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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9864
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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 STREET, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 420-2131
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 12, 1998 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
-----------
ALJ....................... Administrative Law Judge
Company................... El Paso Tennessee Pipeline Co. and its subsidiaries
Court of Appeals.......... United States Court of Appeals for the District of Columbia
Circuit
EPA....................... United States Environmental Protection Agency
EPEC...................... El Paso Energy Corporation
EPNG...................... El Paso Natural Gas Company, a wholly owned subsidiary of El
Paso Energy Corporation subsequent to August 1, 1998
EPMC...................... El Paso Management Company, a subsidiary of EPNG and parent
of EPTPC which merged with and into El Paso Natural Gas
Company in August 1998
EPMSC..................... El Paso Marketing Services Company, a subsidiary of El Paso
Natural Gas Company prior to March 1998
EPTPC..................... El Paso Tennessee Pipeline Co., a wholly owned subsidiary of
El Paso Natural Gas Company
FERC...................... Federal Energy Regulatory Commission
GSR....................... Gas supply realignment
PCB(s).................... Polychlorinated biphenyl(s)
PLN....................... Perusahaan Listrik Negra, the Indonesian government-owned
electric utility
PRP(s).................... Potentially responsible party(ies)
SEC....................... Securities and Exchange Commission
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.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating revenues...................................... $1,461 $1,042 $4,040 $3,425
------ ------ ------ ------
Operating expenses
Cost of gas and other products........................ 1,257 836 3,392 2,827
Operation and maintenance............................. 96 97 299 273
Depreciation, depletion, and amortization............. 40 34 117 112
Taxes, other than income taxes........................ 12 14 38 44
------ ------ ------ ------
1,405 981 3,846 3,256
------ ------ ------ ------
Operating income........................................ 56 61 194 169
------ ------ ------ ------
Other (income) and expense
Interest and debt expense............................. 35 34 101 104
Other -- net.......................................... (43) (14) (81) (33)
------ ------ ------ ------
(8) 20 20 71
------ ------ ------ ------
Income before income taxes.............................. 64 41 174 98
Income tax expense...................................... 19 16 55 38
------ ------ ------ ------
Net income.............................................. $ 45 $ 25 $ 119 $ 60
====== ====== ====== ======
Comprehensive income.................................... $ 42 $ 22 $ 111 $ 56
====== ====== ====== ======
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Current assets
Cash and temporary investments............................ $ 10 $ 34
Accounts and notes receivable, net........................ 735 894
Inventories............................................... 20 41
Deferred income tax benefit............................... 68 106
Other..................................................... 301 276
------ ------
Total current assets.............................. 1,134 1,351
Property, plant, and equipment, net......................... 4,779 4,833
Other....................................................... 413 380
------ ------
Total assets...................................... $6,326 $6,564
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 768 $ 835
Short-term borrowings (including current maturities of
long-term debt)........................................ -- 463
Note payable to EPNG...................................... 125 125
Other..................................................... 503 514
------ ------
Total current liabilities......................... 1,396 1,937
------ ------
Long-term debt, less current maturities..................... 1,379 1,081
------ ------
Deferred income taxes....................................... 1,210 1,215
------ ------
Other....................................................... 727 798
------ ------
Commitments and contingencies (See Note 4)
Minority interest........................................... 25 25
------ ------
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, no par value; 6,000,000 shares issued; stated
at liquidation value.................................. 300 300
Series B, par value $0.01 per share; 3,036,600 shares
issued; stated at liquidation value................... 152 152
Series C, par value $0.01 per share; 934,238 shares
issued; stated at liquidation value................... 47 47
Common stock, par value $0.01 per share; authorized 1,000
shares; issued 1,000 shares............................ -- --
Additional paid-in capital................................ 941 941
Retained earnings......................................... 164 75
Accumulated other comprehensive income.................... (15) (7)
------ ------
Total stockholders' equity........................ 1,589 1,508
------ ------
Total liabilities and stockholders' equity........ $6,326 $6,564
====== ======
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1998 1997
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Cash flows from operating activities
Net income................................................ $ 119 $ 60
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 117 112
Deferred income taxes.................................. 41 227
Other.................................................. (29) (4)
Working capital changes................................... 131 (175)
Other..................................................... (62) (32)
----- ------
Net cash provided by operating activities......... 317 188
----- ------
Cash flows from investing activities
Capital expenditures...................................... (78) (63)
Investment in joint ventures and equity investees......... (35) (44)
Net changes in advances to affiliates..................... (56) 113
Other..................................................... 9 35
----- ------
Net cash provided by (used in) investing
activities....................................... (160) 41
----- ------
Cash flows from financing activities
Net proceeds from long-term debt issuance................. -- 883
Long-term debt retirements................................ (45) --
Net proceeds from Series B Preferred Stock issuance....... -- 150
Revolving credit repayments............................... (117) (1,183)
Repayment of note payable to affiliates................... -- (45)
Preferred stock dividends paid............................ (19) (19)
Other..................................................... -- (4)
----- ------
Net cash used in financing activities............. (181) (218)
----- ------
Increase (decrease) in cash and temporary investments....... (24) 11
Cash and temporary investments
Beginning of period............................... 34 19
----- ------
End of period..................................... $ 10 $ 30
===== ======
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. TRANSFER OF EPMSC TO EPTPC
In March 1998, EPMC exchanged all the common stock of EPMSC (the energy
marketing operations previously owned by a subsidiary of EPNG) for approximately
934,000 shares of 6 1/4% Cumulative Junior Preferred Stock, Series C ("Series C
Preferred Stock") of EPTPC for a total value of $47 million. The value paid
represented the net book value of EPMSC at the exchange date (See Note 5,
Preferred Stock). EPTPC, in turn, contributed the common stock of EPMSC to TGP.
This transaction was accounted for as an exchange between entities under common
control, similar to a pooling of interests. Accordingly, the financial
statements for prior periods have been restated to reflect the combination for
all periods presented. Net income, excluding the effects of the exchange of
EPMSC for the third quarter and nine months ended September 30, 1997, would have
been $25 million and $72 million, respectively.
2. BASIS OF PRESENTATION
The 1997 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 September 30, 1998 and December 31, 1997, and for the
quarters and nine months ended September 30, 1998, and 1997, are unaudited.
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 seasonal
nature of the Company's businesses.
Comprehensive Income
In accordance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Consolidated and
Combined Statements of Income. The only component of comprehensive income is the
cumulative translation adjustment which results from differences in the
translation of foreign currencies. This amount is reflected as accumulated other
comprehensive income in the Condensed Consolidated and Combined Balance Sheets.
Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisers, Investment Companies, and Municipal Securities Issuers
In August 1998, the SEC issued the Interpretive Release: Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers. The Company has
addressed the requirements of the release in its disclosure on year 2000 in Note
4, Commitments and Contingencies.
3. SEGMENTS
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods.
The Regulated segment includes the interstate pipeline systems of TGP,
Midwestern Gas Transmission Company, and East Tennessee Natural Gas Company. The
segment transports natural gas to the northeast, midwest, and mid-Atlantic
sections of the United States including the states of Tennessee, Virginia, and
Georgia as well as New York City, Chicago, and Boston metropolitan areas. The
Non-Regulated segment provides natural gas gathering, products extraction,
dehydration, purification, compression and intrastate
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transmission services. The Non-Regulated segment also markets and trades natural
gas, power, and petroleum products, and develops and operates energy
infrastructure facilities worldwide. The accounting policies of the individual
segments are the same as those of the Company, as a whole, as summarized in Note
2, Basis of Presentation.
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1998
--------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ----------- ----------- --------
Revenues from external customers........... $ 171 $1,290 $1,461
Intersegment revenue....................... 9 -- 9
Operating income (loss).................... 71 (15) 56
Segment assets............................. 5,085 1,112 6,197
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1997
--------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ----------- ----------- --------
Revenues from external customers........... $ 179 $ 863 $1,042
Intersegment revenue....................... 7 3 10
Operating income (loss).................... 68 (7) 61
Segment assets............................. 5,333 1,057 6,390
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ------------ ------------ ---------
Revenues from external customers........... $ 542 $3,498 $4,040
Intersegment revenue....................... 28 -- 28
Operating income (loss).................... 230 (36) 194
Segment assets............................. 5,085 1,112 6,197
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ------------ ------------ ---------
Revenues from external customers........... $ 565 $2,860 $3,425
Intersegment revenue....................... 25 3 28
Operating income (loss).................... 219 (50) 169
Segment assets............................. 5,333 1,057 6,390
The reconciliations of operating income to income before income taxes are
presented below.
QUARTER ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------- --------------------
1998 1997 1998 1997
---- ---- ------- -------
(IN MILLIONS)
Operating income.............................. $ 56 $ 61 $ 194 $ 169
Interest and debt expense..................... (35) (34) (101) (104)
Other -- net.................................. 43 14 81 33
---- ---- ----- -----
Income before income taxes.................... $ 64 $ 41 $ 174 $ 98
==== ==== ===== =====
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4. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia. Under the terms of the project's Power
Purchase Agreement, PLN purchases power from the Company in local currency
(Rupiah) indexed to the U.S. dollar at the date of payment. Due to the
devaluation of the Rupiah, the cost of power to PLN has significantly increased.
PLN is currently unable to pass this increase in cost on to its customers
without creating further political instability. PLN has requested financial aid
from the Minister of Finance to help ease the effects of the devaluation. PLN
has been paying the Company in Rupiah indexed to the U.S. dollar at the rate in
effect prior to the Rupiah devaluation, with a commitment to pay the balance
when financial aid is received. The difference between the current and prior
exchange rate has resulted in an outstanding balance due from PLN of $5.6
million at September 30, 1998. While the Company cannot predict the ultimate
outcome of Indonesia's financial difficulties, it believes PLN, with the backing
of the Minister of Finance, will honor the obligations on the Sengkang project
in full. The Company's investment in the Sengkang project was approximately $25
million at September 30, 1998. Additionally, the Company has provided specific
recourse guarantees of up to $6 million for loans from the project lenders.
Other project debt is nonrecourse. The Company has obtained political risk
insurance for the Sengkang project. The Company believes the current economic
difficulties in Indonesia will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Rates and Regulatory Matters
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it seeks comments on a wide range of initiatives to change the manner in which
short-term transportation markets (contracts for less than one year) are
regulated. Among other things, the NOPR proposes the following: (i) removing the
price cap for the short-term capacity market; (ii) establishing procedures to
make pipeline and shipper-owned capacity comparable; (iii) the auction of all
available short-term pipeline capacity on a daily basis, for which the pipeline
is not able to set a reserve price above variable costs; (iv) changing policies
or pipeline penalties, nomination procedures and services; (v) increasing
pipeline reporting requirements; (vi) permitting the negotiation of terms and
conditions of service; and (vii) potentially modifying the procedures for
certificating new pipeline construction. Also in July 1998, FERC issued a Notice
of Inquiry ("NOI") seeking comments on FERC's policy for pricing long-term
capacity. Comments on the NOPR and NOI are due in January 1999, and it is
unclear when and what action, if any, FERC will take in connection with the NOPR
and NOI and the comments received in response to them.
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery of its GSR and other transition costs and related proceedings (the
"GSR Stipulation and Agreement"). In April 1997, FERC approved the settlement
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 up to $770
million, of which approximately $735 million has been collected as of September
30, 1998. TGP is entitled to recover additional transition costs, up to the
remaining $35 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 an escalating rate cap, indexed to inflation, through October
2005, for certain of TGP's customers. Under the terms of the GSR Stipulation and
Agreement, TGP will be required to refund to customers amounts collected in
excess of each customer's share of transition costs.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. TGP
provided a reserve for these rate refunds as revenues were collected. One party,
a competitor of TGP, filed with the Court of Appeals a Petition for Review of
the FERC orders. In July 1998, the Court of Appeals issued a decision remanding
the case to FERC to respond to the competitor's argument that TGP's cost
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allocation methodology deterred the development of market centers. In October
1998, FERC issued an order requesting comments be filed in January 1999 on the
issues raised in the Court of Appeals remand.
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 ALJ 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, as well as several other customers, have filed with the
Court of Appeals a Petition for Review of the FERC orders. In December 1997, the
ALJ issued his decision on the proper allocation of the New England lateral
costs. The decision adopts a methodology that economically approximates TGP's
current methodology. In October 1998, FERC issued an order affirming the ALJ's
decision.
TGP has filed cashout reports for the period September 1993 through August
1997. TGP's filings showed a cumulative loss of approximately $8 million that
would be rolled forward to the next cashout period pursuant to its tariff. FERC
has requested additional information and justification from TGP as to its
cashout methodology and reports. TGP's cashout methodology and reports are
currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
Environmental Matters
As of September 30, 1998, the Company had a reserve of approximately $234
million to cover environmental assessments and remediation activities discussed
below.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, to assure that its efforts meet
regulatory requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. The
Environmental Stipulation was effective July 1, 1995. As of September 30, 1998,
a balance of $7 million remains to be collected under this stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they may 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
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through
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indemnification by third parties and/or settlements which provide for payment of
the Company's allocable share of remediation costs. Since the clean-up costs are
estimates and are subject to revision as more information becomes available
about the extent of remediation required, and because in some cases the Company
has asserted a defense to any liability, the Company's estimate of its share of
remediation costs could change. Moreover, liability under the federal Superfund
statute is joint and several, meaning that the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs has been considered, where
appropriate, in its determination of its estimated liability as described
herein. The Company presently believes that the costs associated with the
current status of such entities as PRPs at the sites referenced above will not
have a material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. While there are still uncertainties
relating to the ultimate costs which may be incurred, based upon the Company's
evaluation and experience to date, the Company believes the recorded reserve is
adequate.
Legal Proceedings
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPEC: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site, and seeks to recover that
amount plus interest. Other companies named as defendants include Atlantic
Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical
Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas
Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed
their answers and third-party complaints seeking contribution from twelve other
entities believed to be PRPs at Sikes. Although factual investigation relating
to Sikes is in very preliminary stages, the Company believes that the amount of
material, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or
Petro-Tex Chemical Corporation facilities was small, possibly de minimis.
However, the government plaintiffs have alleged that the defendants are each
jointly and severally liable for the entire remediation costs and have also
sought a declaration of liability for future response costs such as groundwater
monitoring. While the outcome of this matter cannot be predicted with certainty,
management does not expect this matter to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
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regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
In 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. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent order with
the EPA. Management believes that the resolution of this issue will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the five phases of its Year 2000 project to assure that the
Company's key automated systems and related processes will remain functional
through the year 2000. Those phases include: (i) awareness; (ii) assessment;
(iii) remediation; (iv) testing; and (v) implementation of the necessary
modifications. The key automated systems of the Company consist of (a)
internally developed computer applications, (b) hardware and equipment, (c)
embedded chip systems in property, plant and equipment, and (d) third-party
developed software. The Company has hired outside consultants (both domestic and
international) to supplement the Company's project team. In addition, the
Company is involved in several industry trade-groups to share insight on issues
facing the industry related to Year 2000.
The Company's awareness phase recognizes the importance of Year 2000 issues
and its potential impact to the Company. Through the executive steering
committee and project team, the Company has established a company-wide awareness
program which includes participation of senior management in each core business
area. Even though the awareness phase is substantially completed, the Company
will continually update awareness efforts throughout the Year 2000 project.
The Company's assessment phase consists of conducting a company-wide
inventory of its key automated systems and related processes, analyzing and
assigning levels of criticality to those systems and processes, identifying and
prioritizing resource requirements, developing validation strategies and testing
plans, and evaluating business partner relationships. The portion of the
assessment phase related to internally developed computer applications is
substantially complete. The Company estimates that it has finished more than
half of the portion of the assessment to determine the nature and impact of the
Year 2000 date change for hardware and equipment, embedded chip systems, and
third-party-developed software. The assessment phase of the project, among other
things, involves efforts to obtain representations and assurances from third
parties, including third party vendors, that their hardware and equipment
products, embedded chip systems, and software products being used by or
impacting the Company are or will be modified to be Year 2000 compliant. To
date, the responses from such third parties are inconclusive. As a result, the
Company cannot predict the
9
12
potential consequences if these or other third parties or their products are not
Year 2000 compliant. The Company is currently evaluating the exposure associated
with such business partner relationships.
The Company expects that the remediation phase, which involves converting,
modifying, replacing or eliminating selected key automated systems, will be
substantially completed by mid-1999. The Company's testing phase represents the
validation process for key automated systems. The Company is utilizing test
tools and written test procedures to document and validate, as necessary, its
unit, system, integration, and acceptance testing. The testing phase is also
anticipated to be substantially completed by mid-1999. While work has begun on
both the remediation and testing phases, the Company estimates that
approximately three-quarters of the work in these phases remain.
The Company's implementation phase involves placing the converted or
replaced key automated systems into operations. In some cases, the
implementation phase will consist of developing and executing contingency plans
needed to support business functions and processes that may be interrupted by
Year 2000 failures which are outside of the Company's control. Contingency plans
will also be developed to prepare for unforeseen failures of the Company's key
automated systems. The Company is in the early stages of the implementation
phase. This phase is expected to be substantially completed by mid-1999.
While the total cost of the Company's Year 2000 project is still being
evaluated, the Company estimates that the costs to be incurred in 1998, 1999,
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software is between $8 million and $18 million. Of these
estimated costs, the Company expects between $2 million and $7 million to be
capitalized and the remainder to be expensed.
It is possible the Company may need to reassess its estimate of Year 2000
costs in the event the Company completes an acquisition of, or makes a material
investment in, substantial facilities or another business entity.
The Company's goal is to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, certain
systems and processes may be interrelated with systems outside the control of
the Company, and therefore there can be no assurance that all implementations
will be successful. The Company's present analysis of its most reasonably likely
worst case scenario for Year 2000 disruptions include Year 2000 failures in the
telecommunications and electricity industries, as well as interruptions from
suppliers that might cause disruptions in the Company's operations, thus causing
temporary financial losses and an inability to deliver products and services to
customers. Accordingly, the Company's contingency plan may also consider any
significant failures related to the most reasonably likely worst case scenario,
as they may occur. The plan is expected to assess the risk of a significant
failure to critical processes performed by the Company. This assessment is
expected to also factor in the severity and duration of the impact of a
significant failure. From this analysis, the Year 2000 contingency plan will be
developed to mitigate those risks.
While most of the Company's domestic plants, pipelines and other facilities
are owned or controlled by the Company, or its wholly owned subsidiaries, nearly
all of the Company's international investments are in plant, pipeline and other
facilities owned in conjunction with unrelated third parties. In many cases, the
operators of such international facilities are not under the sole or direct
control of the Company. As a consequence, the Year 2000 programs instituted at
some of the international facilities may be materially different from the Year
2000 program implemented by the Company domestically, and the party responsible
for the results of such programs may not be under the direct or indirect control
of the Company. The persons responsible for instituting such international Year
2000 programs may not provide the same degree of communication, documentation
and coordination as the Company achieves in its domestic Year 2000 program.
Also, the regulatory and legal environment in which such international
facilities operate make analysis of the most reasonably likely worst case
scenario with respect to certain facilities difficult at this time. Many foreign
jurisdictions appear to be substantially behind the United States in formulating
a Year 2000 strategy with respect to infrastructure or the reporting
requirements of business entities. Accordingly, the Year 2000 risks posed by
international operations as a whole are different than those presented
domestically. The Company has formulated and instituted a program for
identifying such risks and preparing a response to
10
13
such risks, but is not yet able to articulate the most reasonably likely worst
case scenario for each of its international operations at this time.
Management does not expect the costs of the Company's Year 2000 project to
have a material adverse effect on the Company's financial position, results of
operations, or cash flows. Based on information available at this time, however,
the Company cannot conclude that any failure of the Company or third-party
entities to achieve Year 2000 compliance will not adversely effect the Company.
Specific factors which might affect the success of the Company's Year 2000
efforts and the occurrence of Year 2000 disruption or expense include failure of
the Company or its outside consultants to properly identify deficient systems,
the failure of the selected remedial action to adequately address the
deficiencies, failure of the Company's outside consultants to complete the
remediation in a timely manner (due to shortages of qualified labor or other
factors), unforeseen expenses related to the remediation of existing systems or
the transition to replacement systems, and the failure of third parties to
become compliant or to adequately notify the Company of potential noncompliance.
5. PREFERRED STOCK
In March 1998, the Company issued approximately 934,000 shares of Series C
Preferred Stock, which is subordinated to the Series A Preferred Stock, to EPMC
in exchange for EPNG's merchant services activities and related assets and
liabilities for a value of approximately $47 million. EPNG is entitled to
receive cash dividends payable annually at the rate of 6 1/4% of the stated
value of $50 per share.
6. FINANCING TRANSACTIONS
In August 1998, EPEC became a guarantor of EPNG's $750 million 5-year
revolving credit and competitive advance facility and $750 million 364-day
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). In October 1998, the $750 million 364-day portion of the
Revolving Credit Facility was amended to extend the termination date to October
27, 1999. Further, in October 1998, the Revolving Credit Facility was amended to
permit TGP, a designated borrower, to issue commercial paper, provided the total
amount of commercial paper outstanding at EPNG and TGP is equal to or less than
the unused capacity under the Revolving Credit Facility.
In September 1998, TGP filed a shelf registration permitting TGP to offer
up to $600 million (including $100 million carried forward from a prior shelf
registration) of debt securities. In October 1998, TGP issued $400 million ($391
million, net of issuance cost) aggregate principal amount of 7% debentures due
2028. Approximately $300 million of the proceeds were used to repay TGP's
short-term indebtedness under the Revolving Credit Facility and the remainder
was used by TGP for general corporate purposes. As a result of this transaction,
the $300 million EPNG Revolving Credit Facility with TGP designated as borrower
was reclassified to long-term debt in the September 30, 1998, Condensed
Consolidated and Combined Balance Sheets. After this issuance, TGP has $200
million of capacity remaining under its shelf registration.
In August 1998, EPTPC retired its outstanding 10% debentures due August 1,
1998, in the amount of $38 million.
11
14
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1998, and December 31,
1997, consisted of the following:
1998 1997
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost..................... $2,591 $2,534
Less accumulated depreciation and depletion................. 217 125
------ ------
2,374 2,409
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,405 2,424
------ ------
Total property, plant, and equipment, net......... $4,779 $4,833
====== ======
8. INVENTORIES
Inventories at September 30, 1998, and December 31, 1997, consisted of the
following:
1998 1997
----- -----
(IN MILLIONS)
Materials and supplies...................................... $17 $16
Gas in storage.............................................. 3 25
--- ---
$20 $41
=== ===
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
9. RECENT PRONOUNCEMENTS
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of obligations under
those plans. The standard is effective for fiscal years beginning after December
15, 1997. SFAS No. 132 is primarily a disclosure requirement, and accordingly,
will not have any effect on the Company's financial position, results of
operations, or cash flows.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for such costs, and also defines internal-use computer software. It
is effective for fiscal years beginning after December 15, 1998. The application
of this pronouncement will not have a material impact in the Company's financial
position, results of operations, or cash flows.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. In addition, it requires that any
such cost that exists on the balance sheet be expensed upon adoption of this
pronouncement. It is effective for fiscal years beginning after December 15,
1998. The Company is currently evaluating the effects of this pronouncement.
12
15
Accounting for Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal quarters beginning after June 15, 1999. The Company is currently
evaluating the effects of this pronouncement.
Disclosure relating to Euro Conversion
In July 1998, the SEC issued Staff Legal Bulletin No. 6 to provide guidance
for disclosure related to the Euro Conversion. The guidance primarily focuses on
disclosure in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as Description of Business. The Company
currently has no investments in the countries affected by the Euro Conversion.
13
16
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, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim condensed consolidated and combined financial statements
and accompanying notes presented in Item 1 of this Form 10-Q.
TRANSFER OF EPMSC TO EPTPC
In March 1998, EPMC exchanged all the common stock of EPMSC (the energy
marketing operations previously owned by a subsidiary of EPNG) for approximately
934,000 shares of Series C Preferred Stock of EPTPC for a total value of $47
million. EPTPC, in turn, contributed the common stock of EPMSC to TGP. This
transaction was accounted for as an exchange between entities under common
control, similar to a pooling of interests. Accordingly, the financial
statements for prior periods have been restated to reflect the combination for
all periods presented. The management's discussion and analysis of financial
condition and results of operations below is based on restated information for
the combined reporting entity. See Note 1 of Item 1, Financial Statements for a
further discussion.
RESULTS OF OPERATIONS
GENERAL
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods. Operating revenues and expenses by segment include
intersegment sales and expenses which are eliminated in consolidation. For a
further discussion of the individual segments, see Note 3 of Item 1, Financial
Statements.
SEGMENT RESULTS
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
1998 1997 1998 1997
----- ---- ---- ----
(IN MILLIONS)
OPERATING INCOME
Regulated........................................... $ 71 $68 $230 $219
Non-Regulated....................................... (15) (7) (36) (50)
---- --- ---- ----
Total operating income.................... $ 56 $61 $194 $169
==== === ==== ====
Operating income for the quarter and nine months ended September 30, 1998,
was $5 million lower and $25 million higher, respectively, than for the same
period of 1997. Variances by segment are presented below.
REGULATED OPERATIONS
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
(IN MILLIONS)
Operating revenues............................. $ 180 $ 186 $ 570 $ 590
Operating expenses............................. (109) (118) (340) (371)
----- ----- ----- -----
Total operating income............... $ 71 $ 68 $ 230 $ 219
===== ===== ===== =====
14
17
Third Quarter 1998 Compared to Third Quarter 1997
Operating revenues for the quarter ended September 30, 1998, were $6
million lower than for the same period of 1997 primarily because of a downward
revision in the amount of recoverable interest on GSR costs, and lower
throughput resulting from milder temperatures in the northeastern and midwestern
markets.
Operating expenses for the quarter ended September 30, 1998, were $9
million lower than for the same period of 1997 primarily due to lower system
fuel usage associated with operating efficiencies attained during the period of
lower throughput.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Operating revenues for the nine months ended September 30, 1998, were $20
million lower than for the same period of 1997 primarily because of lower
throughput resulting from warmer average temperatures in the northeastern and
midwestern markets and a downward revision in the amount of recoverable interest
on GSR costs.
Operating expenses for the nine months ended September 30, 1998, were $31
million lower than for the same period of 1997 primarily due to lower system
fuel usage associated with operating efficiencies attained during the period of
lower throughput.
NON-REGULATED OPERATIONS
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1998 1997 1998 1997
(IN MILLIONS) ---- ---- ----- ----
Gathering and treating margin............................. $ 4 $ 2 $ 11 $ 6
Processing margin......................................... -- -- 1 3
Natural gas and petroleum marketing margin................ 13 16 11 9
Power margin.............................................. (4) (1) 15 (1)
---- ---- ----- ----
Total gross margin.............................. 13 17 38 17
Other revenues............................................ 8 6 32 9
Operating expenses........................................ (36) (30) (106) (76)
---- ---- ----- ----
Total operating loss............................ $(15) $ (7) $ (36) $(50)
==== ==== ===== ====
Third Quarter 1998 Compared to Third Quarter 1997
Total gross margin (revenue less cost of sales) for the quarter ended
September 30, 1998, was $4 million lower than for the same period of 1997. The
decrease was primarily attributable to price volatility for energy commodities,
particularly power prices, resulting in decreases in the market value of energy
positions which are accounted for on a mark-to-market basis. Third quarter 1998
power prices returned to more normal levels after significant price increases in
the second quarter, brought on by unexpected power shortages in the Midwest.
Other revenues for the quarter ended September 30, 1998, were $2 million
higher than for the same period of 1997 due primarily to an increase in revenue
attributable to the EMA Power project which the Company began reporting on a
consolidated basis in July 1997.
Operating expenses for the quarter ended September 30, 1998, were $6
million higher than for the same period of 1997 primarily due to higher
administrative expenses, partially offset by lower costs due to the marketing
reorganization.
15
18
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Total gross margin for the nine months ended September 30, 1998, was $21
million higher than for the same period of 1997. The increase in total gross
margin was primarily due to increased power volumes compared to 1997, income
recognition from a long-term power contract closed during the first quarter of
1998 and an overall increase in the market value of open power contracts due to
price volatility in June and July 1998.
Other revenues for the nine months ended September 30, 1998, were $23
million higher than for the same period of 1997 due primarily to an increase in
revenue attributable to the EMA Power project which the Company began reporting
on a consolidated basis in July 1997.
Operating expenses for the nine months ended September 30, 1998, were $30
million higher than for the same period of 1997 due primarily to costs related
to the EMA Power project, higher administrative expenses, and higher
international development costs in 1998 reflecting an increase in
project-related activities.
OTHER INCOME AND EXPENSE
Third Quarter 1998 Compared to Third Quarter 1997
Other income for the quarter ended September 30, 1998, was $28 million
higher than for the same period of 1997 primarily due to gains recognized on
asset sales, interest income on a favorable sales and use tax settlement, and
additional earnings from equity investments.
Nine Months Ended 1998 Compared to Nine Months Ended 1997
Other expenses for the nine months ended September 30, 1998, were $51
million lower than for the same period of 1997 primarily due to gains recognized
on asset sales, interest income on a favorable sales and use tax settlement, and
additional earnings from equity investments.
INCOME TAX EXPENSE
The effective tax rate for the quarter and nine months ended September 30,
1998, was lower than the rate for the same periods of 1997 primarily as a result
of increased consolidated foreign income subject to foreign tax rates different
than U.S. tax rates, increased equity income from unconsolidated foreign
affiliates recorded net of foreign income taxes for which no provision for U.S.
income tax is required, and lower state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $129 million higher for the
nine months ended September 30, 1998, compared to the same period of 1997. The
increase was due primarily to a rate refund to TGP's customers in March 1997 and
a higher net tax refund in 1998. The increase was partially offset by lower GSR
collections in 1998 and changes in working capital.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $160 million for the nine months
ended September 30, 1998, compared to net cash provided by investing activities
of $41 million for the same period of 1997. The use of cash was due primarily to
an increase in advances to EPNG during 1998.
Future funding for capital expenditures, acquisitions, and other investing
expenditures are expected to be provided by internally generated funds,
available capacity under existing credit facilities, and/or contributions from
EPNG.
16
19
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $37 million lower for the nine
months ended September 30, 1998, compared to the same period of 1997. The change
was primarily a result of credit facility repayments from the proceeds received
from TGP's debt offering and EPTPC's Series B Preferred Stock offering both of
which occurred in the first quarter of 1997.
In August 1998, EPTPC retired its outstanding 10% debentures due August 1,
1998, in the amount of $38 million.
In August 1998, EPEC became a guarantor of EPNG's Revolving Credit
Facility. In October 1998, the $750 million 364-day portion of the Revolving
Credit Facility was amended to extend the termination date to October 27, 1999.
Further, in October 1998, the Revolving Credit Facility was amended to permit
TGP, a designated borrower, to issue commercial paper, provided, the total
amount of commercial paper outstanding at EPNG and TGP is equal to or less than
the unused capacity under the Revolving Credit Facility.
In September 1998, TGP filed a shelf registration permitting TGP to offer
up to $600 million (including $100 million carried forward from a prior shelf
registration) of debt securities. In October 1998, TGP issued $400 million ($391
million, net of issuance cost) aggregate principal amount of 7% debentures due
2028. Approximately $300 million of the proceeds were used to repay TGP's
short-term indebtedness under the Revolving Credit Facility and the remainder
was used by TGP for general corporate purposes. After this issuance, TGP has
$200 million of capacity remaining under its shelf registration.
Future funding for long-term debt retirements, dividends, and other
financing expenditures will be provided by internally generated funds, available
capacity under existing credit facilities, and/or contributions from EPNG.
COMMITMENTS AND CONTINGENCIES
See Item 1, Financial Statements, Note 4, which is incorporated herein by
reference.
OTHER
PORTLAND
The Company increased its ownership interest in the Portland Natural Gas
Transmission ("Portland") system from 17.8 percent to approximately 19 percent
in April 1998. Portland is developing a 292-mile interstate natural gas pipeline
with a projected capacity of 178 million cubic feet per day extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. In April
1998, Portland secured $256 million in non-recourse project financing.
Construction started in June 1998 and targeted commencement of commercial
operations for the project is first quarter of 1999.
EPEC'S INTERNAL REORGANIZATION
EPEC, the indirect corporate parent of EPTPC, has recently received a
ruling from the Internal Revenue Service that would allow EPEC to reorganize its
business structure to align its operations into the same legal business units,
which would include the transfer of certain subsidiaries to EPEC or other
entities owned by EPEC. If EPEC completes this internal reorganization, EPTPC
will continue to own the interstate pipeline systems known as the TGP System,
East Tennessee System, Midwestern System, and the merchant services operations
of El Paso Energy Marketing. In connection with the reorganization, additional
international operations and field services operations which are currently owned
by EPNG are anticipated to be transferred to the Company. If the reorganization
is completed, the Company will own 100 percent of the international and field
services operations. The reorganization is contingent upon the acceptable
resolution of several factors including the finalization of the Company's
capital structure. If the reorganization occurs, the Company anticipates that it
will not occur before late 1998 or early 1999.
RECENT PRONOUNCEMENTS
See Item 1, Financial Statements, Note 9, which is incorporated by
reference herein.
17
20
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 and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to acquisitions, including EPNG's
acquisition of the Company, 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, including the effect of the Year
2000 date change, 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, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, in addition to
the interim consolidated financial statements and accompanying notes presented
in Items 1 and 2 of this Form 10-Q.
There have been no material changes in market risks faced by the Company
from those reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
18
21
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1, Financial Statements, Note 4, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
Stockholders considering submitting proposals for inclusion in the
Company's Proxy Statement to be issued in connection with the Company's 1999
Annual Meeting (the "Annual Meeting") are encouraged to submit proposals to the
Corporate Secretary by November 20, 1998. The Company will consider only
proposals meeting the requirements of applicable SEC rules. Further, in
accordance with the Company's Bylaws, for a proposal to be considered at the
Annual Meeting, the Company must receive the stockholder's notice addressed to
the Corporate Secretary not earlier than 90 days nor later than 60 days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the Annual Meeting is more than 30 days
before or more than 60 days after such anniversary date, notice must be received
by the Corporate Secretary not earlier than the 90th day prior to such Annual
Meeting and not later than the 60th day prior to such Annual Meeting, or if
later, the 10th day following the day on which public announcement of the date
of such meeting is last made. Any notices by the stockholders to the Corporate
Secretary must be mailed to the principal executive offices of the Company.
19
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below not designated by an asterisk is incorporated
by reference to a prior filing as indicated.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.A -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.A to EPEC's Form 10-Q (Commission File No.
1-14365) for the quarter ended September 30, 1998 filed
with the SEC (the "EPEC Third Quarter 10-Q")).
10.B -- First Amendment to the $750 million 364-Day Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.B to the EPEC Third Quarter
10-Q).
10.C -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.D to the EPEC Third Quarter 10-Q).
10.D -- First Amendment to the $750 million 5-Year Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.E to the EPEC Third Quarter
10-Q).
*27 -- Financial Data Schedule.
- ---------------
* Indicates documents filed as part of this report.
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
20
23
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 12, 1998
/s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
21
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.A -- $750 million 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.A to EPEC's Form 10-Q (Commission File No.
1-14365) for the quarter ended September 30, 1998 filed
with the SEC (the "EPEC Third Quarter 10-Q")).
10.B -- First Amendment to the $750 million 364-Day Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.B to the EPEC Third Quarter
10-Q).
10.C -- $750 million 5-Year Revolving Credit and Competitive
Advance Facility Agreement dated as of October 29, 1997,
by and among EPNG, TGP, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New
York, and certain other banks (incorporated by reference
to Exhibit 10.D to the EPEC Third Quarter 10-Q).
10.D -- First Amendment to the $750 million 5-Year Revolving
Credit and Competitive Advance Facility dated as of
October 9, 1998, among EPNG, TGP, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and certain other banks (incorporated by
reference to Exhibit 10.E to the EPEC Third Quarter
10-Q).
*27 -- Financial Data Schedule.
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* Indicates documents filed as part of this report.