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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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 1-9864
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EL PASO TENNESSEE PIPELINE CO.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0233548
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 757-2131
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
----- -----------
Common Stock, par value $.01 per
share, as of August 12, 1997 1,000 shares
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
DEFINITIONS
-----------
Company................... El Paso Tennessee Pipeline Co. and its subsidiaries
Court of Appeals.......... United States Court of Appeals for the District of Columbia
Circuit
Distributions............. Various intercompany transfers and distributions which
restructured, divided and separated the businesses, 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 businesses were spun-off to
Old Tenneco's then existing common stockholders
EPG....................... El Paso Natural Gas Company, unless the context otherwise
requires
EPTPC..................... El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an
indirect subsidiary of El Paso Natural Gas Company
FERC...................... The Federal Energy Regulatory Commission
GSR....................... Gas supply realignment
Merger.................... The acquisition of El Paso Tennessee Pipeline Co. by El Paso
Natural Gas Company in December 1996
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 El Paso Natural Gas Company
PCB(s).................... Polychlorinated biphenyl(s)
PRP(s).................... Potentially responsible party(ies)
SFAS...................... Statement of Financial Accounting Standards
TGP....................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
SECOND QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Operating revenues................ $785 $626 $1,474 $1,380
------ ---- ------- ------
Operating expenses................
Cost of gas and other
products..................... 590 400 1,053 886
Operation and maintenance....... 95 123 187 253
Finance charges................. -- 16 -- 33
Depreciation, depletion, and
amortization................. 34 38 77 79
Taxes, other than income
taxes........................ 14 14 29 31
------ ---- ------- ------
733 591 1,346 1,282
------ ---- ------- ------
Operating income.................. 52 35 128 98
------ ---- ------- ------
Other (income) and expense
Interest and debt expense....... 35 28 70 63
Gain on sale of assets, net..... -- -- -- (42)
Other -- net.................... (11) (32) (19) (43)
------ ---- ------- ------
24 (4) 51 (22)
------ ---- ------- ------
Income before income taxes........ 28 39 77 120
Income taxes...................... 11 15 30 47
------ ---- ------- ------
Net income........................ $ 17 $ 24 $ 47 $ 73
====== ==== ======= ======
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
Current assets
Cash and temporary investments............................ $ 14 $ 14
Accounts and notes receivable, net........................ 879 956
Inventories............................................... 36 42
Deferred income tax benefit............................... 48 67
Other..................................................... 242 218
------ ------
Total current assets.............................. 1,219 1,297
Property, plant, and equipment, net......................... 4,389 3,952
Other....................................................... 448 506
------ ------
Total assets...................................... $6,056 $5,755
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 673 $ 578
Short-term borrowings (including current maturities of
long-term debt)........................................ 432 715
Note payable to EPG....................................... 125 170
Accrual for regulatory issues............................. -- 167
Other..................................................... 501 356
------ ------
Total current liabilities......................... 1,731 1,986
------ ------
Long-term debt, less current maturities..................... 1,127 1,150
------ ------
Deferred income taxes....................................... 1,088 769
------ ------
Other....................................................... 691 616
------ ------
Commitments and contingencies (See Note 2)
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, par value $0.01 per share; 6,000,000 shares
issued; stated at liquidation value................... 300 296
Series B, par value $0.01 per share; 3,036,600 shares
issued; stated at liquidation value................... 152 --
Common stock, par value $0.01 per share; authorized 1,000
shares; issued 1,000 shares............................ -- --
Additional paid-in capital................................ 938 938
Retained earnings......................................... 29 --
------ ------
Total stockholders' equity........................ 1,419 1,234
------ ------
Total liabilities and stockholders' equity........ $6,056 $5,755
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The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
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POST- PRE-
ACQUISITION ACQUISITION
CONSOLIDATED COMBINED
Cash flows from operating activities
Net income................................................ $ 47 $ 73
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 77 79
Net gain on sale of assets............................. -- (42)
Deferred income tax expense (benefit).................. 185 (2)
Working capital changes................................ (90) (224)
Other.................................................. (39) (58)
------- -----
Net cash provided by (used in) operating
activities...................................... 180 (174)
------- -----
Cash flows from investing activities
Capital expenditures...................................... (31) (164)
Investment in equity securities........................... (42) --
Increase in cash funding from EPG......................... 45 --
Collection of note receivable from partnership............ 53 --
Net proceeds from disposal of businesses and assets....... 1 278
Other..................................................... 6 4
------- -----
Net cash provided by investing activities......... 32 118
------- -----
Cash flows from financing activities
Net proceeds from long-term debt issuance................. 883 --
Net proceeds from Series B Preferred Stock issuance....... 150 --
Revolving credit (repayments) borrowings.................. (1,183) 164
Repayment of note payable to EPG.......................... (45) --
Retirement of long-term debt.............................. -- (292)
Issuance of Old Tenneco common and treasury shares........ -- 46
Purchase of Old Tenneco common stock...................... -- (122)
Redemption of Old Tenneco preferred stock................. -- (20)
Dividends paid on preferred and common stock.............. (12) (158)
Net cash contribution from affiliates..................... -- 289
Other..................................................... (5) --
------- -----
Net cash used in financing activities............. (212) (93)
------- -----
Increase (decrease) in cash and temporary investments....... -- (149)
Cash and temporary investments
Beginning of period............................... 14 249
------- -----
End of period..................................... $ 14 $ 100
======= =====
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The 1996 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated and combined
financial statements at June 30, 1997, and for the six months and quarters ended
June 30, 1997, and 1996, are unaudited. The condensed consolidated balance sheet
at December 31, 1996, is derived from audited financial statements. The Company
has restated its historical financial statements for the six months and quarter
ended June 30, 1996, to reflect the Distributions. These financial statements do
not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all material adjustments necessary to
present fairly the results of operations for such periods have been included.
All such adjustments are of a normal recurring nature. Results of operations for
any interim period are not necessarily indicative of the results of operations
for the entire year due to the cyclical nature of the Company's businesses.
Financial statements for the previous periods include certain reclassifications
which were made to conform to current presentation. Such reclassifications have
no effect on reported net income or stockholders' equity.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to manage price risks
associated with certain energy commodities and interest and foreign currency
exchange rates. In its price risk management activities, the Company engages in
both trading and non-trading activities. The financial instruments used include
swap agreements, futures, options and hedge contracts.
Activities for trading purposes generally consist of services provided to
the energy sector and are accounted for using the mark-to-market method. Such
trading activities are conducted through a variety of financial instruments,
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.
Under mark-to-market accounting, financial instruments with third parties
are reflected at estimated market value, with resulting unrealized 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 other current assets
and other current liabilities 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 and notes receivable, net,
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 settlement of transactions occur.
The market prices used to value these financial instruments reflect
management's best estimate considering various factors including 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.
Activities for non-trading purposes consist of transactions entered into by
the Company to hedge the impact of market fluctuations on assets, liabilities,
production, or other contractual commitments. In order to meet the requirements
of a hedge, the transactions must be designated as a hedge, meet certain
correlation criteria, and reduce price risk. The Company uses forwards, swaps,
and other contracts to hedge the impact of market fluctuations. Changes in the
market value of these financial instruments are deferred until the gains or
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losses on the hedged item are recognized. Cash inflows and outflows are
recognized in operating cash flow as the settlement of transactions occurs. Upon
maturity, the gain or loss on derivatives designated as a hedge is recognized
when the underlying transaction gain or loss is recognized. When the underlying
asset being hedged is sold, deferred gains or losses are recognized at the time
of the sale of the underlying asset. Deferred gains or losses are also
recognized at the time it becomes probable that an anticipated transaction or a
portion thereof will not occur.
2. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery by TGP of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). On April 16, 1997, FERC
approved the settlement and TGP implemented the settlement on May 1, 1997. Under
the terms of the GSR Stipulation and Agreement, TGP will be entitled to collect
from customers a total of up to $770 million, of which approximately $647
million has been collected as of June 30, 1997. TGP is entitled to recover
additional transition costs, up to the remaining $123 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provides for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and provides an escalating
rate cap, indexed to inflation, through October 2005, for certain of TGP's
customers.
In January 1995, FERC accepted TGP's rate case which was filed in December
1994, suspended its effectiveness for the maximum period of five months pursuant
to the normal regulatory process, and set the matter for hearing. On July 1,
1995, TGP began collecting rates, subject to refund, reflecting an $87 million
increase in TGP's annual revenue requirement. A stipulation was filed with an
Administrative Law Judge in this proceeding in April 1996. This stipulation
resolves the rates that are the subject of the December 1994 rate case,
including a structural rate design change that results in a larger proportion of
TGP's transportation revenues being dependent upon throughput. In October 1996,
FERC approved the stipulation with certain modifications and clarifications
which are not material. In January 1997, FERC issued an order denying requests
for rehearing of the October 1996 order. Under the stipulation, TGP's refund
obligation was approximately $185 million, inclusive of interest, of which $161
million was refunded to customers in March and June 1997 with the remaining $24
million refund obligation offset against GSR recoveries in accordance with
particular customer elections. TGP had provided a reserve for these rate refunds
as revenues were collected. One party to the rate proceeding, a competitor of
TGP, filed with the Court of Appeals a Petition for Review of the FERC orders
approving the stipulation. The Company believes the FERC orders will be upheld.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding Administrative Law Judge the issue of proper allocation of TGP's
New England lateral costs. In the July 1997 order on rehearing, FERC clarified
among other things, that although the ultimate resolution as to the proper
allocation of costs will be applied retroactively to July 1, 1995, the cost of
service settlement does not allow TGP to recover from other customers amounts
that TGP may ultimately be required to refund. TGP will seek rehearing of this
order. Management believes that the resolution of this issue will not have a
material impact on the financial position or results of operations of the
Company.
Environmental Matters
As of June 30, 1997, the Company had a reserve of approximately $204
million related to the environmental assessments and remediation activities
discussed below.
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Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances on the United States
Environmental Protection Agency List of Hazardous Substances, at compressor
stations and other facilities operated by both its interstate and intrastate
natural gas pipeline systems. 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 that the recorded estimate for the
reserve is adequate.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
established 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. This
shipper filed a Petition of Review in April 1996 in the Court of Appeals; TGP
believes the FERC order approving the Environmental Stipulation will be upheld
on appeal. The Environmental Stipulation was effective July 1, 1995. As of June
30, 1997, a balance of $37 million remains to be collected under this agreement.
The Company and certain of its subsidiaries have been designated, have
received notice that they should be designated, or have been asked for
information to determine whether they should be designated as a PRP with respect
to 27 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 the
payment of the Company's allocable share of remediation costs. Because the
clean-up costs are estimates and are subject to revision as more information
becomes available about the extent of remediation required, the Company's
estimate of its share of remediation costs could change. Moreover, liability
under the federal Superfund statute is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of remediation
costs if other parties are unable to pay. 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 recorded estimate for the reserve associated with
the Superfund sites is adequate.
In addition, the Company has identified a number of formerly owned or
leased sites, and certain other sites associated with its discontinued
operations, where environmental remediation may be required. The Company
presently believes that the recorded estimate for the reserve associated with
these sites is adequate.
Legal Proceedings
In July 1996, TGP was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District Court for
the District of Columbia (the "Court"). The plaintiff filed this action under
the False Claims Act against most interstate pipelines and others alleging that
the defendants mismeasured natural gas produced from federal and Indian land,
which deprived the United States of royalties otherwise due it. Among other
things, the plaintiff sought to recover unspecified treble damages on behalf of
the United States. The plaintiff also sought to recover his finder's fee and
attorneys' fees. In response to motions filed by most defendants, the Court, in
March 1997, issued an order dismissing the complaint. TGP cannot predict what
action the plaintiff will take in response to the Court's order. Based on
information available at this time, TGP does not believe that the ultimate
resolution of this matter will have a materially adverse effect on the Company's
financial position or results of operations.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
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 its Kentucky stations from the agency, and continues to
work to resolve the remaining issues.
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Management believes that the resolution of this issue will not have a materially
adverse effect on the Company's financial position or results of operations.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial position
or results of operations.
3. FINANCING TRANSACTIONS
The Company had short-term borrowings, excluding current maturities of
short-term debt, at June 30, 1997 and December 31, 1996, of $417 million and
$700 million, respectively.
At December 31, 1996, EPTPC had an additional $900 million outstanding
under its credit facility which was classified as long-term debt because it was
expected to be refinanced with long-term debt during the first quarter of 1997.
In March 1997, TGP closed the sale of $300 million aggregate principal of
7 1/2% debentures due 2017, $300 million aggregate principal of 7% debentures
due 2027, and $300 million aggregate principal 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.
During the first six months of 1997, EPTPC made payments of $150 million on
its credit facility out of internally generated cash flows.
4. PREFERRED STOCK
In March 1997, EPTPC issued to EPG 3,036,600 shares of Series B Preferred
Stock. The Series B Preferred Stock is not convertible into shares of any other
class or series of stock of the Company and it has no maturity date. The holder
of the Series B Preferred Stock is entitled to receive cash dividends payable
annually at the rate of 8 1/2 percent of the stated value of $50 per share. On
or after December 31, 2001, the Series B Preferred Stock is redeemable at the
option of EPTPC, in whole or in part, upon not less than 30 days' notice at a
redemption price of $50 per share, plus unpaid dividends. Proceeds of
approximately $150 million were used to pay down EPTPC's credit facility.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 1997, and December 31, 1996,
consisted of the following:
1997 1996
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost..................... $2,336 $2,371
Less accumulated depreciation and depletion................. 57 --
------ ------
2,279 2,371
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,110 1,581
------ ------
Total property, plant, and equipment, net......... $4,389 $3,952
====== ======
The increase in additional acquisition cost assigned to plant is a result
of the Company's continuing efforts to evaluate the fair market value of the
assets and liabilities acquired in conjunction with the Merger.
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6. INVENTORIES
Inventories at June 30, 1997, and December 31, 1996, consisted of the
following:
1997 1996
------ ------
(IN MILLIONS)
Materials and supplies...................................... $ 19 $ 19
Gas in storage.............................................. 17 23
------ ------
$ 36 $ 42
====== ======
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
7. 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
those accounting methods used by non-regulated entities. Changes in the
regulatory and economic environment may, at some point in the future, create
circumstances in which the application of regulatory accounting principles would
no longer be appropriate. During the first quarter of 1997, FERC approved TGP's
GSR Stipulation and Agreement (discussed previously in Rates and Regulatory
Matters of Note 2). The Company is currently evaluating the impact the FERC
approval may have on the continued application of regulatory accounting
principles. If these accounting principles should no longer be applied, an
amount would be charged to earnings as an extraordinary item in accordance with
SFAS No. 101, Regulated Enterprises -- Accounting for Discontinuation of
Application of SFAS No. 71. At June 30, 1997, this amount was estimated to be
approximately $47 million, net of income taxes. Any potential charge would be
non-cash and would not have a direct effect on the regulated companies' ability
to seek recovery of the underlying deferred costs in their future rate
proceedings or on their ability to collect the rates set thereby.
8. RECENT PRONOUNCEMENTS
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. This pronouncement applies only to entities with publicly
held common stock and, therefore, does not apply to EPTPC.
Capital structure
In March 1997, the Financial Accounting Standards Board issued SFAS No.
129, Disclosure of Information about Capital Structure, which consolidates
capital structure reporting requirements previously required by other accounting
standards. This pronouncement, which will become effective for reporting periods
ending after December 15, 1997, will have no impact on the Company's disclosure
of capital structure information.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of this pronouncement.
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Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This pronouncement
is effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the impact of this pronouncement.
Derivative Disclosure
The Securities and Exchange Commission recently issued Financial Reporting
Release No. 48, Disclosure of Derivative and Other Financial Instruments, which
requires enhanced disclosure related to accounting policies for derivatives and
quantitative and qualitative disclosure concerning market risk inherent in
derivatives and other financial instruments.
The effective date for the enhanced-accounting policy disclosure
requirements is for fiscal periods ending after June 15, 1997 (see Note 1). The
requirements for quantitative and qualitative disclosures about market risks are
effective for the Company for December 31, 1997. The Company is currently
evaluating the impact of this pronouncement.
Other
The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, and
Statement of Position No. 96-1, Environmental Remediation Liabilities, effective
January 1, 1997. These pronouncements did not have a material impact on the
Company's financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
REGULATED OPERATIONS
SECOND QUARTER SIX MONTHS
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Operating revenues......... $189 $187 $404 $400
Operating expenses......... 117 138 252 280
------ ---- ------ ----
Operating income........... $ 72 $ 49 $152 $120
====== ==== ====== ====
Second Quarter 1997 Compared to Second Quarter 1996
Operating revenues for the quarter ended June 30, 1997, were $2 million
higher than for the same period of 1996. The increase was primarily due to new
system rates on TGP which went into effect November 1, 1996.
Operating expenses for the quarter ended June 30, 1997, were $21 million
lower than for the same period of 1996, primarily due to lower labor and benefit
costs attributable to a reduction in staffing levels which occurred throughout
the latter half of 1996 and the first quarter of 1997, as well as lower legal
costs and operating and maintenance costs. The decrease in operating expenses
was partially offset by an increase in depreciation expense as a result of the
amortization of additional acquisition cost assigned to utility plant.
Six Months Ended 1997 Compared to Six Months Ended 1996
Operating revenues for the six months ended June 30, 1997, were $4 million
higher than for the same period of 1996. The increase was primarily due to new
system rates on TGP which went into effect November 1, 1996.
Operating expenses for the six months ended June 30, 1997, were $28 million
lower than for the same period of 1996, primarily due to lower labor and benefit
costs attributable to a reduction in staffing levels which occurred throughout
the latter half of 1996 and the first quarter of 1997, as well as lower legal
costs and operating and maintenance costs. The decrease in operating expenses
was partially offset by an increase in depreciation expense as a result of the
amortization of additional acquisition cost assigned to utility plant.
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NON-REGULATED OPERATIONS
SECOND QUARTER SIX MONTHS
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Gathering and treating
margin................... $ 2 $ 2 $ 4 $ 5
Processing margin.......... -- -- 3 1
Marketing margin........... (1) 3 7 11
Other...................... 2 35 2 77
------ ---- ------ ----
Total gross
margin......... 3 40 16 94
Operating expenses......... 23 54 40 116
------ ---- ------ ----
Operating loss............. $(20) $(14) $(24) $(22)
====== ==== ====== ====
Second Quarter 1997 Compared to Second Quarter 1996
Total gross margin (revenue less cost of sales) and operating expenses were
both lower for the quarter ended June 30, 1997, than for the same period of 1996
primarily due to the discontinuance of Tenneco Credit Corporation (now renamed
El Paso Energy Credit Corporation) commercial activities and the sale of certain
businesses in the fourth quarter of 1996. These sales included the Company's oil
and gas exploration, production and financing unit, formerly known as Tenneco
Ventures, and 70 percent of the Company's interests in two natural gas pipeline
systems in Australia. Following the sale, the Australian natural gas pipelines
operations were accounted for by the equity method. As part of the continuing
effort to integrate the businesses of EPG and the Company subsequent to the
Merger, substantially all the marketing business of EPG's marketing subsidiaries
was transferred to the Company's marketing subsidiaries effective April 1, 1997.
The marketing margin loss is associated with generally lower industry-wide gas
marketing margins.
Six Months Ended 1997 Compared to Six Months Ended 1996
Total gross margin and operating expenses were both lower for the six
months ended June 30, 1997, than for the same period of 1996 primarily due to
the discontinuance of Tenneco Credit Corporation (now renamed El Paso Energy
Credit Corporation) commercial activities and the sale of certain businesses in
the fourth quarter of 1996. These sales included the Company's oil and gas
exploration, production and financing unit, formerly known as Tenneco Ventures,
and 70 percent of the Company's interests in two natural gas pipeline systems in
Australia. Following the sale, the Australian natural gas pipelines operations
were accounted for by the equity method. The decrease in marketing margin is
associated with generally lower industry-wide gas marketing margins in the
second quarter of 1997, as well as extreme market volatility which negatively
impacted natural gas marketing activities and trading positions during the first
quarter.
OTHER INCOME AND EXPENSE
Second Quarter 1997 Compared to Second Quarter 1996
Other expense for the quarter ended June 30, 1997, was $28 million higher
than for the same period of 1996. The increase was due primarily to a favorable
legal settlement in the second quarter of 1996.
Six Months Ended 1997 Compared to Six Months Ended 1996
Other expense for the six months ended June 30, 1997, was $73 million
higher than for the same period of 1996. The increase was due primarily to the
recognition in 1996 of a previously deferred gain on the sale of certain
investments, a gain on the sale of the Company's 50 percent general partnership
interest in Tenneco Mobile Bay Gathering Co. in February 1996, a reduction in
equity income from unconsolidated subsidiaries, a favorable legal settlement in
the second quarter of 1996, and a reduction of other income in 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Cash From Operating Activities
Net cash provided by operating activities was $180 million for the six
months ended June 30, 1997, compared to $174 million net cash used in operating
activities for the same period of 1996. The change was due primarily to an
income tax refund in 1997, higher tax payments in 1996, and other working
capital changes. The increase was partially offset by a rate refund made to
TGP's customers in the first quarter of 1997 and proceeds from a 1996 legal
settlement.
Cash From Investing Activities
Net cash provided by investing activities was $32 million for the six
months ended June 30, 1997, compared to $118 million for the same period of
1996. The change was due primarily to the net proceeds received in the first
quarter of 1996 from the sale of the Company's 50 percent interest in Kern River
Gas Transmission Company. In addition, the first six months of 1997 include
expenditures related to the acquisition of a 50 percent interest in a power
plant located in Hungary and the acquisition of an additional 5 percent interest
in Oasis Pipeline Company bringing the Company's ownership interest to 35
percent. The decrease was partially offset by the collection of a note
receivable from the Company's partnership in a 103 MW cogeneration plant near
Bartow, Florida, return of funds invested with EPG, and a reduction in capital
expenditures during 1997. Capital expenditures were higher in 1996 due to the
construction of the Australian pipeline.
Future funding for capital expenditures, acquisitions, and other investing
expenditures are expected to be provided by internally generated funds,
available credit facilities and/or contributions from EPG.
Cash From Financing Activities
Net cash used in financing activities was $212 million for the six months
ended June 30, 1997, compared to $93 million for the same period of 1996. The
change was primarily a result of credit facility repayments in 1997. Funds used
to repay the credit facility were provided by internally generated cash flows,
the proceeds received from TGP's debt offering, and EPTPC's Series B Preferred
Stock offering in the first quarter of 1997.
Future funding for long-term debt retirements, dividends, and other
financing expenditures will be provided by internally generated funds, available
credit facilities and/or contributions from EPG.
COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Legal Proceedings
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Environmental Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
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15
OTHER
Ongoing and Future Investment and Capital Projects
Significant events during the first six months of 1997 impacting the
Company's development projects are discussed below.
International Operations
Australia Project. The Company's 30 percent owned Australian joint venture
was selected to construct the 270 mile expansion project on the Dampier to
Bunburry natural gas pipeline in Western Australia at an estimated cost of $250
million. The joint venture is evaluating project financing options and
anticipates completion of financing in early 1998. The expansion project is
expected to be operational in the third quarter of 1999.
Hungary Project. The Company's $26 million acquisition of a 50 percent
interest in an operating 70 MW power plant located in Dunaujvaros, Hungary,
closed in the second quarter of 1997. The acquisition did not involve any
financing. Political risk insurance has been obtained from the Overseas Private
Investment Corporation.
Natural Gas Transmission Operations
Eastern Express Project. TGP has announced that is it pursuing various
market and expansion opportunities in the northeast and mid-Atlantic regions of
the United States. TGP held an open season, which concluded in June 1997, to
gauge interest in the TGP Eastern Express Project designed to provide service to
these markets in 1999. TGP is pursuing discussions with customers that
participated in the open season to determine if their needs can be met by TGP.
The Company also announced a second phase of the Eastern Express Project to meet
the needs of shippers that expressed interest in alternate markets and/or
service commencing in the year 2000.
Liquefied Natural Gas Peaking Service Joint Venture. The new venture,
Continental States Peaking Services L.L.C., will be equally owned by TGP and MCN
Investment Corporation, a subsidiary of MCN Energy Group Inc. The proposed $40
to $50 million project would provide liquefaction, storage and vaporization
services at a facility to be built on the Delmarva Peninsula, near Delaware's
border with Maryland. The project's size, and feasibility will be based upon the
results of an open season. Services are expected to begin in early 2000.
DOMAC Lateral Project. TGP proposes to construct a meter station and
pipeline extension from DOMAC's liquefied natural gas plant in Everett,
Massachusetts to a point on TGP's existing Revere Lateral in Saugus,
Massachusetts. TGP will transport up to 90,000 decatherms per day from the
liquefied natural gas plant to customers on the TGP system. The estimated total
cost of the proposed facilities is $26 million.
Field and Merchant Services Operations
Viosca Knoll. During the second quarter of 1997, Viosca Knoll Gathering
Company, the Company's fifty-fifty joint venture with a subsidiary of Leviathon
Gas Pipeline Partners, L.P., announced its intent to construct, at a cost of $25
million, additional facilities to accommodate incremental capacity requirements
on its system, including a new 25 mile, 20-inch diameter pipeline from Main Pass
Block 261 to Viosca Knoll Block 817. Construction is expected to be completed by
the fourth quarter of 1997.
Purchase Price Allocation
The Company is continuing to evaluate the fair market value of the assets
and liabilities acquired in conjunction with the Merger. Management believes
that the final adjustments to the purchase price allocation will not have a
material impact on the Company's financial position or results of operations.
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16
Accounting for Regulated Operations
The Company's interstate pipelines are subject to the regulations and
accounting procedures of FERC, and therefore, continue to follow the reporting
and accounting requirements of SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. For a further discussion, see Part I, Financial
Information, Note 7, which is incorporated herein by reference.
Recent Pronouncements
See Part I, Financial Information, Note 8, which is incorporated by
reference herein.
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17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains 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, the Company cautions 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, the Company or its
management expresses 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.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
Highly Competitive Industry
The ability to maintain or increase current transmission, gathering,
processing, and sales volumes, or to remarket unsubscribed capacity, can be
subject to the impact of future weather conditions, including those that favor
other alternative energy sources; price competition; drilling activity and
supply availability; and service competition. Future profitability also may be
affected by the Company's ability to compete with the services offered by other
energy enterprises which may be larger, offer more services, and possess greater
resources. The ability of TGP to negotiate new contracts and to renegotiate
existing contracts (70 percent of which are expiring over the next four years,
principally in November 2000) could be adversely affected by the proposed
construction by other parties of additional pipeline capacity in the Northeast
U.S., the viability of the Company's expansion projects, reduced demand due to
higher gas prices, the availability of alternative energy sources, and other
factors that are not within its control.
Impact of Natural Gas and Natural Gas Liquids Prices
The value of natural gas transmission services is based on an all-in cost,
including the cost of the natural gas. Therefore, the Company's ability to
compete with other transporters is impacted by natural gas prices in the supply
basins connected to its pipeline systems compared to prices in other gas
producing regions, especially Canada. Additionally, revenues generated by the
Company from its 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. Fluctuations in energy prices are caused by a number of
factors, including regional, domestic and international 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.
Use of Derivative Financial Instruments
In the ordinary course and conduct of its business, some of the Company's
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. The Company could incur financial losses in future periods as a
result of volatility in the market values of the underlying commodities or if
one of its counterparties fails to perform under a contract.
Acquisitions and Investments
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
15
18
effects of, and changes in, U.S. and foreign trade and monetary policies, laws
and regulations, political and economic developments, inflation rates, and the
effects of taxes and operating conditions. Activities in areas outside the U.S.
also 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 legal and regulatory delays
and other unforeseeable obstacles may be beyond the Company's control or ability
to manage.
Potential Environmental Liabilities
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, regulation and
enforcement polices 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.
Operating Hazards and Uninsured Risks
While the Company maintains 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 the
Company.
Potential Liabilities Related to the Merger
The amount of the actual and contingent liabilities of EPTPC, which
remained the liabilities of the Company after the Merger, could vary materially
from the amount estimated by the Company, 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 the Company, under certain legal theories which may or may not be
applicable to the situation, to assume responsibility for such obligations,
which could have a material adverse effect on the Company.
Uncertainty Surrounding Integration of Operations
The Company has begun to integrate the business and operations of EPTPC and
its subsidiaries to increase operating and administrative efficiency through
consolidation and reengineering of facilities, workforce reductions and
coordination of purchasing, sales and marketing activities. Management
anticipates that the complementary interstate and intrastate pipeline operations
and energy marketing activities of the combined company should provide increased
operating flexibility and access to additional customers and markets, although
the amount and timing of the realization of such benefits will depend upon the
Company's ability to integrate successfully the businesses and operations of the
companies, and the time period over which such integration is effected.
Potential Federal Income Tax Liabilities
In connection with the Merger and Distributions, the Internal Revenue
Service issued a private letter ruling to Old Tenneco, in which the Internal
Revenue Service ruled that for U.S. federal income tax purposes (i) 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,
(ii) the Merger would constitute a tax-free reorganization, and (iii) that
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.
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19
Refinancing and Interest Rate Exposure Risks
The business and operating results of the Company 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 the Company, or credit ratings.
Potential for Changes in Accounting Standards
Authoritative generally accepted accounting principles or policy changes
from such standard setting bodies as the Financial Accounting Standards Board,
FERC, and the Securities and Exchange Commission may affect the Company's
results of operations or financial position.
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20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
EPTPC held its annual meeting of stockholders on April 22, 1997. Proposals
presented for a stockholders vote included the election of one director by
holders of EPTPC's 8 1/4% Cumulative Preferred Stock Series A and the election
of five directors by EPG, the sole holder of EPTPC's Common Stock.
The one director nominated to be elected by the holder of EPTPC's 8 1/4%
cumulative Preferred Stock Series A was elected with the following voting
results:
FOR WITHHELD
--------- --------
Kenneth L. Smalley ......................................... 5,275,700 0
Each of the five directors nominated to be elected by the common
shareholder were elected with the following voting results:
FOR WITHHELD
----- --------
William A. Wise............................................. 1,000 0
H. Brent Austin ............................................ 1,000 0
Joel Richards III........................................... 1,000 0
Briton White, Jr............................................ 1,000 0
Jeffrey I. Beason........................................... 1,000 0
There were no broker non-votes for the election of directors.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 -- Financial Data Schedule.
Undertaking
The undersigned, EPTPC, hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of EPTPC and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPTPC and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO TENNESSEE PIPELINE CO.
Date: August 13, 1997 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: August 13, 1997 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
19
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INDEX TO EXHIBITS
EXHIBIT
NUMBER
-------
27 Financial Data Schedule