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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 15, 1999
(DATE OF EARLIEST EVENT REPORTED: DECEMBER 31, 1998)
EL PASO TENNESSEE PIPELINE CO.
(Exact name of registrant as specified in its charter)
DELAWARE 1-9864 76-0233548
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
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EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
(713) 420-2131
(Registrant's telephone number, including area code)
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2
This Amendment amends and restates in its entirety the Current Report on
Form 8-K of El Paso Tennessee Pipeline Co. dated January 14, 1999 as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 31, 1998, El Paso Energy Corporation ("EPEC"), the ultimate
corporate parent of El Paso Tennessee Pipeline Co. ("EPTPC"), initiated and
completed a tax-free internal reorganization of its assets and operations and
those of its subsidiaries (the "Reorganization"), in accordance with a private
letter ruling received from the Internal Revenue Service. After the
Reorganization, EPTPC continues 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 addition, EPTPC now owns all
of the international operations of El Paso Energy International Company and the
field services operations of El Paso Field Services Company. As part of the
Reorganization, EPTPC also transferred certain assets and liabilities of
corporate or discontinued operations to EPEC. Following the Reorganization, EPEC
became the direct corporate parent of EPTPC.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The financial statements of El Paso Field Services Company, omitted from
the initial filing of this Form 8-K as permitted by such Form, are set forth
below.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of El Paso Field Services Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholder's equity and cash flows present
fairly, in all material respects, the consolidated financial position of El Paso
Field Services Company and subsidiaries at December 31, 1997 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which requires that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 9, 1999
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EL PASO FIELD SERVICES COMPANY
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Operating revenues
Gathering and treating................................... $181,472 $101,540 $140,272
Processing............................................... 99,090 60,439 74,696
Natural gas sales........................................ 60,249 -- 53,430
Other.................................................... 4,414 1,732 4,377
-------- -------- --------
345,225 163,711 272,775
Operating expenses
Gathering and treating................................... 71,272 3,027 59,802
Processing............................................... 47,208 25,320 35,579
Cost of gas.............................................. 59,541 -- 52,845
Operations and maintenance............................... 71,525 64,681 53,050
Depreciation and amortization............................ 30,331 28,401 22,251
Taxes, other than income taxes........................... 6,556 5,539 4,961
-------- -------- --------
286,433 126,968 228,488
-------- -------- --------
Operating income........................................... 58,792 36,743 44,287
-------- -------- --------
Other (income) and expense
Interest expense......................................... 122 102 130
Affiliated company interest, net......................... (2,094) 5,787 (1,218)
Other, net............................................... 557 (1,339) 144
-------- -------- --------
(1,415) 4,550 (944)
-------- -------- --------
Income before income taxes................................. 60,207 32,193 45,231
Income tax expense......................................... 23,305 12,426 17,750
-------- -------- --------
Net income................................................. $ 36,902 $ 19,767 $ 27,481
======== ======== ========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO FIELD SERVICES COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and temporary investments....................... $ 228 $ 178 $ 236
Accounts and notes receivable, net
Customer.......................................... 43,976 40,934 49,189
Affiliated companies.............................. 44,232 20,281 107,730
Other............................................. 5,878 14,470 5,180
Other................................................ 3,529 656 6,260
-------- -------- --------
Total current assets......................... 97,843 76,519 168,595
-------- -------- --------
Property, plant and equipment, net..................... 599,916 651,817 391,199
Intangibles, net....................................... 64,449 62,878 64,524
Other.................................................. 1,995 2,338 233
-------- -------- --------
Total assets................................. $764,203 $793,552 $624,551
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts and notes payable
Customer.......................................... $ 27,683 $ 8,212 $ 41,273
Affiliated companies.............................. 192,559 154,901 40,974
Other............................................. 11,448 21,174 11,442
Other current liabilities............................ 22,138 31,451 34,957
-------- -------- --------
Total current liabilities.................... 253,828 215,738 128,646
-------- -------- --------
Deferred income taxes.................................. 103,472 125,967 99,271
-------- -------- --------
Other.................................................. 20,917 19,280 20,069
-------- -------- --------
Commitments and contingencies (See Note 5)
Stockholder's equity
Common stock, par value $1 per share; authorized
1,000 shares; issued and outstanding 1,000
shares............................................ 1 1 1
Additional paid-in capital........................... 316,963 343,777 316,963
Retained earnings.................................... 69,022 88,789 59,601
-------- -------- --------
Total stockholder's equity................... 385,986 432,567 376,565
-------- -------- --------
Total liabilities and stockholder's equity... $764,203 $793,552 $624,551
======== ======== ========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO FIELD SERVICES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1997 1998 1997
------------ -------- --------
(UNAUDITED)
Cash flows from operating activities
Net income............................................... $ 36,902 $ 19,767 $ 27,481
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization......................... 30,331 28,401 22,251
Deferred income taxes................................. 11,731 12,716 6,342
Other................................................. (783) (967) --
Working capital changes, net of noncash transactions
and effects of acquisition
Accounts and notes receivable....................... (23,726) 18,401 (24,673)
Other assets........................................ 2,399 3,497 1,430
Accounts and notes payable.......................... 17,344 (3,081) 15,251
Other liabilities................................... 32,287 7,811 44,220
--------- -------- --------
Net cash provided by operating activities........ 106,485 86,545 92,302
--------- -------- --------
Cash flows from investing activities
Capital expenditures..................................... (48,298) (78,002) (21,412)
Acquisition.............................................. (196,507) -- --
Proceeds from sale of equipment.......................... -- 35,865 --
Investment in affiliated companies....................... 4,515 -- (70,448)
--------- -------- --------
Net cash used in investing activities............ (240,290) (42,137) (91,860)
--------- -------- --------
Cash flows from financing activities
Advances from (repayments to) affiliated companies....... 134,276 (44,322) --
Other.................................................... (243) (136) (206)
--------- -------- --------
Net cash provided by (used in) financing
activities..................................... 134,033 (44,458) (206)
--------- -------- --------
Increase (decrease) in cash and temporary investments...... 228 (50) 236
Cash and temporary investments
Beginning of period...................................... -- 228 --
--------- -------- --------
End of period............................................ $ 228 $ 178 $ 236
========= ======== ========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO FIELD SERVICES COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
December 31, 1996........................... 1 $1 $316,401 $32,120 $348,522
Net income................................ 36,902 36,902
Other..................................... 562 562
-- -- -------- ------- --------
December 31, 1997........................... 1 1 316,963 69,022 385,986
Net income (unaudited).................... 19,767 19,767
Transfer of assets from affiliated
companies (unaudited).................. 26,814 26,814
-- -- -------- ------- --------
September 30, 1998 (unaudited).............. 1 $1 $343,777 $88,789 $432,567
== == ======== ======= ========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
El Paso Field Services Company (the "Company"), a wholly owned subsidiary
of El Paso Natural Gas Company ("EPNG"), was formed for the purpose of owning,
operating, acquiring and constructing non-regulated natural gas gathering,
processing and other related facilities. The Company owns or has ownership
interests in approximately 8,750 miles of gathering lines located in the San
Juan, Anadarko and Permian basins and in east Texas, south Texas, Louisiana, and
the Gulf of Mexico. In addition, the Company owns or has interests in
approximately 1,400 miles of intrastate transmission pipeline, which supply
natural gas to EPNG's interstate pipeline system, and 25 natural gas processing
and treating facilities.
Holding Company and Tax-free Internal Reorganization
Effective August 1, 1998, EPNG reorganized into a holding company
organizational structure, whereby El Paso Energy Corporation ("EPEC") became the
holding company and primary parent corporation. By virtue of the reorganization,
EPNG, the Company's parent, became a direct wholly owned subsidiary of EPEC.
On December 31, 1998, a tax-free internal reorganization resulted in the
distribution of the Company and its subsidiary from EPNG to El Paso Tennessee
Pipeline Co. ("EPTPC"). As a result, EPTPC a subsidiary of EPEC, became the
parent corporation of the Company. These transactions were treated as an
exchange between entities under common control and accounted for in a manner
similar to a pooling of interests. The holding company and tax-free internal
reorganization had no impact on the presentation herein.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries of the Company after the elimination of
all significant intercompany accounts and transactions. Investments in companies
where the Company has the ability to exert significant influence over, but not
control operating and financial policies are accounted for using the equity
method.
Unaudited Interim Information
The unaudited interim consolidated financial statements as of September 30,
1998, and 1997, and for each of the nine month periods ended September 30, 1998,
and 1997, included herein, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities that exist at
the date of the financial statements. Actual results could differ from those
estimates.
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Temporary Investments
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts and Notes Receivable
The Company has established an allowance for losses on accounts and notes
receivable, as well as for gas imbalances due from shippers and operators, which
may become uncollectible. Collectibility is reviewed regularly, and the
allowance is adjusted as necessary using the specific identification method. The
balance of this allowance at December 31, 1997, was $4.1 million.
Gas Imbalances
The Company values gas imbalances due to or due from shippers and operators
at the appropriate index price. The gas imbalances are settled in cash or made
up in-kind.
Inventories
Inventories of $684,000 as of December 31, 1997 and $195,000 as of
September 30, 1998, consisting of natural gas liquids in storage, are valued at
the lower of cost or market with cost determined using the average cost method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major improvements are
capitalized while maintenance and repairs are expensed. Retirements, sales and
disposals of assets are recorded by removing the historical cost and associated
accumulated depreciation with any resulting gain or loss reflected in income.
Included in the Company's property, plant, and equipment is construction work in
progress of approximately $39.1 million at December 31, 1997. Depreciation of
the Company's properties is provided using the straight line method which, in
the opinion of management, is adequate to allocate the cost of properties over
the estimated useful lives of the assets as follows:
YEARS
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Pipeline and right of way................................... 31
Plant....................................................... 22-25
Equipment................................................... 15-34
Other....................................................... 10-38
The Company evaluates impairment of its property, plant, and equipment in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
Intangible Assets
Goodwill and other intangibles are amortized using the straight-line method
over a period of 40 years. The accumulated amortization of intangible assets was
$5.6 million at December 31, 1997.
The Company evaluates impairment of goodwill in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other societal and economic factors and
include estimates of associated legal costs. All available evidence is
considered, including prior experience in remediation of contaminated sites,
other companies' clean-up experience and data released by the Environmental
Protection Agency or other organizations. These estimated liabilities are
subject to revision in future periods based on actual costs or new
circumstances. These liabilities are included in the balance sheets at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when recovery is assured, are recorded and reported separately from the
associated liability in the consolidated financial statements as an asset.
Price Risk Management Activities
The Company has an arrangement with an affiliate, whereby the affiliate
uses futures, swaps and other contracts for purposes other than trading to
reduce the Company's exposure to fluctuations in the price of natural gas and
natural gas liquids. Changes in market value of these transactions are deferred
until the gain or loss on the hedged item is recognized. Hedge accounting is
applied only if the derivative reduces the risk of the underlying hedge item, is
designated a hedge at its inception, and is expected to result in financial
impacts which are inversely correlated to those of the item(s) being hedged. If
correlation ceases to exist mark to market accounting is applied. If the hedged
item matures or is sold, the value of the derivative or other financial
instrument is recognized as a gain or loss in operating income in the
consolidated income statements. In the consolidated statement of cash flows,
cash receipts or payments related to these price risk management activities are
recognized as the settlement of transactions occur. See Note 4 for a further
discussion of the Company's price risk management activities.
Income Taxes
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year-end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
On behalf of itself and all members filing in its consolidated federal
income tax return, including the Company, EPNG adopted a tax sharing policy (the
"Policy") which provides, among other things, that (i) each company in a taxable
income position will be currently charged with an amount equivalent to its
federal income tax computed on a separate return basis, and (ii) each company in
a tax loss position will be reimbursed currently to the extent its deductions,
including general business credits, were utilized in the consolidated return.
Under the Policy, EPNG paid all federal income taxes through 1998 directly to
the Internal Revenue Service and will bill or refund, as applicable, its
subsidiaries for their applicable portion of such income tax payments. Under
this Policy, the Company had recorded a tax liability of approximately $9
million in other current liabilities in the accompanying Consolidated Balance
Sheets as of December 31, 1997. This Policy excludes EPTPC and its subsidiaries
for any year prior to 1999. Starting in 1999, EPEC and
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its 80 percent or more owned subsidiaries, including EPTPC (the new parent of
the Company) and the Company, will file a consolidated U.S. federal income tax
return.
Recognition
Revenue is recognized when products are shipped or services are provided to
customers.
New Accounting Pronouncements Not Yet Adopted
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting
Comprehensive Income, which established standards for reporting and displaying
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 the financial
statements for periods beginning after December 15, 1997. At December 31, 1997,
the Company had no items which would be treated as components of other
comprehensive income.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement provides guidance on accounting for
such costs, and also defines internal-use computer software. The statement is
effective for fiscal years beginning after December 15, 1998. The application of
this pronouncement did not have a material impact on the Company's financial
position, results of operations, or cash flows.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. In addition, it requires that any
such cost that exists on the balance sheet be expensed upon adoption of this
pronouncement. The statement is effective for fiscal years beginning after
December 15, 1998. The application of this pronouncement will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for the changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The standard is effective for all quarters in
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal years beginning after June 15, 1999. The Company is currently evaluating
the effects of this pronouncement.
2. ACQUISITION
In December 1997, the Company completed the purchase of certain gathering
facilities consisting of 360 miles of natural gas pipeline and a natural gas
cryogenic processing plant through the acquisition of 100 percent of the common
stock of PacifiCorp's Texas Gulf Coast ("TPC") gathering and processing
subsidiaries at a cash price of approximately $196 million. The transaction was
accounted for as a purchase. The purchase price approximated the fair value of
net assets acquired. In conjunction with the acquisition, assets acquired and
liabilities assumed are as follows:
(IN THOUSANDS)
Fair value of assets acquired.......... $198,100
Cash paid for the common stock......... 196,507
--------
Fair value of liabilities assumed...... $ 1,593
========
The following unaudited pro forma information presents a summary of what
the consolidated results of operations would have been on a pro forma basis for
the year ended December 31, 1997, assuming the TPC acquisition had occurred on
January 1, 1997:
UNAUDITED
(IN THOUSANDS)
Operating Revenue...................... $368,876
Net income............................. 46,557
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1997:
(IN THOUSANDS)
Pipeline and right of way................................... $614,347
Plant....................................................... 95,222
Equipment................................................... 199,147
Other....................................................... 11,468
--------
920,184
Less accumulated depreciation............................... 320,268
--------
Total property, plant and equipment, net.................... $599,916
========
4. FINANCIAL INSTRUMENTS, PRICE RISK MANAGEMENT ACTIVITIES AND CONCENTRATIONS OF
CREDIT RISK
Financial Instruments
As of December 31, 1997, the carrying amount of the Company's cash and cash
equivalents, trade receivables and payables, and notes receivable and payable
with affiliates approximated their fair value due to the short term nature of
these instruments.
Price Risk Management Activities
El Paso Energy Marketing Company ("EPEM"), an affiliate of the Company uses
exchange-traded futures and option contracts to reduce the Company's exposure to
fluctuations in the prices of natural gas and
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
natural gas liquids. EPEM also uses financial instruments with off-balance sheet
risk such as over-the-counter option contracts in its price risk management
activities associated with the Company's price exposure. The fair value of these
financial instruments, $2.5 million at December 31, 1997, is based upon the
estimated consideration that would be received to terminate those financial
instruments in a gain position and the estimated cost that would be incurred to
terminate those financial instruments in a loss position. As of December 31,
1997, these commodity contracts and financial instruments maturing through
December 1998, had an absolute notional contract quantity of 25 billion cubic
feet. Since the commodity contracts and financial instruments described above
are designated as hedges which fair values correlate to price movements of
natural gas, any gains or losses on the commodity contracts and financial
instruments resulting from market changes will be offset by gains or losses on
the hedged transactions. The Company has off-balance sheet risk of credit loss
in the event of non-performance by counterparties to all over-the-counter swaps
and options. However, the Company believes that these counterparties would be
able to fully satisfy their obligations under these contracts.
Market and Credit Risk
The Company serves a customer group that includes industrial companies, gas
and electric utilities, oil and gas producers and other energy marketers. These
industry concentrations have the potential to impact the Company's overall
exposure to credit risk, either positively or negatively, as customers may be
similarly affected by changes in economic, industry or other conditions.
Receivables are generally not collateralized; however, the Company believes that
the credit risk posed by this industry concentration is offset by the receivable
diversification and creditworthiness of the customer base. The Company has not
experienced material credit losses on receivables related to these industries,
or on its receivable portfolio as a whole.
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties pursuant to the terms of their
contractual obligations. The Company maintains credit policies with regard to
its counterparties to minimize overall credit risk. These policies require an
evaluation of potential counterparties' financial condition (including credit
rating) and collateral requirements under certain contracts.
5. COMMITMENTS AND CONTINGENCIES
Environmental
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. The laws and
regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at current and
former operating sites. As of December 31, 1997, the Company had a total reserve
of approximately $6.2 million primarily for expected remediation costs and
associated onsite, offsite, and ground water technical studies.
Operating Leases
The Company leases certain property, facilities and equipment under various
operating leases.
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum annual rental commitments at December 31, 1997, were as follows:
YEAR ENDING
DECEMBER 31, OPERATING LEASES
- ------------ ----------------
(IN THOUSANDS)
1998........................................................ $ 970
1999........................................................ 671
2000........................................................ 259
2001........................................................ 281
2002........................................................ 275
Thereafter.................................................. --
------
Total............................................. $2,456
======
Rental expense for operating leases for the year ended December 31, 1997,
was $4.7 million.
Guarantees
The Company jointly and severally guarantees the debt of Mountain Creek
Joint Venture ("MCJV"), which does not exceed $2.9 million. MCJV is a joint
venture 50 percent owned by El Paso Energy Intrastate Company, formerly
Cornerstone Pipeline Company, a wholly owned subsidiary of the Company.
Litigation
The Company is involved in litigation and disputes arising in the ordinary
course of business which management believes will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
6. INCOME TAXES
The following table reflects the components of income tax expense for the
year ended December 31, 1997:
(IN THOUSANDS)
Current
Federal................................................... $11,541
State..................................................... 33
-------
11,574
-------
Deferred
Federal................................................... 9,370
State..................................................... 2,361
-------
11,731
-------
Total income tax expense.......................... $23,305
=======
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EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects the components of the net deferred tax
liabilities at December 31, 1997:
(IN THOUSANDS)
Deferred tax assets
Net operating loss and tax credit carryovers.............. $ 10,334
Other..................................................... 1,154
Valuation allowance....................................... (853)
--------
Total deferred tax asset.......................... 10,635
--------
Deferred tax liabilities
Property, plant and equipment............................. 109,926
Other assets.............................................. 4,181
--------
Total deferred tax liability...................... 114,107
--------
Net deferred tax liability.................................. $103,472
========
Tax expense of the Company differs from the amount computed by applying the
statutory federal income tax rate (35 percent) to income before taxes. The
following table outlines the reasons for the differences for the period ended
December 31, 1997:
(IN THOUSANDS)
Tax expense at the statutory federal rate of 35%............ $21,073
Increase:
State income tax, net of federal income tax benefit....... 1,556
Other..................................................... 676
-------
Income tax expense.......................................... $23,305
=======
Effective tax rate.......................................... 39%
=======
As of December 31, 1997, approximately $149,000 of alternative minimum tax
credits were available to offset future regular tax liabilities. These
alternative minimum tax credit carryovers have no expiration date. Additionally,
at December 31, 1997, approximately $853,000 of general business credits and
$26.7 million of net operating loss carryovers were available to offset future
tax liabilities. The general business credit carryovers expire in the years 1998
through 2000. The net operating loss carryovers expire in the years 2002 through
2010. Usage of these carryovers are subject to the limitations provided for
under Sections 382 and 383 of the Internal Revenue Code as well as the separate
return limitation year rules of the Treasury Regulations.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
the general business credit carryovers. Any tax benefits subsequently recognized
from the reversal of this valuation allowance will be allocated to goodwill.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
year ended December 31:
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
Interest received, net...................................... $1,972
Income taxes paid........................................... 695
See Note 2, Acquisition, for a discussion of the non-cash investing
transactions related to the acquisition of TPC.
15
16
EL PASO FIELD SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. TRANSACTIONS WITH AFFILIATED COMPANIES
General and Administrative
EPNG allocates to its subsidiaries, including the Company, certain general
and administrative expenses. Included in the total operations and maintenance
expenses in the consolidated income statement for the year ended December 31,
1997 was $9.9 million of expenses allocated to the Company for administrative,
legal, and financial services. The allocation is based on the estimated level of
effort devoted to the Company's operations and relative size based on revenues,
gross property, and payroll. In addition, EPNG's employee benefit programs
currently cover the employees of the Company. EPNG's total benefit expense is
allocated to each of its subsidiaries based on headcount of which $2 million was
allocated to the Company for the year ended December 31, 1997.
Accounts Receivable and Accounts Payable--Affiliated Companies
Balances in accounts receivable and accounts payable-affiliated companies
relate to activities in the normal course of business. Notes receivable and
notes payable included as a component of accounts receivable and accounts
payable -- affiliated result from cash flow requirements or excess cash
generated by the Company. Notes bear interest based on EPNG's commercial paper
borrowing rate which was 5.76% at December 31, 1997. Commercial paper borrowings
are arranged through EPNG. At December 31, 1997, the Company had approximately
$134 million of notes payable to EPNG. Average notes receivable from EPNG
totaled $11.2 million for 1997 (calculated based on month end balances.) The
Company recorded net interest income related to these receivables of
approximately $2.1 million for the year ended December 31, 1997. Accounts
receivable and payable to affiliates were approximately $44 million and $59
million, respectively, at December 31, 1997. Revenues and operating expenses
resulting from such transactions were approximately $18 million and $14 million,
respectively, for the year ended December 31, 1997.
9. SUBSEQUENT EVENTS
In January 1998, the Company received as a capital contribution the
gathering and transportation assets, liabilities and equity of Channel Pipeline,
an indirect wholly-owned subsidiary of EPNG. The net assets contributed totaled
approximately $302 million.
Pursuant to a Federal Energy Regulatory Commission ruling, in April of 1998
the Company received a capital contribution of compressor facility assets valued
at approximately $26 million, net of a $10 million deferred tax liability from
EPNG.
In September 1998, the Company sold its natural gas gathering, treating,
and processing assets in the Anadarko Basin to Midcoast Energy Resources, Inc.
for $35 million.
16
17
(B) PRO FORMA FINANCIAL INFORMATION.
The pro forma financial information reflecting the effect of the
Reorganization, omitted from the initial filing of this Form 8-K as permitted by
such Form, is set forth below.
EL PASO TENNESSEE PIPELINE CO.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 1998, EPEC, EPTPC's ultimate parent, completed the
Reorganization of its assets and operations and those of its subsidiaries, in
accordance with a private letter ruling received from the Internal Revenue
Service. As an initial step in the Reorganization El Paso Energy Marketing was
transferred to EPTPC in March 1998. After the Reorganization, EPTPC continues 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 addition, EPTPC now owns all of the international
operations of El Paso Energy International Company and the field services
operations of El Paso Field Services Company. These transactions were treated as
an exchange between entities under common control and accounted for in a manner
similar to a pooling of interests. As part of the Reorganization, EPTPC also
transferred certain assets and liabilities of corporate or discontinued
operations to EPEC. Following the Reorganization, EPEC became the direct
corporate parent of EPTPC. The following Unaudited Pro Forma Condensed
Consolidated Financial Statements of EPTPC (the "Pro Forma Financial
Statements") illustrate the effect of the Reorganization. The Pro Forma
Financial Statements have been prepared to give effect to the Reorganization as
of and for the nine months ended September 30, 1998, and for the year ended
December 31, 1997. The Pro Forma Financial Statements are not necessarily
indicative of the actual operating results or financial position had the
Reorganization occurred as of such dates, nor do they purport to indicate
operating results or financial position which may be attained in the future.
The Consolidated Company Historical column represents the unaudited
financial position and results of operations derived from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998,
and the audited results of operations derived from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. Historical financial
statements for previous periods include certain reclassifications which were
made to conform to the current presentation. Such reclassifications have no
effect on reported net income or total stockholders' equity. The El Paso Field
Services Transfer-In Adjustments column includes the effect of consolidating the
operations of El Paso Field Services and its subsidiaries which were not
previously owned by EPTPC. The Other Subsidiaries Transfer-In Adjustments column
as of and for the period ended September 30, 1998, includes the effect of
consolidating the operations of other subsidiaries transferred-in, including the
operations of El Paso Energy International not previously owned by EPTPC. For
the year ended December 31, 1997, this column also includes the effects of the
transfer of El Paso Energy Marketing which occurred in March 1998. The Transfers
to EPEC Adjustments column includes the effect of transferring certain corporate
and discontinued activities to EPEC. The Other Adjustments column includes the
effect of the elimination of intercompany transactions which previously were not
consolidated with EPTPC.
17
18
EL PASO TENNESSEE PIPELINE CO.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN MILLIONS)
EL PASO
FIELD OTHER
CONSOLIDATED SERVICES SUBSIDIARIES TRANSFERS TO CONSOLIDATED
COMPANY TRANSFER-IN TRANSFER-IN EPEC OTHER COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ------------ ------------ ----------- ------------
ASSETS
Current assets
Cash and temporary investments....... $ 10 $ -- $ 1 $ (2) $ -- $ 9
Accounts and notes receivable, net
Customer........................... 479 41 11 -- -- 531
Affiliated companies............... 128 20 35 (18) (165) --
Other.............................. 128 15 25 -- 71 239
Inventories.......................... 20 -- -- -- -- 20
Deferred income tax benefit.......... 68 -- -- -- -- 68
Other................................ 301 1 1 -- (5) 298
------ ---- ---- ---- ----- ------
Total current assets........... 1,134 77 73 (20) (99) 1,165
Property, plant, and equipment, net.... 4,779 652 227 (1) -- 5,657
Investments in unconsolidated
affiliates........................... 224 -- 480 -- 704
Other.................................. 189 65 47 2 -- 303
------ ---- ---- ---- ----- ------
Total assets................... $6,326 $794 $827 $(19) $ (99) $7,829
====== ==== ==== ==== ===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Trade and other.................... $ 623 $ 29 $ 5 $ (3) $ -- $ 654
Affiliated companies............... 144 155 725 -- (165) 859
Short-term borrowings (including
current maturities of long-term
debt).............................. 1 -- -- -- -- 1
Other................................ 627 32 26 (29) 66 722
------ ---- ---- ---- ----- ------
Total current liabilities...... 1,395 216 756 (32) (99) 2,236
------ ---- ---- ---- ----- ------
Long-term debt, less current
maturities........................... 1,379 -- 1 -- -- 1,380
------ ---- ---- ---- ----- ------
Deferred income taxes.................. 1,210 126 16 56 -- 1,408
------ ---- ---- ---- ----- ------
Other.................................. 727 19 -- (43) -- 703
------ ---- ---- ---- ----- ------
Minority interest...................... 25 -- 40 -- -- 65
------ ---- ---- ---- ----- ------
Stockholders' equity
Series A preferred stock............. 300 -- -- -- -- 300
Common stock......................... -- --
Additional paid-in capital........... 1,140 344 77 -- 1,561
Retained earnings.................... 165 89 (63) -- 191
Accumulated other comprehensive
income............................. (15) -- -- -- -- (15)
------ ---- ---- ---- ----- ------
Total stockholder's equity..... 1,590 433 14 -- -- 2,037
------ ---- ---- ---- ----- ------
Total liabilities and
stockholder's equity......... $6,326 $794 $827 $(19) $ (99) $7,829
====== ==== ==== ==== ===== ======
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet
18
19
EL PASO TENNESSEE PIPELINE CO.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
EL PASO FIELD SERVICES TRANSFER-IN ADJUSTMENTS
Reflects the transfer-in of assets and liabilities associated with El Paso
Field Services and its subsidiaries not previously owned by EPTPC in the
Reorganization
OTHER SUBSIDIARIES TRANSFER-IN ADJUSTMENTS
Reflects the transfer-in of assets and liabilities associated with the
operations of other subsidiaries, including all of the international
operations of El Paso Energy International Company, not previously owned by
EPTPC
TRANSFERS TO EPEC ADJUSTMENTS
Reflects the transfer by EPTPC of certain corporate or discontinued
operations to EPEC, EPTPC's direct corporate parent
OTHER ADJUSTMENTS
Reflects the elimination of affiliated company transactions and other
reclassifications
19
20
EL PASO TENNESSEE PIPELINE CO.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN MILLIONS)
EL PASO
FIELD OTHER
CONSOLIDATED SERVICES SUBSIDIARIES TRANSFERS TO CONSOLIDATED
COMPANY TRANSFER-IN TRANSFER-IN EPEC OTHER COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ------------ ------------ ----------- ------------
Operating revenues........... $4,040 $164 $ 17 $ 1 $(48) $4,174
------ ---- ---- --- ---- ------
Operating expenses
Cost of gas and other
products................ 3,392 28 -- 1 (48) 3,373
Operation and
maintenance............. 299 65 25 (9) -- 380
Depreciation, depletion,
and amortization........ 117 28 5 1 -- 151
Taxes, other than income
taxes................... 38 6 1 (1) -- 44
------ ---- ---- --- ---- ------
3,846 127 31 (8) (48) 3,948
------ ---- ---- --- ---- ------
Operating income............. 194 37 (14) 9 -- 226
------ ---- ---- --- ---- ------
Other (income) and expense
Interest and debt
expense................. 101 6 25 (3) (2) 127
Other -- net............... (81) (1) (27) 13 2 (94)
------ ---- ---- --- ---- ------
20 5 (2) 10 -- 33
------ ---- ---- --- ---- ------
Income before income taxes
and minority interest...... 174 32 (12) (1) -- 193
Income tax expense........... 55 12 (1) (4) -- 62
------ ---- ---- --- ---- ------
Net income................... $ 119 $ 20 $(11) $ 3 $ -- $ 131
====== ==== ==== === ==== ======
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Income
Statements
20
21
EL PASO TENNESSEE PIPELINE CO.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS)
EL PASO
FIELD OTHER
CONSOLIDATED SERVICES SUBSIDIARIES TRANSFER TO CONSOLIDATED
COMPANY TRANSFER-IN TRANSFER-IN EPEC OTHER COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ------------ ----------- ----------- ------------
Operating revenue............ $3,602 $345 $1,174 $(2) $(2) $5,117
------ ---- ------ --- --- ------
Operating expenses
Cost of gas and other
products................ 2,763 178 1,183 -- (2) 4,122
Operation and
maintenance............. 379 71 18 (3) -- 465
Depreciation, depletion,
and amortization........ 143 30 4 -- -- 177
Taxes, other than income
taxes................... 54 7 2 (1) -- 62
------ ---- ------ --- --- ------
3,339 286 1,207 (4) (2) 4,826
------ ---- ------ --- --- ------
Operating income............. 263 59 (33) 2 -- 291
------ ---- ------ --- --- ------
Other (income) and expense
Interest and debt
expense................. 136 (2) 14 -- (1) 147
Other, net................. (43) 1 (20) 2 1 (59)
------ ---- ------ --- --- ------
93 (1) (6) 2 -- 88
------ ---- ------ --- --- ------
Income before income taxes
and minority interest...... 170 60 (27) -- -- 203
Income tax expense........... 59 23 (9) -- -- 73
------ ---- ------ --- --- ------
Net income................... $ 111 $ 37 $ (18) $-- $-- $ 130
====== ==== ====== === === ======
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Income
Statements
21
22
EL PASO TENNESSEE PIPELINE CO.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
EL PASO FIELD SERVICES TRANSFER-IN ADJUSTMENTS
Reflects income and expenses of El Paso Field Services and its subsidiaries not
previously owned by EPTPC in the Reorganization
OTHER SUBSIDIARIES TRANSFER-IN ADJUSTMENTS
Reflects for the period ended September 30, 1998, income and expenses of other
subsidiaries, including all of the international operations of El Paso Energy
International Company not previously owned by EPTPC, transferred as part of the
Reorganization, and for the year ended December 31, 1997, also reflects the
income and expenses associated with the transfer of El Paso Energy Marketing
which occurred in March 1998
TRANSFERS EPEC ADJUSTMENTS
Reflects income and expenses associated with certain corporate or discontinued
operations transferred by EPTPC to its corporate parent, EPEC
OTHER ADJUSTMENTS
Reflects the elimination of affiliated company transactions
22
23
(C) EXHIBITS.
The following exhibits are filed as part of this Form 8-K.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
None
23
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
EL PASO TENNESSEE PIPELINE CO.
By:
----------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
Date: March 15, 1999
24