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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 SEPTEMBER 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 November 13, 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:
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)
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Operating revenues................ $851 $616 $2,325 $1,996
------ ---- ------- ------
Operating expenses
Cost of gas and other
products..................... 642 391 1,695 1,277
Operation and maintenance....... 101 98 288 351
Finance charges................. -- 18 -- 51
Depreciation, depletion, and
amortization................. 32 43 109 122
Taxes, other than income
taxes........................ 14 14 43 45
------ ---- ------- ------
789 564 2,135 1,846
------ ---- ------- ------
Operating income.................. 62 52 190 150
------ ---- ------- ------
Other (income) and expense
Interest and debt expense....... 34 38 104 101
(Gain) loss on sale of assets,
net.......................... -- 5 -- (37)
Other -- net.................... (13) (27) (32) (69)
------ ---- ------- ------
21 16 72 (5)
------ ---- ------- ------
Income before income taxes........ 41 36 118 155
Income tax expense................ 16 13 46 59
------ ---- ------- ------
Income before extraordinary
item............................ 25 23 72 96
Extraordinary item................ -- (1) -- (1)
------ ---- ------- ------
Net income........................ $ 25 $ 22 $ 72 $ 95
====== ==== ======= ======
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
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
Current assets
Cash and temporary investments............................ $ 30 $ 14
Accounts and notes receivable, net........................ 856 956
Inventories............................................... 31 42
Deferred income tax benefit............................... 41 67
Other..................................................... 310 218
------ ------
Total current assets.............................. 1,268 1,297
Property, plant, and equipment, net......................... 4,692 3,952
Other....................................................... 390 506
------ ------
Total assets...................................... $6,350 $5,755
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 655 $ 578
Short-term borrowings (including current maturities of
long-term debt)........................................ 478 715
Note payable to EPG....................................... 125 170
Accrual for regulatory issues............................. -- 167
Other..................................................... 545 356
------ ------
Total current liabilities......................... 1,803 1,986
------ ------
Long-term debt, less current maturities..................... 1,082 1,150
------ ------
Deferred income taxes....................................... 1,200 769
------ ------
Other....................................................... 808 616
------ ------
Commitments and contingencies (See Note 2)
Minority interest........................................... 25 --
------ ------
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......................................... 42 --
------ ------
Total stockholders' equity........................ 1,432 1,234
------ ------
Total liabilities and stockholders' equity........ $6,350 $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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ -----------
POST- PRE-
ACQUISITION ACQUISITION
CONSOLIDATED COMBINED
Cash flows from operating activities
Net income................................................ $ 72 $ 95
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 109 122
Net gain on sale of assets............................. -- (37)
Deferred income tax expense (benefit).................. 227 (5)
Working capital changes................................ (172) (198)
Other.................................................. (35) (273)
------- -----
Net cash provided by (used in) operating
activities...................................... 201 (296)
------- -----
Cash flows from investing activities
Capital expenditures...................................... (60) (267)
Investment in joint ventures and equity investees......... (44) (41)
Repayment of advances from EPG............................ 103 --
Collection of note receivable from partnership............ 53 --
Net proceeds from disposal of businesses and assets....... 9 283
Investment in annuity..................................... (42) --
Other..................................................... 14 10
------- -----
Net cash provided by (used in) investing
activities...................................... 33 (15)
------- -----
Cash flows from financing activities
Net proceeds from long-term debt issuance................. 883 --
Net proceeds from Series B Preferred Stock issuance....... 150 --
Revolving credit borrowings (repayments).................. (1,183) 1,004
Repayment of note payable to EPG.......................... (45) --
Retirement of long-term debt.............................. -- (367)
Issuance of Old Tenneco common and treasury shares........ -- 105
Purchase of Old Tenneco common stock...................... -- (149)
Redemption of Old Tenneco preferred stock................. -- (20)
Dividends paid on preferred and common stock.............. (19) (236)
Net cash distribution to affiliates....................... -- (240)
Other..................................................... (4) --
------- -----
Net cash provided by (used in) financing
activities...................................... (218) 97
------- -----
Increase (decrease) in cash and temporary investments....... 16 (214)
Cash and temporary investments
Beginning of period............................... 14 249
------- -----
End of period..................................... $ 30 $ 35
======= =====
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 balance sheet at
December 31, 1996, is derived from audited financial statements. The condensed
consolidated and combined financial statements at September 30, 1997, and for
the nine months and quarters ended September 30, 1997, and 1996, are unaudited.
The Company has restated its historical financial statements for the nine months
and quarter ended September 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.
Accounting for the Acquisition by EPG
On December 12, 1996, EPG acquired the Company through a business
combination accounted for as a purchase. To effect the purchase, a preliminary
allocation of the purchase price was assigned to the Company's assets and
liabilities acquired by EPG pending an analysis and assessment of the exposure
to contingencies assumed in the acquisition, as well as other components of the
purchase price allocation. As of September 30, 1997, EPG had substantially
completed its analysis and, accordingly, the Company had made adjustments for
certain contingencies including, among other things, litigation, environmental,
and regulatory issues. In addition, an independent appraisal of the fair value
of the physical properties acquired, which supports the allocation to the
property, plant and equipment of the Company's interstate pipeline systems, was
completed in September 1997. The Company plans to finalize all adjustments in
the fourth quarter of 1997.
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 consist of services provided to the energy
sector and 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 settlements 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, 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 receivable and accounts
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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 value of these financial instruments reflects 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 such, 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
losses on the hedged item are recognized. When the underlying asset being hedged
is sold, deferred gains or losses are recognized at the time of such sale.
Deferred gains or losses are also recognized at the time it becomes probable
that an anticipated hedged transaction or a portion thereof will not occur. Cash
inflows and outflows are recognized in operating cash flow as the settlement of
transactions occurs.
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 is entitled to collect from
customers a total of up to $770 million, of which approximately $665 million has
been collected as of September 30, 1997. TGP is entitled to recover additional
transition costs, up to the remaining $105 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 provide 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 April 1996, TGP filed with FERC a settlement that resolves the rates
that are the subject of TGP's December 1994 rate case. The settlement included a
structural rate design change that results in a larger portion 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 1997 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 has filed a Petition for
Review with the Court of Appeals and a request for rehearing of the FERC order
on
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this issue. 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.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996 showing a cumulative loss of $11 million that would be
rolled forward to the next cashout period pursuant to its tariff. In October
1997, FERC issued an order requesting additional information and justification
from TGP as to its cashout methodology and reports. Management believes that the
resolution of this issue will not have a material impact on the financial
position or the results of operations of the Company.
Environmental Matters
In connection with EPG's assessment of its exposure to contingencies
assumed in the acquisition of EPTPC, the reserve for certain environmental
assessments and remediation activities has been increased by approximately $40
million in the third quarter of 1997 to $244 million as of September 30, 1997
(see Note 1).
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.
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
September 30, 1997, a balance of $32 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 could 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.
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.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
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 that the recorded
estimate for the reserve is adequate.
Legal Proceedings
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,
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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. 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 September 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.
In October 1997, EPG established a new $750 million 5-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"). EPTPC and TGP are also parties to the Revolving Credit
Facility. Initially, the interest rate on amounts outstanding under the
Revolving Credit Facility will be a 32.5 basis point spread over LIBOR and the
spread will vary based on EPG's long-term debt credit rating. 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
refinanced under the 5-year portion of the new Revolving Credit Facility with
TGP designated as the borrower.
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.
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5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1997, and December 31,
1996, consisted of the following:
1997 1996
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost..................... $2,391 $2,371
Less accumulated depreciation and depletion................. 87 --
------ ------
2,304 2,371
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,388 1,581
------ ------
Total property, plant, and equipment, net......... $4,692 $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 (see Note 1).
6. INVENTORIES
Inventories at September 30, 1997, and December 31, 1996, consisted of the
following:
1997 1996
------ ------
(IN MILLIONS)
Materials and supplies...................................... $ 19 $ 19
Gas in storage.............................................. 12 23
------ ------
$ 31 $ 42
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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. MINORITY INTEREST
At the end of the second quarter, the Company acquired for $26 million a 50
percent legal interest and controlling voting interest in a company that owns
and operates a 70 MW power plant located in Dunaujvaros, Hungary. During the
third quarter the Company began consolidating this investment. Accordingly, the
assets and liabilities of the acquired company are reflected in the Consolidated
Balance Sheets, while the equity not owned by the Company is included in
minority interest in the Consolidated Balance Sheets. Revenues and expenses of
the acquired company are reflected in the Consolidated Statements of Income.
Contractually, the Company is entitled to receive 100 percent of the income of
the acquired company, and the other equity owners are income participants only
to the extent they receive reduced electricity rates; therefore, no minority
interest is presented in the Consolidated Statements of Income.
8. 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 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 and the current
economic environment may have on the continued application of regulatory
accounting principles. If the Company's regulated businesses fail to qualify
under these accounting principles, an amount would be charged to earnings as an
extraordinary item in accordance with SFAS No. 101, Regulated
Enterprises -- Accounting for
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Discontinuation of Application of SFAS No. 71. At September 30, 1997, this
amount was estimated to be approximately $17 million, net of income taxes. Any
potential charge would be non-cash and would not directly effect the regulated
companies' ability to seek recovery of the underlying deferred costs in their
future rate proceedings or their ability to collect the rates set thereby.
9. 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.
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
In February 1997, the Securities and Exchange Commission 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).
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. The adoption of 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
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Operating revenues......... $186 $188 $590 $588
Operating expenses......... 118 115 371 395
------ ---- ------ ----
Operating income........... $ 68 $ 73 $219 $193
====== ==== ====== ====
Third Quarter 1997 Compared to Third Quarter 1996
Operating revenues for the quarter ended September 30, 1997, were $2
million lower than for the same period of 1996. The decrease was primarily due
to a milder 1996-1997 winter heating season which affected the timing as well as
the quantity of customer summer storage activity during the third quarter of
1997.
Operating expenses for the quarter ended September 30, 1997, were $3
million higher than for the same period of 1996, primarily due to an increase in
depreciation expense as a result of the amortization of additional acquisition
cost assigned to utility plant, as well as new lower fuel retention rates that
took effect in the second quarter of 1997. Offsetting the increase were 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.
Nine Months Ended 1997 Compared to Nine Months Ended 1996
Operating revenues for the nine months ended September 30, 1997, were $2
million higher than for the same period of 1996 primarily due to new system
rates on TGP which went into effect November 1, 1996. The increase was offset by
lower revenues due to a milder 1996-1997 winter heating season which affected
the timing as well as the quantity of customer summer storage activity during
the third quarter of 1997.
Operating expenses for the nine months ended September 30, 1997, were $24
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, as
well as new lower fuel retention rates effective during the second quarter of
1997.
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NON-REGULATED OPERATIONS
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED CONSOLIDATED COMBINED
Gathering and treating
margin................... $ 5 $ 3 $ 9 $ 8
Processing margin.......... -- 2 3 3
Marketing margin........... 12 6 19 17
Other...................... 6 26 9 103
--- --- --- ----
Total gross
margin......... 23 37 40 131
Operating expenses......... 29 58 69 174
--- --- --- ----
Operating loss............. $ 6 $21 $29 $ 43
=== === === ====
Third Quarter 1997 Compared to Third Quarter 1996
Total gross margin (revenue less cost of sales) and operating expenses were
both lower for the quarter ended September 30, 1997, than for the same period of
1996 primarily due to the discontinuance of Tenneco Credit Corporation's (now
renamed El Paso Energy Credit Corporation) commercial activities and the sale of
certain businesses in the fourth quarter of 1996 whose revenues and expenses are
included in the 1996 amounts. 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 increase is associated with higher volumes from the assignment
of contracts and generally higher industry-wide gas marketing margins in the
third quarter of 1997. In addition, partially offsetting the decline in gross
margin was the consolidation during the third quarter of 1997 of the Hungary
project described in Note 7.
Nine Months Ended 1997 Compared to Nine Months Ended 1996
Total gross margin and operating expenses were both lower for the nine
months ended September 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 whose revenues and expenses are included in the 1996
amounts. 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 increase in marketing margin is associated with generally
higher volumes from the assignment of contracts and higher industry-wide gas
marketing margins in the third quarter of 1997. Partially offsetting this
increase was lower marketing margins in the second quarter associated with lower
industry-wide gas margins, as well as extreme market volatility which negatively
impacted natural gas marketing activities and trading positions during the first
quarter. In addition, partially offsetting the decline in gross margin was the
consolidation during the third quarter of 1997 of the Hungary project described
in Note 7.
OTHER INCOME AND EXPENSE
Third Quarter 1997 Compared to Third Quarter 1996
Other expense for the quarter ended September 30, 1997, was $5 million
higher than for the same period of 1996. The increase was due primarily to a
decrease in interest income in the third quarter of 1997 offset by a loss on the
sale of assets in the third quarter of 1996.
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Nine Months Ended 1997 Compared to Nine Months Ended 1996
Other expense for the nine months ended September 30, 1997, was $77 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 in the nine months ended
September 30, 1997, a favorable legal settlement in the second quarter of 1996,
and a decrease in interest income in the nine months ended September 30, 1997
offset by a loss on sale of assets during the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash From Operating Activities
Net cash provided by operating activities was $201 million for the nine
months ended September 30, 1997, compared to $296 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 $33 million for the nine
months ended September 30, 1997, compared to $15 million used in investing
activities for the same period of 1996. The change was due primarily to 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. Offsetting
the increase in cash provided by investing activities was 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 nine months of
1997 include expenditures related to the acquisition of a 50 percent interest in
a power plant located in Hungary, the acquisition of an additional 5 percent
interest in Oasis Pipeline Company bringing the Company's ownership interest to
35 percent, and the purchase of an annuity in the third quarter of 1997 to be
used to fund the monthly demand requirement of a long-term gas supply contract.
Future funding for capital expenditures, acquisitions, and other investing
expenditures are expected to be provided by internally generated funds,
available credit facilities, the issuance of other long-term debt or equity,
and/or contributions from EPG.
Cash From Financing Activities
Net cash used in financing activities was $218 million for the nine months
ended September 30, 1997, compared to $97 million provided by financing
activities 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.
In October 1997, EPG established a new $750 million 5-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"). EPTPC and TGP are also parties to the Revolving Credit
Facility. Initially, the interest rate will be a 32.5 basis point spread over
LIBOR and the spread will vary based on EPG's long-term credit rating. 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 5-year portion of the new Revolving Credit
Facility with TGP designated as the borrower.
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Future funding for long-term debt retirements, dividends, and other
financing expenditures will be provided by internally generated funds, available
credit facilities, the issuance of long-term debt or equity, 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.
OTHER
The Company intends to continue pursuing strategic acquisition and
investment opportunities. The timing, size, or success of any acquisition
effort, and the associated potential capital commitments, cannot be predicted.
The Company may fund future acquisitions and investments with internally
generated funds, available capacity under existing credit facilities, the
issuance of other long-term debt or equity, and/or contribution from EPG.
Ongoing and Future Investment and Capital Projects
Significant events during the first nine 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.
Sulawesi Project. The Sengkang power plant began single cycle commercial
operations in September 1997, making it the first independent power plant to
operate in Indonesia. The plant has passed all performance and commissioning
tests, and is dispatching at a 100 percent load factor. Combined cycle
completion is expected in the third quarter of 1998.
Natural Gas Transmission Operations
Portland. TGP owns a 17.8 percent interest in Portland Natural Gas
Transmission System ("Portland"), a partnership formed to construct and own a
292-mile interstate natural gas pipeline that will extend from the Canadian
border in the town of Pittsburg, New Hampshire to Westbrook, Maine, and then to
Haverhill and Dracut, Massachusetts. Portland will link the growing gas markets
of the northeastern United States to the abundant gas supplies of western
Canada. Portland received its FERC certificate in September 1997, and is now
awaiting the approval of Canada's National Energy Board, expected in February
1998, for the extension of the TransQuebec & Maritimes Pipeline, which will
connect Portland with
13
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the TransCanada system. Targeted completion date for Portland is November 1998,
at an estimated total cost of $366 million. Portland is in the process of
securing non-recourse debt financing with an expected February 1998 financial
closing.
Eastern Express Project. TGP has announced that it is 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.
Express 500 Expansion Project. The Express 500 project is designed to meet
the growing needs of the Gulf of Mexico producers caused by significant
increases in deepwater production, and will provide a firm transportation
solution to existing and projected bottlenecks in the Gulf of Mexico supply
basin. TGP is soliciting shipper interest in an open season that will end
December 31, 1997. Service under Express 500 is scheduled to commence as early
as November 1999.
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 Leviathan
Gas Pipeline Partners, L.P., announced its intent to construct, at an estimated
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 has substantially completed its evaluation and allocation, and
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. For a further discussion, see Part I, Financial Information, Note 1,
Note 2, and Note 5, which are incorporated herein by reference.
Accounting for Regulated Operations
The Company's interstate pipelines are subject to the regulations and
accounting procedures of FERC. The Company follows the reporting and accounting
requirements of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation for its interstate pipeline operations. For a further discussion, see
Part I, Financial Information, Note 8, which is incorporated herein by
reference.
Recent Pronouncements
See Part I, Financial Information, Note 9, which is incorporated herein by
reference.
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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.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas, uncertainties associated with acquisitions and joint
ventures, potential environmental liabilities, potential contingent liabilities
and tax liabilities related to the Merger, political and economic risks
associated with current and future operations in foreign countries, conditions
of the equity and other capital markets during the periods covered by the
forward-looking statements, and other risks, uncertainties and factors discussed
more completely in the Company's other filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 1996.
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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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
10.2 $750 million 5-Year Revolving Credit and Competitive Advance
Facility Agreement dated as of October 29, 1997 between
EPG, The Chase Manhattan Bank, Citibank, N.A., Morgan
Guaranty Trust Company of New York, and certain other
banks.
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: November 13, 1997 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 13, 1997 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
10.2 -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997
between EPG, The Chase Manhattan Bank, Citibank, N.A.,
Morgan Guaranty Trust Company of New York, and certain
other banks.
27 -- Financial Data Schedule.