial institutions and other energy marketers. This broad customer mix generates a need for a variety of financial structures, products and terms. This diversity requires the Company to manage, on a portfolio basis, the resulting market risks inherent in these transactions subject to parameters established by the Company's risk management committee. Market risks are monitored by a risk control committee operating independently from the units that create or actively manage these risk exposures to ensure compliance with the Company's stated risk management policies. The Company measures and adjusts the risk in its portfolio in accordance with mark-to-market and other risk management methodologies which utilize forward price curves in the energy markets to estimate the size and probability of future potential exposure. 60 65 Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. The Company maintains credit policies with regard to its counterparties to minimize overall credit risk. These policies require an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances (including cash in advance, letters of credit, and parental guarantees), and the use of standardized agreements which allow for the netting of positive and negative exposures associated with a single counterparty. The counterparties associated with the Company's assets from price risk management activities as of December 31, 1998, and 1997 are summarized as follows:
ASSETS FROM PRICE RISK MANAGEMENT ACTIVITIES AS OF DECEMBER 31, 1998 --------------------------------------------------- BELOW INVESTMENT GRADE(a) INVESTMENT GRADE TOTAL(b) ------------------- ---------------- -------- (IN MILLIONS) Energy marketers.......................... $ 71 $ 5 $ 76 Financial institutions.................... 21 -- 21 Oil and gas producers..................... 37 5 42 Gas and electric utilities................ 104 6 110 Industrials............................... 18 -- 18 Other..................................... 4 2 6 ---- --- ---- Total assets from price risk management activities......... $255 $18 $273 ==== === ====
ASSETS FROM PRICE RISK MANAGEMENT ACTIVITIES AS OF DECEMBER 31, 1997 --------------------------------------------------- BELOW INVESTMENT GRADE(a) INVESTMENT GRADE TOTAL(b) ------------------- ---------------- -------- (IN MILLIONS) Energy marketers.......................... $21 $ 3 $24 Financial institutions.................... 20 20 Oil and gas producers..................... 14 4 18 Gas and electric utilities................ 16 2 18 Industrials............................... 6 1 7 Other..................................... 8 1 9 --- --- --- Total assets from price risk management activities......... $85 $11 $96 === === ===
- --------------- (a) "Investment Grade" is primarily determined using publicly available credit ratings along with consideration of collateral, which encompass standby letters of credit, parent company guarantees and property interest, including oil and gas reserves. Included in Investment Grade are counterparties with a minimum Standard & Poor's or Moody's rating of BBB- or Baa3, respectively, or minimum implied (through internal credit analysis) Standard & Poor's equivalent rating of BBB-. (b) Two customers' exposure at December 31, 1998, and 1997 comprise greater than 5 percent of assets from price risk management activities. These customers have Investment Grade ratings. This concentration of counterparties may impact the Company's overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. Based on the Company's policies, risk exposure, and reserves, the Company does not anticipate a material adverse effect on its financial position, or results of operations, or cash flows as a result of counterparty nonperformance. 61 66 Non-Trading Price Risk Management Activities MPC has entered into interest rate swap agreements which effectively convert $114 million of floating-rate debt to fixed-rate debt (see Note 4). MPC makes payments to counterparties at fixed rates and in return receives payments at floating rates. The two swap agreements were entered into in March 1992 and have remaining terms of approximately 1 year and 3 years, respectively. This transaction is recorded using accrual accounting. Interest expense and cash requirements were $3 million higher in 1998, 1997, and 1996, respectively, as a result of these swaps. In March 1997, the Company purchased a 10.5 percent interest in CAPSA, a privately held Argentine company engaged in power generation and oil and gas production for approximately $57 million. In connection with this acquisition, the Company entered into an equity swap transaction associated with an additional 18.5 percent of CAPSA's then outstanding stock. Under the swap, the Company pays interest to the counterparty, on a quarterly basis, on a notional amount of $100 million at a rate of LIBOR plus 0.85 percent. In exchange, the Company receives dividends on the CAPSA stock to the extent of the counterparty's equity interest of 18.5 percent. The Company also fully participates in the market appreciation or depreciation of the underlying investment whereby the Company will realize appreciation or fund any depreciation attributable to the actual sale of the stock upon termination or expiration of the swap transaction. The initial term of the swap was two years, and in February 1999, was extended for an additional two and one-half years. Upon maturity or termination of the swap, the Company has a right of first refusal to purchase the counterparty's 18.5 percent investment in CAPSA common stock at the fair value of the stock at that date or at a later date at a price offered by a good faith buyer. This transaction is recorded using mark-to-market accounting. 6. COMMITMENTS AND CONTINGENCIES See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Commitments and Contingencies and Environmental, which are incorporated herein by reference. 7. INCOME TAXES The following table reflects the components of income tax expense for the years ended December 31:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Current Federal................................................... $ 6 $(45) $23 State..................................................... (12) (21) 7 Foreign................................................... 5 -- -- ---- ---- --- (1) (66) 30 ---- ---- --- Deferred Federal................................................... 116 164 (4) State..................................................... 14 31 (1) Foreign................................................... (2) -- -- ---- ---- --- 128 195 (5) ---- ---- --- Total tax expense................................. $127 $129 $25 ==== ==== ===
62 67 Tax expense of the Company differs from the amount computed by applying the statutory federal income tax rate (35 percent) to income before taxes. The following table outlines the reasons for the differences for the periods ended December 31:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Tax expense at the statutory federal rate of 35%............ $132 $119 $22 Increase (decrease) State income tax, net of federal income tax benefit....... 1 7 4 Other..................................................... (6) 3 (1) ---- ---- --- Income tax expense.......................................... $127 $129 $25 ==== ==== === Effective tax rate.......................................... 34% 38% 38% ==== ==== ===
The following table reflects the components of the net deferred tax liability at December 31:
1998 1997 ------ ------ (IN MILLIONS) Deferred tax liabilities Property, plant, and equipment............................ $2,012 $1,982 Regulatory and other assets............................... 474 393 ------ ------ Total deferred tax liability...................... 2,486 2,375 ------ ------ Deferred tax assets U.S. net operating loss and tax credit carryovers......... 85 113 Accrual for regulatory issues............................. 266 226 Postretirement benefits................................... 116 123 Other liabilities......................................... 542 539 Valuation allowance....................................... (5) (8) ------ ------ Total deferred tax asset.......................... 1,004 993 ------ ------ Net deferred tax liability(a)............................... $1,482 $1,382 ====== ======
- --------------- (a) As of December 31, 1998, $1 million of non-current foreign deferred income taxes are included in other assets in the Consolidated Balance Sheets. The cumulative undistributed earnings of certain foreign subsidiaries and foreign corporate joint ventures were approximately $35 million as of December 31, 1998. Since the earnings have been or are intended to be indefinitely reinvested in foreign operations, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon actual or deemed repatriation. If a distribution of such earnings were to be made, the Company may be subject to both foreign withholding taxes and U.S. income taxes, net of any allowable foreign tax credits or deductions. However, an estimate of such taxes is not practicable. For the same reasons, the Company has not provided for any U.S. taxes on the foreign currency translation adjustments recognized in comprehensive income. The tax benefit associated with the exercise of non-qualified stock options and restricted stock as well as restricted stock dividends, reduced taxes payable by $9 million in 1998 and $11 million in 1997. Such benefits are included in additional paid-in capital in the Consolidated Balance Sheets. As of December 31, 1998, approximately $45 million of alternative minimum tax credits were available to offset future regular tax liabilities. These alternative minimum tax credit carryovers have no expiration date. Additionally, at December 31, 1998, approximately $1 million of general business credit, $102 million of net operating loss, and $9 million of capital loss carryovers were available to offset future tax liabilities. The general business credit carryovers expire in the years 1999 and 2000. Approximately $57 million of the net operating loss carryovers expire in 2012 and the remaining $45 million expire in the years 2004 through 2011. Usage of these carryovers is subject to the limitations provided for under Sections 382 and 383 of the Internal Revenue Code as well as the separate return limitation year rules of IRS regulations. 63 68 The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of net operating loss and tax credit carryovers. As of December 31, 1998, and 1997, approximately $4 million and $8 million, respectively, of the valuation allowance relates to the net operating loss carryovers of an acquired company. The remainder of the valuation allowance relates to the general business credit carryovers of an acquired company. Any tax benefits subsequently recognized from reversal of this valuation allowance will be allocated to goodwill. Prior to 1999, EPTPC and its subsidiaries filed a consolidated federal income tax return and EPEC and its other subsidiaries filed a separate consolidated federal income tax return. As a result of the tax-free reorganization described in Note 1, starting in 1999, EPEC and its subsidiaries, including EPTPC and its subsidiaries, will file one consolidated federal income tax return. Deferred taxes corresponding to the allocation of the purchase price to the assets and liabilities acquired of EPTPC, have been reflected in the Consolidated Balance Sheets as of December 31, 1998, and 1997. 8. CAPITAL STOCK Common Stock In October 1997, approximately .8 million shares of Company common stock were issued in connection with the acquisition of Gulf States Gas Pipeline Company. Such shares were valued at approximately $21 million. In February 1997, approximately 6 million shares of Company common stock were issued in a public offering registered under the Securities Act of 1933, as amended. Proceeds of $152 million, net of issuance costs, were received and used to repay borrowings under the Revolving Credit Facility. In December 1996, 37.6 million shares of Company common stock were issued in connection with the acquisition of EPTPC. Such shares were valued at approximately $913 million. Treasury Stock From time to time, the Board has authorized the repurchase of EPEC's outstanding shares of common stock to be used in connection with EPEC employee stock-based compensation plans and for other corporate purposes. During 1998, the Company repurchased 995,600 common shares at a weighted average cost of $35.77 per share. As of December 31, 1998, and 1997, EPEC held 4,149,099 and 2,946,832 shares of treasury stock, respectively. Included in the balance at December 31, 1998, were 1,360,000 shares of treasury stock used to secure benefits under certain of the Company's benefit plans which are subject to certain restrictions. Stock Dividend In January 1998, the Board declared a two-for-one stock split in the form of a 100 percent stock dividend (on a per share basis). In March 1998, the stockholders approved an increase in the Company's authorized common stock. The stock dividend of an aggregate of 60,944,417 shares of common stock was paid on April 1, 1998 to stockholders of record on March 13, 1998. All presentations herein are made on a post-split basis. Other EPEC has 25,000,000 shares of authorized preferred stock, par value $0.01 per share, none of which have been issued, but of which 2,750,000 shares have been designated as Series A Junior Participating Preferred Stock and reserved for issuance pursuant to the Company's preferred stock purchase rights plan. 64 69 9. STOCK-BASED COMPENSATION During 1998, 1997, and 1996 the Company granted stock options under various stock option plans (the "Plans"). The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for these Plans. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation which, if fully adopted, changes the methods companies apply in determining expense related to their stock option plans. Adoption of the expense recognition provisions of SFAS No. 123 was optional and the Company elected not to apply provisions of SFAS No. 123. However, pro forma disclosures as if the Company adopted the expense recognition provisions of SFAS No. 123 are presented below. Under the Company's existing stock option plans, the Company is authorized to issue shares of Common Stock to employees and non-employee directors pursuant to awards granted as incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code, non-qualified stock options, restricted stock, stock appreciation rights ("SARs"), and performance units. Non-qualified Stock Options The Company granted non-qualified stock options in 1998, 1997, and 1996 under its stock option plans. The stock options granted during these periods have contractual terms of 10 years and generally vest after completion of one to five years of continuous employment from the grant date. Options are also granted to non-employee members of the Board at fair market value on the date of grant and are exercisable immediately. Under the terms of certain plans, EPEC may grant SARs to certain holders of stock options. SARs are subject to the same terms and conditions as the related stock options. As of December 31, 1998, 50,538 SARs were outstanding which have been included in stock options as part of tandem awards. The stock option holder who has been granted tandem SARs can elect to exercise either an option or a SAR. SARs entitle an option holder to receive a payment equal to the difference between the option price and the fair market value of the common stock of EPEC at the date of exercise of the SAR. To the extent a SAR is exercised, the related option is canceled, and to the extent an option is exercised, the related SAR is canceled. Currently, the SARs are being accounted for as compensation expense under Accounting Principles Board Opinion No. 25 and are not considered for purposes of computing fair value of outstanding options using the Black-Scholes option pricing model as described below. A summary of the status of the Company's stock options as of December 31, 1998, 1997, and 1996 is presented below:
STOCK OPTIONS ------------------------------------------------------------------------ 1998 1997 1996 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED # SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES ----------- -------- ----------- -------- ----------- -------- Outstanding at beginning of the year.............................. 8,782,214 $17.90 8,847,190 $15.83 5,207,910 $14.41 Granted........................... 2,328,450 $33.40 1,775,200 $26.23 4,933,646 $16.55 Exercised......................... 1,072,351 $17.40 1,643,376 $15.28 1,240,596 $12.79 Forfeited......................... 187,070 $21.48 196,800 $21.77 53,770 $14.44 --------- --------- --------- Outstanding at end of year.......... 9,851,243 $21.55 8,782,214 $17.90 8,847,190 $15.83 ========= ========= ========= Exercisable at end of year.......... 5,042,572 $16.94 4,006,508 $15.43 3,960,190 $14.82 ========= ========= =========
65 70 The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
ASSUMPTION: 1998 1997 1996 ----------- ----- ----- ----- Expected Term in Years...................................... 5 3 3 Expected Volatility......................................... 20.3% 17.3% 20.3% Expected Dividends.......................................... 3.0% 3.0% 3.0% Risk-Free Interest Rate..................................... 4.6% 6.3% 5.5%
The Black-Scholes weighted average fair value of options granted during 1998, 1997 and 1996 was as follows:
1998 1997 1996 ------ ------ ------ Weighted-average fair value of options granted at a discount............................................... $ 9.71 $ 5.96 $10.26 Weighted-average fair value of options granted at market................................................. $ 7.00 $ 3.86 $ 2.58
Options outstanding as of December 31, 1998 are summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ----------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 7.50 to $15.37 1,361,776 4.3 $12.66 1,361,776 $12.66 $15.38 to $19.28 4,541,225 6.5 $16.43 2,957,865 $16.56 $19.29 to $31.99 2,169,092 8.3 $26.77 603,531 $25.15 $32.00 to $38.56 1,779,150 9.4 $35.07 119,400 $33.42 --------- --------- $ 7.50 to $38.56 9,851,243 7.1 $21.55 5,042,572 $16.94 ========= =========
Restricted Stock Under the Company's various stock-based compensation plans, a limited number of shares of restricted Company common stock may be granted at no cost to certain key officers and employees. These shares carry voting and dividend rights; however, sale or transfer of the shares is restricted in accordance with the vesting procedures. These restricted stock awards vest over a specific period of time and/or if the Company achieves certain performance targets. Restricted stock awards representing .5 million, .7 million, and 3.2 million shares were granted during 1998, 1997, and 1996, respectively, with a weighted average grant date fair value of $32.29, $28.53, and $18.82 per share, respectively. At December 31, 1998, 4.5 million shares of restricted stock were outstanding. The value of these shares is determined based on the fair market value on the measurement dates and is charged to compensation expense ratably over the restriction period based on the number of shares earned over the vesting period. For 1998, 1997, and 1996, these charges totaled $27 million, $19 million, and $5 million, respectively. The unamortized balance is recorded as a reduction of stockholders' equity in the Consolidated Balance Sheets. Performance Units Certain employees and officers of the Company are awarded performance units that are payable in cash or stock at the end of the vesting period. The final value of the performance units may vary according to the plan under which they are granted, but is usually based on the Company's common stock price at the end of the vesting period. The value of the performance units is charged ratably to compensation expense over the vesting period with periodic adjustments to account for the fluctuation in the market price of the Company's stock. Amounts charged to compensation expense in 1998, 1997, and 1996 were $13 million, $5 million, and $5 million, respectively. 66 71 Pro Forma Net Income and Net Income Per Common Share Had the compensation expense for the Company's stock-based compensation plans been determined applying the provisions of SFAS No. 123, the Company's net income and net income per common share for 1998, 1997, and 1996 would approximate the pro forma amounts below:
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------------- ----------------------- ----------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- SFAS No. 123 charge, pretax..... $ -- $ 61 $ -- $ 30 $ -- $ 17 APB No. 25 charge, pretax....... $ 49 $ -- $ 24 $ -- $ 13 $ -- Net income...................... $ 225 $ 217 $ 186 $ 183 $ 38 $ 36 Basic earnings per common share......................... $1.94 $1.87 $1.64 $1.61 $0.53 $0.50 Diluted earnings per common share......................... $1.85 $1.79 $1.59 $1.56 $0.52 $0.49
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards granted prior to the 1995 fiscal year. At December 31, 1998, 21.1 million shares of common stock were reserved for issuance pursuant to existing and future stock awards, of which approximately 5.4 million shares remain reserved. 10. RETIREMENT BENEFITS Pension Benefits Prior to January 1, 1997, the Company maintained a defined benefit pension plan covering substantially all employees of EPNG and EPFS. Pension benefits were based on years of credited service and final 5-year average compensation, subject to maximum limitations as defined in the pension plan. During 1996, the Company recognized a $21 million charge to pension expense related to an early retirement window and workforce reductions. Effective January 1, 1997, the plan was amended to provide benefits determined by a cash balance formula and to include employees added as a result of the Merger and other acquisitions prior to 1997. Employees who were participants on December 31, 1996, receive the greater of cash balance benefits or prior plan benefits accrued through December 31, 2001. During 1997, the Company offered special termination benefits to employees added as a result of the Merger who were at least 55 years old and who were eligible to retire under the Tenneco Inc. Retirement Plan on December 31, 1996. Eligible employees accepting this offer and retiring by July 1, 1997, received a cash balance credit based on an enhanced formula not to exceed one year's base salary. The cost associated with the special termination benefits was accrued at December 31, 1996, as part of the liabilities assumed in the Merger. In 1997, the Company funded $11 million for these special termination benefits. Other Postretirement Benefits EPNG provides postretirement medical benefits for a closed group of employees who retired on or before March 1, 1986, and limited postretirement life insurance for employees who retired after January 1, 1985. As such, EPNG's obligation to accrue for other postretirement employee benefits ("OPEB") is primarily limited to the fixed population of retirees who retired on or before March 1, 1986. The medical plan is pre-funded to the extent employer contributions are recoverable through rates. To the extent actual OPEB costs differ from the amounts recovered in rates, a regulatory asset or liability is recorded. As a result of the Merger, EPTPC retained responsibility for certain postretirement medical and life insurance benefits for former employees of operations previously disposed of by Old Tenneco, and for employees, including TGP employees, added as a result of the Merger who were eligible to retire on December 31, 1996, and did so on or before July 1, 1997. Medical benefits for this closed group of retirees may be subject to deductibles, co-payment provisions, and other limitations and dollar caps on the amount of 67 72 employer costs. EPTPC has reserved the right to change these benefits. Employees who retired on or after July 1, 1997 will continue to receive limited postretirement life insurance benefits. TGP's postretirement benefit plan costs are pre-funded to the extent such costs are recoverable through rates. Effective February 1, 1992, TGP began recovering through its rates the OPEB costs included in the June 2, 1993 rate case settlement agreement. To the extent actual OPEB costs differ from the amounts funded, a regulatory asset or liability is recorded. Several plan amendments were made effective January 1, 1998, including increases in deductibles, increases in out-of-pocket limits, and changes to the prescription drug provisions. These changes resulted in a $25 million decrease in the postretirement benefits obligation. The following table sets forth the change in benefit obligation, change in plan assets, funded status, and components of net periodic benefit cost for pension benefits and other postretirement benefits. In 1998, the Company changed the measurement date for measuring its pension and OPEB obligations from December 31 to September 30. Traditionally, timing of the receipt of this information has limited the Company's ability to maximize planning and budgeting opportunities with respect to projected costs of its various plans. The Company changed its benefit reporting date to facilitate the planning process and gather necessary financial reporting information in a more timely manner. Management believes the date change is preferable to the method previously employed. This change in measurement date has been accounted for as a change in accounting principle and had no material cumulative effect on retirement benefit expense for the current or prior periods.
POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- -------------- 1998 1997 1998 1997 ------ ------ ----- ----- (IN MILLIONS) Change in benefit obligation Actuarial present value of benefit obligation at January 1,..................................................... $535 $505 $ 417 $ 427 Service cost.............................................. 11 13 -- -- Interest cost............................................. 36 37 27 30 Participant contributions................................. -- -- 4 5 Amendments................................................ -- -- (25) -- Special termination benefits.............................. -- 11 -- -- Actuarial (gain) or loss.................................. (8) 28 29 15 Benefits paid............................................. (38) (59) (45) (60) ---- ---- ----- ----- Actuarial present value of benefit obligation for 1998 at September 30 and for 1997 at December 31............... $536 $535 $ 407 $ 417 ==== ==== ===== ===== Change in plan assets Fair value of plan assets at January 1,................... $547 $497 $ 55 $ 42 Actual return on plan assets.............................. 7 79 3 9 Employer contributions.................................... 4 30 46 59 Participant contributions................................. -- -- 4 5 Benefits paid............................................. (38) (59) (45) (60) ---- ---- ----- ----- Fair value of plan assets for 1998 at September 30 and for 1997 at December 31.................................... $520 $547 $ 63 $ 55 ==== ==== ===== ===== Reconciliation of fund status Funded status............................................. $(16) $ 12 $(344) $(362) Fourth quarter contributions.............................. 5 -- 15 -- Unrecognized net actuarial (gain) or loss................. 29 (4) -- (26) Unrecognized net transition obligation.................... 6 8 54 70 Unrecognized prior service cost........................... (34) (37) (12) -- ---- ---- ----- ----- Net accrued benefit cost at December 31,.................. $(10) $(21) $(287) $(318) ==== ==== ===== =====
68 73 As of December 31, 1998, and 1997, the current liability portion of the postretirement benefits was $39 million and $33 million, respectively. Benefit obligations are based upon certain actuarial estimates as described below.
POSTRETIREMENT PENSION BENEFITS BENEFITS ------------------ ------------------ YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (IN MILLIONS) Benefit cost for the plans includes the following components Service cost........................................ $ 11 $ 13 $ 7 $-- $-- $-- Interest cost....................................... 36 37 41 27 30 6 Expected return on plan assets...................... (47) (43) (41) (3) (3) (2) Amortization of net actuarial gain.................. -- -- -- -- (4) (2) Amortization of transition obligation............... 2 2 2 7 9 9 Amortization of prior service cost.................. (3) (3) -- (1) -- -- Curtailment and special termination benefits expense.......................................... -- -- 21 -- -- -- ---- ---- ---- --- --- --- Net benefit cost.................................... $ (1) $ 6 $ 30 $30 $32 $11 ==== ==== ==== === === ===
POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------------------- ---------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 1998 1997 1998 1997 ------------- ------------- ------------- ------------ Weighted average assumptions Discount rate........................... 6.75% 7.00% 6.75% 7.00% Expected return on plan assets.......... 9.50% 9.25% 7.50% 8.50% Rate of compensation increase........... 4.50% 4.50% -- --
Actuarial estimates for the Company's postretirement benefits plans assumed a weighted average annual rate of increase in the per capita costs of covered health care benefits of 10 percent through 2000, gradually decreasing to 6 percent by the year 2008. Assumed health care cost trends have a significant effect on the amounts reported for other postretirement benefit plans. A one-percentage point change in assumed health care cost trends would have the following effects:
1998 1997 ----- ----- (IN MILLIONS) One Percentage Point Increase Aggregate of Service Cost and Interest Cost for 1998 at September 30 and for 1997 at December 31............... $ 0.7 $ 0.6 Accumulated Postretirement Benefit Obligation for 1998 at September 30 and for 1997 at December 31............... $ 9.9 $ 9.1 One Percentage Point Decrease Aggregate of Service Cost and Interest Cost for 1998 at September 30 and for 1997 at December 31............... $(0.6) $(0.6) Accumulated Postretirement Benefit Obligation for 1998 at September 30 and for 1997 at December 31............... $(9.1) $(8.2)
Retirement Savings Plan The Company maintains a defined contribution plan covering all employees of the Company. During the first six months of 1996, the Company made matching contributions equal to a participant's basic contributions of up to 6 percent where the participant had fewer than 10 years of employment with the Company, or up to 8 percent where the participant had 10 or more years of employment with the Company. In February 1996, the Company changed its matching contribution to 75 percent of a participant's basic contributions of up to 6 percent, with the matching contribution being made in Company stock. Amounts 69 74 expensed under the plan were approximately $9 million, $9 million and $4 million for the years ended December 31, 1998, 1997, and 1996, respectively. 11. EMPLOYEE SEPARATION AND ASSET IMPAIRMENT CHARGE During the first quarter of 1996, the Company adopted a program to reduce operating costs through work force reductions and improved work processes and adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. As a result of the workforce reduction program and the adoption of SFAS No. 121, the Company recorded a special charge of $99 million ($47 million for employee separation costs and $52 million for asset impairments) in the first quarter of 1996. The employee separation charge included approximately $26 million for expected severance-related costs and $21 million for pension costs related to special termination benefits and work force reductions. The special charge for pension-related costs will have no cash impact outside of the normal funding of the Company's pension plan. In accordance with SFAS No. 121, the Company determined the fair value of certain assets based on discounted future cash flows. The resultant non-cash charge for asset impairments included approximately $44 million for the impairment of certain natural gas gathering, processing, and production facilities and $8 million for the write-off of a regulatory asset established upon the adoption of SFAS No. 112, Employers' Accounting for Postemployment Benefits, but not recoverable through the Company's rate settlement filed with FERC in March 1996. 12. PREFERRED STOCK OF SUBSIDIARY In November 1996, EPTPC issued 6 million shares of 8 1/4% cumulative preferred stock with a par value of $50 per share for $296 million (net of issuance costs). The preferred stock is redeemable, at the option of EPTPC, after December 31, 2001, at a redemption price equal to $50 per share, plus dividends accrued and unpaid up to the date of redemption. During 1998, 1997, and 1996, dividends of approximately $25 million, $25 million, and $3 million, respectively, were paid on the cumulative preferred stock. Approximately $2 million is reflected in 1996 as minority interest for the 20 days EPTPC was included in the Consolidated Statements of Income. 13. SEGMENT INFORMATION The Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, effective January 1, 1998. Accordingly, the Company has segregated its business activities into five segments: Tennessee Gas Pipeline segment, El Paso Natural Gas segment, El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso Energy International segment. These segments are strategic business units that offer a variety of different energy products and services. They are managed separately as each business requires different technology and marketing strategies. The Tennessee Gas Pipeline segment, which includes the interstate pipeline systems of TGP, Midwestern, and East Tennessee, transports natural gas to the northeast, midwest, and mid-Atlantic sections of the U.S. including the states of Tennessee, Virginia and Georgia as well as the New York City, Chicago, and Boston metropolitan areas. The El Paso Natural Gas segment, which includes the interstate pipeline systems of EPNG and MPC, transports natural gas primarily to the California market. The El Paso Field Services segment provides natural gas gathering, products extraction, dehydration, purification, compression and intrastate transmission services. The El Paso Energy Marketing segment markets and trades natural gas, power, and petroleum products and participates in the development and ownership of domestic power generation projects. The El Paso Energy International segment develops and operates energy infrastructure facilities worldwide. 70 75 The accounting policies of the individual segments are the same as those of the Company, as a whole, as described in Note 1. Certain business segments' earnings are largely derived from the earnings on equity investments which are reported in Other, net in the Consolidated Statements of Income. Accordingly, the Company evaluates segment performance, based on EBIT. To the extent practicable, results of operations for the years ended December 31, 1997, and 1996 have been reclassified to conform to the current business segment presentation, although such results are not necessarily indicative of the results which would have been achieved had the revised business segment structure been in effect during that period.
SEGMENTS AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------- TENNESSEE EL PASO EL PASO EL PASO EL PASO GAS NATURAL FIELD ENERGY ENERGY PIPELINE GAS SERVICES MARKETING INTERNATIONAL TOTAL --------- ------- -------- --------- ------------- ------ (IN MILLIONS) Revenue from external customers Domestic......................... $ 728 $ 473 $ 194 $4,000 $ -- $5,395 Foreign.......................... -- -- -- 323 58 381 Intersegment revenue............... 38 2 59 17 -- 116 Depreciation and amortization...... 143 61 47 3 9 263 Operating income................... 332 215 60 5 (28) 584 Other, net......................... 26 2 15 4 53 100 Earnings before interest and taxes............................ 358 217 75 9 25 684 Assets Domestic......................... 4,995 1,742 1,426 762 281 9,206 Foreign.......................... -- -- -- 73 581 654 Capital expenditures............... 138 31 107 2 119 397 Equity investments................. 74 -- 87 -- 436 597
SEGMENTS AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------- TENNESSEE EL PASO EL PASO EL PASO EL PASO GAS NATURAL FIELD ENERGY ENERGY PIPELINE GAS SERVICES MARKETING INTERNATIONAL TOTAL --------- ------- -------- --------- ------------- ------ (IN MILLIONS) Revenue from external customers Domestic......................... $ 765 $ 518 $360 $3,757 $ -- $5,400 Foreign.......................... -- -- -- 218 13 231 Intersegment revenue............... 33 2 20 20 -- 75 Depreciation and amortization...... 137 56 33 4 1 231 Operating income................... 304 255 66 (31) (24) 570 Other, net......................... 14 5 8 3 26 56 Earnings before interest and taxes............................ 318 260 74 (28) 2 626 Assets Domestic......................... 5,179 1,838 852 859 180 8,908 Foreign.......................... -- -- -- 16 238 254 Capital expenditures............... 111 84 62 8 21 286 Equity investments................. 64 -- 24 44 241 373
71 76
SEGMENTS FOR THE YEAR ENDED OF DECEMBER 31, 1996 ------------------------------------------------------------------- TENNESSEE EL PASO EL PASO EL PASO EL PASO GAS NATURAL FIELD ENERGY ENERGY PIPELINE GAS SERVICES MARKETING INTERNATIONAL TOTAL --------- ------- -------- --------- ------------- ------ (IN MILLIONS) Revenue from external customers Domestic......................... $47 $510 $276 $2,177 $-- $3,010 Intersegment revenue............... 1 1 15 6 -- 23 Depreciation and amortization...... 12 58 27 4 -- 101 Operating income................... 14 209 35 23 (3) 278 Other, net......................... 2 14 -- 1 (1) 16 Earnings before interest and taxes............................ 16 223 35 24 (4) 294
The reconciliations of revenues for reportable segments to total consolidated revenues are presented below.
FOR THE YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Total revenues for segments................................. $5,892 $5,706 $3,033 Other revenues.............................................. 6 7 2 Elimination of intersegment revenue......................... (116) (75) (23) ------ ------ ------ Total consolidated revenues....................... $5,782 $5,638 $3,012 ====== ====== ======
The reconciliations of other, net for reportable segments to total consolidated other, net are presented below.
FOR THE YEAR ENDED DECEMBER 31, ------------------ 1998 1997 1996 ---- ---- ---- Total other, net for segments............................... $100 $ 56 $ 16 Corporate other, net........................................ 38 1 (11) ---- ---- ---- Total consolidated other, net..................... $138 $ 57 5 ==== ==== ====
The reconciliations of EBIT to income before income taxes and minority interest are presented below.
FOR THE YEAR ENDED DECEMBER 31, ------------------- 1998 1997 1996 ---- ----- ---- (IN MILLIONS) Total EBIT for segments..................................... $684 $ 626 $294 Corporate expenses, net..................................... 40 48 119 Interest and debt expense................................... 267 238 110 ---- ----- ---- Income before income taxes and minority interest........................................ $377 $ 340 $ 65 ==== ===== ====
The reconciliations of assets for reportable segments to total consolidated assets are presented below.
AS OF DECEMBER 31, ------------------ 1998 1997 -------- ------- (IN MILLIONS) Total assets for segments................................... $ 9,860 $9,162 Corporate and other assets.................................. 209 370 ------- ------ Total consolidated assets......................... $10,069 $9,532 ======= ======
72 77 The Company did not have gross revenue from any customer equal to, or in excess of, ten percent of consolidated operating revenue for the years ended December 31, 1998, 1997, and 1996. 14. INVENTORIES Inventories consisted of the following at December 31:
1998 1997 ----- ----- (IN MILLIONS) Materials and supplies...................................... $45 $42 Gas in storage.............................................. 4 26 --- --- Total............................................. $49 $68 === ===
15. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consisted of the following at December 31:
1998 1997 ------ ------ (IN MILLIONS) Property, plant, and equipment, at cost Tennessee Gas Pipeline.................................... $2,438 $2,289 El Paso Natural Gas....................................... 2,417 2,454 El Paso Field Services.................................... 1,118 1,022 El Paso Energy Marketing.................................. 47 78 El Paso Energy International.............................. 283 79 Corporate and Other....................................... 103 82 ------ ------ 6,406 6,004 Less accumulated depreciation and depletion................. 1,546 1,395 ------ ------ 4,860 4,609 Additional acquisition cost assigned to utility plant, net of accumulated amortization............................... 2,481 2,507 ------ ------ Total property, plant, and equipment, net................... $7,341 $7,116 ====== ======
16. EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which establishes new guidelines for calculating earnings per share. The pronouncement is effective for reporting periods ending after December 15, 1997. SFAS No. 128 requires companies to present both a basic and diluted earnings per share amount on the face of the statement of income and to restate prior period earnings per share amounts to comply with this standard. Basic and diluted earnings per share amounts calculated in accordance with SFAS No. 128 are presented below for the years ended December 31.
1998 1997 ------------------------------------ ------------------------ AVERAGE AVERAGE SHARES EARNINGS SHARES NET INCOME OUTSTANDING PER SHARE NET INCOME OUTSTANDING ---------- ----------- --------- ---------- ----------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) Basic.................. $225 115.8 $1.94 $186 114.0 ===== Effect of dilutive securities Stock options........ -- 2.5 -- 2.1 Trust preferred securities......... 8 6.2 -- -- Restricted stock..... -- 1.4 -- 1.3 ---- ----- ---- ----- Diluted................ $233 125.9 $1.85 $186 117.4 ==== ===== ===== ==== ===== 1997 1996 --------- ------------------------------------ AVERAGE EARNINGS SHARES EARNINGS PER SHARE NET INCOME OUTSTANDING PER SHARE --------- ---------- ----------- --------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) Basic.................. $1.63 $38 72.3 $0.53 ===== ===== Effect of dilutive securities Stock options........ -- 1.0 Trust preferred securities......... -- -- Restricted stock..... -- -- --- ---- Diluted................ $1.59 $38 73.3 $0.52 ===== === ==== =====
73 78 17. SUPPLEMENTAL CASH FLOW INFORMATION The following table contains supplemental cash flow information for the years ended December 31:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Interest.................................................. $266 $249 $ 85 Income tax payments (refunds)............................. (93) (34) 49
See Note 2, for a discussion of the non-cash investing transactions related to certain acquisitions. 18. INVESTMENT IN AFFILIATED COMPANIES (UNAUDITED) The Company holds investments in various affiliates which are accounted for on the equity method of accounting. The principal equity method investments are the Company's investments in international pipelines, interstate pipelines, power generation plants, gathering systems and natural gas storage facilities. Summarized financial information of the Company's proportionate share of 50 percent or less owned companies and majority owned unconsolidated subsidiaries accounted for by the equity method of accounting is as follows:
YEAR ENDED DECEMBER 31, ----------------------- COMPANIES OWNED 50% OR LESS 1998 1997 1996 - --------------------------- ----- ----- ----- (IN MILLIONS) Operating results data: Revenues and other income................................. $202 $130 $98 Costs and expenses........................................ 156 103 68 Net income................................................ 46 26 30
DECEMBER 31, --------------- 1998 1997 ------ ------ Financial position data: Current assets............................................ $ 182 $ 78 Non-current assets........................................ 1,941 1,033 Short-term debt........................................... 175 25 Other current liabilities................................. 75 50 Long-term debt............................................ 1,028 640 Other non-current liabilities............................. 171 67 Equity in net assets...................................... 674 329
74 79 19. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Financial information by quarter is summarized below. In the opinion of management, all adjustments necessary for a fair presentation have been made.
QUARTERS ENDED ----------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ----------- ------------ ------- -------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) 1998 Operating revenues............................... $1,252 $1,615 $1,296 $1,619 Operating income................................. 140 112 113 141 Net income....................................... 60 52 55 58 Basic earnings per common share.................. 0.52 0.45 0.47 0.50 Diluted earnings per share....................... 0.49 0.43 0.45 0.48 1997 Operating revenues............................... $1,577 $1,251 $ 979 $1,831 Operating income................................. 137 120 125 139 Net income....................................... 52 44 43 47 Basic earnings per common share.................. 0.45 0.38 0.38 0.43 Diluted earnings per share....................... 0.44 0.37 0.37 0.42
75 80 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of El Paso Energy Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 14.(a) 1. present fairly, in all material respects, the consolidated financial position of El Paso Energy Corporation as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14.(a) 2. presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinions expressed above. PricewaterhouseCoopers LLP Houston, Texas March 9, 1999 76 81 SCHEDULE II EL PASO ENERGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- ------------------- ---------- --------- CHARGED BALANCE AT TO COSTS CHARGED BALANCE BEGINNING AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- -------- -------- ---------- --------- 1998 Allowance for doubtful accounts.......... $ 56 $ 7 $ 4 $(29)(a) $ 38 Valuation allowance on deferred tax assets................................ 8 -- 4 (7) 5 1997 Allowance for doubtful accounts.......... $ 64 $ 53 $ -- $(61)(a) $ 56 Valuation allowance on deferred tax assets................................ -- -- 8(b) -- 8 1996 Allowance for doubtful accounts.......... $ 11 $ 6 $ 51(c) $ (4)(a) $ 64
- --------------- (a) Primarily accounts written off. (b) Due to acquisition of Gulf States Gas Pipeline Company. (c) Primarily due to acquisition of EPTPC. 77 82 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing under the captions "Proposal No. 1 -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in EPEC's proxy statement for the 1999 Annual Meeting of Stockholders is incorporated herein by reference. Information regarding executive officers of EPEC is presented in Item 1, Business, of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information appearing under the caption "Executive Compensation" in EPEC's proxy statement for the 1999 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing under the caption "Security Ownership of a Certain Beneficial Owner and Management" in EPEC's proxy statement for the 1999 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT: 1. Financial statements. The following consolidated financial statements of the Company are included in Part II, Item 8 of this report:
PAGE ---- Consolidated Statements of Income...................... 42 Consolidated Balance Sheets............................ 43 Consolidated Statements of Cash Flows.................. 44 Consolidated Statements of Stockholders' Equity........ 45 Consolidated Statements of Comprehensive Income........ 46 Notes to Consolidated Financial Statements............. 47 Report of independent accountants...................... 76 2. Financial statement schedules and supplementary information required to be submitted. Schedule II -- Valuation and qualifying accounts....... 77 Schedules other than that listed above are omitted because they are not applicable 3. Exhibit list............................................. 79
(B) REPORTS ON FORM 8-K: None. 78 83 EL PASO ENERGY CORPORATION EXHIBIT LIST DECEMBER 31, 1998 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 asterisk; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. Exhibits designated with a "+" constitute a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- Agreement and Plan of Merger, dated July 16, 1998, by and among EPEC, EPNG, and El Paso Energy Merger Company (Exhibit 2.1 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 3.A -- Restated Certificate of Incorporation of EPEC, dated July 16, 1998; Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of EPEC, dated July 16, 1998, as amended (Exhibit 3.1 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 3.B -- By-laws of EPEC, as amended dated October 21, 1998 (Exhibit 3.B to EPEC's Form 10-Q, filed November 12, 1998, File No. 1-14365 (the "EPEC 1998 Third Quarter 10-Q")). 4.A -- Amended and Restated Shareholder Rights Agreement, between EPEC and BankBoston, N.A., dated January 20, 1999 (Exhibit 1 to EPEC's Registration Statement on Form 8-A/A Amendment No. 1, filed January 29, 1999, File No. 1-14365). 4.B -- Amended and Restated Declaration of Trust of El Paso Energy Capital Trust I dated March 16, 1998 (Exhibit 4.4 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Amendment to the Amended and Restated Declaration of Trust of El Paso Energy Capital Trust I, dated August 1, 1998 (Exhibit 4.3 of EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 4.C -- Subordinated Debt Securities Indenture dated March 1, 1998, between EPNG and The Chase Manhattan Bank as Trustee (Exhibit 4.1 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Supplemental Indenture dated March 17, 1998, between EPNG and The Chase Manhattan Bank, as Trustee (Exhibit 4.2 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); Second Supplemental Indenture, dated August 1, 1998 between EPEC and The Chase Manhattan Bank, as Trustee (Exhibit 4.2 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 4.D -- 4 3/4% Convertible Subordinated Debenture due 2028 (Exhibit 4.6 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700). 4.E -- Certificate of Trust Preferred Security (Exhibit 4.5 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700). 4.F -- Trust Preferred Securities Guarantee Agreement issued by EPNG dated March 17, 1998 (Exhibit 4.7 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Amendment to Trust Preferred Securities Guarantee Agreement issued by EPEC dated August 1, 1998, (Exhibit 4.4 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365).
79 84
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.A -- $750 million 364-Day Revolving Credit and Competitive Advance Facility Agreement dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York and certain other banks (Exhibit 10.A to the EPEC 1998 Third Quarter 10-Q); First Amendment to the $750 million 364-Day Revolving Credit and Competitive Advance Facility dated as of October 9, 1998, among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.B to the EPEC 1998 Third Quarter 10-Q); Guarantee, dated as of August 28, 1998, made by EPEC in favor of The Chase Manhattan Bank, as Administrative Agent for several banks and other financial institutions from time to time parties to the $750 million 364-Day Revolving Credit and Competitive Advance Facility dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.C to the EPEC 1998 Third Quarter 10-Q). *10.A.1 -- Joinder Agreement dated December 7, 1998, made by EPEC to the $750 million 364-Day Revolving Credit and CAF Advance Facility Agreement, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York. 10.B -- $750 million 5-Year Revolving Credit and Competitive Advance Facility Agreement dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.D to the EPEC 1998 Third Quarter 10-Q); First Amendment to the $750 million 5-Year Revolving Credit and Competitive Advance Facility dated as of October 9, 1998, among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.E to the EPEC 1998 Third Quarter 10-Q); Guarantee, dated as of August 28, 1998, made by EPEC in favor of The Chase Manhattan Bank, as Administrative Agent for several banks and other financial institutions from time to time parties to the $750 million 5-Year Revolving Credit and Competitive Advance Facility dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.F to the EPEC 1998 Third Quarter 10-Q). *10.B.1 -- Joinder Agreement dated December 7, 1998, made by EPEC to the $750 million 5-Year Revolving Credit and CAF Advance Facility Agreement, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York. *+10.C -- Omnibus Compensation Plan dated January 1, 1992; Amendment No. 1 effective as of April 1, 1998; Amendment No. 2 effective as of August 1, 1998; Amendment No. 3 effective as of December 3, 1998; and Amendment No. 4 effective as of January 20, 1999. *+10.D -- 1995 Incentive Compensation Plan, Amended and Restated effective as of December 3, 1998. +10.E -- 1995 Compensation Plan for Non-Employee Directors, Amended and Restated effective as of August 1, 1998 (Exhibit 10.H to the EPEC 1998 Third Quarter 10-Q). *+10.F -- Stock Option Plan for Non-Employee Directors, Amended and Restated effective as of January 20, 1999.
80 85
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.G -- 1995 Omnibus Compensation Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.J to the EPEC 1998 Third Quarter 10-Q). *+10.G.1 -- Amendment No. 1 to the 1995 Omnibus Compensation Plan effective as of December 3, 1998; Amendment No. 2 to the 1995 Omnibus Compensation Plan effective as of January 20, 1999. *+10.H -- Supplemental Benefits Plan, Amended and Restated effective as of December 3, 1998. +10.I -- Senior Executive Survivor Benefit Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.M to the EPEC 1998 Third Quarter 10-Q). *+10.J -- Deferred Compensation Plan, Amended and Restated effective as of December 3, 1998. +10.K -- Key Executive Severance Protection Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.O to the EPEC 1998 Third Quarter 10-Q). +10.L -- Director Charitable Award Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.P to the EPEC 1998 Third Quarter 10-Q). +10.M -- Strategic Stock Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.Q to the EPEC 1998 Third Quarter 10-Q). *+10.M.1 -- Amendment No. 1 to the Strategic Stock Plan, effective as of December 3, 1998; Amendment No. 2 to the Strategic Stock Plan, effective as of January 20, 1999. +10.N -- Domestic Relocation Policy, effective November 1, 1996 (Exhibit 10.Q to EPNG's Form 10-K for 1997, File No. 1-2700). +10.O -- Employment Agreement dated July 31, 1992 between EPNG and William A. Wise (Exhibit 10.R to the EPEC 1998 Third Quarter 10-Q); Amendment to Employment Agreement dated January 29, 1996, between EPNG and William A. Wise (Exhibit 10.U.1 to EPNG's Form 10-K for 1995, File No. 1-2700). *+10.P -- Letter Agreement dated January 13, 1995 between EPNG and William A. Wise. +10.Q -- Promissory Note dated May 30, 1997, made by William A. Wise to EPEC (Exhibit 10.R to EPNG's Form 10-Q, filed May 15, 1998, File No. 1-2700; Amendment to Promissory Note dated November 20, 1997 (Exhibit 10.R to EPNG's Form 10-Q, filed May 15, 1998, File No. 1-2700). +10.S -- Letter Agreement dated February 22, 1991, between EPNG and Britton White Jr. (Exhibit 10.V to the EPEC 1998 Third Quarter 10-Q). *18 -- Letter regarding Change in Accounting Principles. *21 -- Subsidiaries of EPEC. *23 -- Consent of Independent Accountants. *27 -- Financial Data Schedule.
81 86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, El Paso Energy Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 9th day of March 1999. EL PASO ENERGY CORPORATION Registrant By /s/ WILLIAM A. WISE ------------------------------------ William A. Wise Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of El Paso Energy Corporation and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM A. WISE Chairman of the Board, March 9, 1999 - ----------------------------------------------------- President, Chief Executive (William A. Wise) Officer and Director /s/ H. BRENT AUSTIN Executive Vice President and March 9, 1999 - ----------------------------------------------------- Chief Financial Officer (H. Brent Austin) /s/ JEFFREY I. BEASON Vice President and Controller March 9, 1999 - ----------------------------------------------------- (Chief Accounting Officer) (Jeffrey I. Beason) /s/ BYRON ALLUMBAUGH Director March 9, 1999 - ----------------------------------------------------- (Byron Allumbaugh) /s/ JUAN CARLOS BRANIFF Director March 9, 1999 - ----------------------------------------------------- (Juan Carlos Braniff) /s/ PETER T. FLAWN Director March 9, 1999 - ----------------------------------------------------- (Peter T. Flawn) /s/ JAMES F. GIBBONS Director March 9, 1999 - ----------------------------------------------------- (James F. Gibbons) /s/ BEN F. LOVE Director March 9, 1999 - ----------------------------------------------------- (Ben F. Love) /s/ KENNETH L. SMALLEY Director March 9, 1999 - ----------------------------------------------------- (Kenneth L. Smalley) /s/ MALCOLM WALLOP Director March 9, 1999 - ----------------------------------------------------- (Malcolm Wallop)
82 87 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- Agreement and Plan of Merger, dated July 16, 1998, by and among EPEC, EPNG, and El Paso Energy Merger Company (Exhibit 2.1 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 3.A -- Restated Certificate of Incorporation of EPEC, dated July 16, 1998; Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of EPEC, dated July 16, 1998, as amended (Exhibit 3.1 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 3.B -- By-laws of EPEC, as amended dated October 21, 1998 (Exhibit 3.B to EPEC's Form 10-Q, filed November 12, 1998, File No. 1-14365 (the "EPEC 1998 Third Quarter 10-Q")). 4.A -- Amended and Restated Shareholder Rights Agreement, between EPEC and BankBoston, N.A., dated January 20, 1999 (Exhibit 1 to EPEC's Registration Statement on Form 8-A/A Amendment No. 1, filed January 29, 1999, File No. 1-14365). 4.B -- Amended and Restated Declaration of Trust of El Paso Energy Capital Trust I dated March 16, 1998 (Exhibit 4.4 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Amendment to the Amended and Restated Declaration of Trust of El Paso Energy Capital Trust I, dated August 1, 1998 (Exhibit 4.3 of EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 4.C -- Subordinated Debt Securities Indenture dated March 1, 1998, between EPNG and The Chase Manhattan Bank as Trustee (Exhibit 4.1 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Supplemental Indenture dated March 17, 1998, between EPNG and The Chase Manhattan Bank, as Trustee (Exhibit 4.2 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); Second Supplemental Indenture, dated August 1, 1998 between EPEC and The Chase Manhattan Bank, as Trustee (Exhibit 4.2 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365). 4.D -- 4 3/4% Convertible Subordinated Debenture due 2028 (Exhibit 4.6 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700). 4.E -- Certificate of Trust Preferred Security (Exhibit 4.5 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700). 4.F -- Trust Preferred Securities Guarantee Agreement issued by EPNG dated March 17, 1998 (Exhibit 4.7 to EPNG's Form 8-K, filed March 17, 1998, File No. 1-2700); First Amendment to Trust Preferred Securities Guarantee Agreement issued by EPEC dated August 1, 1998, (Exhibit 4.4 to EPEC's Form 8-K, filed August 3, 1998, File No. 1-14365).
88
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.A -- $750 million 364-Day Revolving Credit and Competitive Advance Facility Agreement dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York and certain other banks (Exhibit 10.A to the EPEC 1998 Third Quarter 10-Q); First Amendment to the $750 million 364-Day Revolving Credit and Competitive Advance Facility dated as of October 9, 1998, among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.B to the EPEC 1998 Third Quarter 10-Q); Guarantee, dated as of August 28, 1998, made by EPEC in favor of The Chase Manhattan Bank, as Administrative Agent for several banks and other financial institutions from time to time parties to the $750 million 364-Day Revolving Credit and Competitive Advance Facility dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.C to the EPEC 1998 Third Quarter 10-Q). *10.A.1 -- Joinder Agreement dated December 7, 1998, made by EPEC to the $750 million 364-Day Revolving Credit and CAF Advance Facility Agreement, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York. 10.B -- $750 million 5-Year Revolving Credit and Competitive Advance Facility Agreement dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.D to the EPEC 1998 Third Quarter 10-Q); First Amendment to the $750 million 5-Year Revolving Credit and Competitive Advance Facility dated as of October 9, 1998, among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.E to the EPEC 1998 Third Quarter 10-Q); Guarantee, dated as of August 28, 1998, made by EPEC in favor of The Chase Manhattan Bank, as Administrative Agent for several banks and other financial institutions from time to time parties to the $750 million 5-Year Revolving Credit and Competitive Advance Facility dated as of October 29, 1997, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and certain other banks (Exhibit 10.F to the EPEC 1998 Third Quarter 10-Q). *10.B.1 -- Joinder Agreement dated December 7, 1998, made by EPEC to the $750 million 5-Year Revolving Credit and CAF Advance Facility Agreement, by and among EPNG, TGP, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York. *+10.C -- Omnibus Compensation Plan dated January 1, 1992; Amendment No. 1 effective as of April 1, 1998; Amendment No. 2 effective as of August 1, 1998; Amendment No. 3 effective as of December 3, 1998; and Amendment No. 4 effective as of January 20, 1999. *+10.D -- 1995 Incentive Compensation Plan, Amended and Restated effective as of December 3, 1998. +10.E -- 1995 Compensation Plan for Non-Employee Directors, Amended and Restated effective as of August 1, 1998 (Exhibit 10.H to the EPEC 1998 Third Quarter 10-Q). *+10.F -- Stock Option Plan for Non-Employee Directors, Amended and Restated effective as of January 20, 1999.
89
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.G -- 1995 Omnibus Compensation Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.J to the EPEC 1998 Third Quarter 10-Q). *+10.G.1 -- Amendment No. 1 to the 1995 Omnibus Compensation Plan effective as of December 3, 1998; Amendment No. 2 to the 1995 Omnibus Compensation Plan effective as of January 20, 1999. *+10.H -- Supplemental Benefits Plan, Amended and Restated effective as of December 3, 1998. +10.I -- Senior Executive Survivor Benefit Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.M to the EPEC 1998 Third Quarter 10-Q). *+10.J -- Deferred Compensation Plan, Amended and Restated effective as of December 3, 1998. +10.K -- Key Executive Severance Protection Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.O to the EPEC 1998 Third Quarter 10-Q). +10.L -- Director Charitable Award Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.P to the EPEC 1998 Third Quarter 10-Q). +10.M -- Strategic Stock Plan, Amended and Restated effective as of August 1, 1998 (Exhibit 10.Q to the EPEC 1998 Third Quarter 10-Q). *+10.M.1 -- Amendment No. 1 to the Strategic Stock Plan, effective as of December 3, 1998; Amendment No. 2 to the Strategic Stock Plan, effective as of January 20, 1999. +10.N -- Domestic Relocation Policy, effective November 1, 1996 (Exhibit 10.Q to EPNG's Form 10-K for 1997, File No. 1-2700). +10.O -- Employment Agreement dated July 31, 1992 between EPNG and William A. Wise (Exhibit 10.R to the EPEC 1998 Third Quarter 10-Q); Amendment to Employment Agreement dated January 29, 1996, between EPNG and William A. Wise (Exhibit 10.U.1 to EPNG's Form 10-K for 1995, File No. 1-2700). *+10.P -- Letter Agreement dated January 13, 1995 between EPNG and William A. Wise. +10.Q -- Promissory Note dated May 30, 1997, made by William A. Wise to EPEC (Exhibit 10.R to EPNG's Form 10-Q, filed May 15, 1998, File No. 1-2700; Amendment to Promissory Note dated November 20, 1997 (Exhibit 10.R to EPNG's Form 10-Q, filed May 15, 1998, File No. 1-2700). +10.S -- Letter Agreement dated February 22, 1991, between EPNG and Britton White Jr. (Exhibit 10.V to the EPEC 1998 Third Quarter 10-Q). *18 -- Letter regarding Change in Accounting Principles. *21 -- Subsidiaries of EPEC. *23 -- Consent of Independent Accountants. *27 -- Financial Data Schedule.
EX-10.A.1 2 JOINDER AGREEMENT - RE: 364-DAY REVOLVING CREDIT 1 EXHIBIT 10.A.1 JOINDER AGREEMENT Reference is made to the $750,000,000 364-Day Revolving Credit and CAF Advance Facility Agreement, dated as of October 29, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among El Paso Natural Gas Company, Tennessee Gas Pipeline Company, certain banks and other financial institutions from time to time thereto, The Chase Manhattan Bank, as Administrative Agent and CAF Advance Agent, Citibank, N.A., as Documentation Agent, and Morgan Guaranty Trust Company of New York, as Syndication Agent. Capitalizated terms used herein and not otherwise defined have the meanings assigned such terms in the Credit Agreement. The undersigned hereby acknowledges that it has received and reviewed an executed copy of the Credit Agreement, and agrees to: (a) join the Credit Agreement as a Borrower party thereto; (b) be bound by all covenants, agreements and acknowledgments attributable to a Borrower in the Credit Agreement and any Note to which it is a party; and (c) perform all obligations required of it by the Credit Agreement and any Note to which it is a party. The undersigned hereby represents and warrants that the representations and warranties with respect to it contained in, or made deemed made by it in, Article IV of the Credit Agreement are true and correct on the date hereof. THIS JOINDER AGREEMENT SHALL BE GOVERNED BY, AND CONTSTRUED AND INTERPRETED IN ACCODANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Joinder Agreement to be duly executed and delivered in Houston, Texas by its proper and duly authorized officer as of this 7th day of December, 1998. EL PASO ENERGY CORPORATION By: /s/ H. Brent Austin ----------------------------------- Title: Executive Vice President and Chief Financial Officer ACKNOWLEDGED AND AGREED TO: EL PASO NATURAL GAS COMPANY By: /s/ H. Brent Austin ----------------------------------- Title: Executive Vice President and CHIEF FINANCIAL OFFICER EX-10.B.1 3 JOINDER AGREEMENT - RE: 5-YEAR REVOLVING CREDIT 1 EXHIBIT 10.B.1 JOINDER AGREEMENT Reference is made to the $750,000,000 5-Year Revolving Credit and CAF Advance Facility Agreement, dated as of October 29, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among El Paso Natural Gas Company, Tennessee Gas Pipeline Company, certain banks and other financial institutions from time to time thereto, The Chase Manhattan Bank, as Administrative Agent and CAF Advance Agent, Citibank, N.A., as Documentation Agent, and Morgan Guaranty Trust Company of New York, as Syndication Agent. Capitalizated terms used herein and not otherwise defined have the meanings assigned such terms in the Credit Agreement. The undersigned hereby acknowledges that it has received and reviewed an executed copy of the Credit Agreement, and agrees to: (a) join the Credit Agreement as a Borrower party thereto; (b) be bound by all covenants, agreements and acknowledgments attributable to a Borrower in the Credit Agreement and any Note to which it is a party; and (c) perform all obligations required of it by the Credit Agreement and any Note to which it is a party. The undersigned hereby represents and warrants that the representations and warranties with respect to it contained in, or made deemed made by it in, Article IV of the Credit Agreement are true and correct on the date hereof. THIS JOINDER AGREEMENT SHALL BE GOVERNED BY, AND CONTSTRUED AND INTERPRETED IN ACCODANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Joinder Agreement to be duly executed and delivered in Houston, Texas by its proper and duly authorized officer as of this 7th day of December, 1998. EL PASO ENERGY CORPORATION By: /s/ H. Brent Austin ----------------------------------- Title: Executive Vice President and Chief Financial Officer ACKNOWLEDGED AND AGREED TO: EL PASO NATURAL GAS COMPANY By: /s/ H. Brent Austin ---------------------------------- Title: Executive Vice President and Chief Financial Officer EX-10.C 4 OMNIBUS COMPENSATION PLAN 1 EXHIBIT 10.C EL PASO NATURAL GAS COMPANY OMNIBUS COMPENSATION PLAN Dated as of January 1, 1992 2 TABLE OF CONTENTS SECTION 1 PURPOSES....................................................................................... 1 SECTION 2 DEFINITIONS.................................................................................... 1 2.1 Beneficiary.................................................................................... 1 2.2 Board of Directors............................................................................. 1 2.3 Cause.......................................................................................... 1 2.4 Change in Control.............................................................................. 2 2.5 Code........................................................................................... 3 2.6 Common Stock .................................................................................. 3 2.7 Exchange Act .................................................................................. 3 2.8 Fair Market Value.............................................................................. 3 2.9 Good Reason .................................................................................. 4 2.10 Incentive Stock Option......................................................................... 5 2.11 Management Committee........................................................................... 5 2.12 Nonqualified Option............................................................................ 5 2.13 Option Price .................................................................................. 5 2.14 Participant .................................................................................. 5 2.15 Performance Cycle.............................................................................. 5 2.16 Performance Share Unit or Units................................................................ 6 2.17 Permanent Disability or Permanent Disabled..................................................... 6 2.18 Plan Administrator............................................................................. 6 2.19 Predecessor Option............................................................................. 6 2.20 Restricted Stock............................................................................... 6 2.21 Subsidiary .................................................................................. 6 2.22 Valuation Date................................................................................. 7 SECTION 3 ADMINISTRATION................................................................................. 7 SECTION 4 ELIGIBILITY.................................................................................... 9 SECTION 5 SHARES AND UNITS AVAILABLE FOR THE PLAN........................................................ 9 SECTION 6 STOCK OPTION................................................................................... 10 SECTION 7 STOCK APPRECIATION RIGHTS...................................................................... 16
3 SECTION 8 LIMITED STOCK APPRECITATION RIGHTS............................................................. 18 SECTION 9 PERFORMANCE SHARE UNITS........................................................................ 19 9.1 Grants of Units................................................................................ 19 9.2 Performance Objectives......................................................................... 19 9.3 Vesting ....................................................................................... 20 9.4 Adjustment by Plan Administrator............................................................... 21 9.5 Notice to Participants......................................................................... 21 9.6 Entitlement to Payment......................................................................... 21 9.7 Deferred Payment............................................................................... 22 9.8 Memorandum Account............................................................................. 22 9.9 Discretionary Investment by Company............................................................ 23 9.10 Payment of Deferred Compensation............................................................... 23 9.11 Acceleration of Payments of Deferred Compensation............................................................................. 24 9.12 Acceleration of Payment Due to Change in Control.................................................................................. 24 9.13 Payment of BR Deferred Compensation............................................................ 24 9.14 Unfunded Obligation............................................................................ 25 9.15 Designation of Beneficiary..................................................................... 25 SECTION 10 RESTRICTED STOCK............................................................................... 26 SECTION 11 REGULATORY APPROVALS AND LISTINGS.............................................................. 28 SECTION 12 EFFECTIVE DATE AND TERM OF PLAN................................................................ 28 SECTION 13 GENERAL PROVISIONS............................................................................. 29 SECTION 14 AMENDMENT, TERMINATION OR DISCONTINUANCE OF THE PLAN.............................................................................. 30
4 EL PASO NATURAL GAS COMPANY OMNIBUS COMPENSATION PLAN SECTION 1 PURPOSES The purposes of the El Paso Natural Gas Company Omnibus Compensation Plan (the "Plan") are to promote the interests of El Paso Natural Gas Company (the "Company") and its stockholders by strengthening its ability to attract and retain officers and key employees in the employ of the Company and its Subsidiaries (as defined below) by furnishing suitable recognition of their ability and industry which contributed materially to the success of the Company. The Plan provides for the assumption of stock options, limited stock appreciation rights and stock appreciation rights granted under the 1988 Burlington Resources Inc. Stock Option Incentive Plan and for the grant of stock options, limited stock appreciation rights, stock appreciation rights, restricted stock and performance share units in accordance with the terms and conditions set forth below. SECTION 2 DEFINITIONS Unless otherwise required by the context, the following terms when used in the Plan shall have the meanings set forth in this Section 2: 2.1 BENEFICIARY The person or persons designated by the Participant pursuant to Section 6.4(f) or Section 9.15 to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. 2.2 BOARD OF DIRECTORS The Board of Directors of the Company. 2.3 CAUSE The Company may terminate the Participant's employment for Cause. A termination for Cause is a termination evidenced by a resolution adopted in good faith by two-thirds (2/3) of the Board of Directors that the Participant (i) willfully and continually failed to substantially perform the Participant's 5 duties with the Company (other than a failure resulting from the Participant's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial Performance has been delivered to the Participant specifying the manner in which the Participant has failed to substantially perform or (ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; provided, however, that no termination of the Participant's employment shall be for Cause as set forth in clause (ii) above until (A) there shall have been delivered to the Participant a copy of a written notice setting forth that the Participant was guilty of the conduct set forth in clause (ii) above and specifying the particulars thereof in detail and (B) the Participant shall have been provided an opportunity to be heard by the Board of Directors (with the assistance of the Participant's counsel if the Participant so desires). No act, nor failure to act, on the Participant's part shall be considered "willful" unless the Participant has acted, or failed to act, with an absence of good faith and without a reasonable belief that the Participant's action or failure to act was in the best interest of the Company. Notwithstanding anything contained in the Plan to the contrary, no failure to perform by the Participant after notice of termination is given by the Participant shall constitute Cause. 2.4 CHANGE IN CONTROL As used in the Plan, a Change in Control shall be deemed to occur (i) if any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), except Burlington Resources Inc. ("BR"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, (ii) upon the first purchase of the Common Stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company), (iii) upon the approval by the Company's stockholders of a merger or consolidation, a sale or disposition of all or substantially all the Company's assets or a plan of liquidation or dissolution of the Company, or (iv) if, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors Cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director 6 was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the above, any 7 distribution of Common Stock solely to BR stockholders, and any change in the constitution of the Board of Directors occurring in connection therewith, shall not be deemed a Change in Control. For purposes of this Section 2.4, the term "the Company" shall include BR until such time as BR distributes all the outstanding Common Stock owned by it to the stockholders of BR. 2.5 CODE The Internal Revenue Code of 1986, as amended and in effect from time to time, and the temporary or final regulations of the Secretary of the Treasury adopted pursuant to the Code. 2.6 COMMON STOCK The Common Stock of the Company, $3 par value per share, or such other class of shares or other securities as may be applicable pursuant to the provisions of Section 5. 2.7 EXCHANGE ACT The Securities Exchange Act of 1934, as amended. 2.4 FAIR MARKET VALUE As applied to a specific date, Fair Market Value shall be deemed to be the mean between the highest and lowest quoted selling prices at which Common Stock was sold on such date as reported in the NYSE-Composite Transactions by The Wall Street Journal on such date, or if no Common Stock was traded on such date, on the next preceding day on which Common Stock was so traded. Notwithstanding the foregoing, upon the exercise, (a) during the thirty (30) day period following a Change in Control, of a limited stock appreciation right or stock appreciation right granted in connection with a Nonqualified Option more than six (6) months prior to a Change in Control, or (b) during the seven (7) month period following a Change in Control, of a limited stock appreciation right or of a stock appreciation right granted in connection with a Nonqualified option less than six (6) months prior to a Change in Control, Fair Market Value on the date of exercise shall be deemed to be the greater of (i) the highest price per share of Common Stock as reported in the NYSE-Composite Transactions by The Wall Street Journal during the sixty (60) day period ending on the day preceding the date of exercise of the stock 8 appreciation right or limited stock appreciation right, as the case may be, and (ii) if the Change in Control is one described in clause (ii) or (iii) of Section 2.4, the highest price per share paid for Common Stock in connection with such Change in Control. 2.9 GOOD REASON Good Reason shall mean the occurrence of any of the following events or conditions: (a) a change in the Participant's status, title, position or responsibilities (including reporting responsibilities) which, in the Participant's reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which, in the Participant's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Participant from or failure to reappoint or reelect the Participant to any of such positions, except in connection with the termination of the Participant's employment for Cause, for Permanent Disability or as a result of his or her death, or by the Participant other than for Good Reason; (b) a reduction in the Participant's annual base salary; (c) the Company's requiring the Participant (without the consent of the Participant) to be based at any place outside a thirty-five (35) mile radius of his or her place of employment prior to a Change in Control, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (d) the failure by the Company to (i) continue in effect any material compensation or benefit plan in which the Participant was participating at the time of the Change in Control, including, but not limited to, the Plan, the El Paso Natural Gas Company Pension Plan, the El Paso Natural Gas Company Supplemental Benefits Plan, the El Paso Natural Gas Company Incentive Compensation Plan, the El Paso Natural Gas Company Deferred Compensation Plan and the El Paso Natural Gas Company Retirement Savings Plan; or (ii) provide the Participant with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program 9 and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in control, if greater); (e) any material breach by the Company of any provision of the Plan; or (f) any purported termination of the Participant's employment for Cause by the Company which does not otherwise comply with the terms of the Plan. 2.10 INCENTIVE STOCK OPTION An option intended to meet the requirements of an Incentive Stock Option as defined in Section 422 of the Code, as in effect at the time of grant of such option, or any statutory provision that may hereafter replace such Section. 2.11 MANAGEMENT COMMITTEE A committee consisting of the Chief Executive Officer and such other officers as the Chief Executive Officer shall designate. 2.12 NONQUALIFIED OPTION An option which is not intended to meet the requirements of an Incentive Stock Option as defined in Section 422 of the Code. 2.13 OPTION PRICE The price per share of Common Stock at which each option is exercisable. 2.14 PARTICIPANT An eligible employee to whom an option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit is granted under the Plan as set forth in Section 4. 2.15 PERFORMANCE CYCLE That period commencing with January 1 of each year in which the grant of a Performance Share Unit is made and ending on December 31 of the third succeeding year. While a-new Performance Cycle will normally be initiated only every four (4) years, the Plan Administrator, in its discretion, may initiate an overlapping Performance Cycle that begins before an existing Performance Cycle has ended. 10 2.16 PERFORMANCE SHARE UNIT OR UNITS The unit of award having an accounting value equal to the Fair Market Value of one (1) share of Common Stock. 2.17 PERMANENT DISABILITY OR PERMANENTLY DISABLED A Participant shall be deemed to have become Permanently Disabled for purposes of the Plan if the Chief Executive Officer of the Company shall find upon the basis of medical evidence satisfactory to the Chief Executive Officer that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company or any of its subsidiaries, and that such disability will be permanent and continuous during the remainder of the Participant's life; provided, that for officers and directors of the Company who are subject to Section 16 of the Exchange Act, such determination shall be made by the Plan Administrator. 2.18 PLAN ADMINISTRATOR The Board of Directors or the committee appointed and/or authorized pursuant to Section 3 to administer the Plan. 2.19 PREDECESSOR OPTION An option to purchase BR common stock which has been surrendered in exchange for and converted into an option issued pursuant to the Plan. 2.20 RESTRICTED STOCK Common Stock granted under the Plan that is subject to the requirements of Section 10 and such other restrictions as the Plan Administrator deems appropriate. 2.21 SUBSIDIARY An entity that is designated by the Plan Administrator as a subsidiary for purposes of the Plan and that is a corporation (or other form of business association that is treated as a corporation for tax purposes) of which shares (or other ownership interests) having more than fifty percent (50%) of the voting power are owned or controlled, directly or indirectly, by the Company so as to qualify as a "subsidiary corporation" (within the meaning of Section 424(f) of-the Code). 11 2.22 VALUATION DATE The date at the end of the Performance Cycle (or at such other time as the Plan may require or the Plan Administrator may select) that is designated by the Plan Administrator for the purpose of determining the Fair Market Value of vested Units that will be paid to the Participant or Beneficiary or credited to the Participant's Memorandum Account (as defined in Section 9.8) in accordance with Section 9.8. SECTION 3 ADMINISTRATION 3.1 The Plan shall be administered by the Board of Directors or, in the event the Board of Directors shall appoint and/or authorize a committee to administer the Plan, by such committee. The administrator of the Plan shall hereinafter be referred to as the "Plan Administrator." In the event a member of the Board of Directors (or the committee) may be eligible, subject to the restrictions set forth in Section 4, to participate in or receive or hold options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units under the Plan, no member of the Board of Directors or the committee shall vote with respect to the granting of options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units hereunder to himself or herself, as the case may be, and, if state corporate law does not permit a committee to grant options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units to directors, then any option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit granted under the Plan to a director for his or her services as such shall be approved by the full Board of Directors. The members of any committee serving as Plan Administrator shall be appointed by the Board of Directors for such term as the Board of Directors may determine. The Board of Directors may from time to time remove members from, or add members to, the committee. Vacancies on the committee, however caused, may be filled by the Board of Directors. With respect to grants made under the Plan to officers and directors of the Company who are subject to Section 16 of the Exchange Act, the Plan Administrator shall be constituted at all times so as to meet the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act. 12 3.2 Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, to select persons eligible to participate in the Plan, to grant options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units thereunder, to administer the Plan, to make recommendations to the Board of Directors, to take all such steps and make all such determinations in connection with the Plan and the options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units granted thereunder as it may deem necessary or advisable, which determination shall be final and binding upon all Participants, so long as such interpretation and construction with respect to Incentive Stock Options correspond to the requirements of Section 422 of the Code. The Plan Administrator shall cause the Company at its expense to take any action related to the Plan which may be required or necessary to comply with the provisions of any federal or state law or any regulations issued thereunder. 3.3 Each member of any committee acting as Plan Administrator, while serving as such, shall be considered to be acting in his or her capacity as a director of the Company. Members of the Board of Directors and members of any committee acting under the Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability except for gross negligence or willful misconduct in the performance of their duties. 3.4 The fact that a member of the Board of Directors is, or shall theretofore have been or thereafter may be, a person who has received or is eligible to receive an option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit shall not disqualify him or her from taking part in and voting at any time as a member of the Board of Directors in favor of or against any amendment or repeal of the Plan. 3.5 It is the intention of the Company that, so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, the Plan shall comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and, if any Plan provision is later found not to be in compliance with such Section, that provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board of Directors, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or 13 condition the use of any provision of the Plan to Participants who are officers and directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. SECTION 4 ELIGIBILITY To be eligible for selection by the Plan Administrator to participate in the Plan, an individual must be an officer or key employee of the Company, or of any Subsidiary, as of the date on which the Plan Administrator grants to such individual an option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit and who in the judgment of the Plan Administrator holds a position of responsibility and is able to contribute substantially to the Company's continued success. Directors of the Company who are full-time salaried officers shall be eligible to participate. SECTION 5 SHARES AND UNITS AVAILABLE FOR THE PLAN 5.1 Subject to Section 5.3, the maximum number of shares for which options, limited stock appreciation rights, stock appreciation rights and Restricted Stock may at any time be granted under the Plan is four million (4,000,000) shares of Common Stock, from shares held in the Company's treasury or out of the authorized but unissued shares of the Company, or partly out of each, as shall be determined by the Board of Directors. Upon (i) the expiration or termination in whole or in part of unexercised options or the surrender of an option, or portion thereof, upon exercise of a related limited stock appreciation right or stock appreciation right for cash and (ii) to the extent permissible under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, the forfeiture of Restricted Stock, shares of Common Stock which were subject thereto shall again be available for grants of options, limited stock appreciation rights, stock appreciation rights and Restricted Stock under the Plan. 5.2 Subject to Section 5.3, the number of Performance Share Units which may be granted under the Plan is set at one million (1,000,000) Units. Units that have been granted and are fully vested or that still may become fully vested under the terms of the Plan shall reduce the number of outstanding Units that are available for use in making future grants under the Plan. Upon expiration or termination, in whole or in part, of nonvested Units at the end of a Performance Cycle or otherwise, such expired or terminated Units shall again be available for awards under the Plan. 14 5.3 In the event of a recapitalization, stock split, stock dividend, exchange of shares, merger, reorganization, change in corporate structure or shares of the Company or similar event, the Board of Directors, upon the recommendation of the Plan Administrator, may make appropriate adjustments in the number of shares and Performance Share Units authorized for the Plan and, with respect to outstanding options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units, the Plan Administrator may make appropriate adjustments in the number of shares and Units and the Option Price. SECTION 6 STOCK OPTIONS 6.1 Options may be granted to eligible employees in such number and at such times during the term of the Plan as the Plan Administrator shall determine, the Plan Administrator taking into account the duties of the respective employees, their present and potential contributions to the success of the Company, and such other factors as the Plan Administrator shall deem relevant in accomplishing the purposes of the Plan. The granting of an option shall take place when the Plan Administrator by resolution, written consent or other appropriate action determines to grant such an option to a particular Participant at a particular price. Each option shall be evidenced by a written instrument delivered by or on behalf of the Company containing provisions not inconsistent with the Plan. 6.2 An option granted under the Plan may be either an Incentive Stock Option or a Nonqualified Option. 6.3 Each provision of the Plan and each Incentive Stock Option granted thereunder shall be construed so that each such option shall qualify as an Incentive Stock option, and any provision thereof that cannot be so construed shall be disregarded, unless the Participant agrees otherwise. The total number of shares which may be purchased upon the exercise of Incentive Stock Options granted under the Plan shall not exceed the total specified in Section 5.1. Incentive Stock Options granted in exchange for Predecessor Options shall be converted in accordance with the provisions of the Code necessary to maintain their status as Incentive Stock Options. Incentive Stock Options, in addition to complying with the other provisions of the Plan relating to options generally, shall be subject to the following conditions: 15 (a) TEN PERCENT (10%) STOCKHOLDERS A Participant must not, immediately before an incentive Stock option is granted, own stock representing more than ten percent (10%) of the voting power or value of all classes of stock of the Company or of a Subsidiary. This requirement is waived if (i) the Option Price of the Incentive Stock Option to be granted is at least one hundred ten percent (110%) of the Fair Market Value of the stock subject to the option, determined at the time the option is granted, and (ii) the option is not exercisable more than five (5) years from the date the option is granted. (b) ANNUAL LIMITATION To the extent that the aggregate Fair Market Value (determined at the time of the grant of the option) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year exceeds One Hundred Thousand Dollars ($100,000), such options shall be treated as Nonqualified Options. (c) ADDITIONAL TERMS Any other terms and conditions which the Plan Administrator determines, upon advice of counsel, must be imposed for the option to be an Incentive Stock Option. 6.4 Except as otherwise provided in Section 6.3, all Incentive Stock Options and Nonqualified Options under the Plan shall be granted subject to the following terms and conditions: (a) OPTION PRICE The Option Price shall be determined by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date the option is granted; provided, however, that the option Price of options granted prior to or at the time of the Company's initial public offering of Common Stock (the "IPO") shall be as follows: (i) with respect to options granted upon conversion of Predecessor options, at such proportionate per share conversion price as the Plan Administrator determines; and (ii) with respect to all other options which are Nonqualified options, at the per share offering price of Common Stock in the IPO. 16 (b) DURATION OF OPTIONS Options shall be exercisable at such time and under such conditions as set forth in the option grant, but in no event shall any Incentive Stock Option be exercisable subsequent to the day before the tenth anniversary of the date on which the option is granted, nor shall any other option be exercisable later than the tenth anniversary of the date of its grant. (c) EXERCISE OF OPTIONS Subject to Section 6.4(j), a Participant may not exercise an option until the Participant has completed one (1) year of continuous employment with the Company or any of its Subsidiaries immediately following the date on which the option is granted, or, in the case of options granted upon conversion of Predecessor Options, the date on which the Predecessor Option was granted, or such longer period as the Plan Administrator may determine in a particular case. This requirement is waived in the event of death or Permanent Disability of a Participant before such period of continuous employment is completed and may be waived or modified in the agreement evidencing the option or by resolution adopted at any time by the Plan Administrator. Thereafter, shares of Common Stock covered by an option may be purchased at one time or in such installments over the balance of the option period as may be provided in the option grant. Any shares not purchased on the applicable installment date may be purchased at one time or in such installments over the balance of the option period as may be provided in the option grant. Any shares not purchased on the applicable installment date may be purchased thereafter at any time prior to the final expiration of the option. To the extent that the right to purchase shares has accrued thereunder, options may be exercised from time to time by written notice to the Company setting the number of shares with respect to which the option is being exercised. (d) PAYMENT The purchase price of shares purchased under options shall be paid in full to the Company upon the exercise of the option by delivery of consideration equal to the product of the option Price and the number of shares purchased (the "Purchase Price"). Such consideration may be either (i) in cash or (ii) at the discretion of the Plan Administrator, in Common Stock already owned by the Participant for at least six (6) months, or any combination of cash and Common Stock. The Fair Market Value of such Common Stock as delivered shall be valued 17 as of the day prior to delivery. The Plan Administrator can determine at the time the option is granted that additional forms of payment will be permitted. To the extent permitted by the Plan Administrator and applicable laws and regulations (including, but not limited to, federal tax and securities laws, regulations and state corporate law), an option may also be exercised by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds to pay the Purchase Price. A Participant shall have none of the rights of a stockholder until the shares of Common Stock are issued to the Participant. (e) RESTRICTIONS The Plan Administrator shall determine, with respect to each option, the nature and extent of the restrictions, if any, to be imposed on the shares of Common Stock which may be purchased thereunder, including, but not limited to, restrictions on the transferability of such shares acquired through the exercise of such options for such periods as the Plan Administrator may determine and, further, that in the event a Participant's employment by the Company, or a Subsidiary, terminates during the period in which such shares are nontransferable, the Participant shall be required to sell such shares back to the Company at such prices as the Plan Administrator may specify in the option. (f) NONTRANSFERABILITY OF OPTIONS During a Participant's lifetime, an option may be exercisable only by the Participant. Options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution, except that to the extent permitted by applicable law and Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, the Plan Administrator may permit a recipient of a Nonqualified Option to designate in writing during the Participant's lifetime a Beneficiary to receive and exercise Nonqualified options in the event of such Participant's death (as provided in Section 6.4(i)). A designation by a Participant under the 1988 Burlington Resources Inc. Stock Option Incentive Plan shall remain in effect under the Plan for any Option 18 assumed under the Plan unless such designation is revoked or changed under the Plan. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, shall be null and void. (g) PURCHASE FOR INVESTMENT The Plan Administrator shall have the right to require that each Participant or other person who shall exercise an option under the Plan, and each person into whose name shares of Common Stock shall be issued pursuant to the exercise of an option, represent and agree that any and all shares of Common Stock purchased pursuant to such option are being purchased for investment only and not with a view to the distribution or resale thereof and that such shares will not be sold except in accordance with such restrictions or limitations as may be set forth in the option. This Section 6.4(g) shall be inoperative during any period of time when the Company has obtained all necessary or advisable approvals from governmental agencies and has completed all necessary or advisable registrations or other qualifications of shares of Common Stock as to which options may from time to time be granted as contemplated in Section 9. (h) TERMINATION OF EMPLOYMENT Upon the termination of a Participant's employment for any reason other than death or Permanent Disability, the Participant's option shall be exercisable only to the extent that it was then exercisable and, unless the term of the options expires sooner, such options shall expire according to the following schedule; provided, that the Plan Administrator may at any time determine in a particular case that specific limitations and restrictions under the Plan shall not apply: (i) RETIREMENT The option shall expire, unless exercised, thirty-six (36) months after the Participant's retirement from the Company or any Subsidiary. 19 (ii) DISABILITY The option shall expire, unless exercised, thirty-six (36) months after the Participant's Permanent Disability. (iii) TERMINATION WITH APPROVAL The option shall expire, unless exercised, thirty-six (36) months after a Participant resigns or is terminated as an employee of the Company or any of its Subsidiaries, provided that the Chief Executive officer of the Company shall have determined in a specific case that the option should not terminate when the Participant's employment status ceases, and provided that, for officers and directors who are subject to Section 16 under the Exchange Act, such determination shall be made by the Plan Administrator. (iv) TERMINATION FOLLOWING A CHANGE IN CONTROL The option shall expire, unless exercised, within thirty-six (36) months of a Participant's termination of employment (other than a termination by the Company for Cause or a voluntary termination by the Participant other than for Good Reason) following a Change in control, provided that said termination of employment occurs within two years following a Change in Control. (v) ALL OTHER TERMINATIONS Except as provided in subparagraphs (iii) and (iv) above, the option shall expire upon termination of employment. (i) DEATH OF PARTICIPANT Upon the death of a Participant, whether during the Participant's period of employment or during the thirty six (36) month period referred to in Sections 6.4(h)(i), (ii) and (iii), the option shall expire, unless the term of the option expires sooner, twelve (12) months after the date of the Participant's death, unless the option is exercised within such twelve (12) month period by the Participant's Beneficiary, legal representatives, estate or the person or persons to whom the deceased's option rights shall have passed by will or the laws of descent and distribution; provided, that the Plan Administrator shall determine in a particular case that specific 20 limitations and restrictions under the Plan shall not apply. (j) CHANGE IN CONTROL Notwithstanding other Plan provisions pertaining to the times at which options may be exercised, all outstanding options, to the extent not then currently exercisable, shall become exercisable in full upon the occurrence of a Change in Control. In no event, however, shall any intended Incentive Stock Option without the consent of the Participant first become exercisable, pursuant to Section 6.4(c) or this Section 6.4(j), if the result would be to cause such option, when granted, not to be treated as an Incentive Stock Option (whether by reason of the possible future violation of the annual limitation of Section 6.3(b) or otherwise). In addition, no option (whether or not intended to be an Incentive Stock Option) shall continue to be exercisable, pursuant to Sections 6.4(h) and 6.4(i), at a time that would violate the maximum duration of Section 6.4(b). SECTION 7 STOCK APPRECIATION RIGHTS 7.1 The Plan Administrator may grant stock appreciation rights to Participants in connection with any option granted under the Plan, either at the time of the grant of such option or at any time thereafter during the term of the option. Such stock appreciation rights shall cover the same shares covered by the options (or such lesser number of shares of Common Stock as the Plan Administrator may determine) and shall, except as provided in Section 7.3, be subject to the same terms and conditions as the related options and such further terms and conditions not inconsistent with the Plan as shall from time to time be determined by the Plan Administrator. 7.2 Each stock appreciation right shall entitle the holder of the related option to surrender to the Company unexercised the related option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to the excess of the Fair Market Value of one share of Common Stock on the date the right is-exercised over the Option Price per share times the number of shares covered by the option, or portion thereof, which is surrendered. Payment shall be made in shares of Common Stock valued at Fair Market Value as of the date the right is exercised, or in cash, or partly in shares and partly in cash, at the discretion of the Plan Administrator; provided, however, that payment shall be made solely in cash with respect to a stock appreciation right which is exercised within seven (7) months following a Change 21 in Control. Notwithstanding the foregoing and to the extent required by Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, a payment, in whole or in part, of cash upon exercise of a stock appreciation right by an officer or director subject to Section 16 of the Exchange Act may be made only if the right is exercised (i) during the period beginning on the third business day following the date of release for publication of the quarterly or annual summary statements of sales and earnings of the Company and ending on the twelfth business day following such date or (ii) during the seven (7) month period following the Company's obtaining actual knowledge of a Change in Control or (iii) six (6) months prior to the date the stock appreciation right becomes taxable. Stock appreciation rights may be exercised from time to time upon actual receipt by the Company of written notice stating the number of shares of Common Stock with respect to which the stock appreciation right is being exercised. The value of any fractional shares shall be paid in cash. 7.3 Stock appreciation rights are subject to the following restrictions: (a) Each stock appreciation right shall be exercisable at such time or times that the option to which they relate shall be exercisable or at such other times as the Plan Administrator may determine; provided, however, that such rights shall not be exercisable until the Participant shall have completed a six (6) month period of continuous employment with the Company or any of its Subsidiaries immediately following the date on which the stock appreciation right is granted. In the event of death or Permanent Disability of a Participant during employment but before the Participant has completed such period of continuous employment, such stock appreciation right shall be exercisable only within the period specified in the related option. In the event of a Change in Control, the requirement that a Participant shall have completed a six (6) month period of continuous employment is waived with respect to a Participant who is employed by the Company at the time of the Change in Control but who, within the six (6) month period, voluntarily terminates employment for Good Reason or is terminated by the Company other than for Cause. Notwithstanding the foregoing, a stock appreciation right may not be exercised for cash by an officer or director subject to Section 16 of the Exchange Act under any circumstances until the expiration of the six (6) month period following the date of grant. 22 (b) Except in the event of a Change in Control, the Plan Administrator in its sole discretion may approve or deny in whole or in part a request to exercise a stock appreciation right. Denial or approval of such request shall not require a subsequent request to be similarly treated by the Plan Administrator. (c) The right of a Participant to exercise a stock appreciation right shall be cancelled if and to the extent the related option is exercised. To the extent that a stock appreciation right is exercised, the related option shall be deemed to have been surrendered, unexercised and cancelled. (d) A holder of stock appreciation rights shall have none of the rights of a stockholder until shares of Common Stock, if any, are issued to such holder pursuant to such holder's exercise of such rights. (e) The acquisition of Common Stock pursuant to the exercise of a stock appreciation right shall be subject to the same restrictions as would apply to the acquisition of Common Stock acquired upon acquisition of the related option, as set forth in Section 6.4. SECTION 8 LIMITED STOCK APPRECIATION RIGHTS 8.1 The Plan Administrator may grant limited stock appreciation rights to Participants in connection with any options granted under the Plan, either at the time of the grant of such option or at any time thereafter during the term of the option. Such limited stock appreciation rights shall cover the same shares covered by the options (or such lesser number of shares of Common Stock as the Plan Administrator may determine) and shall, except as provided in Section 8.3, be subject to the same terms and conditions as the related options and such further terms and conditions not inconsistent with the Plan as shall from time to time be determined by the Plan Administrator. 8.2 Each limited stock appreciation right shall entitle the holder of the related option to surrender to the Company the unexercised portion of the related option and to receive from the Company in exchange therefor an amount in cash equal to the excess of the Fair Market Value of one (1) share of Common Stock on the date the right is exercised over the option Price per share times the number of shares covered by the option, or portion thereof, which is surrendered. 23 8.3 Limited stock appreciation rights are subject to the following restrictions: (a) Each limited stock appreciation right shall be exercisable in full for a period of seven (7) months following the date of a Change in Control, provided, however, that limited stock appreciation rights may not be exercised under any circumstances until the expiration of the six (6) month period following the date of grant. Limited stock appreciation rights shall be exercisable only to the same extent and subject to the same conditions as the options related thereto are exercisable, as provided in Section 6.4(j). (b) The right of a Participant to exercise a limited stock appreciation right shall be cancelled if and to the extent the related option is exercised. To the extent that a limited stock appreciation right is exercised, the related option shall be deemed to have been surrendered, unexercised. SECTION 9 PERFORMANCE SHARE UNITS 9.1 GRANTS OF UNITS Units may be granted to Participants in such number and at such times during the Performance Cycle as the Plan Administrator shall determine, taking into account the duties of the respective executives, their present and potential contributions to the success of the Company or its Subsidiaries, their compensation provided by other incentive plans, their salaries, and such other factors as the Plan Administrator shall deem appropriate. Normally, however, Units will be granted only at the beginning of each Performance Cycle except in cases where a prorated grant may be made in mid-cycle to a newly eligible Participant or a Participant whose job responsibilities have significantly changed during the cycle. 9.2 PERFORMANCE OBJECTIVES The Plan Administrator shall have the sole authority for deciding what measures of corporate performance ("Performance Targets") are appropriate for (i) judging the success of the Company and its Subsidiaries in meeting their strategic objectives during the Performance Cycle and (ii) measuring the contribution of Participants toward such success. At the request of the Plan Administrator, the Company's Chief Executive Officer shall submit his or her recommendations to the Plan Administrator regarding applicable Performance Targets to be adopted for the Units to be awarded for each Performance Cycle. 24 9.3 VESTING (a) VESTING SCHEDULE The Plan Administrator shall adopt a vesting schedule for each year of the Performance Cycle. Vesting for each year will depend upon vesting guidelines established by the Plan Administrator which reflect the Company's performance in relation to the Performance Targets for the appropriate period of the Performance Cycle, provided that the Plan Administrator may, in its discretion, alter the vesting guidelines in the event of unusual circumstances. The Plan Administrator may, in its discretion, carry over to the end of the fourth year of a Performance Cycle any Units that did not vest during the first three (3) years of the Performance Cycle because of the Company's performance in relation to the Performance Targets. Vesting with respect to Participants who begin participation or receive an additional grant of Units during the Performance Cycle will be determined by the Plan Administrator at the time of grant. (b) DETERMINATION OF PERFORMANCE The annual performance rating resulting in vesting under Section 9.3(a) shall be determined by the Plan Administrator based on criteria selected by it such as relationships between actual and targeted results for Performance Targets, comparisons of relative performance by the Company and other companies chosen by the Plan Administrator, and such additional or alternative factors as the Plan Administrator may deem appropriate. (c) OTHER VESTING CONSIDERATIONS Becoming vested in a Unit means acquiring a nonforfeitable right to receive payment for that Unit. The time and manner of such payment shall be determined under the provisions of the Plan other than this Section 9.3. Participants (or their Beneficiaries in the case of their deaths) who have retired, died, become Permanently Disabled, or who have terminated their employment, prior to the end of a Performance Cycle shall not be entitled to receive payment from the Company or its Subsidiaries for any Units which were not vested as of the time such Participants (or Beneficiaries in the case of their deaths) ceased active employment with the Company or its subsidiaries. 25 (d) CHANGE IN CONTROL Notwithstanding the foregoing vesting provisions, one-fourth (1/4) of all Units originally granted in the Performance Cycle shall become fully vested in the event of a Change in Control. In the event of termination of the Participant's employment within two (2) years following a Change in Control but subsequent to the year in which the Change in Control occurs, for any reason other than (i) the Participant's death, (ii) the Participant's Permanent Disability, (iii) Cause, or (iv) by the Participant without Good Reason, one-fourth (1/4) of all Units originally granted in the Performance Cycle shall become fully vested. With respect to Units granted during the second, third or fourth years of a Performance Cycle, the preceding provisions of this Section 9.3(d) shall be applied by substituting "one-fourth (1/4)" with "one-third (1/3)", "one-half (1/2)" or "the entire amount", respectively. 9.4 ADJUSTMENT BY PLAN ADMINISTRATOR The Plan Administrator may, at its discretion, change from time to time the Performance Targets and vesting schedules with respect to nonvested Units to (i) include or exclude extraordinary or nonrecurring items, (ii) reflect changes in prevailing competitive or general economic conditions, (iii) adjust for changes in income tax laws and regulations or accounting rules, (iv) reflect changes in the Company's financial or corporate structure, as a result of a recapitalization, merger, reorganization, acquisition or divestiture, and (v) to reflect other appropriate major events. 9.5 NOTICE TO PARTICIPANTS The Plan Administrator shall notify each Participant in writing of the grant of Units to the Participant and the Performance Targets and vesting criteria applicable to such Units. 9.6 ENTITLEMENT TO PAYMENT Each Unit which has vested shall entitle the Participant or the Participant's Beneficiary to receive from the Participant's employer a lump-sum cash payment as soon as practicable following the applicable Valuation Date. The amount of such payment shall be determined by multiplying the 26 number of vested Units by the Fair Market Value of a share of Common Stock on the Valuation Date. For this purpose, the number of vested Units shall be the sum of the Units in which the Participant became vested during the Performance Cycle, pursuant to Section 9.3, determined (i) as of the end of the Performance Cycle in the case of a Participant who is still then an employee of the Company or a Subsidiary or (ii) as of the end of the year prior to the Participant's death, Permanent Disability, retirement date or other termination of employment (whichever is applicable) in the case of a Participant who is no longer an employee of the Company or of a Subsidiary at the end of the Performance Cycle. Moreover, the Valuation Date shall correspond to the end of the Performance Cycle, except that the Valuation Date shall be the date of the Participant's death or Permanent Disability if such event has occurred. Notwithstanding the foregoing, however, a Participant may receive a deferral payment in lieu of all or a portion of a lump-sum payment pursuant to an election described below in this Section 9. 9.7 DEFERRED PAYMENT Prior to the time that Units first vest pursuant to Section 9.3, the Participant may, subject to the consent of the Plan Administrator and in accordance with procedures that the Plan Administrator has approved, elect to have all or a portion (subject to a $1,000 minimum) of the lump-sum payment described in Section 9.6 with respect to such vested Units deferred until the Participant's retirement, death, Permanent Disability, resignation or other termination of employment with the Company and its Subsidiaries or until any other specified time that is acceptable to the Plan Administrator. Such deferred amount shall be paid in accordance with the remainder of this Section 9 rather than as provided in Section 9.6, whereas amounts payable with respect to other Units that vest at a different time in the Performance Cycle and are not subject to a deferred payment election shall continue to be paid as a lump sum in accordance with Section 9.6. The election shall be irrevocable and shall be made on a form approved by the Plan Administrator. 9.8 MEMORANDUM ACCOUNT The Company shall establish a ledger account (the "Memorandum Account") for each Participant who has elected to defer a payment pursuant to Section 9.7. Interest shall accrue on the deferred payment to the date of distribution and shall be credited to the Memorandum Account at the end of each calendar quarter or such other periods as may be determined by the Management Committee. The Management Committee shall determine the rate of interest periodically and in so doing 27 may take into account the earnings, losses, appreciation or depreciation attributable to any discretionary investments made pursuant to Section 9.9. 9.9 DISCRETIONARY INVESTMENT BY COMPANY The deferred compensation to be paid to the Participants is an unfunded obligation. The Management Committee may annually direct that an amount equal to all or part of the outstanding liability for such compensation shall be invested by the Company, as the Management Committee, in its sole discretion, shall determine. The Management Committee may in its sole discretion determine that all or some portion of an amount equal to such outstanding liability shall be paid into one or more grantor or other trusts to be established by the Company in a manner that does not create a funded plan for purposes of the Code or the Employee Retirement Income Security Act of 1974. The Management Committee may designate an investment advisor to direct investments and reinvestments of such trust assets. 9.10 PAYMENT OF DEFERRED COMPENSATION Upon retirement, death, Permanent Disability, resignation or termination of employment of a Participant who has elected to defer the payment in respect of any Units, the employer shall pay in cash to the Participant (or the Participant's Beneficiary in the case of the Participant's death) an amount equal to the balance of the Participant's Memorandum Account, together with an investment adjustment (determined under Section 9.8) on the outstanding account balance to the date of distribution and subject to approval of the Management Committee (except that following the occurrence of a Change in Control, no such consent shall be required), as follows: (a) a lump-sum payment; (b) in sixty (60) consecutive equal monthly installments; or (c) in one hundred twenty (120) consecutive equal monthly installments. Payment of deferred Units shall commence or be made in the month following the Participant's retirement, death, Permanent Disability, resignation or termination of employment or any other specified time that is elected and is acceptable to the Plan Administrator. 28 9.11 ACCELERATION OF PAYMENTS OF DEFERRED COMPENSATION The Management Committee, in its discretion, may accelerate the payment of the unpaid balance of a Participant's Memorandum Account in the event of the Participant's retirement, death, Permanent Disability, resignation or termination of employment, or upon the Management Committee's determination that the Participant (or the Participant's Beneficiary in the case of the Participant's death) has incurred a severe financial hardship. The Management Committee in making its determination may consider such factors and require such information as it deems appropriate. 9.12 ACCELERATION OF PAYMENT DUE TO CHANGE IN CONTROL Upon a Change in Control, the current Performance Cycle shall immediately end, and all vested Units (including Units that vest pursuant to Section 9.3(d)) shall be valued at their then Fair Market Value. Each Participant's employer (or the Company in the event that another employer does not promptly make payment) shall pay the Participant the Fair Market Value of his or her vested Units and also or alternatively, as the case may be, the remaining unpaid balance of his or her Memorandum Account. This payment shall be made (i) in a lump sum that is in lieu of any otherwise applicable form and time of payment under the Plan and (ii) within ten (10) days after the Change in Control; provided, however, that any Participant may elect prior to the occurrence of a Change in Control to have the payment in respect to all or a portion of the Participant's Units deferred until the Participant's retirement, death, Permanent Disability, resignation or termination of employment. A deferral election shall be revocable until the date of such a Change in Control and after the date of the Change in Control such election shall be irrevocable. A deferred election shall be made on a form prescribed by the Management Committee. All deferred payments with respect to Units shall be paid pursuant to the payment options set forth in Section 9.10. 9.13 PAYMENT OF BR DEFERRED COMPENSATION Vested units which were deferred by a Participant under the Burlington Resources Inc. Performance Share Unit Plan, together with interest accrued thereon, shall be paid-by the Company in accordance with the terms of the Plan and in lieu of payment by BR. 29 9.14 UNFUNDED OBLIGATION Any deferred amounts to be paid to Participants as installment payments pursuant to the Plan are unfunded obligations. Neither the Company nor any Subsidiary is required to segregate and monies from its general funds, to create any trusts or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments, including trust investments which the Company may make to fulfill this obligation, shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or Memorandum Accounts shall not create or constitute a trust or a fiduciary relationship between the Plan Administrator, the Management Committee, the Company or any Subsidiary and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant's Beneficiary or the Participant's creditors in any assets of the Company or its Subsidiaries whatsoever. The Participants shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan. 9.15 DESIGNATION OF BENEFICIARY The designation of a Beneficiary shall be on a form provided by the Plan Administrator, executed by the Participant (with the consent of the Participant's spouse, if required by the Plan Administrator for reasons of community property or otherwise), and delivered to the Plan Administrator. A Participant may change his or her Beneficiary designation at any time. A designation by a Participant under the Burlington Resources Inc. Performance Share Unit Plan shall remain in effect under the Plan for any Performance Share Unit assumed under the Plan unless such designation is revoked or changed under the Plan. If no Beneficiary is designated, if the designation is ineffective, or if the Beneficiary dies before the balance of a Memorandum Account is paid, the balance shall be paid to the Participant's spouse, or if there is no surviving spouse, to the Participant's lineal descendant, pro rata, or if there is no surviving spouse or lineal descendants, to the Participant's estate. Notwithstanding the foregoing, however, a Participant's Beneficiary shall be determined under applicable state law if such state law does not recognize Beneficiary designations under plans of this sort and is not preempted by laws which recognize the provisions of this Section 9.15. 30 SECTION 10 RESTRICTED STOCK 10.1 Restricted Stock may be granted to Participants in such number and at such times during the term of the Plan as the Plan Administrator shall determine, the Plan Administrator taking into account the duties of the respective Participants, their present and potential contributions to the success of the Company, and such other factors as the Plan Administrator shall deem relevant in accomplishing the purposes of the Plan. The granting of Restricted Stock shall take place when the Plan Administrator by resolution, written consent or other appropriate action determines to grant such Restricted Stock to a particular Participant. Each grant shall be evidenced by a written instrument delivered by or on behalf of the Company containing provisions not inconsistent with the Plan. The Participant receiving a grant of Restricted Stock shall be recorded as a stockholder of the Company. 10.2 A grant of Restricted Stock shall entitle a Participant to receive, on the date or dates designated by the Plan Administrator, upon payment to the Company of the par value of the Common Stock in a manner determined by the Plan Administrator, the number of shares of Common Stock selected by the Plan Administrator. The Plan Administrator may require, under such terms and conditions as it deems appropriate or desirable, that the certificates for Restricted Stock delivered under the Plan may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody until the Restriction Period (as defined in Section 10.3) expires or until restrictions thereon otherwise lapse, and may require, as a condition of any receipt of Restricted Stock that the Participant shall have delivered a stock power endorsed in blank relating to the shares of Restricted Stock. 10.3 During a period of years following the date of grant, as determined by the Plan Administrator, which shall in no event be less than one (1) year (the "Restriction Period"), the Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of by the recipient, except in the event of death or Permanent Disability, the transfer to the Company as provided under the Plan or the Plan Administrator's waiver or modification of such restrictions in the agreement evidencing the grant of Restricted Stock, or by resolution of the Plan Administrator adopted at any time. 10.4 Except as provided in Section 10.5 or 10.6, if a Participant terminates employment with the Company for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall 31 be forfeited by the Participant to the Company. In addition, in the event of any attempt by the Participant to sell, exchange, transfer, pledge or otherwise dispose of shares of Restricted Stock in violation of the terms of the Plan, such shares shall be forfeited to the Company. Upon any such forfeiture, the forfeited shares of Restricted Stock shall again become available for grant under the Plan. 10.5 The Restriction Period for any Participant shall be deemed to end and all restrictions on shares of Restricted Stock shall lapse upon the Participant's death or Permanent Disability or any termination of employment determined by the Plan Administrator to end the Restriction Period. 10.6 The Restriction Period for any Participant shall be deemed to end and all restrictions on shares of Restricted Stock shall terminate immediately upon a Change in Control. 10.7 When the restrictions imposed by Section 10.3 expire or otherwise lapse with respect to one or more shares of Restricted Stock, the Company shall deliver to the Participant (or the Participant's legal representative, Beneficiary or heir) one (1) share of Common Stock for each share of Restricted Stock. At that time, the agreement referred to in Section 10.1, as it relates to such shares, shall be terminated. 10.8 Subject to Section 10.2, each Participant entitled to receive Restricted Stock under the Plan shall be issued a certificate for such shares. Such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend reciting the terms, conditions and restrictions, if any, applicable to such shares and shall be subject to appropriate stop-transfer orders. 10.9 All certificates for shares of Common Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Plan Administrator may deem advisable under the rules, regulations and other requirements of the Securities and Exchange commission, any stock exchange upon which Common Stock is then listed and any applicable federal or state securities laws, and the Plan Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The foregoing provisions of this Section 10.9 shall not be effective if and to the extent that the shares of Common Stock delivered under the Plan are covered by an effective and current registration statement under the Securities Act of 1933, as amended, or if and so long as the Plan Administrator determines that application of 32 such provisions is no longer required or desirable. In making such determination, the Plan Administrator may rely upon an opinion of counsel for the Company. 10. 10 Each Participant who receives a grant of Restricted Stock shall have all the rights of a stockholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions. No Participant awarded Restricted Stock shall have any right as a stockholder with respect to any shares subject to the Participant's Restricted Stock grant prior to the date of issuance to the Participant of a certificate or certificates for such shares. SECTION 11 REGULATORY APPROVALS AND LISTING 11.1 The Company shall not be required to issue any certificate for shares of Common Stock upon the exercise of an option or a stock appreciation right granted under the Plan or with respect to a grant of Restricted Stock prior to: (a) the obtaining of any approval or ruling from the Securities and Exchange Commission, the Internal Revenue Service or any other governmental agency which the Company, in its sole discretion, shall determine to be necessary or advisable; (b) the listing of such shares on any stock exchange on which the Common Stock may then be listed; or (c) the completion of any registration or other qualification of such shares under any federal or state laws, rulings or regulations of any governmental body which the Company, in its sole discretion, shall determine to be necessary or advisable. SECTION 12 EFFECTIVE DATE AND TERM OF PLAN The Plan shall be dated as of January 1, 1992 and shall be effective upon adoption by the Board, but the Plan shall be void unless it is approved by the Company's sole stockholder within the earlier of the date of the Company's next annual meeting of stockholders and twelve (12) months after the date the Plan is adopted by the Board of Directors. Subject to the foregoing condition, options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units may be granted pursuant to the Plan from time to time within the period commencing upon adoption of the Plan by the Board of Directors and ending five (5) years after the earlier of such adoption and the approval of 33 the Plan by the stockholders. Options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units theretofore granted may extend beyond that date and the terms and conditions of the Plan shall continue to apply thereto and to shares of Common Stock acquired thereunder. SECTION 13 GENERAL PROVISIONS 13.1 Nothing contained in the Plan, or in any option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit granted pursuant to the Plan, shall confer upon any employee any right with respect to continuance of employment by the Company or a Subsidiary, nor interfere in any way with the right of the Company or a Subsidiary to terminate the employment of such employee at any time with or without assigning any reason therefor. 13.2 Grants, vesting or payment of stock options, limited stock appreciation rights, stock appreciation rights, Restricted Stock or Performance Share Units shall not be considered as part of a Participant's salary or used for the calculation of any other pay, allowance, pension or other benefit unless otherwise permitted by other benefit plans provided by the Company or its Subsidiaries, or required by law or by contractual obligations of the Company or its Subsidiaries. 13.3 The right of a Participant or Beneficiary to the payment of any compensation under the Plan may not be assigned, transferred, pledged or encumbered, nor shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 13.4 Leaves of absence for such periods and purposes conforming to the personnel policy of the Company, or of its Subsidiaries, as applicable, shall not be deemed terminations or interruptions of employment. The foregoing notwithstanding, with respect to Incentive Stock Options, employment shall not be deemed to continue beyond the first ninety (90) days of such leave unless the Participant's reemployment rights are guaranteed by statute or contract. 13.5 In the event a Participant is transferred from the Company to a Subsidiary, or vice versa, or is promoted or given different responsibilities, the stock options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units granted to the Participant prior to such date shall not be affected. 34 13.6 The Plan shall be construed and governed in accordance with the laws of the State of Texas, except that it shall be construed and governed in accordance with applicable federal law in the event that such federal law preempts state law. 13.7 Appropriate provision shall be made for all taxes required to be withheld in connection with the exercise, grant or other taxable event with respect to options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Share Units under the applicable laws or regulations of any governmental authority, whether federal, state or local and whether domestic or foreign. Tax advice should be obtained by the Participant prior to the Participant's (i) entering into any transaction under or with respect to the Plan, (ii) designating or choosing the time of distributions under the Plan, or (iii) disposing of any shares of Common Stock issued under the Plan. SECTION 14 AMENDMENT, TERMINATION OR DISCONTINUANCE OF THE PLAN 14.1 Subject to the Board of Directors and Section 14.2, the Plan Administrator may from time to time make such amendments to the Plan as it may deem proper and in the best interest of the Company without further approval of the stockholders of the Company, including, but not limited to, any amendment necessary to ensure that the Company may obtain any regulatory approval referred to in Section 11; provided, however, that no change in any option, limited stock appreciation right, stock appreciation right, Restricted Stock or Performance Share Unit theretofore granted may be made without the consent of the Participant which would impair the right of the Participant to acquire or retain Common Stock or cash that the Participant may have acquired as a result of the Plan. 14.2 The Plan Administrator and the Board of Directors may not amend the Plan without the approval of the stockholders of the Company to (a) increase the number of shares, rights or Units that may be issued under the Plan; (b) with respect to Incentive Stock Options and any related stock appreciation rights (whether limited or not), change the description of the Participants or class of Participants eligible for participation in the Plan, or, with respect to all other grants under the Plan, 35 materially modify the requirements as to eligibility for participation in the Plan; or (c) otherwise materially increase the benefits accruing to the Participants under the Plan. 14.3 The Board of Directors may at any time suspend the operation of or terminate the Plan with respect to any shares of Common Stock rights or Performance Share Units not at the time subject to option, limited stock appreciation right, stock appreciation right or grant of Restricted Stock, or with respect to any Performance Share Units not yet granted under Section 9. 36 IN WITNESS WHEREOF, the Company has caused the Plan to be executed effective as of January 15, 1992. EL PASO NATURAL GAS COMPANY By /s/ Joel Richards III -------------------------------------- Title: Senior Vice President ATTEST: By /s/ Stacy J. James -------------------------------- Title: Corporate Secretary 37 AMENDMENT NO. 1 TO THE OMNIBUS COMPENSATION PLAN Pursuant to Sections 5.3 and 14.1 of the El Paso Natural Gas Company Omnibus Compensation Plan, dated as of January 1, 1992 (the "Plan"), the Plan is hereby amended as follows, effective April 1, 1998: Sections 5.1 is amended to read as follows: "5.1 Subject to Section 5.3, the maximum number of shares for which options, limited stock appreciation rights, stock appreciation rights and Restricted Stock may at any time be granted under the Plan is eight million (8,000,000) shares of Common Stock, from shares held in the Company's treasury or out of the authorized but unissued shares of the Company, or partly out of each, as shall be determined by the Board of Directors, subject to, and reduced by (on a post-split basis), the number of shares of Common Stock awarded prior to the occurrence of a two-for-one stock split effected by the Company in the form of a 100% stock dividend on April 1, 1998. Upon (i) the expiration or termination in whole or in part of unexercised options or the surrender of an option, or portion thereof, upon exercise of a related limited stock appreciation right or stock appreciation right for cash, and (ii) to the extent permissible under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, the forfeiture of Restricted Stock, shares of Common Stock which were subject thereto shall again be available for grants of options, limited stock appreciation rights, stock appreciation rights and Restricted Stock under the Plan. Any options, limited stock appreciation rights, stock appreciation rights and shares of Restricted Stock outstanding under the Plan on April 1, 1998, shall be adjusted on a two-for-one basis to reflect the stock dividend." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 1st day of April, 1998. EL PASO NATURAL GAS COMPANY By: /s/ Joel Richards III ------------------------------------ Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - ------------------------------------ Corporate Secretary 38 AMENDMENT NO. 2 TO THE OMNIBUS COMPENSATION PLAN Pursuant to Sections 5.3 and 14.1 of the El Paso Natural Gas Company Omnibus Compensation Plan, dated as of January 1, 1992 (the "Plan"), the Plan is hereby amended as follows, effective August 1, 1998: The name of the Plan is hereby be changed to "El Paso Energy Corporation Omnibus Compensation Plan." All references in the Plan to "El Paso Natural Gas Company" or the "Company" shall mean "El Paso Energy Corporation." Section 14.1 is hereby amended to add the following language at the end of Section 14.1: "The Board of Directors amended and restated the Plan effective as of August 1, 1998, in connection with the reorganization of the Company into a holding company structure whereby El Paso Energy Corporation became the publicly held company and El Paso Natural Gas Company became a wholly owned subsidiary. This Plan was assumed by El Paso Energy Corporation pursuant to an Assignment and Assumption Agreement effective as of August 1, 1998, by and between El Paso Energy Corporation and El Paso Natural Gas Company." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 1st day of August, 1998. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III -------------------------------- Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - -------------------------------- Corporate Secretary 39 AMENDMENT NO. 3 TO THE OMNIBUS COMPENSATION PLAN Pursuant to Section 14.1 of the El Paso Energy Corporation Omnibus Compensation Plan, dated as of January 1, 1992, as amended (the "Plan"), the Plan is hereby amended as follows, effective December 3, 1998: The following subsection (k) shall be added to Section 6.4 to read as follows: "(k) Deferral Election A Participant may elect irrevocably (at a time and in a manner determined by the Plan Administrator or the Company, as appropriate) at any time prior to exercising an option and/or associated stock appreciation right granted under the Plan that issuance of shares of Common Stock upon exercise of such option shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. After the exercise of any such option and prior to the issuance of any deferred shares, the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant to the Company's then-existing Deferred Compensation Plan (as it may be further amended) (the "Deferred Compensation Plan"), and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 3rd day of December, 1998. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III ------------------------------- Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - ----------------------------------- Corporate Secretary 40 AMENDMENT NO. 4 TO THE OMNIBUS COMPENSATION PLAN Pursuant to Section 14.1 of the El Paso Energy Corporation Omnibus Compensation Plan, dated as of January 1, 1992, as amended (the "Plan"), the Plan is hereby amended as follows, effective January 20, 1999: The following paragraph shall be added as the last paragraph to Section 6.4(d) to read as follows: "Notwithstanding any other provision in this Plan to the contrary and unless the Plan Administrator shall otherwise determine, in the event of a "cashless" exercise, and for that purpose only under this Plan, a Participant's compensation shall be equal to the difference between the actual sales price received for the underlying Common Stock and the Option Price. For all other purposes under this Plan, the Fair Market Value shall be the value against which compensation is determined." The following sentence shall be added as the last sentence to Section 6.4(e) to read as follows: "In addition, the Plan Administrator may require that a Participant who wants to effectuate a "cashless" exercise of options be required to sell the shares of Common Stock acquired in the associated exercise to the Company, or in the open market through the use of a broker selected by the Company, at such price and on such terms as the Plan Administrator may determine at the time of grant, or otherwise." Section 6.4(f) is hereby deleted in its entirety and replaced with the following: "(f) Nontransferability of Options Options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing and only as provided by the Plan Administrator or the Company, as applicable, Nonqualified Options may be transferred to a Participant's immediate family members, directly or indirectly or by means of a trust, corporate entity or partnership (a person who thus acquires this option by such transfer, a "Permitted Transferee"). A transfer of an option may only be effected by the Company at the request of the Participant and shall become effective upon the Permitted Transferee agreeing to such terms as the Plan Administrator may require and only when recorded in the Company's record of outstanding options. In the event an option is transferred as contemplated hereby, the option may not be subsequently transferred by the Permitted Transferee except a transfer back to the Participant or by will or the laws of descent and distribution. A transferred option may be exercised by a Permitted Transferee to the same extent as, and subject to the same terms and conditions as, the Participant (except as otherwise provided herein), as if no transfer had taken place. As used herein, "immediate 41 family" shall mean, with respect to any person, such person's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and shall include adoptive relationships. In the event of exercise of a transferred option by a Permitted Transferee, any amounts due to (or to be withheld by) the Company upon exercise of the option shall be delivered by (or withheld from amounts due to) the Participant, the Participant's estate or the Permitted Transferee, in the reasonable discretion of the Company. In addition, to the extent permitted by applicable law and Rule 16b-3, the Plan Administrator may permit a recipient of a Nonqualified Option to designate in writing during the Participant's lifetime a Beneficiary to receive and exercise the Participant's Nonqualified Options in the event of such Participant's death (as provided in Section 6.4(i)). A designation by a Participant under the Burlington Resources Inc. Stock Option Incentive Plan shall remain in effect under the Plan for any options unless such designation is revoked or changed under the Plan. Except as otherwise provided for herein, if any Participant attempts to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan or such option, or suffers the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, all affected options held by such Participant shall be immediately forfeited." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 20th day of January, 1999. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III --------------------------------- Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - ------------------------------------ Corporate Secretary -2- EX-10.D 5 1995 INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.D EL PASO ENERGY CORPORATION 1995 INCENTIVE COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 2 TABLE OF CONTENTS
SECTION 1 PURPOSES..............................................................................1 1.1 Purposes..............................................................................1 SECTION 2 ADMINISTRATION........................................................................1 2.1 Administration........................................................................1 2.2 Compliance With Rule 16b-3 and Section 162(m).........................................2 SECTION 3 SHARES AVAILABLE FOR THE PLAN.........................................................2 3.1 Maximum Number of Shares..............................................................2 3.2 Adjustment to Number of Shares........................................................2 SECTION 4 PARTICIPANTS..........................................................................3 4.1 Participants..........................................................................3 SECTION 5 PERFORMANCE GOALS.....................................................................3 5.1 Performance Period....................................................................3 5.2 Performance Goals.....................................................................3 5.3 Procedures............................................................................4 SECTION 6 INDIVIDUAL AWARDS.....................................................................5 6.1 Performance Goal Certification........................................................5 6.2 Maximum Award Payable.................................................................5 6.3 Discretion to Reduce Awards; Participant's Performance................................5 6.4 Stockholder Approval of Performance Goals.............................................5 6.5 New Employee, Retirement, Death, Disability, or Termination of Employment...........................................5 SECTION 7 PAYMENT OF INCENTIVE AWARDS...........................................................6 7.1 Required Payment......................................................................6 7.2 Restricted Stock Election.............................................................7 7.3 Deferred Payment......................................................................7 7.4 Payment Upon Change in Control........................................................8 SECTION 8 RESTRICTED STOCK......................................................................9 SECTION 9 GENERAL PROVISIONS...................................................................12 9.1 Issuance of Common Stock.............................................................12 9.2 No Right to Continued Employment.....................................................12 9.3 Other Benefits.......................................................................13 9.4 Nonassignment........................................................................13 9.5 Leaves of Absence....................................................................13
- -------------------------------------------------------------------------------- El Paso Energy Corporation i Table of Contents 1995 Incentive Compensation Plan 3 9.6 Transfers and Promotions.............................................................13 9.7 Unfunded Obligation..................................................................13 9.8 Beneficiary..........................................................................14 9.9 Permanent Disability.................................................................14 9.10 Incapacity of Participant or Beneficiary.............................................14 9.11 Withholding Taxes....................................................................15 9.12 Termination and Amendment............................................................16 9.13 Stockholder Approval.................................................................16 9.14 Applicable Law.......................................................................16 9.15 Effective Date and Term of the Plan..................................................16
- -------------------------------------------------------------------------------- El Paso Energy Corporation ii Table of Contents 1995 Incentive Compensation Plan 4 EL PASO ENERGY CORPORATION 1995 INCENTIVE COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 SECTION 1 PURPOSES 1.1 PURPOSES The purposes of the El Paso Energy Corporation 1995 Incentive Compensation Plan (the "Plan") are to encourage outstanding performances by the executives of El Paso Energy Corporation (the "Company") and its subsidiaries, to attract and retain exceptional executives, and to provide a direct incentive to the Participants (as defined in Section 4.1) to achieve the Company's strategic and financial goals. SECTION 2 ADMINISTRATION 2.1 ADMINISTRATION With respect to awards made under the Plan to certain officers and directors of the Company and its subsidiaries ("Section 16 Insiders") who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan shall be administered by the Compensation Committee (the "Plan Administrator") of the Company's Board of Directors (the "Board"), which shall be constituted at all times so as to meet the disinterested administration requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and the outside director requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act. The Plan Administrator shall prescribe, amend, and rescind rules and procedures for establishing Performance Goals (as defined in Section 5.2) pursuant to Section 162(m) of the Code. Subject to the Plan Administrator, and as may be required by Rule 16b-3 and Section 162(m) of the Code, the Plan shall be administered by a management committee (the "Management Committee") consisting of the Chief Executive Officer and such other senior officers as the Chief Executive Officer shall designate. The Management Committee shall interpret the Plan, prescribe, amend, and rescind rules relating to it, select eligible Participants, grant incentive awards, and take all other actions necessary for its administration, which actions shall be final and binding upon all Participants. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 1 1995 Incentive Compensation Plan 5 2.2 COMPLIANCE WITH RULE 16B-3 AND SECTION 162(m) The Company's intention is that, so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, with respect to awards granted to or held by Section 16 Insiders, the Plan shall comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. The Plan shall also be administered so as to comply with Section 162(m) of the Code and regulations promulgated thereunder. If any Plan provision is later found not to be in compliance with Rule 16b-3 of the Exchange Act or Section 162(m) of the Code, that provision shall be deemed modified as necessary to meet the requirements of Rule 16b-3 and Section 162(m) of the Code. Notwithstanding anything in the Plan to the contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit, or condition the applicability of any provision of the Plan to Participants who are Section 16 Insiders without so restricting, limiting, or conditioning the Plan with respect to other Participants. SECTION 3 SHARES AVAILABLE FOR THE PLAN 3.1 MAXIMUM NUMBER OF SHARES Subject to Section 3.2, the maximum number of shares of common stock of the Company, $3 par value per share, (the "Common Stock") which may at any time be awarded under the Plan is two million five hundred thousand (2,500,000) shares of Common Stock, from shares held in the Company's treasury or out of authorized but unissued shares of the Company, or partly out of each, as shall be determined by the Management Committee, subject to, and reduced by (on a post-split basis), the number of shares of Common Stock awarded prior to the occurrence of a two-for-one stock split effected by the Company in the form of a 100% stock dividend on April 1, 1998. "Restricted Stock" is any share of Common Stock which is subject to the requirements of Section 8 and such other restrictions as the Plan Administrator may deem appropriate. Any shares of Restricted Stock outstanding under the Plan on April 1, 1998, shall be adjusted on a two-for-one basis to reflect the stock dividend. 3.2 ADJUSTMENT TO NUMBER OF SHARES In the event of recapitalization, stock split, stock dividend, exchange of shares, merger, reorganization, change in corporate structure or shares of the Company or similar event, the Board, upon recommendation of the Plan Administrator, may make appropriate adjustments to the number of shares authorized for the Plan and, with respect to outstanding Restricted Stock, the Plan Administrator may make appropriate adjustments to the number of shares. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 2 1995 Incentive Compensation Plan 6 SECTION 4 PARTICIPANTS 4.1 PARTICIPANTS The Plan Administrator shall determine and designate the Section 16 Insiders and the Management Committee shall designate all other executives of the Company and its subsidiaries who are eligible to receive awards under the Plan (the "Participants"). Participants, in general, will be limited to those executives who hold any of the following positions within the Company and, in the case of Participants employed by Company subsidiaries, those executives with positions equivalent thereto, but not necessarily with the same titles: Chairman of the Board, President, Chief Executive Officer, Vice Chairman of the Board (if any), Chief Operating Officer, any Executive Vice President, any Senior Vice President, and any Vice President. Members of the Board of Directors of the Company who are full-time executives of the Company shall be eligible to participate in the Plan. Any Participant in the El Paso Natural Gas Company Incentive Compensation Plan dated as of January 1, 1992 (the "Predecessor Plan") on the day immediately preceding the effective date of this Plan, who is an employee of the Company or its subsidiaries, shall be come a Participant in this Plan on the effective date. SECTION 5 PERFORMANCE GOALS 5.1 PERFORMANCE PERIOD The term "Performance Period" as used in this Plan shall mean the period of twelve consecutive months beginning on January 1 and ending on December 31, or such other period as the Plan Administrator may determine. 5.2 PERFORMANCE GOALS The Plan Administrator shall establish the performance goal or goals ("Performance Goal or Goals") for each Performance Period in writing prior to the commencement of the applicable Performance Period, or at such other time as permitted by applicable provisions of the Code and regulations thereunder, and shall state the amount of award to be paid to each Participant, subject to Section 6.3 below, upon attainment of the stated Performance Goals. Each Performance Goal selected for a particular Performance Period shall be a relative or absolute measure of any one or more of the following: Operating Income Pre-tax Profit Earnings Per Share Cash Flow - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 3 1995 Incentive Compensation Plan 7 Return on Capital Return on Equity Return on Net Assets Net Income Debt Reduction Safety Return on Investment Revenues Total Stockholder Return The foregoing terms shall have the same meaning as used in the Company's financial statements, or if the terms are not used in the Company's financial statements, they shall have the meaning generally applied pursuant to general accepted accounting principles, or as used in the industry, as applicable. The Plan Administrator shall set the target level of performance required for each Performance Goal selected for a particular Performance Period in order to determine whether a Performance Goal has been attained. The Plan Administrator may specify that a percentage (less than 100%) of awards may be payable if a designated level of performance of a Performance Goal is attained that is less than the target level of performance for such Performance Goal. The Plan Administrator may select one or more Performance Goals for a particular Performance Period. If the Plan Administrator selects more than one Performance Goal for a particular Performance Period, the Plan Administrator may determine to make awards upon attainment of any one or more of such Performance Goals, provided that such Performance Goals are established in accordance with this Section 5.2 and are stated as alternatives to one another. 5.3 PROCEDURES Prior to the beginning of a particular Performance Period, or such other date as the Code may allow, the Plan Administrator shall specify in writing: (a) the Participants who shall be eligible to receive an award for a Performance Period, (b) the Performance Goals for such Performance Period, and (c) the maximum award amount payable to each Participant if the Performance Goals are met. Any Participant chosen to participate in the Plan for a given Performance Period shall receive the maximum award amount if the designated Performance Goals are achieved, subject to the discretion of the Plan Administrator to reduce such award, as described in Section 6.3. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 4 1995 Incentive Compensation Plan 8 SECTION 6 INDIVIDUAL AWARDS 6.1 PERFORMANCE GOAL CERTIFICATION An award shall become payable to the extent provided herein in the event that the Plan Administrator, or the Management Committee in the case of Participants other than Section 16 Insiders, certifies in writing prior to payment of the award that the Performance Goal or Goals selected for a particular Performance Period has or have been attained. In no event will an award be payable under this Plan if the threshold level of performance set for each Performance Goal for the applicable Performance Period is not attained. 6.2 MAXIMUM AWARD PAYABLE The maximum award payable under this Plan to any Participant for any Performance Period shall be two million dollars ($2,000,000) in cash, Restricted Stock, or a combination of cash and Restricted Stock. 6.3 DISCRETION TO REDUCE AWARDS; PARTICIPANT'S PERFORMANCE The Plan Administrator, or the Management Committee in the case of Participants other than Section 16 Insiders, in its sole and absolute discretion, may reduce the amount of any award otherwise payable to a Participant upon attainment of any Performance Goal for the applicable Performance Period. A Participant's individual performance must be satisfactory, regardless of the Company's performance and the attainment of Performance Goals, before he or she may be granted an incentive award. In evaluating a Participant's performance, the Plan Administrator and the Management Committee, as applicable, shall consider the Performance Goals of the Company and the Participant's responsibilities and accomplishments, and such other factors as it deems appropriate. 6.4 STOCKHOLDER APPROVAL OF PERFORMANCE GOALS Awards shall not be payable under this Plan unless the Plan Administrator determines that the material terms of the Performance Goal(s) under which an award is to be paid have been disclosed and subsequently approved by the Company's stockholders in accordance with Section 162(m) of the Code and applicable regulations thereunder. 6.5 NEW EMPLOYEE, RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT To the extent consistent with the deductibility of awards under Section 162(m) of the Code or regulations promulgated thereunder, the Plan Administrator or the Management Committee, as applicable, may grant all or such portion of an incentive award for the Performance Period as it deems advisable to a Participant (or the Participant's Beneficiary (as defined in Section 9.8) in the case of the Participant's death) - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 5 1995 Incentive Compensation Plan 9 who is first employed or who is promoted to a position eligible to become a Participant under this Plan during the Performance Period, or whose employment is terminated during the Performance Period because of the Participant's retirement, death, permanent disability, resignation, or discharge, provided that any of the Performance Goals are attained for the applicable Performance Period. SECTION 7 PAYMENT OF INCENTIVE AWARDS 7.1 REQUIRED PAYMENT The Plan Administrator, or the Management Committee in the case of Participants other than Section 16 Insiders, shall make a determination within thirty (30) days after the Company's financial information is available for a particular Performance Period (the "Award Date") whether the Performance Goals for that Performance Period have been achieved and the amount of the award for each Participant. In the absence of an election by the Participant pursuant to Sections 7.2 or 7.3, the award shall be paid not later than the end of the month following the month in which the Plan Administrator or Management Committee determines the amount of the award and shall be paid as follows: (a) Participants employed by the Company holding the position of Chairman of the Board, President, Chief Executive Officer, Vice Chairman of the Board, Chief Operating Officer, Executive Vice President, or Senior Vice President and Participants employed by Company subsidiaries with equivalent positions thereto, but not necessarily the same titles, shall receive their incentive award as follows: (i) 50% (fifty percent) in cash and (ii) 50% (fifty percent) in Restricted Stock. (b) Participants employed by the Company holding the position of Vice President and Participants employed by Company subsidiaries with an equivalent position thereto, but not necessarily the same title, shall receive their incentive award as follows: (i) 75% (seventy-five percent) in cash and (ii) 25% (twenty-five percent) in Restricted Stock. (c) Because the Participant bears forfeiture, price fluctuation, and other attendant risks during the Restriction Period (as defined in Section 8.3) associated with the Restricted Stock awarded under this Plan, Participants shall be awarded an additional amount of Restricted Stock equal to the amount of Restricted Stock which a Participant is awarded pursuant to Sections 7.1(a)(ii) or 7.1(b)(ii), as applicable. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 6 1995 Incentive Compensation Plan 10 (d) Notwithstanding subsections (a) and (b) above, the Plan Administrator or Management Committee, as appropriate, may determine that a Participant must receive a greater amount of his or her award in Restricted Stock, up to and including the entire award in Restricted Stock. (For purposes of the Plan, such required shares shall be treated as being awarded pursuant to Section 7.1(a)(ii) or Section 7.1(b)(ii), as applicable.) In such event, a Participant shall be entitled to the additional shares of Restricted Stock, awarded pursuant to Section 7(c) above. For purposes of this Plan, the value of awards payable in Restricted Stock and the calculation of fair market value of Common Stock shall be the mean between the highest and lowest quoted selling prices at which the Common Stock is sold on the Award Date (or such other date in the case of calculating fair market value for other purposes) as reported in the NYSE Composite Transactions by The Wall Street Journal for such date or, if no Common Stock was traded on such date, on the next preceding date on which the Common Stock was so traded. The value of any fractional share shall be paid in cash. 7.2 RESTRICTED STOCK ELECTION In lieu of receiving all or any portion of the cash in accordance with Sections 7.1(a)(i) or 7.1(b)(i), a Participant may elect to receive additional Restricted Stock with a value equal to the portion of the incentive award which the Participant would otherwise have received in cash, but has elected to receive in Restricted Stock ("Restricted Stock Election"). Participants must make their Restricted Stock Election at such time and in such a manner as prescribed by the Management Committee. If required by Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, any Restricted Stock Election made by a Participant who is a Section 16 Insider shall be made at least six months prior to the Award Date, or at such other time as is allowed by Section 16(b) of the Exchange Act. Each Participant who makes the Restricted Stock Election shall be entitled to the additional Restricted Stock granted pursuant to Section 7.1(c) with respect to the amount of the Participant's Restricted Stock Election. Except as provided in Section 8, all shares of Restricted Stock awarded pursuant to the Restricted Stock Election are subject to the same terms and conditions as the Restricted Stock a Participant receives pursuant to Sections 7.1(a)(ii) or 7.1(b)(ii), as applicable. 7.3 DEFERRED PAYMENT Each Participant may elect to have the payment of all or a portion of any incentive award made pursuant to Sections 7.1(a)(i) or 7.1(b)(i), as applicable, for the year deferred according to the terms and conditions of the Company's Deferred Compensation Plan. The election shall be irrevocable and shall be made at such time and in such a manner as prescribed by the Management Committee. The election shall apply only to that year. If a Participant has not made an election under this Section, any incentive award granted to the Participant for that year shall be paid pursuant to Sections 7.1 or 7.2, as applicable. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 7 1995 Incentive Compensation Plan 11 7.4 PAYMENT UPON CHANGE IN CONTROL Notwithstanding any other provision of this Plan, in the event of a Change in Control of the Company, the award attributable to the Performance Period in which the Change in Control occurs shall become fully vested and distributable, in cash, within 30 days after the date of the Change in Control, in an amount equal to the greater of the annual incentive percentage of Annual Salary established by the Plan Administrator, or the following: Participants employed by the Company holding any of the following positions and Participants employed by Company subsidiaries with positions equivalent Percentage of Annual Salary thereto, but not necessarily with the same titles: 100% of Annual Salary Chairman of the Board, President, Chief Executive Officer, Vice Chairman of the Board, Chief Operating Officer, or Executive Vice President 80% of Annual Salary Senior Vice President 60% of Annual Salary Vice President The term "Annual Salary" as used in this Plan shall mean a Participant's annual base salary in effect on the date of a Change in Control. In the event a Change in Control occurs after the end of a Performance Period, but before the Award Date, each Participant shall be entitled to receive in cash, within 30 days after the date of the Change in Control, those amounts set forth above in this Section 7.4 for such Performance Period. Such amounts are in addition to the amount to which Participants shall be entitled for the Performance Period in which a Change in Control is deemed to occur. For purposes of this Plan a "Change in Control" shall be deemed to occur: (a) if any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; (b) upon the first purchase of the Common Stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 8 1995 Incentive Compensation Plan 12 (c) upon the approval by the Company's stockholders of a merger or consolidation, a sale, or disposition of all or substantially all the Company's assets or a plan of liquidation or dissolution of the Company; or (d) if, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur if the Company either merges or consolidates with or into another company or sells or disposes of all or substantially all of its assets to another company, if such merger, consolidation, sale or disposition is in connection with a corporate restructuring wherein the stockholders of the Company immediately before such merger, consolidation, sale or disposition own, directly or indirectly, immediately following such merger, consolidation, sale or disposition at least eighty percent (80%) of the combined voting power of all outstanding classes of securities of the company resulting from such merger or consolidation, or to which the Company sells or disposes of its assets, in substantially the same proportion as their ownership in the Company immediately before such merger, consolidation, sale or disposition. SECTION 8 RESTRICTED STOCK 8.1 Any share of Restricted Stock awarded pursuant to this Plan shall be subject to the provisions of this Section 8, and to any additional restrictions imposed by the Plan Administrator. Restricted Stock may be awarded to Participants under this Plan in lieu of cash as provided in Section 7. Each award of Restricted Stock shall be evidenced by a written instrument delivered by or on behalf of the Company containing provisions not inconsistent with the Plan. The award of Restricted Stock shall entitle a Participant to receive, on the date or dates designated by the Plan Administrator, the number of shares of Common Stock awarded by the Plan Administrator. Each Participant who receives a grant of Restricted Stock shall have all the rights of a stockholder with respect to such shares (except as provided in the restrictions on transferability), including the right to vote the shares and receive dividends and other distributions. However, no Participant awarded Restricted Stock shall have any right as a stockholder with respect to such shares prior to the date of issuance to the Participant of a certificate or certificates for such shares. 8.2 Notwithstanding Section 8.1, the Plan Administrator may require, under such terms and conditions as it deems appropriate or desirable, that the certificates for - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 9 1995 Incentive Compensation Plan 13 Restricted Stock delivered under the Plan may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody until the Restriction Period expires or until restrictions thereon otherwise lapse, and may require, as a condition of any issuance of Restricted Stock that the Participant shall have delivered a stock power endorsed in blank relating to the shares of Restricted Stock. 8.3 During a period of years following the award of Restricted Stock, as determined by the Plan Administrator, which shall in no event be less than one (1) year (the "Restriction Period"), the Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of by the Participant, except as otherwise provided for in this Plan, upon the Plan Administrator's waiver or modification of such restrictions in the agreement evidencing the grant of Restricted Stock, or by resolution of the Plan Administrator adopted at any time. 8.4 Except as provided in Sections 8.5 or 8.6, if a Participant terminates employment with the Company for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant to the Company. In addition, in the event of any attempt by the Participant to sell, exchange, transfer, pledge, or otherwise dispose of shares of Restricted Stock in violation of the terms of the Plan, such shares shall be forfeited to the Company. 8.5 The Restriction Period for any Participant shall be deemed to end and all restrictions on shares of Restricted Stock awarded pursuant to Sections 7.1(a)(ii), 7.1(b)(ii), and 7.2 (except for Restricted Stock awarded pursuant to Section 7.1(c)) shall lapse upon the Participant's death, retirement, Permanent Disability, or any other involuntary termination without Cause. The Restriction Period shall be deemed to end and all restrictions on a Participant's shares of Restricted Stock awarded pursuant to Section 7.1(c) shall lapse on a pro rata basis measured in years between (i) the amount of time which has elapsed between the Award Date and the Participant's death, retirement, Permanent Disability, or any other involuntary termination without Cause and (ii) the Restriction Period for such shares. All shares of Restricted Stock for which the Restriction Period has not lapsed as described above shall be forfeited to the Company. Notwithstanding the foregoing, the Plan Administrator, or the Management Committee in the case of Participants other than Section 16 Insiders, may determine that such Restriction Period should not lapse or that the Restriction Period on additional shares of Restricted Stock should lapse. For the purposes of this Plan, a termination with "Cause" is a termination evidenced by a resolution adopted in good faith by two-thirds (2/3) of the Board of Directors that the Participant (i) willfully and continually failed to substantially perform the Participant's duties with the Company (other than a failure resulting from the Participant's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Participant specifying the manner in which the - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 10 1995 Incentive Compensation Plan 14 Participant has failed to substantially perform or (ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; provided, however, that no termination of the Participant's employment shall be for Cause as set forth in clause (ii) above until (A) there shall have been delivered to the Participant a copy of a written notice setting forth that the Participant was guilty of the conduct set forth in clause (ii) above and specifying the particulars thereof in detail and (B) the Participant shall have been provided an opportunity to be heard by the Board of Directors (with the assistance of the Participant's counsel if the Participant so desires). No act, nor failure to act, on the Participant's part shall be considered "willful" unless the Participant has acted, or failed to act, with an absence of good faith and without a reasonable belief that the Participant's action or failure to act was in the best interest of the Company. Notwithstanding anything contained in the Plan to the contrary, no failure to perform by the Participant after notice of termination is given by the Participant shall constitute Cause. 8.6 The Restriction Period for any Participant shall be deemed to end and all restrictions on shares of Restricted Stock shall lapse immediately upon a Change in Control. 8.7 Subject to Section 8.2, a Participant is entitled to receive Restricted Stock under the Plan shall be issued a certificate for such shares. Such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend reciting the terms, conditions, and restrictions, if any, applicable to such shares and shall be subject to appropriate stop-transfer orders. When the restrictions imposed by Section 8.3 expire or otherwise lapse with respect to one (1) or more shares of Restricted Stock, the Company shall deliver to the Participant (or the Participant's legal representative, Beneficiary, or heir) one (1) share of unrestricted Common Stock for each share of Restricted Stock. At that time, the agreement referred to in Section 8.1, as it relates to such shares, shall be terminated. 8.8 A Participant may elect irrevocably (at a time and in the manner determined by the Plan Administrator or the Company, as appropriate), prior to vesting of Restricted Stock, that the Participant relinquishes any and all rights in the shares of Restricted Stock in exchange for an interest in the Company's then-existing Deferred Compensation Plan (as it may be further amended) (the "Deferred Compensation Plan") and receipt of such shares shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. At the time the restrictions lapse on the shares of Restricted Stock (as specified at the time of grant, or otherwise if changed by the Plan Administrator), the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant to the Deferred Compensation Plan, and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 11 1995 Incentive Compensation Plan 15 additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine. SECTION 9 GENERAL PROVISIONS 9.1 ISSUANCE OF COMMON STOCK The Company shall not be required to issue any certificate for shares of Common Stock prior to: (a) obtaining any approval or ruling from the Securities and Exchange Commission, the Internal Revenue Service, or any other governmental agency which the Company, in its sole discretion, deems necessary or advisable; (b) listing the shares on any stock exchange on which the Common Stock may then be listed; or (c) completing any registration or other qualification of such shares under any federal or state laws, rulings, or regulations of any governmental body which the Company, in its sole discretion, determines to be necessary or advisable. All certificates for shares of Common Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Plan Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which Common Stock is then listed, and any applicable federal or state securities laws, and the Plan Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The foregoing provisions of this paragraph shall not be effective if and to the extent that the shares of Common Stock delivered under the Plan are covered by an effective and current registration statement under the Securities Act of 1933, as amended, or if and so long as the Plan Administrator determines that application of such provisions is no longer required or desirable. In making such determination, the Plan Administrator may rely upon an opinion of counsel for the Company. 9.2 NO RIGHT TO CONTINUED EMPLOYMENT Nothing in the Plan, or any awards of cash or Restricted Stock pursuant to the Plan, shall be construed to confer upon any Participant any right to continued employment with the Company or a subsidiary, nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 12 1995 Incentive Compensation Plan 16 9.3 OTHER BENEFITS Incentive awards shall not be considered as part of a Participant's salary or used for the calculation of any other pay, allowance, pension, or other benefit unless otherwise permitted by other benefit plans provided by the Company or its subsidiaries, or required by law or by contractual obligations of the Company or its subsidiaries. Notwithstanding the preceding sentence, the Restricted Stock awarded pursuant to Section 7.1(c) shall not be considered as part of a Participant's salary or used for the calculation of any other pay, allowance, pension, or other benefit unless required by contractual obligations of the Company or its subsidiaries. 9.4 NONASSIGNMENT The right of a Participant or Beneficiary to the payment of any incentive awards under the Plan may not be assigned, transferred, pledged, or encumbered, nor shall such right or other interests be subject to attachment, garnishment, execution, or other legal process. 9.5 LEAVES OF ABSENCE Leaves of absence for such periods and purposes conforming to the personnel policy of the Company, or of its subsidiaries, as applicable, shall not be deemed terminations or interruptions of employment, unless a Participant commences a leave of absence from which he or she is not expected to return to active employment with the Company or its subsidiaries. 9.6 TRANSFERS AND PROMOTIONS In the event a Participant is transferred from the Company to a subsidiary, or vice versa, or is promoted or given different responsibilities, the Restricted Stock awarded to the Participant prior to such date shall not be affected. 9.7 UNFUNDED OBLIGATION The incentive awards to be paid to Participants pursuant to this Plan are an unfunded obligation of the Company. The Management Committee, in its sole discretion, may direct the Company to share with its subsidiaries the costs of a portion of the incentive awards paid to Participants who are executives of those companies. The Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Beneficial ownership of any investments which the Company may make to fulfill this obligation shall at all times remain in the Company. Any investments and the creation or maintenance of any Participant account under the Company's Deferral Compensation - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 13 1995 Incentive Compensation Plan 17 Plan shall not create or constitute a trust or a fiduciary relationship between the Plan Administrator, the Management Committee or the Company and a Participant, or otherwise create any vested interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 9.8 BENEFICIARY The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. The designation shall be on a form provided by the Management Committee, executed by the Participant and delivered to the Management Committee. A Participant may change his or her beneficiary designation at any time. A designation by a Participant under the Predecessor Plan shall remain in effect under this Plan unless it is revoked or changed under this Plan. If no Beneficiary is designated, the designation is ineffective, or in the event the Beneficiary dies before the balance of a Participant's account is paid, the balance shall be paid to the Participant's spouse or, if there is no surviving spouse, to his or her lineal descendants, pro rata, or, if there is no surviving spouse or any lineal descendant, to the Participant's estate. 9.9 PERMANENT DISABILITY A Participant shall be deemed to have become "permanently disabled" for purposes of this Plan if the Management Committee finds, upon the basis of medical evidence satisfactory to it, that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company or any of its subsidiaries and that such disability will be permanent and continuous during the remainder of his or her life. 9.10 INCAPACITY OF PARTICIPANT OR BENEFICIARY If the Management Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefore shall have been made by a duly appointed legal representative), at the discretion of the Management Committee, may be paid to the spouse, child, parent, brother, or sister of such Participant or Beneficiary or to any person whom the Management Committee has determined has incurred expense for such Participant or Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 14 1995 Incentive Compensation Plan 18 9.11 WITHHOLDING TAXES Appropriate provision shall be made for all taxes required to be withheld in connection with the award or other taxable event with respect to cash awards or Restricted Stock awards under the applicable laws and regulations of any governmental authority, whether federal, state or local and whether domestic or foreign, including, but not limited to, the required withholding of a sufficient number of shares of Common Stock otherwise issuable to a Participant to satisfy the said required minimum tax withholding obligations. Unless otherwise provided in the instrument awarding the cash and Restricted Stock award, a Participant is permitted to deliver shares of unrestricted Common Stock, to the extent permitted by applicable regulations, for payment of withholding taxes on the payment of a cash award or the vesting of Restricted Stock. At the election of the Plan Administrator or, subject to approval of the Plan Administrator at its sole discretion, at the election of a Participant, shares of Common Stock may be withheld from the shares issuable to the Participant upon the vesting of the Restricted Stock to satisfy tax withholding obligations. The fair market value of Common Stock as delivered pursuant to this Section 9.11 shall be valued as of the day prior to delivery, and shall be calculated in accordance with Section 7.1. The withholding of shares of Common Stock to pay tax obligations in connection with the vesting of Restricted Stock by a Section 16 Insider must be approved by the Plan Administrator and must occur (i) pursuant to an irrevocable election made six (6) months in advance of the transaction, (ii) during the period beginning on the third business day following the date of release for publication of the quarterly or annual summary statements of sales and earnings of the Company and ending on the twelfth business day following such date, or (iii) otherwise in accordance with the provisions of Rule 16b-3 and interpretations thereunder. In the event Rule 16b-3 is amended or interpreted to permit shares of Common Stock to be withheld to pay tax obligations outside the periods described in clause (i) or (ii) of the preceding sentence, or without Plan Administrator approval, the Plan Administrator may determine that such provisions shall no longer apply to Section 16 Insiders. Notwithstanding the foregoing, the Management Committee shall determine, for Participants other than Section 16 Insiders, the appropriate means of providing for the withholding of taxes. Any Participant that makes a Section 83(b) election under the Code shall, within ten (10) days of making such election, notify the Company in writing of such election and shall provide the Company with a copy of such election form filed with the Internal Revenue Service. Tax advice should be obtained by the Participant prior to the Participant's (i) entering into a transaction under or with respect to the Plan, (ii) designating or choosing the time of distributions under the Plan, or (iii) disposing of any shares of Common Stock issued under the Plan. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 15 1995 Incentive Compensation Plan 19 9.12 TERMINATION AND AMENDMENT The Board and the Plan Administrator may from time to time amend, suspend, or terminate the Plan, in whole or in part, including, but not limited to, any amendment necessary to insure that the Company may obtain any required regulatory approvals, and if the Plan is suspended or terminated, the Plan Administrator may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or increase the obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension, or termination may impair the right of a Participant or his or her designated Beneficiary to receive the deferred compensation benefit accrued prior to the effective date of such amendment, suspension, or termination. 9.13 STOCKHOLDER APPROVAL Notwithstanding any other provision in this Plan, the Board, the Plan Administrator, and the Management Committee may not amend the Plan without the approval of the stockholders of the Company to: (a) materially increase the number of shares that may be issued under the Plan; (b) materially modify the requirements as to eligibility for participation in the Plan; (c) change the Performance Goals; or (d) otherwise materially increase the benefits accruing to the Participants under the Plan. 9.14 APPLICABLE LAW The Plan shall be construed and governed in accordance with the laws of the State of Texas. 9.15 EFFECTIVE DATE AND TERM OF THE PLAN The Plan was originally adopted by the Board effective as of January 13, 1995, and approved by the Company's stockholders on March 16, 1995. The Board amended and restated the Plan effective as of December 3, 1998. The Board had previously amended and restated the Plan effective as of August 1, 1998, in connection with the reorganization of the Company into a holding company structure whereby El Paso Energy Corporation became the publicly held company and El Paso Natural Gas Company became a wholly owned subsidiary. This Plan was assumed by El Paso Energy Corporation pursuant to an Assignment and Assumption Agreement effective as of August 1, 1998, by and between El Paso Energy Corporation and El Paso Natural Gas Company. Incentive awards of cash, Restricted Stock, or both may be granted pursuant to the Plan from time to time with the period commencing upon adoption of the Plan by the Board and ending ten (10) years after approval of the Plan by the stockholders. Awards of Restricted Stock granted under the Plan shall continue to be subject to the terms and conditions of the Plan after the expiration date. To the extent required for - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 16 1995 Incentive Compensation Plan 20 compliance with Rule 16b-3, shares of Common Stock underlying shares of Restricted Stock granted subject to subsequent stockholder approval of the Plan to Section 16 Insiders may not be sold until a date at least six (6) months after the date such stockholder approval is obtained. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 17 1995 Incentive Compensation Plan 21 IN WITNESS WHEREOF, the Company has caused the Plan to be amended and restated effective as of December 3, 1998. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III --------------------------------- Title: Executive Vice President ATTEST: By: /s/ David L. Siddall ---------------------------------- Title: Corporate Secretary - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 18 1995 Incentive Compensation Plan EX-10.F 6 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1 EXHIBIT 10.F EL PASO ENERGY CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 20, 1999 2 TABLE OF CONTENTS SECTION 1 PURPOSE...................................................1 SECTION 2 SHARES SUBJECT TO THE PLAN................................1 SECTION 3 ADMINISTRATION OF THE PLAN................................1 SECTION 4 PARTICIPATION IN THE PLAN.................................2 SECTION 5 STOCK OPTION GRANTS AND TERMS.............................2 SECTION 6 GENERAL PROVISIONS........................................5 SECTION 7 EFFECTIVE DATE AND DURATION OF PLAN.......................6 SECTION 8 COMPLIANCE WITH SECTION 16................................6 SECTION 9 AMENDMENT, TERMINATION OR DISCONTINUANCE OF THE PLAN......6
- -------------------------------------------------------------------------------- El Paso Energy Corporation Table of Contents Stock Option Plan For Non-Employee Directors 3 EL PASO ENERGY CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 20, 1999 SECTION 1 PURPOSE The purpose of the E1 Paso Energy Corporation Stock Option Plan for Non-Employee Directors, Amended and Restated effective as of January 20, 1999 (the "Plan") is to attract and retain the services of experienced and knowledgeable non-employee Directors of E1 Paso Energy Corporation (the "Company"), and to provide an incentive for such Directors to increase their proprietary interests in the Company's long-term success and progress. SECTION 2 SHARES SUBJECT TO THE PLAN 2.1 Subject to Section 2.2, the maximum number of shares of common stock of the Company, par value $3.00 per share, (the "Common Stock") for which stock options may be granted under the Plan is two hundred thousand (200,000) (the "Shares"). The Shares shall be shares held in the Company's treasury or out of authorized but unissued shares of the Company, or partly out of each, as shall be determined by the Plan Administrator (defined below), subject to, and reduced by (on a post-split basis), the number of shares of Common Stock awarded prior to the occurrence of a two-for-one stock split effected by the Company in the form of a 100% stock dividend on April 1, 1998. 2.2 In the event of a recapitalization, stock split, stock dividend, exchange of shares, merger, reorganization, change in corporate structure or shares of the Company or similar event, the Board of Directors of the Company (the "Board"), may make appropriate adjustments in the number of Shares authorized for the Plan and, with respect to outstanding stock options, the Plan Administrator may make appropriate adjustments in the number of shares and the option price. In the event of any adjustment in the number of Shares covered by any stock option, any fractional Shares resulting from such adjustment shall be disregarded and each such stock option shall cover only the number of full Shares resulting from such adjustment. SECTION 3 ADMINISTRATION OF THE PLAN Unless otherwise determined by the Board and subject to Section 9, the Plan shall be administered by a management committee (the "Plan Administrator") consisting of the - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 1 Stock Option Plan For Non-Employee Directors 4 Chairman of the Board of the Company and such other senior officers as the Chairman of the Board shall designate. The Plan Administrator shall interpret the Plan, shall prescribe, amend and rescind rules relating to the Plan from time to time as it deems proper and in the best interests of the Company, and shall take any other action necessary for the administration of the Plan. SECTION 4 PARTICIPATION IN THE PLAN Each member of the Board elected or appointed who is not otherwise an employee of the Company or any subsidiary corporation (a "Participant") shall be eligible to receive stock option grants as provided in the Plan. SECTION 5 STOCK OPTION GRANTS AND TERMS Each stock option granted to a Participant under the Plan and the issuance of Shares thereunder shall be subject to the following terms: 5.1 OPTION GRANTS A Participant shall automatically receive (a) a grant of stock options to purchase three thousand (3,000) Shares when the Participant is initially elected or appointed as a Director of the Company and (b) a grant of stock options to purchase two thousand (2,000) Shares on each date the Participant is reelected as a Director of the Company at the annual meeting of stockholders of the Company, beginning with such annual meeting in 1998. Each stock option granted under the Plan shall be evidenced by a written instrument delivered by or on behalf of the Plan Administrator containing terms, provisions and conditions not inconsistent with the Plan. 5.2 VESTING OF OPTIONS Each stock option granted to a Participant under the Plan shall be fully vested and immediately exercisable upon grant. 5.3 OPTION PRICE The option price for a stock option granted under the Plan shall be the fair market value of the Shares covered by the stock option at the time the stock option is granted to the Participant. For purposes of the Plan, "fair market value" shall be the mean between the highest and lowest quoted selling prices at which the Common Stock was sold on - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 2 Stock Option Plan For Non-Employee Directors 5 such date as reported in the NYSE Composite Transactions by The Wall Street Journal for such date or, if no Common Stock was traded on such date, on the next preceding date on which Common Stock was so traded. 5.4 TIME AND MANNER OF EXERCISE OF A STOCK OPTION Each option may be exercised in whole or in part at any time and from time to time; provided, however, that no fewer than one hundred (100) Shares (or the remaining Shares then purchasable under the stock option, if less than one hundred (100) Shares) may be purchased upon exercise of any stock option hereunder and that only whole Shares will be issued pursuant to the exercise of any stock option. The purchase price of shares purchased under stock options shall be paid in full to the Company incident to the exercise of the stock option by delivery of consideration equal to the product of the option price and the number of shares purchased (the "Purchase Price"). Such consideration may be paid (i) in cash or by check; (ii) in shares of Common Stock already owned by the Participant for a sufficient time (generally six (6) months) to not result in an accounting charge to the Company, or any combination of cash and Common Stock, with the fair market value of such Common Stock valued as of the day prior to delivery; or (iii) by delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds to pay the Purchase Price. The Plan Administrator can specify that stock options granted or to be granted shall permit additional techniques to pay the Purchase Price. A Participant shall have none of the rights of a stockholder until the Shares of Common Stock are issued to the Participant. 5.5 TERM OF OPTIONS Each stock option shall expire ten (10) years from the date of the granting thereof, but shall be subject to earlier termination as follows: (a) In the event that a Participant ceases to be a Director of the Company for any reason other than the death of the Participant, the stock options granted to such Participant shall expire unless exercised by him or her within thirty-six (36) months after the date such Participant ceases to be a Director of the Company. (b) In the event of the death of a Participant, whether during the Participant's service as a Director or during the thirty-six (36) month period referred to in Section 5.5(a), the stock options granted to such Participant shall be exercisable, and such stock options shall expire unless exercised within twelve (12) months after the date of the Participant's death, by the legal representatives or the estate of such Participant, by any person or persons - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 3 Stock Option Plan For Non-Employee Directors 6 whom the Participant shall have designated in writing on forms prescribed by and filed with the Company or, if no such designation has been made, by the person or persons to whom the Participant's rights have passed by will or the laws of descent and distribution. 5.6 TRANSFERABILITY Stock options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or the applicable laws of descent and distribution. Notwithstanding the foregoing and only as provided by the Plan Administrator or the Company, as applicable, stock options may be transferred to a Participant's immediate family members, directly or indirectly or by means of a trust, corporate entity or partnership (a person who thus acquires this option by such transfer, a "Permitted Transferee"). A transfer of a stock option may only be effected by the Company at the request of the Participant and shall become effective upon the Permitted Transferee agreeing to such terms as the Plan Administrator may require and only when recorded in the Company's record of outstanding stock options. In the event a stock option is transferred as contemplated hereby, the stock option may not be subsequently transferred by the Permitted Transferee except a transfer back to the Participant or by will or the laws of descent and distribution. A transferred stock option may be exercised by a Permitted Transferee to the same extent as, and subject to the same terms and conditions as, the Participant (except as otherwise provided herein), as if no transfer had taken place. As used herein, "immediate family" shall mean, with respect to any person, such person's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and shall include adoptive relationships. In addition, to the extent permitted by applicable law and the Rules promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan Administrator may permit a recipient of a stock option to designate in writing during the Participant's lifetime a beneficiary to receive and exercise stock options in the event of the Participant's death (as provided in Section 5.5(b)). Except as otherwise provided for herein, any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any stock option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan or such stock option, or the sale or levy or any attachment or similar process upon the rights and privileges conferred thereby, shall be null and void. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 4 Stock Option Plan For Non-Employee Directors 7 5.7 DEFERRAL ELECTION A Participant may elect irrevocably at any time prior to exercising a stock option granted under the Plan that issuance of Shares upon exercise of such option shall be deferred until the Participant reaches a pre-specified age or ceases to serve as a Director of the Company, as elected by the Participant. After the exercise of any such stock option and prior to the issuance of any deferred shares, the number of Shares issuable to the Participant shall be credited to a memorandum deferred account and any dividends or other distributions paid on the Common Stock shall be deemed reinvested in additional shares of Common Stock until all credited Shares shall become issuable pursuant to the Participant's election. SECTION 6 GENERAL PROVISIONS 6.1 Neither the Plan, nor the granting of a stock option, nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that a Participant has a right to continue as a Director for any period of time or at any particular rate of compensation. 6.2 The Company shall not be required to issue any certificate or certificates for Shares upon the exercise of a stock option granted under the Plan, or record as a holder of record of Shares the name of the individual exercising an option under the Plan, (a) without obtaining to the complete satisfaction of the Plan Administrator the approval of all regulatory bodies deemed necessary by the Plan Administrator, and (b) without complying, to the Plan Administrator's complete satisfaction, with all rules and regulations under federal, state or local law deemed applicable by the Plan Administrator. 6.3 All costs and expenses of the adoption and administration of the Plan shall be borne by the Company. 6.4 The Plan shall be construed and governed in accordance with the laws of the State of Texas, except that it shall be construed and governed in accordance with applicable federal law in the event that such federal law preempts state law. 6.5 Appropriate provision shall be made for all taxes required to be withheld in connection with the exercise or other taxable event with respect to stock options under the applicable laws or regulations of any governmental authority, whether federal, state or local and whether domestic or foreign. By participating in the Plan, each Participant shall agree that he or she is responsible for obtaining qualified tax advice prior to the Participant's (i) entering into any transaction under or with respect to the Plan, (ii) designating or choosing the times of distributions under the Plan, or (iii) disposing of any shares of Common Stock issued under the Plan. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 5 Stock Option Plan For Non-Employee Directors 8 SECTION 7 EFFECTIVE DATE AND DURATION OF THE PLAN The original plan was dated as of January 1, 1992 and adopted by the Company's Board and approved by the Company's sole stockholder on January 15, 1992. The Board amended and restated the Plan effective as of August 1, 1998, in connection with the reorganization of the Company into a holding company structure whereby El Paso Energy Corporation became the publicly held company and El Paso Natural Gas Company became a wholly owned subsidiary. This Plan was assumed by El Paso Energy Corporation pursuant to an Assignment and Assumption Agreement effective as of August 1, 1998, by and between El Paso Energy Corporation and El Paso Natural Gas Company. The Board amended and restated the Plan effective as of January 20, 1999. The Plan shall continue in effect until it is terminated by action of the Board or the Company's stockholders, but such termination shall not affect the then-outstanding terms of any stock options or the Company's obligation to issue Shares under any then-exercised stock options as to which a deferral election has been made under Section 5.7. SECTION 8 COMPLIANCE WITH SECTION 16 The Company's intention is that, so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, with respect to awards granted to or held by Section 16 Insiders, the Plan shall comply in all respects with Rule 16b-3 or any successor rule or rule of similar application under Section 16 of the Exchange Act or rules thereunder, and, if any Plan provision is later found not to be in compliance with such exemption under Section 16 of the Exchange Act, that provision shall be deemed modified as necessary to meet the requirements of such applicable exemption. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 6 Stock Option Plan For Non-Employee Directors 9 SECTION 9 AMENDMENT, TERMINATION OR DISCONTINUANCE OF THE PLAN 9.1 Subject to the Board and Section 9.2, the Plan Administrator may from time to time make such amendments to the Plan as it may deem proper and in the best interest of the Company, including, but not limited to, any amendment necessary to ensure that the Company may obtain any regulatory approval referred to in Section 6.2; provided, however, that unless the Plan Administrator determines that such change does not materially impair the value of the stock options, no change in any stock option theretofore granted may be made which would impair the right of the Participant to acquire Shares or retain Shares that the Participant may have acquired as a result of the Plan without the consent of the Participant. 9.2 The Board may at any time suspend the operation of or terminate the Plan with respect to any Shares which are not at that time subject to any outstanding stock options. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 7 Stock Option Plan For Non-Employee Directors 10 IN WITNESS WHEREOF, the Company has caused the Plan to be amended and restated effective as of January 20, 1999. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III -------------------------------- Title: Executive Vice President ATTEST: By /s/ David L. Siddall ----------------------------- Title: Corporate Secretary - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 8 Stock Option Plan For Non-Employee Directors EX-10.G.1 7 AMENDMENT NO.1 TO 1995 OMNIBUS COMPENSATION PLAN 1 EXHIBIT 10.G.1 AMENDMENT NO. 1 TO THE 1995 OMNIBUS COMPENSATION PLAN Pursuant to Section 15.1 of the El Paso Energy Corporation 1995 Omnibus Compensation Plan, as amended and restated (the "Plan"), the Plan is hereby amended as follows, effective December 3, 1998: The following subsection (k) shall be added to Section 6.4 to read as follows: "(k) Deferral Election A Participant may elect irrevocably (at a time and in a manner determined by the Plan Administrator or the Company, as appropriate) at any time prior to exercising an option granted under the Plan that issuance of shares of Common Stock upon exercise of such option and/or associated stock appreciation right shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. After the exercise of any such option and prior to the issuance of any deferred shares, the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant the Company's then-existing Deferred Compensation Plan (as it may be further amended) (the "Deferred Compensation Plan"), and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine." Section 9.5(c) is amended to read as follows: "(c) Form of Payment A Participant or a Participant's Beneficiary shall be entitled to receive from the Company a benefit payment as provided pursuant to Sections 9.5(b)(i) or 9.5(b)(ii), as applicable, equal to the product of the Adjusted Value and the number of vested Units of a Participant. Such payment shall be made as soon as practicable following the applicable Valuation Date in accordance with this Section 9.5(c). Except as provided in Sections 9.5(d) and 9.7 (or unless the Plan Administrator otherwise determines at any time that the form of payment should be changed), benefit payments made to a Participant pursuant to this Section 9, shall be made as follows: (i) Participants employed by the Company holding the position of Chairman of the Board, President or Chief Executive Officer and Participants employed by Company Subsidiaries holding equivalent 2 positions, but not necessarily the same title, shall receive their Performance Unit payout as follows: (A) 50% (fifty percent) in cash and (B) 50% (fifty percent) in Common Stock. (ii) Participants employed by the Company holding the position of Vice Chairman of the Board, Chief Operating Officer, or Executive Vice President and Participants employed by Company Subsidiaries holding equivalent positions, but not necessarily the same title, shall receive their Performance Unit payout as follows: (A) 60% (sixty percent) in cash and (B) 40% (forty percent) in Common Stock. (iii) Participants employed by the Company holding the position of Senior Vice President and Participants employed by Company Subsidiaries holding equivalent positions, but not necessarily the same title, shall receive their Performance Unit payout as follows: (A) 75% (seventy-five percent) in cash and (B) 25% (twenty-five percent) in Common Stock." The following Section 10.10 shall be added to read as follows: "10.10 A Participant may elect irrevocably (at a time and in the manner determined by the Plan Administrator or the Company, as appropriate), prior to vesting of Restricted Stock, that the Participant relinquishes any and all rights in the shares of Restricted Stock in exchange for an interest in the Deferred Compensation Plan and receipt of such shares shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. At the time the restrictions lapse on the shares of Restricted Stock (as specified at the time of grant, or otherwise if changed by the Plan Administrator), the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant to the Deferred Compensation Plan, and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine." -2- 3 The first sentence of Section 13.7 is hereby deleted in its entirety and replaced with the following sentence: "Appropriate provision shall be made for all taxes required to be withheld in connection with the exercise, grant or other taxable event with respect to options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Units under the applicable laws and regulations of any governmental authority, whether federal, state or local and whether domestic or foreign, including, but not limited to, the required withholding of a sufficient number of shares of Common Stock otherwise issuable to a Participant to satisfy the said required minimum tax withholding obligations." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 3rd day of December, 1998. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III --------------------------------- Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - ------------------------------- Corporate Secretary 4 AMENDMENT NO. 2 TO THE 1995 OMNIBUS COMPENSATION PLAN Pursuant to Section 15.1 of the El Paso Energy Corporation 1995 Omnibus Compensation Plan, as amended and restated (the "Plan"), the Plan is hereby amended as follows, effective January 20, 1999: The following paragraph shall be added as the last paragraph to Section 6.4(d) to read as follows: "Notwithstanding any other provision in this Plan to the contrary and unless the Plan Administrator shall otherwise determine, in the event of a "cashless" exercise, and for that purpose only under this Plan, a Participant's compensation shall be equal to the difference between the actual sales price received for the underlying Common Stock and the Option Price. For all other purposes under this Plan, the Fair Market Value shall be the value against which compensation is determined." The following sentence shall be added as the last sentence to Section 6.4(e) to read as follows: "In addition, the Plan Administrator may require that a Participant who wants to effectuate a "cashless" exercise of options be required to sell the shares of Common Stock acquired in the associated exercise to the Company, or in the open market through the use of a broker selected by the Company, at such price and on such terms as the Plan Administrator may determine at the time of grant, or otherwise." Section 6.4(f) is hereby deleted in its entirety and replaced with the following: "(f) Nontransferability of Options Options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing and only as provided by the Plan Administrator or the Company, as applicable, Nonqualified Options may be transferred to a Participant's immediate family members, directly or indirectly or by means of a trust, corporate entity or partnership (a person who thus acquires this option by such transfer, a "Permitted Transferee"). A transfer of an option may only be effected by the Company at the request of the Participant and shall become effective upon the Permitted Transferee agreeing to such terms as the Plan Administrator may require and only when recorded in the Company's record of outstanding options. In the event an option is transferred as contemplated hereby, the option may not be subsequently transferred by the Permitted Transferee except 5 a transfer back to the Participant or by will or the laws of descent and distribution. A transferred option may be exercised by a Permitted Transferee to the same extent as, and subject to the same terms and conditions as, the Participant (except as otherwise provided herein), as if no transfer had taken place. As used herein, "immediate family" shall mean, with respect to any person, such person's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and shall include adoptive relationships. In the event of exercise of a transferred option by a Permitted Transferee, any amounts due to (or to be withheld by) the Company upon exercise of the option shall be delivered by (or withheld from amounts due to) the Participant, the Participant's estate or the Permitted Transferee, in the reasonable discretion of the Company. In addition, to the extent permitted by applicable law and Rule 16b-3, the Plan Administrator may permit a recipient of a Nonqualified Option to designate in writing during the Participant's lifetime a Beneficiary to receive and exercise the Participant's Nonqualified Options in the event of such Participant's death (as provided in Section 6.4(i)). A designation by a Participant under the Company's Omnibus Compensation Plan dated as of January 1, 1992 (the "Predecessor Plan") shall remain in effect under the Plan for any options unless such designation is revoked or changed under the Plan. Except as otherwise provided for herein, if any Participant attempts to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan or such option, or suffers the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, all affected options held by such Participant shall be immediately forfeited." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 20th day of January, 1999. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III ------------------------------------ Joel Richards III Executive Vice President Attest: /s/ David L. Siddall - ------------------------------------- Corporate Secretary -2- EX-10.H 8 AMENDED SUPPLEMENTAL BENEFITS PLAN 1 EXHIBIT 10.H EL PASO ENERGY CORPORATION SUPPLEMENTAL BENEFITS PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 2 TABLE OF CONTENTS SECTION 1 PURPOSES............................................................................. 1 SECTION 2 DEFINITIONS.......................................................................... 1 2.1 Beneficiary.......................................................................... 1 2.2 Board................................................................................ 1 2.3 Change in Control.................................................................... 1 2.4 Code................................................................................. 2 2.5 Company.............................................................................. 2 2.6 Deferred Compensation Plans.......................................................... 2 2.7 Employer............................................................................. 3 2.8 Management Committee................................................................. 3 2.9 Participant.......................................................................... 3 2.10 Pension Plan......................................................................... 3 2.11 RSP.................................................................................. 3 2.12 Surviving Spouse..................................................................... 3 SECTION 3 ADMINISTRATION....................................................................... 3 3.1 Management Committee................................................................. 3 SECTION 4 PARTICIPANTS......................................................................... 4 4.1 Participants......................................................................... 4 SECTION 5 BENEFITS............................................................................. 4 5.1 Supplemental Pension Benefits........................................................ 4 5.2 Supplemental RSP Benefits............................................................ 5 5.3 Other Supplemental Benefits.......................................................... 6 5.4 Time and Manner of Payment........................................................... 6 5.5 Determination of Supplemental Pension Benefit Payments............................... 7 SECTION 6 GENERAL PROVISIONS................................................................... 8 6.1 Unfunded Obligation.................................................................. 8 6.2 Discretionary Investment by Company.................................................. 8 6.3 Incapacity of Participant, Surviving Spouse or Beneficiary........................... 8 6.4 Nonassignment........................................................................ 9 6.5 No Right to Continued Employment..................................................... 9 6.6 Withholding Taxes.................................................................... 9 6.7 Termination and Amendment............................................................ 9 6.8 ERISA Exemption......................................................................10 6.9 Applicable Law.......................................................................10
- -------------------------------------------------------------------------------- El Paso Energy Corporation - i - Table of Contents Supplemental Benefits Plan 3 EL PASO ENERGY CORPORATION SUPPLEMENTAL BENEFITS PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 SECTION 1 PURPOSES The purposes of the El Paso Energy Corporation Supplemental Benefits Plan (the "Plan") are to attract and retain exceptional executives by providing retirement or termination benefits to selected officers and key management employees of outstanding competence. This Plan is effective January 15, 1992. SECTION 2 DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 BENEFICIARY "Beneficiary" means the individual(s) designated by a Participant to receive benefits from this Plan in the event of his or her death. If no designated Beneficiary survives the Participant, the Beneficiary shall be the person or persons in the first of the following classes who survive the Participant: (a) spouse at date of death, (b) descendants, per stirpes, (c) parents, (d) brothers and sisters, (e) estate. 2.2 BOARD "Board" means the Board of Directors of the Company. 2.3 CHANGE IN CONTROL A "Change in Control" shall be deemed to occur: (a) if any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 1 Supplemental Benefits Plan 4 directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) upon the first purchase of the Company's Common Stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); (c) upon the approval by the Company's stockholders of a merger or consolidation, a sale or disposition of all or substantially all of the Company's assets or a plan of liquidation or dissolution of the Company; or (d) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur if the Company either merges or consolidates with or into another company or sells or disposes of all or substantially all of its assets to another company, if such merger, consolidation, sale or disposition is in connection with a corporate restructuring wherein the stockholders of the Company immediately before such merger, consolidation, sale or disposition own, directly or indirectly, immediately following such merger, consolidation, sale or disposition at least eighty percent (80%) of the combined voting power of all outstanding classes of securities of the company resulting from such merger or consolidation, or to which the Company sells or disposes of its assets, in substantially the same proportion as their ownership in the Company immediately before such merger, consolidation, sale or disposition. 2.4 CODE "Code" means the Internal Revenue Code of 1986, as amended. 2.5 COMPANY "Company" means El Paso Energy Corporation, a Delaware corporation. 2.6 DEFERRED COMPENSATION PLANS "Deferred Compensation Plans" means the El Paso Energy Corporation Deferred Compensation Plan, 1995 Incentive Compensation Plan, 1995 Omnibus Compensation Plan, Strategic Stock Plan and other similar plans maintained by an Employer and such additional deferred compensation plans as may be designated by the Company from time to time. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 2 Supplemental Benefits Plan 5 2.7 EMPLOYER "Employer" means El Paso Energy Corporation, and its subsidiaries. 2.8 MANAGEMENT COMMITTEE "Management Committee" means the committee appointed pursuant to Section 3.1 to administer the Plan. 2.9 PARTICIPANT "Participant" means each individual who participates in the Plan in accordance with Section 4. 2.10 PENSION PLAN "Pension Plan" means the El Paso Energy Corporation Pension Plan and any pension plans maintained by an Employer. 2.11 RSP "RSP" means the El Paso Energy Corporation Retirement Savings Plan. 2.12 SURVIVING SPOUSE "Surviving Spouse" means the person to whom surviving spouse death benefits are to be paid pursuant to the terms of the Pension Plan. SECTION 3 ADMINISTRATION 3.1 MANAGEMENT COMMITTEE This Plan shall be administered by the Management Committee consisting of the Chief Executive Officer of the Company and such other senior officers of the Company as he or she shall designate. Subject to approval by the Board, the Management Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it, select eligible Participants, and take all other action necessary for its administration, which actions shall be final and binding upon all Participants. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 3 Supplemental Benefits Plan 6 SECTION 4 PARTICIPANTS 4.1 PARTICIPANTS The Management Committee shall determine and designate the officers and key management employees of an Employer who are eligible to become Participants and receive benefits under the Plan. Each Participant must be a selected management or highly compensated employee, or entitled to qualified plan benefits in excess of the Code Section 415 limitations on benefits. A Participant who is not a selected management or highly compensated employee shall be eligible only for the benefits described in Sections 5.1(a) and 5.2(a). SECTION 5 BENEFITS 5.1 SUPPLEMENTAL PENSION BENEFITS Upon termination of employment of a Participant, the Company shall pay or cause to be paid to such Participant (or his or her Surviving Spouse in the case of his or her death) supplemental pension benefits under this Plan which, when combined with the amounts he or she is entitled to receive under the Pension Plan shall be the actuarial equivalent of the retirement, or Surviving Spouse death benefits, which would have been payable to the Participant or his or her Surviving Spouse had the Pension Plan's benefit formula been applied: (a) without regard to the limitations of Section 415 of the Code (including, without limitation, the maximum benefit payable under Section 415(b)(1), the actuarial reduction for early retirement of Section 415(b)(2)(C), the reduction for limited service or participation of Section 415(b)(5) and the combined limits of Section 415(e)), (b) by including in the Participant's compensation during the period for which the Pension Plan benefits are computed, to the extent not already done so under the Pension Plan, any amount that has not been taken into account due to the limitations of Section 401(a)(17) of the Code or due to a reduction of compensation that has occurred pursuant to an election of the Participant under Section 125 or Section 401(k) of the Code or under the Deferred Compensation Plans, and (c) by taking into account any service granted to the Participant and any benefit formula adjustments required by an employment contract. Supplemental pension benefits under this Section 5 shall be vested and nonforfeitable to the same extent that the related benefits under the Pension Plan are vested and nonforfeitable. Notwithstanding the preceding sentence, in the event of a - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 4 Supplemental Benefits Plan 7 Change in Control, the supplemental pension benefits computed under this Section 5.1 shall be fully vested and nonforfeitable immediately. 5.2 SUPPLEMENTAL RSP BENEFITS Upon termination of employment of a Participant, the Company shall pay or cause to be paid to such Participant (or his or her Beneficiary in the case of his or her death) supplemental RSP benefits calculated as described below. The Company shall periodically determine the amount of any additional Employer matching contributions that would have been credited to a Participant's account under the RSP if his or her current election of Participant contributions had been given effect and no adjustment of such contributions had occurred due to: (a) The maximum dollar limit under Code Section 415(c)(1)(A) on RSP annual additions, (b) the maximum limit under Code Section 401(a)(17) on the compensation taken into account under the RSP, (c) any further reductions in the compensation taken into account under the RSP as a result of any deferrals of compensation elected by the Participant pursuant to Section 125 or Section 401(k) of the Code or under the Deferred Compensation Plans. From time to time, as determined by the Management Committee, the Company shall allocate amounts equal to such additional Employer matching contributions to a ledger account (the "Memorandum Account") to be established in the El Paso Energy Corporation Deferred Compensation Plan, as it may be amended (the "Deferred Compensation Plan") for the Participant as of the time or times that such amounts would have been contributed to the RSP if permitted thereunder. Interest or earnings/losses, as applicable, will be credited to the balance in each Participant's Memorandum Account on a semi-monthly basis or at such other intervals as may be determined by the Management Committee. The Management Committee shall determine the rate of interest or earnings/losses periodically and in so doing may take into account the earnings, losses, appreciation or depreciation attributable to any discretionary investment made pursuant to Section 6.2, and any other factors it deems appropriate. Notwithstanding any other provision to the contrary, any and all supplemental RSP benefits determined pursuant to this Plan shall be credited to the Deferred Compensation Plan. Supplemental RSP benefits under this Section 5.2 shall be vested and nonforfeitable to the same extent that the related benefits under the RSP are vested and nonforfeitable. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 5 Supplemental Benefits Plan 8 5.3 OTHER SUPPLEMENTAL BENEFITS Upon the termination of employment of a Participant, the Company shall pay or cause to be paid to such Participant (or his or her Beneficiary in the case of his or her death) other supplemental benefits as determined by the Board and contained in the Participant's employment contract or other agreement with the Company. Other supplemental benefits under this Section 5.3 shall be vested and nonforfeitable to the extent provided in the applicable employment contract or agreement. 5.4 TIME AND MANNER OF PAYMENT The payment of any benefits shall be made as provided below. Such payment or payments shall constitute a complete discharge of all obligations to the Participant and his or her Surviving Spouse or Beneficiary under the Plan. (a) Supplemental Pension Benefit Payments. The amount of the payments under this subparagraph 5.4(a) shall be determined pursuant to Section 5.5. (i) The payment of any supplemental benefits pursuant to Section 5.1 owed to a Participant (or his or her Surviving Spouse) shall be made in a lump sum if such Participant (A) terminates employment with the Employer prior to attaining age 55, or (B) dies while employed with the Employer. The payment shall be made as soon as practicable after the Participant's termination of employment with the Employer or death. (ii) In the absence of a valid, irrevocable election made by a Participant pursuant to the provisions described in (iii) below, the payment of any supplemental pension benefits pursuant to Section 5.1 owed to a Participant who terminates employment with the Employer after attaining age 55 shall be made in a lump sum as soon as practicable after the Participant terminates employment with the Employer. The amount of such payments shall be determined under Section 5.5 below. (iii) In the case of a benefit payable under Section 5.1, the Participant may irrevocably elect one of the forms of payment described in (iv) below. Such election must be made by the Participant before the later of (A) the date the Participant attains age 53, or (B) 30 days after becoming a Participant. For such election to become effective, the Participant must remain in continuous active employment with the Employer for at least two years or, in the case of an election made pursuant to clause (B), such Participant must remain in continuous active employment for a minimum of six months following such election. In no event will an election become effective if the Participant terminates - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 6 Supplemental Benefits Plan 9 employment with the Employer prior to attaining age 55, or dies in service. (iv) A Participant may elect only one of the following forms of payment: (A) A lump sum; (B) Monthly payments made over a five-year period, notwithstanding the earlier death of the Participant; (C) Monthly payments made over a ten-year period, notwithstanding the earlier death of the Participant; or (D) Monthly payments made over the remaining life of the Participant. In the case of option (A), payment will be made as soon as practicable after the Participant's termination of employment with the Employer. In the case of (B), (C) and (D), monthly payments will commence as soon as practicable after the Participant's termination of employment with the Employer. (b) Supplemental RSP Benefit Payments. The payment of any supplemental RSP benefits pursuant to Section 5.2 owed to a Participant (or his or her Beneficiary) shall be made in a lump sum as soon as practicable after the Participant's termination of employment with the Employer and shall be in an amount equal to the Participant's Memorandum Account balance at the time of such payment, subject to other applicable terms and conditions of the Deferred Compensation Plan (other than the time and manner of payment). (c) Other Supplemental Benefit Payments. The payment of any other supplemental benefits pursuant to an employment contract or other agreement with the Company under Section 5.3 shall be made as provided in such employment contract or other agreement. 5.5 DETERMINATION OF SUPPLEMENTAL PENSION BENEFIT PAYMENTS The amount of a payment of supplemental pension benefits pursuant to Section 5.1 to a Participant (or his or her Surviving Spouse in the event of the Participant's termination of employment on account of death) shall be determined by calculating the benefit according to the terms of the Pension Plan as a single life annuity. If another form of payment is payable, the amount under such form shall be actuarially equivalent to such single life benefit using the interest rate and mortality assumptions for calculating lump sum distributions under the Pension Plan. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 7 Supplemental Benefits Plan 10 SECTION 6 GENERAL PROVISIONS 6.1 UNFUNDED OBLIGATION The supplemental benefits to be paid to Participants and/or their Surviving Spouses and Beneficiaries pursuant to this Plan are unfunded obligations of the Company, and shall, until actual payment, continue to be part of the general funds of the Company. The Company is not required to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to these obligations. Beneficial ownership of any investments, including trust investments, which the Company may make to fulfill these obligations shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Management Committee or the Employer and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Surviving Spouse or Beneficiary or his or her creditors in any assets of the Employer whatsoever. The Participants and their Surviving Spouses and Beneficiaries shall have no claim against the Employer for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 6.2 DISCRETIONARY INVESTMENT BY COMPANY The Management Committee, after consulting with the actuary employed by the Company in conjunction with the Pension Plan, may from time to time direct the investment by the Company of an amount sufficient to meet all or such portion of the supplemental benefits to be paid under this Plan as the Management Committee, in its sole discretion, shall determine. The Management Committee may in its sole discretion determine that all or some portion of the amount to be invested shall be paid into one or more grantor trusts to be established by the Employer of which it shall be the Beneficiary, and to the assets of which it shall become entitled as and to the extent that Participants (or their Surviving Spouses or Beneficiaries in the case of their deaths) receive benefits under this Plan. The Management Committee may designate an investment advisor to direct investments and reinvestments of the funds, including investments of any grantor trusts hereunder. 6.3 INCAPACITY OF PARTICIPANT, SURVIVING SPOUSE OR BENEFICIARY If the Management Committee finds that any Participant, Surviving Spouse or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payments due (unless a prior claim therefor shall have been made by a duly appointed legal representative) at the discretion of the Management Committee may be paid to the spouse, child, parent or brother or sister of such Participant, Surviving Spouse or Beneficiary, or to any person whom the Management Committee has determined has incurred expense for such Participant, Surviving Spouse or - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 8 Supplemental Benefits Plan 11 Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. 6.4 NONASSIGNMENT The right of a Participant or his or her Surviving Spouse or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 6.5 NO RIGHT TO CONTINUED EMPLOYMENT Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a subsidiary nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 6.6 WITHHOLDING TAXES Provision shall be made for the withholding of taxes under the Federal Insurance Contributions Act as required by regulations and appropriate income taxes shall be withheld from payments made to Participants pursuant to this Plan. 6.7 TERMINATION AND AMENDMENT The Board may from time to time amend, suspend, or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Board may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or increase the obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension or termination may, however, impair the right of a Participant or his or her Surviving Spouse or Beneficiary to receive the supplemental benefits accrued prior to the effective date of such amendment, suspension or termination. The Board of Directors amended and restated the Plan effective as of August 1, 1998, in connection with the reorganization of the Company into a holding company structure whereby El Paso Energy Corporation became the publicly held company and El Paso Natural Gas Company became a wholly owned subsidiary. This Plan was assumed by El Paso Energy Corporation pursuant to an Assignment and Assumption Agreement effective as of August 1, 1998, by and between El Paso Energy Corporation and El Paso Natural Gas Company. If the Plan is terminated, Participants, Surviving Spouses and Beneficiaries who have accrued benefits under the Plan as of the date of termination will receive payment of - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 9 Supplemental Benefits Plan 12 such benefits at the times specified in the Plan. Notwithstanding this or any other provision of the Plan to the contrary, this Plan may not be terminated so long as the Pension Plan and/or RSP remain in effect. 6.8 ERISA EXEMPTION The portion of this Plan providing benefits in excess of the limitations of Section 415 of the Code is intended to qualify for exemption from the Employee Retirement Income Security Act of 1974 ("ERISA") as an unfunded excess benefit plan under Sections 3(36) and 4(b)(5) of ERISA. The portion of this Plan providing benefits in excess of the limitation of Section 401(a)(17) of the Code and other supplemental benefits is intended to qualify for exemption from Parts II, III and IV of ERISA as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. 6.9 APPLICABLE LAW The Plan shall be construed and governed in accordance with the laws of the State Texas. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 10 Supplemental Benefits Plan 13 IN WITNESS WHEREOF, the Company has caused the Plan to be amended and restated effective as of December 3, 1998. EL PASO ENERGY CORPORATION By /s/ Joel Richards III -------------------------------- Title: Executive Vice President ATTEST: By /s/ David L. Siddall ----------------------------------------- Title: Corporate Secretary - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 11 Supplemental Benefits Plan EX-10.J 9 AMENDED DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.J EL PASO ENERGY CORPORATION DEFERRED COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 2 TABLE OF CONTENTS SECTION 1 PURPOSE........................................................................................ 1 1.1 Purpose........................................................................................ 1 SECTION 2 ADMINISTRATION................................................................................. 1 2.1 Management Committee........................................................................... 1 SECTION 3 PARTICIPANTS................................................................................... 1 3.1 Participants................................................................................... 1 SECTION 4 DEFERRALS...................................................................................... 2 4.1 Eligible Compensation.......................................................................... 2 4.2 Deferred Payment of Base Salary................................................................ 2 4.3 Deferred Payment of Cash Incentive Awards...................................................... 3 4.4 Deferred Payment for Performance Units......................................................... 3 4.5 Deferred Payment for Equity Awards............................................................. 3 4.6 Deferred Payment for Amounts Awarded Under Other Plans......................................... 3 4.7 Memorandum Account and Subaccounts............................................................. 4 4.8 Prior Deferrals................................................................................ 5 4.9 Payment of Deferred Eligible Compensation...................................................... 5 4.10 Acceleration of Payment of Deferred Eligible Compensation...................................... 5 SECTION 5 GENERAL PROVISIONS............................................................................. 6 5.1 Unfunded Obligation............................................................................ 6 5.2 Discretionary Investment by Company............................................................ 6 5.3 Beneficiary.................................................................................... 6 5.4 Permanent Disability........................................................................... 7 5.5 Incapacity of Participant or Beneficiary....................................................... 7 5.6 Nonassignment.................................................................................. 7 5.7 No Right to Continued Employment............................................................... 7 5.8 Withholding Taxes.............................................................................. 7 5.9 Termination and Amendment...................................................................... 8 5.10 Applicable Law................................................................................. 8 5.11 Compliance with Securities Laws................................................................ 8 5.12 Source of Common Stock and Adjustments......................................................... 8 5.13 Regulatory Approvals and Listing............................................................... 9
- -------------------------------------------------------------------------------- El Paso Energy Corporation -i- Table of Contents Deferred Compensation Plan 3 EL PASO ENERGY CORPORATION DEFERRED COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 3, 1998 SECTION 1 PURPOSE 1.1 PURPOSE The purpose of the El Paso Energy Corporation Deferred Compensation Plan (the "Plan") is to permit the executives and certain key management employees of El Paso Energy Corporation (the "Company") and its subsidiaries to defer all or some part of their Eligible Compensation (as defined below) in order for the Company to attract and retain exceptional personnel. SECTION 2 ADMINISTRATION 2.1 MANAGEMENT COMMITTEE The Plan shall be administered by a management committee (the "Management Committee") consisting of the Chief Executive Officer and such other senior officers as he or she shall designate. Subject to the Compensation Committee (the "Compensation Committee") of the Company's Board of Directors (the "Board"), the Management Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it, select eligible Participants, and take all other actions necessary for its administration, which actions shall be final and binding upon all Participants. No member of the Management Committee shall vote on any matter that pertains solely to himself or herself. SECTION 3 PARTICIPANTS 3.1 PARTICIPANTS The Management Committee shall determine and designate the executives and key management employees of the Company and its subsidiaries who are eligible to defer Eligible Compensation under the Plan (the "Participants"). Members of the Board who are full-time executives of the Company shall be eligible to participate in the Plan. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 1 Deferred Compensation Plan 4 SECTION 4 DEFERRALS 4.1 ELIGIBLE COMPENSATION For purposes of this Plan the term "Eligible Compensation" means the following: a. "Base Salary" is the Participant's base salary being paid for the year or partial year, exclusive of bonuses or other forms of cash incentive compensation for the year; b. "Cash Incentive Award" is an annual incentive award made under the Company's Incentive Compensation Plan or an annual cash incentive award under a similar annual incentive plan maintained by the Company or a subsidiary of the Company, as applicable; c. Payment for "Performance Units" which are granted pursuant to the Company's Omnibus Compensation Plan or other similar performance unit plan maintained by the Company or a subsidiary of the Company, as applicable; d. "Equity Award" is a Participant's award of nonqualified stock options, stock appreciation rights, restricted stock, or other equity-based compensation granted pursuant to the terms and conditions of the applicable Company plan from which such awards were made; and e. Compensation otherwise payable pursuant to the terms of other plans which the Company or its subsidiaries may from time to time maintain, including but not limited to, the supplemental RSP benefits under the Company's Supplemental Benefit Plan, as may be amended from time to time. 4.2 DEFERRED PAYMENT OF BASE SALARY Prior to January 1 of any year (or, with respect to individuals who first become Participants during a year, on or before the date on which they become Participants) each Participant may elect to have the payment of all or a portion of his or her Base Salary for the year beginning January 1 (or, if later, so much of the year as commences on the day following the date on which the individual becomes a Participant) deferred until his or her retirement, death, Permanent Disability (as defined below), resignation or termination of employment with the Company and its subsidiaries, or until any other specified time that is determined by the Management Committee. The minimum amount that may be so deferred is $1,000. The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. The election shall apply only to that calendar year or partial year. If a Participant has not made an election, the Base Salary paid to him or her for that year shall be paid in accordance with the Company's normal payroll practices. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 2 Deferred Compensation Plan 5 4.3 DEFERRED PAYMENT OF CASH INCENTIVE AWARDS Each Participant may, at such time as the Management Committee may determine, in its sole discretion, elect to have the payment of all or a portion of his or her Cash Incentive Award, if any, for the year deferred until the Participant's retirement, death, Permanent Disability, resignation or termination of employment with the Company and its subsidiaries, or until any other specified time that is determined by the Management Committee. The minimum amount that may be so deferred is $1,000. The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. The election shall apply only to that year. If a Participant has not made an election, any Cash Incentive Award granted to the Participant for that year shall be paid pursuant to the terms of the applicable annual incentive compensation plan under which the award was made. 4.4 DEFERRED PAYMENT FOR PERFORMANCE UNITS Each Participant may, prior to the vesting of Performance Units and in a manner prescribed by the Management Committee, elect to have all or a portion of the lump-sum cash payment payable pursuant to the terms of the applicable omnibus compensation plan or other performance unit plan with respect to vested Performance Units deferred until the Participant's retirement, death, Permanent Disability, resignation or termination of employment with the Company and its subsidiaries or until any other specified time that is determined by the Management Committee. The minimum amount that may be so deferred is $1,000. The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. The election shall apply only to the Performance Units that may become vested with respect to that year. If a Participant has not made an election, any cash payment for Performance Units shall be paid pursuant to the applicable provisions of the plan under which the Performance Units were granted. 4.5 DEFERRED PAYMENT FOR EQUITY AWARDS Each Participant may elect, at a time and in a manner determined by the Management Committee and the plan administrator of the plan from which Equity Awards are granted, to have the payment of all or a portion of such Equity Award deferred until his or her retirement, death, Permanent Disability, resignation or termination of employment with the Company and its subsidiaries, or until any other specified time that is determined by the Management Committee. The election shall be irrevocable and shall be made on a form prescribed or accepted by the Management Committee. If a Participant has not made an election, any Equity Award granted to the Participant shall be paid pursuant to the terms of the applicable Company plan under which the award was made. All Equity Awards deferred shall be credited to the Deferred Stock Account, unless the Management Committee shall, in its sole discretion, otherwise determine. 4.6 DEFERRED PAYMENT FOR AMOUNTS AWARDED UNDER OTHER PLANS Participants may be allowed to irrevocably elect to defer, in the sole discretion of the Management Committee, amounts that would otherwise be payable under any other plan - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 3 Deferred Compensation Plan 6 maintained or which may be maintained by the Company or its subsidiaries. Any such deferrals must be permitted pursuant to the terms of such other plans. If an election is made under another Company plan to have amounts deferred pursuant to the terms of this Plan, the amount initially to be credited as deferred under this Plan shall be determined as provided in the applicable other plan of the Company. Except as otherwise specifically provided in any such other plan, from the date specified in the applicable election (or if no such date is specified then from the date such election is effective) until the date any deferred amount is paid (or otherwise credited back to the applicable plan as provided in applicable provisions of such plan which are acceptable to the Management Committee), the provisions of this Plan shall govern (i) the determination of the value of amounts deferred, including the calculation (and, where applicable, the disposition), of income, expenses, gains and losses to be credited to such deferrals, and (ii) the terms and conditions of the distribution of such deferred amounts. 4.7 MEMORANDUM ACCOUNT AND SUBACCOUNTS The Company shall establish a ledger account (the "Memorandum Account") for each Participant who has elected to defer the payment of any part of his or her Eligible Compensation, for the purpose of reflecting the Company's obligation to pay the deferred amount as provided in Section 4.9. Interest or other income, expense, gain or loss, as applicable, shall accrue on the deferred amount to the date of distribution, and shall be credited to the Memorandum Account at the end of each calendar quarter or such other periods as may be determined by the Management Committee. The Management Committee shall determine the rate of interest or method for determining other income, expense, gain or losses periodically and in so doing may take into account the earnings, losses, appreciation or depreciation attributable to any discretionary investments made pursuant to Section 5.2, including, but not limited to, any investment direction from a Participant regarding amounts credited to his or her Memorandum Account. A Memorandum Account can consist of the following types of subaccounts: a. "Interest Account" means a subaccount that is credited with interest periodically at such times and rates as may be determined by the Management Committee in its sole discretion; b. "Investment Account" means the subaccount that has earnings/losses credited periodically based upon, at least in part, the performance of certain investment funds (and can include any other subaccount other than the Deferred Stock Account) made available from time to time by the Management Committee, in its sole discretion; c. "Deferred Stock Account" means the subaccount that is credited with hypothetical shares of Company common stock, par value three dollars ($3.00) per share ("Common Stock"), and has earnings/losses credited periodically based upon the performance of the Common Stock, including, but not limited to, the reinvestment of dividends and distributions, if any, made on the Common Stock; and d. Such other subaccounts as the Management Committee, in its sole discretion, shall determine to create. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 4 Deferred Compensation Plan 7 4.8 PRIOR DEFERRALS Compensation which was deferred by a Participant under the Company's Incentive Compensation Plan or Omnibus Compensation Plan or a similar plan maintained by the Company's former parent company shall be paid by the Company pursuant to the terms of this Plan. 4.9 PAYMENT OF DEFERRED ELIGIBLE COMPENSATION Upon the retirement, death, Permanent Disability, resignation, designated payment date, or termination of employment of a Participant who has elected to defer any portion of his or her Eligible Compensation for any year, the Company shall pay to such Participant (or his or her Beneficiary in the case of his or her death) an amount equal to the balance of his or her Memorandum Account, plus interest, income, expense, gain or loss, as applicable (at a rate determined by the Management Committee pursuant to Section 4.7), on the outstanding account balance to the date of distribution and subject to approval of the Management Committee, as follows: (a) a lump-sum cash payment; (b) a lump-sum Common Stock distribution, to the extent the Participant has shares of Common Stock credited to his or her Deferred Stock Account (subject to applicable laws and regulations concerning the issuance of such shares of Common Stock); (c) a combination of (a) and (b) above; or (d) in periodic installments (consisting of cash and/or Common Stock (to the extent of the Participant's Deferred Stock Account)) over a period of years to be determined by the Participant at the time the deferral election is made, or as otherwise provided by the Management Committee in its sole discretion. Unless otherwise elected at the time of deferral, payment of deferred amounts shall commence or be made in January of the year following the calendar year in which the Participant retired, died, became Permanently Disabled, resigned, or otherwise terminated employment. 4.10 ACCELERATION OF PAYMENT OF DEFERRED ELIGIBLE COMPENSATION The Management Committee, in its sole discretion, may accelerate the payment of the unpaid balance of a Participant's Memorandum Account in the event of the Participant's retirement, death, Permanent Disability, resignation or termination of employment, or upon its determination that the Participant (or his or her Beneficiary in the case of his or her death) has incurred a severe financial hardship. The Management Committee in making its determination may consider such factors and require such information as it deems appropriate. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 5 Deferred Compensation Plan 8 SECTION 5 GENERAL PROVISIONS 5.1 UNFUNDED OBLIGATION The deferred amounts to be paid to Participants pursuant to this Plan are unfunded obligations of the Company. The Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Beneficial ownership of any investments, including trust investments, which the Company may make to fulfill this obligation shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Management Committee or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 5.2 DISCRETIONARY INVESTMENT BY COMPANY The Management Committee may direct that an amount equal to the deferred amounts shall be invested by the Company as the Management Committee, in its sole discretion, shall determine. The Management Committee may, in its sole discretion, determine that all or some portion of an amount equal to the deferred amounts shall be paid into one or more grantor trusts to be established by the Company of which it shall be the beneficiary, and to the assets of which it shall become entitled as and to the extent that Participants receive benefits under this Plan. The Management Committee may designate an investment advisor(s) to direct investments and reinvestments of funds, including investments of any grantor trusts hereunder, and, subject to Section 4.5, may consider (but shall not be bound by) investment direction from Participants regarding the amounts credited to his or her Memorandum Account. 5.3 BENEFICIARY The term "Beneficiary" shall mean the person or persons to whom payments are to be made pursuant to the terms of the Plan in the event of the Participant's death. The designation shall be on a form provided by the Management Committee, executed by the Participant, and delivered to the Committee. A Participant may change his Beneficiary designation at any time. A designation by a Participant under the Burlington Resources Inc. Deferred Compensation Plan shall remain in effect under this Plan unless it is revoked or changed under this Plan. If no Beneficiary is designated, the designation is ineffective, or in the event the Beneficiary dies before the balance of the Memorandum Account is paid, the balance shall be paid to the Participant's spouse or lineal descendants, to the Participant's estate (unless the Management Committee for a given year has designated investment in an annuity, in which case the payment options selected by the Participant with respect thereto shall govern). - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 6 Deferred Compensation Plan 9 5.4 PERMANENT DISABILITY A Participant shall be deemed to have become disabled for purposes of this Plan if the Management Committee finds, upon the basis of medical evidence satisfactory to it, that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company or any of its subsidiaries and that such disability will be permanent and continuous during the remainder of his or her life. 5.5 INCAPACITY OF PARTICIPANT OR BENEFICIARY If the Management Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefore shall have been made by a duly appointed legal representative) at the discretion of the Committee, may be paid to the spouse, child, parent or brother or sister of such Participant or Beneficiary or to any person whom the Committee has determined has incurred expense for such Participant or Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. 5.6 NONASSIGNMENT The right of a Participant or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 5.7 NO RIGHT TO CONTINUED EMPLOYMENT Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a subsidiary, nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 5.8 WITHHOLDING TAXES Provision shall be made for the withholding of taxes under the Federal Insurance Contributions Act at the time of vesting of benefits under the Plan and appropriate income taxes shall be withheld from payments made to Participants pursuant to this Plan, including if so determined by the Management Committee, with respect to any payment otherwise to be made in the form of Company Common Stock, but not limited to, withholding a sufficient number of shares of Company Common Stock to satisfy the minimum required federal, state and local income and employment tax withholding obligations associated with such distribution; with the value of such shares withheld to be determined by using the fair market value (average of high and low selling prices of the Company Common Stock, as reported in the NYSE-Composite Transactions by The Wall Street Journal) on the day prior to day the distribution is made, or if the New York Stock Exchange is closed on said day, the next succeeding business day. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 7 Deferred Compensation Plan 10 5.9 TERMINATION AND AMENDMENT The Board or the Compensation Committee may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Board or the Compensation Committee may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or the obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension or termination may impair the right of a Participant or his designated beneficiary to receive the deferred compensation benefit accrued prior to the effective date of such amendment, suspension or termination. The Board amended and restated the Plan effective as of December 3, 1998. The Board had previously amended and restated the Plan effective as of August 1, 1998, in connection with the reorganization of the Company into a holding company structure whereby El Paso Energy Corporation became the publicly held company and El Paso Natural Gas Company became a wholly owned subsidiary. This Plan was assumed by El Paso Energy Corporation pursuant to an Assignment and Assumption Agreement effective as of August 1, 1998, by and between El Paso Energy Corporation and El Paso Natural Gas Company. 5.10 APPLICABLE LAW The Plan shall be construed and governed in accordance with the laws of the State of Texas, except to the extent preempted by applicable federal law. 5.11 COMPLIANCE WITH SECURITIES LAWS The Company's intention is that, so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, this Plan shall be operated in compliance with Section 16(b) thereof, and the rules and regulations promulgated thereunder; and, if any Plan provision or transaction is found not to comply with Section 16(b), that provision or transaction, as the case may be, shall be deemed null and void. Notwithstanding anything in the Plan to the contrary, the Management Committee, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are subject to Section 16(b) without so restricting, limiting or conditioning the Plan with respect to other Participants. 5.12 SOURCE OF COMMON STOCK AND ADJUSTMENTS Any shares of Common Stock delivered pursuant to this Plan shall consist of Common Stock held in the Company's treasury or out of authorized but unissued shares of the Company, or partly out of each, as shall be determined by the Management Committee or the Company, as appropriate; provided such shares are available pursuant to original plan from which they were deferred. Shares of Common Stock deferred under this Plan as a result of an Equity Award are subject to the terms and conditions of the plan from which Equity Award was originally granted. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 8 Deferred Compensation Plan 11 In the event of a recapitalization, stock split, stock dividend, exchange of shares, merger, reorganization, change in corporate structure or shares of the Company or similar event, the Board, upon the recommendation of the Management Committee, may make appropriate adjustments in the number of shares credited to each Participant's Deferred Stock Account. 5.13 REGULATORY APPROVALS AND LISTING The Company shall not be required to issue any certificate for shares of Common Stock upon the distribution of Common Stock under the Plan prior to: (a) obtaining any approval or ruling from the Securities and Exchange Commission, the Internal Revenue Service or any other governmental agency which the Company, in its sole discretion, shall determine to be necessary or advisable; (b) listing of such shares on any stock exchange on which the Common Stock may then be listed; or (c) completing any registration or other qualification of such shares under any federal or state laws, rulings or regulations of any governmental body which the Company, in its sole discretion, shall determine to be necessary or advisable. All certificates for shares of Common Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Management Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which Common Stock is then listed and any applicable federal or State securities laws, and the Management Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. The foregoing provisions of this paragraph shall not be effective if and to the extent that the shares of Common Stock delivered under the Plan are covered by an effective and current registration statement under the Securities Act of 1933, as amended, or if and so long as the Management Committee determines that application of such provisions as no longer required or desirable. In making such determination, the Management Committee may rely upon an opinion of counsel for the Company. - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 9 Deferred Compensation Plan 12 IN WITNESS WHEREOF, the Company has caused the Plan to be amended and restated effective as of December 3, 1998. EL PASO ENERGY CORPORATION By /s/ Joel Richards III ----------------------------------- Title: Executive Vice President ATTEST: By /s/ David L. Siddall ------------------------------------- Title: Corporate Secretary - -------------------------------------------------------------------------------- El Paso Energy Corporation Page 10 Deferred Compensation Plan EX-10.M.1 10 AMENDMENT NO.1 TO STRATEGIC STOCK PLAN 1 EXHIBIT 10.M.1 AMENDMENT NO. 1 TO THE STRATEGIC STOCK PLAN Pursuant to Section 14.1 of the El Paso Energy Corporation Strategic Stock Plan, as amended and restated (the "Plan"), the Plan is hereby amended as follows, effective December 3, 1998: The following subsection (k) shall be added to Section 6.2 to read as follows: "(k) Deferral Election A Participant may elect irrevocably (at a time and in the manner determined by the Plan Administrator or the Company, as appropriate) at any time prior to exercising an option granted under the Plan that issuance of shares of Common Stock upon exercise of such option and/or associated stock appreciation right shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. After the exercise of any such option and prior to the issuance of any deferred shares, the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant to the Company's then-existing Deferred Compensation Plan (as it may be further amended) (the "Deferred Compensation Plan"), and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine." The following Section 9.9 shall be added to read as follows: "9.9 A Participant may elect irrevocably (at a time and in the manner determined by the Plan Administrator or the Company, as appropriate), prior to vesting of Restricted Stock, that the Participant relinquishes any and all rights in the shares of Restricted Stock in exchange for an interest in the Deferred Compensation Plan and receipt of such shares shall be deferred until a pre-specified date in the future or until the Participant ceases to be employed by the Company or any of its Subsidiaries, as elected by the Participant. At the time the restrictions lapse on the shares of Restricted Stock (as specified at the time of grant, or otherwise if changed by the Plan Administrator), the number of shares of Common Stock issuable to the Participant shall be credited to the deferred stock account (or such other account(s) as the Management Committee shall deem necessary and appropriate) under a memorandum deferred account established pursuant to the Deferred Compensation Plan, and any dividends or other distributions paid on the Common Stock (or its equivalent) shall be deemed reinvested in additional shares of Common Stock (or its equivalent) until all credited deferred shares shall become issuable pursuant to 2 the Participant's election, unless the Management Committee of the Deferred Compensation Plan shall otherwise determine." The first sentence of Section 12.7 is hereby deleted in its entirety and replaced with the following sentence: "Appropriate provision shall be made for all taxes required to be withheld in connection with the exercise, grant or other taxable event with respect to options, limited stock appreciation rights, stock appreciation rights, Restricted Stock and Performance Units under the applicable laws and regulations of any governmental authority, whether federal, state or local and whether domestic or foreign, including, but not limited to, the required withholding of a sufficient number of shares of Common Stock otherwise issuable to a Participant to satisfy the said required minimum tax withholding obligations." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 3rd day of December, 1998. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III ---------------------------------- Attest: Joel Richards III Executive Vice President /s/ David L. Siddall - ---------------------------------- Corporate Secretary -2- 3 AMENDMENT NO. 2 TO THE STRATEGIC STOCK PLAN Pursuant to Section 14.1 of the El Paso Energy Corporation Strategic Stock Plan, as amended and restated (the "Plan"), the Plan is hereby amended as follows, effective January 20, 1999: The following paragraph shall be added as the last paragraph to Section 6.2(d) to read as follows: "Notwithstanding any other provision in this Plan to the contrary and unless the Plan Administrator shall otherwise determine, in the event of a "cashless" exercise, and for that purpose only under this Plan, a Participant's compensation shall be equal to the difference between the actual sales price received for the underlying Common Stock and the Option Price. For all other purposes under this Plan, the Fair Market Value shall be the value against which compensation is determined." The following sentence shall be added as the last sentence to Section 6.2(e) to read as follows: "In addition, the Plan Administrator may require that a Participant who wants to effectuate a "cashless" exercise of options be required to sell the shares of Common Stock acquired in the associated exercise to the Company, or in the open market through the use of a broker selected by the Company, at such price and on such terms as the Plan Administrator may determine at the time of grant, or otherwise." Section 6.2(f) is hereby deleted in its entirety and replaced with the following: "(f) Nontransferability of Options Options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing and only as provided by the Plan Administrator or the Company, as applicable, options may be transferred to a Participant's immediate family members, directly or indirectly or by means of a trust, corporate entity or partnership (a person who thus acquires this option by such transfer, a "Permitted Transferee"). A transfer of an option may only be effected by the Company at the request of the Participant and shall become effective upon the Permitted Transferee agreeing to such terms as the Plan Administrator may require and only when recorded in the Company's record of outstanding options. In the event an option is transferred as contemplated hereby, the option may not be subsequently transferred by the Permitted Transferee except 4 a transfer back to the Participant or by will or the laws of descent and distribution. A transferred option may be exercised by a Permitted Transferee to the same extent as, and subject to the same terms and conditions as, the Participant (except as otherwise provided herein), as if no transfer had taken place. As used herein, "immediate family" shall mean, with respect to any person, such person's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and shall include adoptive relationships. In the event of exercise of a transferred option by a Permitted Transferee, any amounts due to (or to be withheld by) the Company upon exercise of the option shall be delivered by (or withheld from amounts due to) the Participant, the Participant's estate or the Permitted Transferee, in the reasonable discretion of the Company. In addition, to the extent permitted by applicable law and Rule 16b-3, the Plan Administrator may permit a recipient of a Nonqualified Option to designate in writing during the Participant's lifetime a Beneficiary to receive and exercise the Participant's options in the event of such Participant's death (as provided in Section 6.2(i)). Except as otherwise provided for herein, if any Participant attempts to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan or such option, or suffers the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, all affected options held by such Participant shall be immediately forfeited." IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed on this 20th day of January, 1999. EL PASO ENERGY CORPORATION By: /s/ Joel Richards III ---------------------------------- Attest: Joel Richards III Executive Vice President /s/ David L. Siddall - -------------------------------- Corporate Secretary -2- EX-10.P 11 LETTER AGREEMENT, DATED 05/30/97 1 EXHIBIT 10.P (EL PASO NATURAL GAS LETTERHEAD) January 13, 1995 Mr. William A. Wise Chairman, President and CEO El Paso Natural Gas Company 100 North Stanton Street El Paso, Texas 79901 Dear Bill: This letter relates to shares of restricted stock held by you now or in the future under either the El Paso Natural Gas Company Omnibus Compensation Plan dated as of January 1, 1992, or the El Paso Natural Gas Company 1995 Omnibus Compensation Plan (the "Omnibus Plans"), and as to which restrictions have not lapsed on any applicable date (the "Omnibus Restricted Shares"). This letter also relates to stock options issued under either of the Omnibus Plans and which have not become exercisable on any applicable date (the "Unexercisable Options"). Finally, this letter also relates to additional shares of Restricted Stock to be received by you under the El Paso Natural Gas Company 1995 Incentive Compensation Plan (the "1995 Incentive Plan"). (Capitalized terms not separately defined have the meaning given in the 1995 Incentive Plan.) You may receive such Restricted Stock as an award under Section 7.1(a)(ii) of the 1995 Incentive Plan. You will also have the right under Section 7.2 of the Incentive Plan to elect to have an additional portion of your annual bonus paid in shares of Restricted Stock. In both cases, the number of shares of Restricted Stock set aside for your account will include additional shares of Restricted Stock as described in Section 7.1(c) of the 1995 Incentive Plan. Hereafter, all such shares of Restricted Stock acquired by you under the 1995 Incentive Plan shall be referred to as your "Incentive Plan Restricted Shares." Section 8.5 of the 1995 Incentive Plan provides certain terms relating to the lapse of restrictions on Restricted Stock in the event a participant's employment terminates. However, Section 8.5 also provides that the Plan Administrator may accelerate or defer the lapse of restrictions under that Section. In order to reduce uncertainty to you in connection with the Omnibus Plans or the 1995 Incentive Plan, as well as to encourage you to elect payment of annual bonus in the form of shares of Restricted Stock under Section 7.2 of the 1995 Incentive Plan. The Company hereby agrees that upon termination of your employment due to (i) death, (ii) retirement, (iii) Permanent Disability, (iv) any other involuntary termination without Cause, or (v) any voluntary termination for "Good Reason" as that term is defined in the El Paso Natural Gas Company Key Executive Severance Protection Plan, as Amended and Restated Effective as of January 13, 1995, except that "Good Reason" shall also include loss of your position as Chairman of the Board of Directors otherwise than as a result of a termination of your employment for Cause, or voluntary termination without Good Reason, 2 Mr. William A. Wise January 13, 1995 Page 2 (a) the "Restriction Period" as defined in each of the Omnibus Plans shall lapse, and all restrictions on any Omnibus Restricted Shares shall end, (b) any Unexercisable Option shall become fully exercisable for a period of thirty-six months from the applicable date, unless such Option by its terms expires sooner, and no restrictions shall be placed under either of the Omnibus Plans on the shares acquired therewith, other than such restrictions as may be reasonably determined by the Company to be necessary to comply with applicable laws, and (c) the Restriction Period on your Incentive Plan Restricted Shares shall end and all restrictions shall lapse. The special provisions set forth above have been specifically approved by the Company's Compensation Committee of the Board of Directors, acting as the Plan Administrator under the Omnibus Plans and the 1995 Incentive Plan. Please indicate your understanding of and agreement to the terms set forth above. EL PASO NATURAL GAS COMPANY By: /s/ BEN F. LOVE Ben F. Love, Chairman, Compensation Committee Understood and Agreed: /s/ WILLIAM A. WISE By: /s/ JOEL RICHARDS III William A. Wise Joel Richards III Senior Vice President EX-18 12 LETTER RE: CHANGE IN ACCOUNTING PRINCIPLES 1 EXHIBIT 18 Board of Directors El Paso Energy Corporation 1001 Louisiana Houston, Texas 77002 We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have read management's justification for the change in the measurement date used in accounting for pensions and for other post-retirement benefits other than pensions from December 31 to September 30 reflected in the Company's Form 10-K for the year ended December 31, 1998. Based on our reading of the data and discussions with Company officials about the business judgment and business planning factors relating to the change, we believe management's justification to be reasonable. Accordingly, in reliance on management's determination as regards elements of business judgment and business planning, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. PricewaterhouseCoopers LLP Houston, Texas January 31, 1999 EX-21 13 SUBSIDIARIES OF EPEC 1 EXHIBIT 21 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (Delaware) Cross Country Development L.L.C. (Delaware LLC)................................................................... 50.33% (El Paso Energy Corporation owns 50.33%; unaffiliated parties own 49.67%.) DEEPTECH INTERNATIONAL INC. (Delaware)............................................................................ 100 DeepTech Offshore (Cayman) Ltd. (Cayman)....................................................................... 100 Deepwater Production Systems, Inc. (Texas)..................................................................... 100 FPS I, Inc. (Delaware)..................................................................................... 100 Key Ocean Services, Inc. (Texas)............................................................................... 50 (DeepTech International Inc. owns 50%; unaffiliated parties own 50%.) Leviathan Holdings Company (Delaware).......................................................................... 100 Leviathan Gas Pipeline Company (Delaware).................................................................. 100 Delos Offshore Company, L.L.C. (Delaware LLC).......................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Ewing Bank Gathering Company, L.L.C. (Delaware LLC).................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Flextrend Development Company, L.L.C. (Delaware LLC)................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Green Canyon Pipe Line Company, L.L.C. (Delaware LLC).................................................. 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) West Cameron Dehydration Company, L.L.C. (Delaware LLC)............................................. 50 (Green Canyon Pipe Line Company, L.L.C. owns 50%; an unaffiliated party owns 50%.) Leviathan Gas Pipeline Partners, L.P. ................................................................. 26.6 (Leviathan Gas Pipeline Company owns 26.6%; unaffiliated parties own 73.4%) Delos Offshore Company, L.L.C. (Delaware LLC)...................................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Ewing Bank Gathering Company, L.L.C. (Delaware LLC)................................................ 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Flextrend Development Company, L.L.C. (Delaware LLC)............................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Green Canyon Pipe Line Company, L.L.C. (Delaware LLC).............................................. 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) West Cameron Dehydration Company, L.L.C. (Delaware LLC)......................................... 50 (Green Canyon Pipe Line Company, L.L.C. owns 50%; an unaffiliated party owns 50%.) Leviathan Oil Transport Systems, L.L.C. (Delaware LLC)............................................. 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 8.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Manta Ray Gathering Company, L.L.C. (Delaware LLC)................................................. 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Poseidon Pipeline Company, L.L.C. (Delaware LLC)................................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Poseidon Oil Pipeline Company, L.L.C. (Delaware LLC)............................................ 36 (Poseidon Pipeline Company, L.L.C. owns 36%; Unaffiliated parties own 64%) Sailfish Pipeline Company, L.L.C. (Delaware LLC)................................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Neptune Pipeline Company, L.L.C. (Delaware LLC)................................................. 25.67 (Sailfish Pipeline Company, L.L.C. owns 25.67%; unaffiliated parties own 74.33%)
1 2 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) DEEPTECH INTERNATIONAL INC. (CONTINUED) LEVIATHAN HOLDINGS COMPANY (CONTINUED) LEVIATHAN GAS PIPELINE COMPANY (CONTINUED) LEVIATHAN GAS PIPELINE PARTNERS, L.P. (CONTINUED) SAILFISH PIPELINE COMPANY, L.L.C. (CONTINUED) NEPTUNE PIPELINE COMPANY, L.L.C. (CONTINUED) Manta Ray Offshore Gathering Company, L.L.C. (Delaware LLC)................................... 99 % (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Nautilus Pipeline Company, L.L.C. (Delaware LLC).............................................. 99 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Ocean Breeze Pipeline Company, L.L.C. (Delaware LLC)............................................. 25.67 (Sailfish Pipeline Company, L.L.C. owns 25.67%; unaffiliated parties own 74.33%) Manta Ray Offshore Gathering Company, L.L.C. (Delaware LLC)................................... 1 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Nautilus Pipeline Company, L.L.C. (Delaware LLC).............................................. 1 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Stingray Holding, L.L.C. (Delaware LLC)................................................................. 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Stingray Pipeline Company (Louisiana Partnership)................................................ 50 (Stingray Holding, L.L.C. owns 50%; unaffiliated party owns 50%) Tarpon Transmission Company (Texas)..................................................................... 100 Texam Offshore Gas Transmission L.L.C. (Delaware LLC) .................................................. 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) High Island Offshore System (Delaware GP)........................................................ 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) Western Gulf Holdings, L.L.C. (Delaware LLC)..................................................... 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) East Breaks Gathering Company, L.L.C. (Delaware LLC)........................................... 100 Transco Hydrocarbons Company, L.L.C. (Delaware LLC) .................................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) U-T Offshore System (Delaware GP)................................................................ 33.33 (Transco Hydrocarbons Company, L.L.C. owns 33 1/3%; Unaffiliated companies own 67 2/3%) Transco Offshore Pipeline Company, L.L.C. (Delaware LLC)................................................ 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) High Island Offshore System (Delaware GP)........................................................ 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) Western Gulf Holdings, L.L.C. (Delaware LLC)..................................................... 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) East Breaks Gathering Company, L.L.C. (Delaware LLC)........................................... 100 VK Deepwater Gathering Company, L.L.C. (Delaware LLC)................................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%)
2 3 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) DEEPTECH INTERNATIONAL INC. (CONTINUED) LEVIATHAN HOLDINGS COMPANY (CONTINUED) LEVIATHAN GAS PIPELINE COMPANY (CONTINUED) LEVIATHAN GAS PIPELINE PARTNERS, L.P. (CONTINUED) VK DEEPWATER GATHERING COMPANY, L.L.C. (CONTINUED) Viosca Knoll Gathering Company (Delaware JV)..................................................... 50% (VK Deepwater Gathering Company, L.L.C. owns 50%; EPEC Deepwater Gathering Company owns 50%) VK-Main Pass Gathering Company, L.L.C. (Delaware LLC)............................................... 98.9899 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Leviathan Oil Transport Systems, L.L.C. (Delaware LLC).................................................. 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Manta Ray Gathering Company, L.L.C. (Delaware LLC)...................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Poseidon Pipeline Company, L.L.C. (Delaware LLC)........................................................ 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Poseidon Oil Pipeline Company, L.L.C. (Delaware LLC)................................................ 36 (Poseidon Pipeline Company, L.L.C. owns 36%; Unaffiliated parties own 64%) Sailfish Pipeline Company, L.L.C. (Delaware LLC)........................................................ 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Neptune Pipeline Company, L.L.C. (Delaware LLC).................................................. 25.67 (Sailfish Pipeline Company, L.L.C. owns 25.67%; unaffiliated parties own 74.33%) Manta Ray Offshore Gathering Company, L.L.C. (Delaware LLC)................................ 99 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Nautilus Pipeline Company, L.L.C. (Delaware LLC)........................................... 99 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company owns 1%) Ocean Breeze Pipeline Company, L.L.C. (Delaware LLC)............................................. 25.67 (Sailfish Pipeline Company, L.L.C. owns 25.67%; unaffiliated parties own 74.33%) Manta Ray Offshore Gathering Company, L.L.C. (Delaware LLC)................................ 1 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company, L.L.C. owns 1%) Nautilus Pipeline Company, L.L.C. (Delaware LLC)........................................... 1 (Neptune Pipeline Company, L.L.C. owns 99%; Ocean Breeze Pipeline Company owns 1%) Stingray Holding, L.L.C. (Delaware LLC)................................................................. 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Stingray Pipeline Company (Louisiana Partnership)................................................... 50 (Stingray Holding, L.L.C. owns 50%; Unaffiliated party owns 50%) Texam Offshore Gas Transmission L.L.C. (Delaware LLC) .................................................. 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) High Island Offshore System (Delaware GP)........................................................... 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) Transco Hydrocarbons Company, L.L.C. (Delaware LLC) .................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) U-T Offshore System (Delaware GP)................................................................... 33.33 (Transco Hydrocarbons Company, L.L.C. owns 33 1/3%; Unaffiliated companies own 67 2/3%)
3 4 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) DEEPTECH INTERNATIONAL INC. (CONTINUED) LEVIATHAN HOLDINGS COMPANY (CONTINUED) LEVIATHAN GAS PIPELINE COMPANY (CONTINUED) Transco Offshore Pipeline Company, L.L.C. (Delaware LLC)................................................ 1.0101% (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) High Island Offshore System (Delaware GP)........................................................... 20 (Texam Offshore Gas Transmission L.L.C. owns 20%; Transco Offshore Pipeline Company owns 20%; Unaffiliated parties own 60%) VK Deepwater Gathering Company, L.L.C. (Delaware LLC)................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Viosca Knoll Gathering Company (Delaware JV)........................................................ 50 (VK Deepwater Gathering Company, L.L.C. owns 50%; EPEC Deepwater Gathering Company owns 50%) VK-Main Pass Gathering Company, L.L.C. (Delaware LLC)................................................... 1.0101 (Leviathan Gas Pipeline Partners, L.P., owns 98.9899%; Leviathan Gas Pipeline Company owns 1.0101%) Offshore Gas Marketing, Inc. (Texas)............................................................................. 100 Offshore Gas Processors (Texas).................................................................................. 100 Tatham Offshore Development, Inc. (Delaware)..................................................................... 100 El Paso Energy Capital Trust I (Delaware)............................................................................. 100 El Paso Energy Capital Trust II (Delaware)............................................................................ 100 El Paso Energy Capital Trust III (Delaware)........................................................................... 100 El Paso Energy E.S.T. Company (Delaware).............................................................................. 100 El Paso Energy Finance Company (Delaware)............................................................................. 100 El Paso Energy Foundation (Texas)..................................................................................... 100 El Paso Energy Management Company (Delaware).......................................................................... 100 El Paso Energy Resources Company (Delaware)........................................................................... 100 El Paso Energy Risk Management Company (Delaware)..................................................................... 100 El Paso Energy Service Company (Delaware)............................................................................. 100 El Paso Energy Sports Corporation (Delaware).......................................................................... 100 EL PASO NATURAL GAS COMPANY (Delaware)............................................................................... 100 Border Gas Inc. (Delaware) (a close corp.)....................................................................... 15 (El Paso Natural Gas Company owns 15%; Tennessee Gas Pipeline Company owns 37.5%; unaffiliated parties own 47.50%.) El Paso Development Company (Delaware)........................................................................... 100 El Paso Gas Transportation Company (Delaware).................................................................... 100 El Paso Middle East B.V. (Netherlands)........................................................................... 100 El Paso Mojave Pipeline Co. (Delaware)........................................................................... 100 Mojave Pipeline Company (Texas GP)........................................................................... 50 (El Paso Mojave Pipeline Co. owns 50%; EPNG Mojave, Inc. owns 50%.) Mojave Pipeline Operating Company (Texas)............................................................... 100 El Paso Pipeline Services Company (Delaware) .................................................................... 100 El Paso TransColorado Company (Delaware) ........................................................................ 100 EPEC Energy Argentina S.A. (Argentina) .......................................................................... 7.7 (El Paso Energy International Company owns 92.3%; El Paso Natural Gas Company owns 7.7%) EPNG Mojave, Inc. (Texas) .................................................................................. 100 Mojave Pipeline Company (Texas GP)........................................................................... 50 (EPNG Mojave, Inc. owns 50%; El Paso Mojave Pipeline Co. owns 50%.) Mojave Pipeline Operating Company (Texas) .............................................................. 100 Gasoductos de Chihuahua, S. de R.L. de C.V. (Mexico) ............................................................ 10 (El Paso Natural Gas Company owns 10%; El Paso Energy International Company owns 40%; unaffiliated parties own 50%.)
4 5 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (Delaware).............................................................................. 100 % (El Paso Energy Corporation owns 100% of the issued and outstanding Company Common Stock. Unaffiliated parties own 100% of the Series A Preferred Stock.) East Tennessee Natural Gas Company (Tennessee)..................................................................... 100 EL PASO ENERGY INTERNATIONAL COMPANY (Delaware).................................................................... 100 El Paso Energia Mexico, S.A. de C.V. (Mexico).................................................................. 0.1 (El Paso Energy International Company owns 0.1%; EPEC Gas Latin America Inc. owns 99.9%.) El Paso Energy Asia Corporation (Delaware)..................................................................... 100 El Paso Energy Europe Company (Delaware)....................................................................... 100 El Paso Energy Pittsfield Corporation (Delaware)............................................................... 100 Berkshire Feedline Acquisition L.P. (Massachusetts L.P.).................................................. 50 (El Paso Energy Pittsfield Corporation owns 50%; an unaffiliated party owns 50%.) El Paso Energy Servicios S. de R.L. de C.V. (Mexico)........................................................... 1 (EPED Holding Company owns 99%; El Paso Energy International Company owns 1%.) El Paso Mauritius Power Limited (Mauritius) ................................................................... 100 El Paso Pakistan Power (Private) Limited (Pakistan)....................................................... 99.9 (El Paso Mauritius Power Limited owns 99.9%; Individuals own 0.1%) El Paso Kabirwala Power Ltd. (Cayman Islands)......................................................... 100 Fauji Kabirwala Power Company Limited (Pakistan).................................................. 42.17 (El Paso Kabirwala Power Ltd. owns 42.17%; unaffiliated parties own 57.83%.) EPEC Argentina Corporation (Delaware).......................................................................... 100 EPEC Baja California Corporation (Delaware) ................................................................... 100 EPEC Canada Ltd. (Canada)...................................................................................... 100 EPEC China Inc. (Delaware)..................................................................................... 100 EPEC Energy Argentina S.A. (Argentina)......................................................................... 92.3 (El Paso Energy International Company owns 92.3%; El Paso Natural Gas Company owns 7.7%) EPEC Cayman Islands Company (Cayman Islands).............................................................. 100 Companias Asociadas Petroleraoes S.A. (Argentina)..................................................... 45 (EPEC Cayman Islands Company owns 45%; unaffiliated own 55%.) CAPEX S.A. (Argentina)............................................................................ 55 (Companias Asociadas Petroleraoes S.A. owns 55%; remaining is publicly traded.) Triunion Energy Company (Cayman Islands)...................................................... 38.4 (EPED B Company owns 23.2%; An unaffiliated party owns 38.4% and CAPEX S.A. owns 38.4%) El Paso Energy Argentina Limitada S.A. (Argentina)....................................... 99 (Triunion Energy Company owns 99%; unaffiliated parties own 1%) Triunion Energy Chile A Company (Cayman Islands)......................................... 100 Triunion Energy Inversiones (Chile) Limitada (Chile) ................................. 0.1 (Triunion Energy Pacifico Company owns 99.9%; Triunion Energy Chile A Company owns 0.1%.) Triunion Energy Inversiones Company (Cayman Islands)..................................... 100 Triunion Energy Finance Pacifico Company (Cayman Islands)............................. 100 Triunion Energy Pacifico Company (Cayman Islands)........................................ 100 Triunion Energy Inversiones Pacifico (Chile) Limitada (Chile)......................... 1 (Triunion Energy Pacifico Company owns 1%; Triunion Energy Inversiones (Chile) Limitada owns 99%.) Triunion Energy Inversiones (Chile) Limitada (Chile).................................. 99.9 (Triunion Energy Pacifico Company owns 99.9%; Triunion Energy Chile A Company owns 0.1%.) Triunion Energy Inversiones Pacifico (Chile) Limitada (Chile)................... 99 (Triunion Energy Pacifico Company owns 1%; Triunion Energy Inversiones (Chile) Limitada owns 99%.) EPEC Ethanol Company (Delaware) ............................................................................... 100 EPEC Ethanol Services Company (Delaware) ...................................................................... 100
5 6 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPEC Gas Brazil Corporation (Delaware)........................................................................ 100 % EPIC Gas International Servicos do Brasil Ltda. (Brazil) .................................................. 99.9 (EPEC Gas Brazil Corporation owns 99.9%; El Paso Energy International Company, owns 0.1%.) EPEC Gas Canada Ltd. (Ontario)................................................................................ 100 EPEC Gas Chile Corporation (Delaware)......................................................................... 100 Gas de Chile S.A. (Chile).................................................................................. 50 (EPEC Gas Chile Corporation owns 50%; unaffiliated parties own 50%.) Inversiones EPEC Gas (Chile) Limitada (Chile).............................................................. 99.99 (EPEC Gas Chile Corporation owns 99.99%; EPEC Gas Latin America Inc. owns .01%.) EPEC Gas Latin America Inc. (Delaware)........................................................................ 100 El Paso Energia Mexico, S.A. de C.V. (Mexico).............................................................. 99.9 (EPEC Gas Latin America Inc. owns 99.9%; El Paso Energy International Company owns 0.1%.) Pasotronica, S.A. de C.V. (Mexico)..................................................................... 50 (El Paso Energia Mexico, S.A. de C.V. owns 50%; an unaffiliated party owns 50%.) Inversiones EPEC Gas (Chile) Limitada (Chile).............................................................. 0.01 (EPEC Gas Chile Corporation owns 99.99%; EPEC Gas Latin America Inc. owns .01%.) Gasoducto Transandino S.A. de Argentina (Argentina) ....................................................... 0.01 (EPEC Gas Latin America Inc. owns.01%; Gasoducto Transandino S.A. owns 99.99%) EPEC Gas Services (Chile) Corporation (Delaware).............................................................. 100 EPIC Gas Transportes S.A. (Chile).......................................................................... 99.9 (EPEC Gas Services (Chile) Corporation owns 99.9%; unaffiliated parties own 0.1%.) EPEC Hungary Inc. (Delaware).................................................................................. 100 EPEC Independent Power I Company (Delaware)................................................................... 100 MASSPOWER (Massachusetts G.P.)............................................................................. 17 (EPEC Independent Power I Company owns 17% as general partner; unaffiliated parties own 83%.) EPEC Independent Power II Company (Delaware).................................................................. 100 EPEC International (East Asia/Pacific) Inc. (Delaware)........................................................ 100 EPEC MLP Inc. (Delaware)...................................................................................... 100 Polk Power Partners, L.P. (Delaware L.P.).................................................................. 45.75 (EPEC MLP Inc., as a Limited Partner, owns 45.75%; Polk Power GP, Inc., as General Partner, owns 1%; unaffiliated parties, as Limited Partners, own 53.25%.) EPEC Trinidad LNG, Inc. (Delaware) ........................................................................... 100 EPEC Ventures Bolivia Corporation (Delaware).................................................................. 100 EPEC Ventures Poland Corporation (Delaware)................................................................... 100 Weilkopolska Energia S.A. (Poland)......................................................................... 50 (EPEC Ventures Poland Corporation owns 50%; unaffiliated parties own 50%) EPED Holding Company (Delaware)............................................................................... 100 DBNGP Finance Company L.L.C. (Delaware LLC)............................................................ 50 (EPED Holding Company owns 50%; unaffiliated parties own 50%) El Paso Cayman DBNGP, Ltd. (Cayman Islands)...................................................... 100 El Paso DBNGP Limited (Labuan)............................................................... 100 Epic Energy Australia Trust (Australia)................................................... 33.33 (El Paso DGNGP Limited owns 33.33%; unaffiliated parties own 66.67%) Epic Energy (Australia) Nominees Pty. Ltd. (Australia).................................... 33.33 (El Paso DBNGP Limited owns 33.33%; unaffiliated parties own 66.67%) Epic Energy (WA) Nominees Pty. Ltd. (Australia)........................................ 100 Epic Energy (DBNGP Finance) Pty. Ltd. (Australia)................................. 100 Epic Energy Western Australia Pty. Limited (Australia) ........................... 100 Epic Energy (WA) Investments Pty. Ltd. (Australia)..................................... 100 Epic Energy (WA) Transmission Pty. Ltd. (Australia)............................... 100 Epic Energy (Pilbara Pipeline) Pty. Ltd. (Australia).............................. 100
6 7 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPED HOLDING COMPANY (CONTINUED) DBNGP FINANCE COMPANY L.L.C. (CONTINUED) EPIC ENERGY (AUSTRALIA) NOMINEES PTY. LTD. (CONTINUED) EPIC ENERGY (WA) INVESTMENTS PTY. LTD. (CONTINUED) Dampier to Bunbury Pipeline Employment Pty. Ltd. (Australia).................................. 100 % Epic Energy WA Pipeline Trust (Australia)......................................................... 100 El Paso ECK Holding Company (Delaware).................................................................... 100 Energeticke Centrum Kladno s.r.o. (Czechoslovakia).................................................... 18.55 (El Paso ECK Holding Company owns 18.55%; unaffiliated parties own 81.45%.) El Paso Energy Argentina Service Company (Delaware)....................................................... 100 Servicios El Paso S.R.L. (Argentina).................................................................. 99.9 (El Paso Energy Argentina Service Company owns 99.9%; unaffiliated parties own 0.1%) El Paso Energy Portugal Company (Delaware)................................................................ 100 El Paso Energy Servicios, S. de R.L. de C.V. (Mexico)..................................................... 99 (EPED Holding Company owns 99%; El Paso Energy International owns 1%.) El Paso Kladno B.V. (Netherlands)......................................................................... 100 Matra Powerplant Holding B.V. (Netherlands)........................................................... 35 (El Paso Kladno B.V. owns 35%; unaffiliated parties own 65%.) ECK Generating s.r.o. (Czechoslovakia)............................................................ 89 (Matra Powerplant Holding B.V. owns 89%; unaffiliated parties own 11%.) El Paso Rosarito Company, L.L.C. (Delaware)............................................................... 100 El Paso Sierra Chaco Holding AB (Sweden).................................................................. 100 Empresa Energetica Sierra Chaco S.A. (Bolivia)........................................................ 98 (El Paso Sierra Chaco Holding AB owns 98%; El Paso Sierra Chaco Sweden AB owns 1%; El Paso Sierra Chaco Bolivia AB owns 1%) El Paso Sierra Chaco Sweden AB (Sweden)............................................................... 100 Dynaf Bolivia S.R.L. (Bolivia).................................................................... 10 (El Paso Sierra Chaco Sweden AB owns 10%; El Paso Sierra Chaco Bolivia AB owns 90%) Empresa Energetica Sierra Chaco SA (Bolivia)...................................................... 1 (El Paso Sierra Chaco Holding AB owns 98%; El Paso Sierra Chaco Sweden AB owns 1%; El Paso Sierra Chaco Bolivia AB owns 1%) El Paso Sierra Chaco Bolivia AB (Sweden).............................................................. 100 Dynaf Bolivia S.R.L. (Bolivia).................................................................... 90 (El Paso Sierra Chaco Sweden AB owns 10%; El Paso Sierra Chaco Bolivia AB owns 90%) Empresa Energetica Sierra Chaco SA (Bolivia)...................................................... 1 (El Paso Sierra Chaco Holding AB owns 98%; El Paso Sierra Chaco Sweden AB owns 1%; El Paso Sierra Chaco Bolivia AB owns 1%) EPEC Nederland Holding B.V. (Netherlands)................................................................. 100 El Paso El Sauz B.V. (Netherlands).................................................................... 100 El Paso Energy Hydro Holding B.V. (Netherlands)....................................................... 100 El Paso Energy Ujung Pangdang B.V. (Netherlands)...................................................... 100 El Paso Hermosillo B.V. (Netherlands)................................................................. 100 El Paso Mexico I B.V. (Netherlands)................................................................... 100 El Paso Mexico II B.V. (Netherlands).................................................................. 100 El Paso Northwest Mexico B.V. (Netherlands)........................................................... 100 El Paso Rio Bravo B.V. (Netherlands).................................................................. 100 EPED A Company (Cayman Islands)........................................................................... 100 El Paso Development (Tanzania) Company Limited (Tanzania)............................................. 1 (EPED A Company owns 1%; EPED B Company owns 99%.)
7 8 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPED HOLDING COMPANY (CONTINUED) EPED A COMPANY (CONTINUED) EPED Aguaytia Company (Cayman Islands)............................................................ 99 % (EPED A Company owns 99% and EPED B Company owns 1%.) Aguaytia Energy L.L.C. (Delaware LLC)......................................................... 24.3 (EPED Aguaytia Company owns 24.3%; The Maple Gas Development Corporation owns 16.96%; unaffiliated parties own 58.74%.) Aguaytia Energy del Peru S.R. Ltda. (Peru)................................................ 99 (Aguaytia Energy L.L.C. owns 99%; Peru Energy Holdings L.L.C. owns 1%.) Peru Energy Holdings L.L.C. (Delaware LLC)................................................ 99 (Aguaytia Energy L.L.C. owns 99%; Peru Energy Holdings owns 1%.) Peru Energy Holdings (Cayman Islands).................................................... 100 Peru Energy Holdings L.L.C. (Delaware LLC)........................................... 1 (Peru Energy Holdings owns 1%; Aguaytia Energy L.L.C. owns 99%.) Aguaytia Energy del Peru S.R. Ltda. (Peru)..................................... 1 (Peru Energy Holdings L.L.C. owns 1%; Aguaytia Energy L.L.C. owns 99%.) Latin America Capital L.L.C. (Cayman Islands)................................................ 27.5 (EPED Aguaytia Company owns 27.5%; The Maple Gas Development Corporation owns 16.96%; unaffiliated parties own 55.54%.) EPIC Aguaytia Maple Company (Cayman Islands)...................................................... 100 The Maple Gas Development Corporation (Cayman Islands)........................................ 18.43 (EPIC Aguaytia Maple Company owns 18.43%; unaffiliated parties own 81.57%.) Aguaytia Energy L.L.C. (Delaware) ........................................................ 16.96 (The Maple Gas Development Corporation owns 16.96%; EPED Aguaytia Company owns 24.3%; unaffiliated parties own 58.74%.) Latin America Capital L.L.C. (Cayman Islands) ............................................ 16.96 (The Maple Gas Development Corporation owns 16.96%; EPED Aguaytia Company owns 27.5%; unaffiliated parties own 55.54%.) EPIC Yucatan Pipeline Company (Cayman Islands).................................................... 99 (EPED A Company owns 99%; EPED B Company owns 1%.) EPIC Yucatan S. de R.L. de C.V. (Mexico)...................................................... 99 (EPIC Yucatan Pipeline Company owns 99%; EPED B Company owns 1%.) NEPC Consortium Power Ltd. (Bangladesh)........................................................... 50 (EPED A Company owns 50%; unaffiliated parties own 50%.) EPED Central Chile Corporation (Delaware)............................................................. 100 EPIC Samalayuca A, L.L.C. (Delaware LLC)............................................................. 15 (EPED Holding Company owns 15% and EPED SAM Holdings Company owns 85%.) EPIC Samalayuca B, L.L.C. (Delaware LLC).............................................................. 15 (EPED Holding Company owns 15% and EPED SAM Holdings Company owns 85%.) EPED B Company (Cayman Islands)....................................................................... 100 Arklow Private Ltd. (Mauritius)................................................................... 100 CAYGER Finance Company (Cayman Islands)........................................................... 100 El Paso Development (Tanzania) Company Limited (Tanzania)......................................... 99 (EPED A Company owns 1%; EPED B Company owns 99%.) El Paso Energy CAYGER I Company (Cayman Islands).................................................. 100 El Paso Rio Claro Ltda. (Brazil).............................................................. 99.95 (El Paso Energy CAYGER I Company owns 99.95%; an unaffiliated party owns 0.05%.) El Paso Rio Grande Ltda. (Brazil)............................................................. 99.95 (El Paso Energy CAYGER I Company owns 99.95%; an unaffiliated party owns 0.05%.) El Paso Energy CAYGER II Company (Cayman Islands)................................................. 100 El Paso Energy Brazil Corporation (Cayman Islands)................................................ 100
8 9 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPED HOLDING COMPANY (CONTINUED) EPED B COMPANY (CONTINUED) EL PASO ENERGY BRAZIL CORPORATION (CONTINUED) El Paso Energy International do Brasil Ltda. (Brazil).......................................... 99.9% (El Paso Energy Brazil Corporation owns 99.9%; unaffiliated parties own 0.1%) El Paso Energy East Asia Company (Cayman Islands).................................................. 100 El Paso Energy Gasoducto Company (Cayman Islands).................................................. 100 El Paso Fife I Company (Cayman Islands)............................................................ 100 Fife Power (Scotland).......................................................................... 50 (El Paso Fife I Company owns 50%; unaffiliated parties own 50%.) El Paso Sierra Chaco I Company (Cayman Islands).................................................... 100 EPED Aguaytia Company (Cayman Islands)............................................................. 1 (EPED B Company owns 1% and EPED A Company owns 99%.) EPIC Energy Amazon Company (Cayman Islands)........................................................ 50 (EPED B Company owns 50%; unaffiliated parties own 50%.) El Paso Amazonas Energia Ltda. (Brazil)........................................................ 99.9 (EPIC Energy Amazon Company owns 99.9%; unaffiliated parties own 0.1%) EPIC Mato Grosso Company (Cayman Islands).......................................................... 100 El Paso Empreendimentos e Participacoes Ltda (Brazil) ......................................... 99.9 (EPIC Mato Grosso Company owns 99.9%; unaffiliated parties own 0.1%) EPIC Mato Grosso do Sul Company (Cayman Islands)................................................... 100 EPIC Jordan Company (Cayman Islands)............................................................... 100 EPIC Yucatan Pipeline Company (Cayman Islands).................................................... 1 (EPED B Company owns 1% and EPED A Company owns 99%.) EPIC Yucatan S. de R.L. de C.V. (Mexico)....................................................... 99 (EPIC Yucatan Pipeline Company owns 99%; EPED B Company owns 1%.) EPIC Yucatan S. de R.L. de C.V. (Mexico)........................................................... 1 (EPED B Company owns 1%; EPIC Yucatan Pipeline Company owns 99%) Interenergy Company (Cayman Islands)............................................................... 45 (EPED B Company owns 45%; unaffiliated parties own 55%) Triunion Energy Company (Cayman Islands)........................................................... 23.2 (EPED B Company owns 23.2%; an unaffiliated party owns 38.4% and CAPEX S.A. owns 38.4%) El Paso Energy Argentina Limitada S.A. (Argentina)............................................. 99 (Triunion Energy Company owns 99%; unaffiliated parties own 1%) Triunion Energy Chile A Company (Cayman Islands)............................................... 100 Triunion Energy Inversiones (Chile) Limitada (Chile) ..................................... 0.1 (Triunion Energy Pacifico Company owns 99.9%; Triunion Energy Chile A Company owns 0.1%.) Triunion Energy Inversiones Company (Cayman Islands)........................................... 100 Triunion Energy Finance Pacifico Company (Cayman Islands) ................................ 100 Triunion Energy Pacifico Company (Cayman Islands).............................................. 100 Triunion Energy Inversiones Pacifico (Chile) Limitada (Chile)............................. 1 (Triunion Energy Pacifico Company owns 1%; Triunion Energy Inversiones (Chile) Limitada owns 99%.) Triunion Energy Inversiones (Chile) Limitada (Chile)...................................... 99.9 (Triunion Energy Pacifico Company owns 99.9%; Triunion Energy Chile A Company owns 0.1%.) Triunion Energy Inversiones Pacifico (Chile) Limitada (Chile) ........................ 99 (Triunion Energy Pacifico Company owns 1%; Triunion Energy Inversiones (Chile) Limitada owns 99%.) VEN Energy Holding Company (Cayman Islands)........................................................ 100
9 10 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPED HOLDING COMPANY (CONTINUED) EPED B COMPANY (CONTINUED) VEN Field Services Company (Cayman Islands)....................................................... 50 % (EPED B Company owns 50%; unaffiliated parties own 50%.) EPED SAM Holdings Company (Delaware).................................................................. 100 EPIC Samalayuca A, L.L.C. (Delaware LLC).......................................................... 85 (EPED SAM Holdings Company owns 85%; EPED Holding Company owns 15%) Samalayuca Holding Partnership (Delaware G.P.)................................................ 25 (EPIC Samalayuca A, L.L.C. owns 25% and unaffiliated parties own 75%.) Compania Samalayuca II, S.A. de C.V. (Mexico)............................................ 80 (Samalayuca Holding Partnership owns 80%; EPIC Samalayuca B, L.L.C. owns 10%; an unaffiliated party owns 10%.) Samalayuca Trust (Mexico)............................................................ 100 EPIC Samalayuca B, L.L.C. (Delaware LLC).......................................................... 85 (EPED SAM Holdings Company owns 85%; EPED Holding Company owns 15%.) Compania Samalayuca II, S.A. de C.V. (Mexico)................................................. 10 (EPIC Samalayuca B, L.L.C. owns 10%; Samalayuca Holding Partnership owns 80%; an unaffiliated party owns 10%.) Samalayuca Trust (Mexico)................................................................ 100 SAM II Equity Funding, L.L.C. (Delaware LLC)...................................................... 60 (EPED SAM Holdings Company owns 60%; unaffiliated parties own 40%.) Samalayuca II Management L.L.C. (Delaware LLC).................................................... 50 (EPED Sam Holdings owns 50%; unaffiliated parties own 50%.) Samalayuca II Management, S. de R.L. de C.V. (Mexico)......................................... 98 (Samalayuca II Management L.L.C. owns 98%; EPED Sam Holdings Company owns 1%; and unaffiliated parties own 1%.) Samalayuca II Management, S. de R.L. de C.V. (Mexico)............................................. 1 (EPED Sam Holdings Company owns 1%; Samalayuca II Management L.L.C. owns 98%; unaffiliated parties own 1%.) EPIC Samalayuca A, L.L.C. (Delaware LLC).............................................................. 15 (EPED Holding Company owns 15%; EPED SAM Holdings Company owns 85%) Samalayuca Holding Partnership (Delaware GP)...................................................... 25 (EPIC Samalayuca A, L.L.C. owns 25% and unaffiliated parties own 75%.) Compania Samalayuca II, S.A. de C.V. (Mexico)................................................. 80 (Samalayuca Holding Partnership owns 80%; EPIC Samalayuca B, L.L.C. owns 10%; an unaffiliated party owns 10%.) Samalayuca Trust (Mexico)................................................................ 100 EPIC Samalayuca B, L.L.C. (Delaware LLC).............................................................. 15 (EPED SAM Holdings Company owns 85%; EPED Holding Company owns a 15%.) Compania Samalayuca II, S.A. de C.V. (Mexico)..................................................... 10 (EPIC Samalayuca B, L.L.C. owns 10%; Samalayuca Holding Partnership owns 80%; an unaffiliated party owns 10%.) Samalayuca Trust (Mexico)..................................................................... 100 KLT Power Inc. (Missouri)............................................................................. 100 Central Costanera, S.A. (Argentina)............................................................... 12 (KLT Power Inc. owns 12%; unaffiliated parties own 88%.) Central Termoelectrica Buenos Aires, S.A. (Argentina)......................................... 51.3 (Central Costanera, S.A. owns 51.3%; KLT Power (Bermuda) Ltd. owns 7.8%; unaffiliated parties own 40.9%.) KLT Power (Asia) (Cayman Islands)................................................................. 100 El Paso Guna Power (Mauritius) Limited (Mauritius)............................................ 100 KEI Energy Private Ltd. (India).......................................................... 60 (El Paso Guna Power (Mauritius) Limited owns 60%; unaffiliated parties own 40%.)
10 11 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) EPED HOLDING COMPANY (CONTINUED) KLT POWER INC. (CONTINUED) KLT Power (Bermuda) Ltd. (Bermuda)................................................................. 100 % Central Termoelectrica Buenos Aires, S.A. (Argentina).......................................... 7.8 (Central Costanera, S.A. owns 51.3%; KLT Power (Bermuda) Ltd. owns 7.8%; unaffiliated parties own 40.9%.) KLT Power Latin America (Cayman Islands)........................................................... 100 EPIC Energy Hungary B.V. (Netherlands)...................................................................... 100 Enfield Holdings B.V. (Netherlands).................................................................... 50 (EPIC Energy Hungary B.V. owns a 50% interest; unaffiliated parties own a 50% interest.) Enfield Energy Centre Ltd. (United Kingdom)........................................................ 50 (Enfield Holdings B.V. owns a 50% interest; unaffiliated parties own a 50% interest.) NR Gibraltar (Gibraltar)........................................................................... 100 EMA Power Kft. (Hungary)............................................................................... 50 EPIC Energy Hungary B.V. owns a 50% interest; unaffiliated parties own a 50% interest.) EPIC Gas International Servicos do Brasil Ltda (Brazil)..................................................... 0.1 (El Paso Energy International Company owns 0.1%; EPEC Gas Brazil Corporation owns 99.9%.) Galtee Limited (Cayman Islands)............................................................................. 100 El Paso (Labuan) Limited (Labuan)...................................................................... 100 Epic Energy Pty. Limited (Australia)............................................................... 30 (El Paso (Labuan) Limited owns 30%; unaffiliated parties own 70%.) Epic Energy Australia Pty. Limited (Australia)................................................. 99.95 (Epic Energy Pty. Limited owns 99.95%; Epic Energy Corporate Shared Services owns 0.05%.) Epic Energy Queensland Pty. Limited (Australia)........................................... 100 Epic Energy South Australia Pty. Limited (Australia).................................. 0.02 (Epic Energy Queensland Pty. Limited owns 0.02%; Epic Energy Australia Pty. Limited owns 99.98%.) Epic Energy South Australia Pty. Limited (Australia)...................................... 99.98 (Epic Energy Australia Pty. Limited owns 99.98%; Epic Energy Queensland Pty. Limited owns 0.02%.) Epic Energy Northern Territory Pty. Limited (Australia)........................................ 100 Epic Energy Corporate Shared Services (Australia).............................................. 99.9 (Epic Energy Pty. Limited owns 99.9%; Epic Energy Australia Pty. Limited owns 0.1%.) Epic Energy Australia Pty. Limited (Australia)............................................ 0.05 (Epic Energy Corporate Shared Services owns 0.05%; Epic Energy Pty. Limited owns 99.95%.) Epic Energy Corporate Shared Services (Australia)..................................... 0.1 (Epic Energy Australia Pty. Limited owns 0.1%; Epic Energy Pty. Ltd. owns 99.9%.) Ventures Holdings Pty. Limited (Australia)............................................................. 100 EPIC Sulawesi Gas Pty. Limited (Australia)......................................................... 100 Energy Equity EPIC (Sengkang) Pty. Limited (Australia)......................................... 50 (EPIC Sulawesi Gas Pty. Limited owns 50%; unaffiliated parties own 50%.) Sulawesi Energy Pty Limited (Australia)............................................................ 50 (Ventures Holdings Pty. Limited owns 50%; unaffiliated parties own 50%.) PT Energi Sengkang (Indonesia)................................................................. 95 (Sulawesi Energy Pty. Ltd. owns 95%; unaffiliated parties own 5%.) Gasoductos de Chihuahua, S. de R.L. de C.V. (Mexico)........................................................ 40 (El Paso Energy International Company owns 40%; El Paso Natural Gas Company owns 10%; unaffiliated parties own 50%.) Orange Acquisition, Inc. (Delaware)......................................................................... 100
11 12 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO ENERGY INTERNATIONAL COMPANY (CONTINUED) ORANGE ACQUISITION, INC. (CONTINUED) Orange Cogeneration Limited Partnership (Delaware L.P.)............................................. 49.5% (Orange Acquisition, Inc., as a Limited Partner, owns 49.5%; an unaffiliated party owns 49.5%, as a Limited Partner; and Orange Cogeneration GP, Inc., as General Partner, owns 1%.) Orange Cogeneration Funding Corp. (Delaware)........................................................ 100 Orange Cogeneration GP II, Inc. (Delaware)............................................................. 50 (El Paso Energy International Company owns 50%; an unaffiliated party owns 50%.) Orange Cogeneration G.P., Inc. (Delaware)........................................................... 100 Orange Cogeneration Limited Partnership (Delaware L.P.)........................................ 1 (Orange Cogeneration GP, Inc. owns 1%, as General Partner; Orange Acquisition, Inc., owns 49.5%, as a Limited Partner; an unaffiliated party owns 49.5%, as a Limited Partner.) Polk Power GP II, Inc. (Delaware)...................................................................... 50 (El Paso Energy International Company owns 50%; an unaffiliated party owns 50%.) Polk Power GP, Inc. (Delaware)..................................................................... 100 Polk Power Partners, L.P. (Delaware L.P.)....................................................... 1 (Polk Power GP, Inc., as General Partner, owns 1%; EPEC MLP Inc., as Limited Partner, owns 45.75%; unaffiliated parties, as Limited Partners, own 53.25%.) Sandbar Petroleum Company (Delaware)................................................................... 100 S.K. Petroleum Company (Delaware)...................................................................... 100 West Campus Cogeneration Company (Delaware)............................................................ 100 EL PASO FIELD SERVICES COMPANY (Delaware).................................................................. 100 Cornerstone Gas Gathering Company (Delaware)........................................................... 100 Coyote Gas Treating Limited Liability Company (Colorado LLC)........................................... 50 (El Paso Field Services Company owns 50%; unaffiliated parties own 50%.) Dubach Gas Company (Texas)............................................................................. 100 El Paso Dubach Liquids Pipeline Company (Delaware)..................................................... 100 El Paso Energy Intrastate Company (Delaware)........................................................... 100 Mountain Creek Joint Venture (Texas J.V.).............................................................. 50 (El Paso Energy Intrastate Company owns 50%; unaffiliated parties own 50%.) Oletha Pipeline I, Ltd. (Texas LP)..................................................................... 98 (El Paso Energy Intrastate Company, as Limited Partner, owns 98%; Oletha Pipeline Corporation, as General Partner, owns 2%.) Oletha Pipeline II, Ltd. (Texas LP).................................................................... 98 (El Paso Energy Intrastate Company, as Limited Partner owns 98%; Oletha Pipeline Corporation, as General Partner, owns 2%.) Oletha Pipeline Corporation (Texas).................................................................... 100 Oletha Pipeline I, Ltd. (Texas LP).................................................................. 2 (Oletha Pipeline Corporation, as General Partner, owns 2%; El Paso Energy Intrastate Company, as Limited Partner, owns 98%.) Oletha Pipeline II, Ltd. (Texas LP)................................................................. 2 (Oletha Pipeline Corporation, as General Partner, owns 2%; El Paso Energy Intrastate Company, as Limited Partner, owns 98%.) El Paso New Chaco Company (Delaware)........................................................................ 100 El Paso Offshore Gathering & Transmission Company (Delaware)................................................ 100 Seahawk Transmission Company (Texas).................................................................... 100 EPEC Deepwater Gathering Company (Delaware)................................................................. 100 Viosca Knoll Gathering Company (Delaware J.V.).......................................................... 50 (EPEC Deepwater Gathering Company owns 50%; VK Deepwater Gathering Company owns 50%.) Garvin County Pipeline (Texas J.V.)......................................................................... 33.33 (El Paso Field Services Company, owns 33 1/3%; unaffiliated parties own 66.2/3%) Gulf States Gas Pipeline Company (Delaware)................................................................. 100 Gulf States Pipeline Corporation (Louisiana)............................................................ 100
12 13 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) EL PASO FIELD SERVICES COMPANY (CONTINUED) GULF STATES PIPELINE COMPANY (CONTINUED) GULF STATES PIPELINE CORPORATION (CONTINUED) Gulf States Transmission Corporation (Louisiana)................................................ 100% Oasis Pipe Line Company (Delaware)...................................................................... 35 (El Paso Field Services Company owns 35%; unaffiliated parties own 65%.) Pentex Pipeline Company (Texas)......................................................................... 100 Tembec Company (Texas J.V.)............................................................................. 50 (El Paso Field Services Company owns 50%; unaffiliated parties own 50%.) El Paso Services Holding Company (Delaware)................................................................. 100 EPEC Corporation (Delaware)............................................................................. 100 El Paso Energy Marketing Company (Delaware) ......................................................... 100 Argentina Energy Marketing Company (Cayman Islands)............................................. 100 Eastex Gas Production Company (Delaware)........................................................ 100 (IN DISSOLUTION) Eastex Gas Storage and Exchange, Inc. (Delaware)................................................ 100 Eastex Gas Transmission Company (Delaware)...................................................... 100 (IN DISSOLUTION) El Paso Energy Marketing Canada Inc. (Canada) .................................................. 100 ECNG Inc. (Canada)............................................................................ 100 Inter-City Cogenerating Services Ltd. (Canada) .......................................... 100 El Paso Gas Marketing Company (Delaware)........................................................ 100 Heath Petra Exploration, Inc. (Delaware)........................................................ 100 (IN DISSOLUTION) Heath Petra Resources, Inc. (Delaware).......................................................... 100 Island Sound Commercial Energy Sales, Inc. (Delaware)........................................... 100 Paragon Gas Marketing Company (Delaware) ....................................................... 100 Premier Gas Company (Delaware).................................................................. 100 EPEC Nederland B.V. (Netherlands)..................................................................... 100 Marlin Drilling Co., Inc. (Delaware).................................................................. 100 Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) ........................................... 99.84 (Marlin Drilling Co., Inc. owns 99.84%; Bluefin Supply Company owns 0.16%.) Bluefin Supply Company (Delaware)............................................................... 100 Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) ....................................... 0.16 (Bluefin Supply Company owns 0.16%; and Marlin Drilling Co., Inc. owns 99.84%.) MIDWESTERN GAS TRANSMISSION COMPANY (Delaware)............................................................. 100 EPEC Minerals Company - California (Delaware)............................................................ 100 EPEC Minerals Company - Nevada (Delaware)................................................................ 100 EPEC OCS Company, Inc. (Delaware)........................................................................ 100 EPEC Oil Company (Delaware).............................................................................. 100 (IN DISSOLUTION) EPEC Polymers, Inc. (Delaware)........................................................................... 100 H.T. Gathering Company (Texas)........................................................................... 50 (IN DISSOLUTION) SWL Security Corp. (Texas)............................................................................... 100 (IN DISSOLUTION) Tennessee Overthrust Gas Company (Delaware).............................................................. 100 (IN DISSOLUTION) TGP Corporation (Delaware) 100 (IN DISSOLUTION)
13 14 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) Oil Casualty Insurance Ltd. (Bermuda)....................................................................... 8.14% (El Paso Tennessee Pipeline Co. owns 8.14%; unaffiliated parties own 91.86%.) TENNESSEE GAS PIPELINE COMPANY (Delaware)................................................................... 100 Border Gas Inc. (Delaware) (a close corp.)............................................................... 37.5 (Tennessee Gas Pipeline Company owns 37.5%; El Paso Natural Gas Company owns 15%; unaffiliated parties own 47.5%.) El Paso Energy Holdings Inc. (Delaware).................................................................. 100 Eastern Insurance Company Limited (Bermuda).............................................................. 100 El Paso Energy Portland Corporation (Delaware)........................................................... 100 Portland Natural Gas Transmission System (Maine G.P.)................................................ 17.8 (El Paso Energy Portland Corporation, as General Partner, owns 17.8%; unaffiliated parties own 82.2%.) El Paso Gas Services Company (Delaware).................................................................. 100 El Paso Power Services Company (Delaware)................................................................ 100 Brush Generation Company, L.L.C. (Delaware).......................................................... 100 Colorado Power Partners (Colorado G.P.)........................................................... 1 Morgan Generation Company, L.L.C. owns 99%; Brush Generation Company, L.L.C. owns 1%. El Paso Berkshire Power I Company (Delaware)......................................................... 100 Berkshire Power Company L.L.C. (Massachusetts LLC)............................................... 10 (El Paso Berkshire Power I Company owns 10%; El Paso Berkshire Power II Company owns 80%; an unaffiliated party owns 10%.) El Paso Berkshire Power II Company (Delaware)........................................................ 100 Berkshire Power Company L.L.C. (Massachusetts LLC)............................................... 80 (El Paso Berkshire Power I Company owns 10%; El Paso Berkshire Power II Company owns 80%; an unaffiliated party owns 10%.) El Paso Milford Power I Company (Delaware)........................................................... 100 Milford Power Company L.L.C. (Delaware).......................................................... 5 (El Paso Milford Power I Company owns 5%; El Paso Milford Power II Company owns 90%; and an unaffiliated party owns 5%) El Paso Milford Power II Company (Delaware).......................................................... 100 Milford Power Company L.L.C. (Delaware).......................................................... 90 (El Paso Milford Power I Company owns 5%; El Paso Milford Power II Company owns 90%; and an unaffiliated party owns 5%) Morgan Generation Company, L.L.C. (Delaware)......................................................... 100 Colorado Power Partners (Colorado G.P.).......................................................... 99 Morgan Generation Company, L.L.C. owns 99%; Brush Generation Company, L.L.C. owns 1%. EPEC - Altamont Corporation (Delaware).................................................................. 100 (IN DISSOLUTION) EPEC Chase, Inc. (Texas)................................................................................ 100 (IN DISSOLUTION) EPEC Communications Corporation (Delaware).............................................................. 100 EPEC Delta XII Gas Co., Inc. (Delaware)................................................................. 100 (IN DISSOLUTION) EPEC East Corporation (Delaware)........................................................................ 100 (IN DISSOLUTION) EPEC EIS Company (Delaware)............................................................................. 100 EPEC EIS Canada Ltd. (Alberta) ...................................................................... 100 EPEC Gas Louisiana Inc. (Delaware)...................................................................... 100 (IN DISSOLUTION) Martin Exploration Company (Delaware)................................................................ 100 (IN DISSOLUTION) EPEC Gas Properties Inc. (Delaware)..................................................................... 100 EPEC Gas Services, Inc. (Delaware)...................................................................... 100
14 15 EL PASO ENERGY CORPORATION SUBSIDIARIES AND AFFILIATES AS OF CLOSE OF BUSINESS DECEMBER 31, 1998 EL PASO ENERGY CORPORATION (CONTINUED) EL PASO TENNESSEE PIPELINE CO. (CONTINUED) TENNESSEE GAS PIPELINE COMPANY (CONTINUED) EPEC Liquids Corporation (Delaware).................................................................. 100% (IN DISSOLUTION) EPEC Midwest Corporation (Delaware).................................................................. 100 (IN DISSOLUTION) EPEC MTBE, Inc. (Delaware)........................................................................... 100 (IN DISSOLUTION) EPEC OGS Inc. (Delaware)............................................................................. 100 EPEC Realty, Inc. (Delaware)......................................................................... 100 EPEC Services Company (Delaware)..................................................................... 100 (IN DISSOLUTION) EPEC AIRCO Inc. (Delaware)....................................................................... 100 (IN DISSOLUTION) EPEC OCSPET Inc. (Delaware)....................................................................... 100 (IN DISSOLUTION) EPEC SNG Inc. (Delaware)............................................................................ 100 EPEC Texas Acquisition Inc. (Delaware)............................................................... 100 (IN DISSOLUTION) EPEC West, Inc. (Delaware)........................................................................... 100 EPEC Technology Consulting Services Inc. (Delaware)............................................... 100 EPEC Western Market Center Corporation (Delaware).................................................... 100 The Western Market Center Joint Venture (Wyoming J.V.)............................................ 50 (EPEC Western Market Center Corporation owns 50%; unaffiliated parties own 50%.) EPEC Western Market Center Service Corporation (Delaware)............................................ 100 Land Ventures, Inc. (Delaware)....................................................................... 100 Midwestern Gas Marketing Company (Delaware).......................................................... 100 Mont Belvieu Land Company (Delaware)................................................................. 100 New Midwestern Inc. (Delaware)....................................................................... 100 Tennessee Gas Transmission Company (Delaware)........................................................ 100 Tennessee Storage Company (Delaware)................................................................. 100 Bear Creek Storage Company (Louisiana Partnership)................................................ 50 (Tennessee Storage Company, as General Partner, owns 50%; unaffiliated parties own 50%.) Bear Creek Capital Corporation (Delaware)..................................................... 100 Travis Place Parking Garage Inc. (Delaware).......................................................... 100 Mt. Franklin Insurance Ltd. (Bermuda)........................................................................ 100
15 EX-23 14 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of El Paso Energy Corporation (the "Company") on Form S-3 (File Nos. 333-42713 and 333-61039) and the registration statements of the Company on Form S-8 (File Nos. 333-26813, 333-26823, 333-26831, 33-46519, 33-49956, 33-51851 and 33-57553) of our report dated March 9, 1999, on our audits of the consolidated financial statements and the financial statement schedule of the Company as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Houston, Texas March 9, 1999 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS. 1,000,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 90 0 733 0 49 1,209 7,341 0 10,069 2,162 2,552 0 0 373 1,735 10,069 0 5,782 0 5,276 0 0 267 377 127 225 0 0 0 225 1.94 1.85 Not separately identified in the consolidated financial statements or accompanying notes thereto. Represents basic earnings per share.
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