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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, 1999
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.
Common Stock, par value $.01 per share. Shares outstanding on November 12,
1999: 1,971
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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
EAPRC..................... East Asia Power Resources Corporation, a publicly traded
Philippine company
EBIT...................... Earnings before interest expense and income taxes, excluding
affiliate interest income
EnCap..................... EnCap Investments L.L.C., a Delaware limited liability
company
EPA....................... United States Environmental Protection Agency
EPEC...................... El Paso Energy Corporation, the parent of El Paso Tennessee
Pipeline Co.
EPFS...................... El Paso Field Services Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
EPME...................... El Paso Merchant Energy segment, which is comprised of El
Paso Energy Marketing Company, a wholly owned indirect
subsidiary of El Paso Tennessee Pipeline Co.
EPNG...................... El Paso Natural Gas Company, a wholly owned subsidiary of El
Paso Energy Corporation
EPTPC..................... El Paso Tennessee Pipeline Co., a direct subsidiary of El
Paso Energy Corporation
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)
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 STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Operating revenues...................................... $1,146 $1,498 $3,167 $4,174
------ ------ ------ ------
Operating expenses
Cost of gas and other products........................ 870 1,245 2,287 3,373
Operation and maintenance............................. 132 122 375 374
Depreciation, depletion, and amortization............. 54 52 158 151
Taxes, other than income taxes........................ 12 15 45 44
------ ------ ------ ------
1,068 1,434 2,865 3,942
------ ------ ------ ------
Operating income........................................ 78 64 302 232
------ ------ ------ ------
Other income
Equity investment earnings............................ (8) (10) (46) (33)
Other, net............................................ (20) (26) (64) (54)
------ ------ ------ ------
(28) (36) (110) (87)
------ ------ ------ ------
Income before interest, income taxes and cumulative
effect of accounting change........................... 106 100 412 319
------ ------ ------ ------
Non-affiliated interest and debt expense................ 33 31 106 93
Affiliated interest expense, net........................ 6 12 10 28
Income tax expense...................................... 21 19 92 64
------ ------ ------ ------
60 62 208 185
------ ------ ------ ------
Income before cumulative effect of accounting change.... 46 38 204 134
Cumulative effect of accounting change, net of income
taxes................................................. -- -- (13) --
------ ------ ------ ------
Net income.............................................. $ 46 $ 38 $ 191 $ 134
====== ====== ====== ======
Comprehensive income.................................... $ 43 $ 35 $ 181 $ 126
====== ====== ====== ======
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 24 $ 28
Accounts and notes receivable, net........................ 665 433
Materials and supplies.................................... 22 21
Assets from price risk management activities.............. 304 151
Other..................................................... 141 118
------ ------
Total current assets.............................. 1,156 751
Property, plant, and equipment, net......................... 5,723 5,628
Investment in unconsolidated affiliates..................... 848 579
Other....................................................... 710 476
------ ------
Total assets...................................... $8,437 $7,434
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts and notes payable................................ $2,081 $1,200
Short-term borrowings (including current maturities of
long-term debt)........................................ 24 194
Other..................................................... 403 471
------ ------
Total current liabilities......................... 2,508 1,865
------ ------
Long-term debt, less current maturities..................... 1,466 1,467
------ ------
Deferred income taxes....................................... 1,375 1,277
------ ------
Other....................................................... 686 607
------ ------
Commitments and contingencies (See Note 3)
Minority interest........................................... 65 65
------ ------
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, no par; 6,000,000 shares issued; stated at
liquidation value..................................... 300 300
Common stock, par value $0.01 per share; authorized
100,000 shares; issued 1,971 shares.................... -- --
Additional paid-in capital................................ 1,561 1,540
Retained earnings......................................... 500 327
Accumulated comprehensive income.......................... (24) (14)
------ ------
Total stockholders' equity........................ 2,337 2,153
------ ------
Total liabilities and stockholders' equity........ $8,437 $7,434
====== ======
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30
----------------
1999 1998
----- -----
Cash flows from operating activities
Net income................................................ $ 191 $ 134
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 158 151
Deferred income taxes.................................. 77 59
Undistributed earnings in equity investees............. (22) (20)
Cumulative effect of accounting change, net of income
taxes................................................. 13 --
Net gain on sale of assets............................. (20) (29)
Working capital changes, net of the effect of
acquisitions........................................... (230) 14
Other..................................................... (13) (41)
----- -----
Net cash provided by operating activities......... 154 268
----- -----
Cash flows from investing activities
Capital expenditures...................................... (154) (169)
Investment in joint ventures and equity investees......... (313) (440)
Return of investment in joint ventures and equity
investees.............................................. 11 --
Net change in advances from EPEC.......................... 535 450
Cash paid for acquisitions, net of cash received ......... (76) --
Restricted cash deposited in escrow related to equity
investee............................................... (101) --
Proceeds from sale of assets.............................. 40 56
Other..................................................... (12) (7)
----- -----
Net cash used in investing activities............. (70) (110)
----- -----
Cash flows from financing activities
Net commercial paper repayments........................... (170) --
Net proceeds from long-term note payable.................. 101 --
Dividends paid on preferred stock......................... (19) (19)
Revolving credit repayments............................... -- (117)
Long-term debt retirements................................ -- (45)
----- -----
Net cash used in financing activities............. (88) (181)
----- -----
Decrease in cash and temporary investments.................. (4) (23)
Cash and temporary investments
Beginning of period............................... 28 35
----- -----
End of period..................................... $ 24 $ 12
===== =====
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1998 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 Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at September 30, 1999, and for the quarters and nine months
ended September 30, 1999 and 1998, are unaudited. The condensed consolidated
balance sheet at December 31, 1998, is derived from audited financial statements
at that date. These financial statements do not include all disclosures required
by generally accepted accounting principles, but have been prepared pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission. 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,
except for those relating to the change in Company structure as described below,
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. Financial statements for
the previous periods include certain reclassifications which were made to
conform to the current presentation. Such reclassifications have no effect on
reported net income or stockholders' equity.
Change in Company Structure
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal reorganization in which certain energy marketing operations of EPME,
certain field services operations of EPFS, and certain international operations
of El Paso Energy International were transferred to EPTPC. The transactions were
treated as a transfer of ownership between entities under common control and
were accounted for in a manner similar to a pooling of interests. Accordingly,
the information for the quarter and nine months ended September 30, 1998, has
been presented as though the transactions occurred on January 1, 1998.
Cumulative Effect of Accounting Change
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 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 Company adopted this pronouncement effective January 1, 1999,
and reported a charge of $13 million, net of income taxes, in the first quarter
of 1999 as a cumulative effect of an accounting change.
2. ACQUISITIONS AND DISPOSITIONS
East Asia Power
In February 1999, the Company acquired a 46 percent ownership interest in
EAPRC along with an interest in a convertible loan. Following its acquisition,
the Company converted its interest in the convertible loan to equity, increasing
its ownership interest to 65 percent, and in September 1999, the Company
acquired an additional 17 percent from another shareholder, increasing its
overall ownership interest to 82 percent. As of September 30, 1999, the
Company's total investment in EAPRC was approximately $92 million. EAPRC owns
and operates seven power generation facilities in the Philippines with a total
generating capacity of 388 megawatts. Electric power generated by the facilities
is supplied to a diversified base of customers including National Power
Corporation, the Philippine state-owned utility, private distribution companies
and industrial users. Since the Company is currently evaluating bids to
partially sell-down the Company's interest in EAPRC and expects to complete its
sell down prior to the end of the first quarter of 2000, the Company's
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majority ownership is expected to be temporary. Therefore, this investment is
accounted for under the equity method of accounting.
EnCap
In March 1999, the Company acquired EnCap for $52 million, net of cash
acquired. The purchase price included $17 million in Company common stock, of
which $7 million is issuable upon the occurrence of certain events. The
acquisition was accounted for as a purchase. EnCap is an institutional funds
management firm specializing in financing independent oil and gas producers.
EnCap manages three separate institutional oil and gas investment funds in the
U.S., and serves as investment advisor to Energy Capital Investment Company PLC,
a publicly traded investment company in the United Kingdom.
Other
In June 1999, the Company acquired a 26 percent interest in a power plant
in Tamil Nadu, India for $37 million. Approximately $11 million was paid in June
1999, and the remaining amount will be paid in the first quarter of 2001. The
project consists of a 346 megawatt combined cycle power plant which will serve
as a base load facility and sell power to the state-owned Tamil Nadu Electricity
Board under a thirty-year power purchase agreement. Construction began in
January 1999, and operations are expected to commence in early 2001.
In June 1999, the Company transferred a 49 percent interest in Viosca Knoll
Gathering Company to Leviathan Gas Pipeline Partners, L.P. ("Leviathan") for
total consideration of approximately $80 million. Total consideration included
cash of approximately $20 million with the balance in Leviathan common units.
The gain from the transaction is included in Other, net in the Condensed
Consolidated Statements of Income. In November 1999, Leviathan announced a name
change to El Paso Energy Partners, L.P. effective December 1, 1999.
In August 1999, the Company acquired a 100% interest in the 158 megawatt
Rio Negro power plant located in Manaus, Brazil for $110 million. Electricity
from the Rio Negro facility will be sold under a long-term contract to
Eletronorte, a subsidiary of the Brazilian federal electric utility.
As a result of a Federal Trade Commission order related to the merger of
Sonat Inc. into EPEC, the Company must dispose of certain operations, including
its wholly owned East Tennessee Natural Gas Company. The impact of the required
divestiture is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.
3. COMMITMENTS AND CONTINGENCIES
Indonesia
The Company owns a 47.5 percent ownership interest in a power generating
plant in Sengkang, South Sulawesi, Indonesia. Under the terms of the project's
power purchase agreement, PLN purchases power from the Company in Indonesian
rupiah indexed to the U.S. dollar at the date of payment. Due to the devaluation
of the rupiah beginning in 1997, the cost of power to PLN has increased. PLN has
been unable to pass this increased cost on to its customers and has requested
financial aid from Indonesia's 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. The difference
between the current and prior exchange rate has resulted in an outstanding
balance due from PLN of $18 million at September 30, 1999. During September
1999, the Company entered into an interim agreement with PLN, pursuant to which
PLN and the Company will attempt to negotiate long-term resolutions to the
existing difficulties. The total investment in the Sengkang project was
approximately $27 million at September 30, 1999. All project debt is
non-recourse, and the Company has political risk insurance on the Sengkang
project. The Company believes the current economic difficulties in Indonesia
will not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
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Brazil
The Company owns 100 percent of a 240 megawatt power generating plant in
Manaus, Brazil. Power from the plant is currently sold to a subsidiary of
Centrais Electricas do Norte do Brasil, S.A., ("Eletronorte"), denominated in
Brazilian real. In January 1999, the real was devalued. Under a provision in the
contract, the Company is entitled to adjust its forward tariff rate for
devaluations. In April 1999, the contract with Eletronorte was amended to extend
the term from four to six years. The Company believes the current economic
difficulties in Brazil will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
The contract for the Manaus power project provides for delay and
availability damages to be paid to Eletronorte if the specified construction
schedule is not met or the project does not meet certain availability standards.
Completion of the project was delayed beyond the originally scheduled completion
dates provided in the contract, and the availability standards were not met.
Such delays resulted in claims by Eletronorte for damages. In the second quarter
of 1999, the Company reached a settlement with all parties which resolved all
claims for availability damages and continues to negotiate toward the settlement
of the claims on delay damages. The Company does not believe the ultimate
resolution of claims for delay damages will have a material adverse effect on
the Company's financial position, results of operations, or cash flows.
Pakistan
The Company owns a 42 percent interest in a 151 megawatt natural gas-fired
combined cycle plant in Kabirwala, Pakistan. Upon its completion, the plant will
sell electricity to the state owned Water & Power Development Authority
("WAPDA") under a 30-year contract. Due to an inlet filter fire and other
miscellaneous delays, the commencement of commercial operations of the power
plant has been delayed. The project company has received a claim from WAPDA for
liquidated damages due to this delay in commercial operations. The Company is
disputing this claim. In addition, the project company has certain claims for
delay damages against the project contractor. The Company believes that this
delay and any resolution regarding these damages 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 sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. Among
other things, the NOPR proposes the following: (i) removing the price cap for
the short-term capacity market; (ii) establishing procedures to make pipeline
and shipper-owned capacity comparable; (iii) auctioning all available short-term
pipeline capacity on a daily basis with the pipeline unable to set a reserve
price above variable costs; (iv) changing policies or pipeline penalties,
nomination procedures and services; (v) increasing pipeline reporting
requirements; (vi) permitting the negotiation of terms and conditions of
service; and (vii) potentially modifying the procedures for certificating new
pipeline construction. Also in July 1998, FERC issued a Notice of Inquiry
("NOI") seeking comments on FERC's policy for pricing long-term capacity. The
Company provided comments on the NOPR and NOI in April 1999.
In April 1997, FERC approved the settlement of all issues related to the
recovery of TGP's GSR and other transition costs and related proceedings (the
"GSR Stipulation and Agreement"). Under the terms of the GSR Stipulation and
Agreement, TGP is entitled to collect up to $770 million from its customers,
$693 million through a demand surcharge and $77 million through an interruptible
transportation surcharge. The demand portion has been fully collected. As of
September 30, 1999, $45 million of the interruptible transportation portion had
been collected. There is no time limit for collection of the interruptible
transportation surcharge. 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. In March 1999, TGP filed a GSR
reconciliation report with FERC in accordance with the terms of its GSR
Stipulation and Agreement. The
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report indicated that collections from firm customers through the demand
surcharge were $14 million more than the $693 million TGP was entitled to
collect. In June 1999, FERC accepted the report as complying with the GSR
Stipulation and Agreement, and in July 1999, TGP refunded the overcollections to
its firm customers. TGP will be required to refund to firm customers amounts
collected in excess of each firm customer's share of the final transition costs
based on the final GSR reconciliation report, which will be filed in March 2001.
Any future refund is not expected to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved a settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. One
party, a competitor of TGP, filed a Petition for Review of the FERC approved
settlement with the Court of Appeals, which subsequently remanded the case to
FERC to respond to the competitor's argument that TGP's cost allocation
methodology deterred the development of market centers (centralized locations
where buyers and sellers can physically exchange gas). At FERC's request,
comments were filed in January 1999. This matter is still pending before FERC.
All cost of service issues related to TGP's 1991 general rate proceeding
were resolved pursuant to a settlement agreement approved by FERC which now has
become final. In a subsequent ruling, FERC remanded to an ALJ the issue of the
proper allocation of TGP's New England lateral costs. In October 1998, FERC
issued an order establishing the proper allocation of the New England lateral
costs and in April 1999 FERC denied requests for rehearing of that order. The
methodology approved by FERC economically approximates the methodology
previously used by TGP. In April 1999, TGP filed with FERC revised rates to be
effective May 1, 1999, consistent with the FERC's decision. TGP refunded
approximately $1 million to certain of its customers in the third quarter of
1999. The refunds resolved this proceeding.
In April 1999, FERC approved a settlement which resolved all outstanding
FERC proceedings relating to the cashout reports that TGP had filed for the
period September 1993 through August 1998. The settlement also established a new
cashout mechanism to account for customer imbalances. The new cashout mechanism
was implemented in the second quarter of 1999, retroactive to September 1998.
As previously reported, contracts representing 70 percent of TGP's firm
transportation capacity were due to expire by November 2000. As a result of
negotiations with existing customers to extend or restructure these contracts,
those contracts expiring by November 2000 now only represent approximately 20
percent of firm transportation capacity. To date, the conditions of settlements
and extensions have been similar to the original contracts. Currently, 80
percent of TGP's contracted firm transportation capacity has an average term in
excess of four years. TGP continues to pursue future markets and customers for
the capacity that is not committed beyond November 2000 and expects that this
capacity will be placed under a combination of long-term and short-term
contracts. However, there can be no assurance as to whether TGP will be able to
replace these contracts or that the terms of new contracts will be as favorable
to TGP as the existing contracts.
As an interstate pipeline, TGP is subject to FERC audits of its books and
records. As part of an
industry-wide initiative, TGP's property retirements are currently under review
by the FERC audit staff.
As the aforementioned rate and regulatory matters are fully and
unconditionally resolved, the Company may either recognize an additional refund
obligation or a non-cash benefit to finalize previously estimated liabilities.
Management believes the ultimate resolutions of these matters, which are in
various stages of finalization, will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Legal Proceedings
In February 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") cost recovery action
against fourteen companies including the Company and certain of its affiliated
companies relating to the Sikes Disposal Pits Superfund Site ("Sikes") located
in Harris County, Texas. The suit claims
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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 from all
defendants to the suit. Although factual investigation relating to Sikes is in
the preliminary stages, the Company believes that the amount of material, if
any, disposed at Sikes by the Company was small, possibly de minimis. However,
the 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 EPA and the
relevant states regarding those remediation activities. TGP is also working with
the Pennsylvania and New York environmental agencies regarding remediation and
post-remediation activities at the Pennsylvania and New York stations.
Management believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.
In November 1988, the Kentucky environmental agency filed a complaint in a
Kentucky state court alleging that TGP discharged pollutants into the waters of
the state without a permit and disposed of PCBs without a permit. The agency
sought an injunction against future discharges, sought an order to remediate or
remove PCBs, and sought a civil penalty. TGP has entered into agreed orders with
the agency to resolve many of the issues raised in the original allegations, has
received water discharge permits for its Kentucky compressor stations from the
agency, and continues to work to resolve the remaining issues. The relevant
Kentucky compressor stations are scheduled to be characterized and remediated
under the consent order with the EPA. Management believes that the resolution of
this issue will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
A number of subsidiaries of EPEC, including wholly and partially owned
subsidiaries of the Company, have been named defendants in actions brought by
Jack Grynberg on behalf of the U.S. Government under the False Claims Act.
Generally, the complaints allege an industry-wide conspiracy to underreport the
heating value as well as the volumes of the natural gas produced from federal
and Indian lands, thereby depriving the U.S. Government of royalties. The
Company believes the complaint to be without merit and that the ultimate
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 cannot be predicted with
certainty, management currently does not expect these matters to have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
Environmental
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at current and
former operating sites. As of September 30, 1999, the Company had reserves of
approximately $137 million for expected environmental costs.
In addition, the Company estimates that its subsidiaries will make capital
expenditures for environmental matters of approximately $4 million for the
remainder of 1999. These expenditures primarily relate to compliance with air
regulations and, to a lesser extent, control of water discharges. The Company
expects to incur expenditures of approximately $96 million in the aggregate for
the years 2000 through 2007.
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
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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 Stipulation and Agreement (the "Environmental Stipulation") that establishes a
mechanism for recovering a substantial portion of the environmental costs
identified in the internal project. The Environmental Stipulation was effective
July 1, 1995. As of September 30, 1999, all amounts have been collected under
the Environmental Stipulation. Refunds may be required to the extent actual
eligible expenditures are less than estimated eligible expenditures used to
determine amounts collected under the Environmental Stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they could be designated, or have been asked for
information to determine whether they could be designated as a PRP with respect
to 11 sites under CERCLA or state equivalents. The Company has sought to resolve
its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for payment of
the Company's allocable share of remediation costs. 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 the determination of its estimated liability. The Company
presently believes that the costs associated with the current status of such
other entities as PRPs at the Superfund sites referenced above will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with various environmental matters. In these proceedings, the Company contends
that certain environmental costs and liabilities associated with various
entities or sites, including costs associated with former operating sites, must
be paid or reimbursed by certain of its historic insurers. The proceedings are
in the discovery stage, and it is not yet possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or other relevant 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 reserves are adequate.
Other than the items discussed above, management is not aware of any other
commitments or contingent liabilities which would have a material adverse effect
on the Company's financial condition, results of operations, or cash flows.
9
12
4. SEGMENT INFORMATION
During the third quarter of 1999, the Company renamed its El Paso Energy
Marketing segment El Paso Merchant Energy. The change had no impact on reported
segment results.
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD MERCHANT ENERGY
PIPELINE SERVICES ENERGY INTERNATIONAL TOTAL
--------- -------- -------- ------------- ------
(IN MILLIONS)
Revenues from external customers.... $ 173 $ 96 $ 862 $ 14 $1,145
Intersegment revenue................ 7 14 5 -- 26
Operating income (loss)............. 73 17 3 (11) 82
EBIT................................ 76 20 2 12 110
Segment assets...................... 4,938 1,065 922 1,279 8,204
SEGMENTS
AS OF OR FOR THE QUARTER ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD MERCHANT ENERGY
PIPELINE SERVICES ENERGY INTERNATIONAL TOTAL
--------- -------- -------- ------------- ------
(IN MILLIONS)
Revenues from external customers.... $ 171 $ 37 $1,275 $ 15 $1,498
Intersegment revenue................ 9 17 4 -- 30
Operating income (loss)............. 71 9 -- (9) 71
EBIT................................ 82 13 -- 12 107
Segment assets...................... 4,906 986 606 886 7,384
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD MERCHANT ENERGY
PIPELINE SERVICES ENERGY INTERNATIONAL TOTAL
--------- -------- -------- ------------- ------
(IN MILLIONS)
Revenues from external customers.... $ 556 $ 241 $2,325 $ 43 $3,165
Intersegment revenues............... 21 47 11 -- 79
Operating income (loss)............. 286 44 18 (34) 314
EBIT................................ 302 73 19 31 425
Segment assets...................... 4,938 1,065 922 1,279 8,204
SEGMENTS
AS OF OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD MERCHANT ENERGY
PIPELINE SERVICES ENERGY INTERNATIONAL TOTAL
--------- -------- -------- ------------- ------
(IN MILLIONS)
Revenues from external customers.... $ 542 $ 145 $3,440 $ 43 $4,170
Intersegment revenues............... 28 41 13 -- 82
Operating income (loss)............. 230 43 (4) (22) 247
EBIT................................ 252 54 -- 23 329
Segment assets...................... 4,906 986 606 886 7,384
10
13
The reconciliations of EBIT to income before income taxes and cumulative
effect of accounting change are presented below:
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ---- ----
(IN MILLIONS)
Total EBIT for segments............................ $110 $107 $425 $329
Corporate expenses, net............................ (4) (7) (13) (10)
---- ---- ---- ----
Income before interest, income taxes and cumulative
effect of accounting change...................... $106 $100 $412 $319
==== ==== ==== ====
5. DEBT AND OTHER CREDIT FACILITIES
In August 1999, EPEC established a new $1,250 million 364-day renewable
revolving credit and competitive advance facility. As of September 30, 1999,
EPEC's interest rate for borrowings under this facility was equal to LIBOR plus
50 basis points. The rate will vary based on EPEC's long-term unsecured debt
rating. This facility replaced EPEC's $750 million 364-day renewable revolving
credit and competitive advance facility established in October 1997. TGP is a
designated borrower under this credit facility. As of September 30, 1999, no
amounts were outstanding under this facility.
The weighted average interest rate of short-term borrowings was 5.5% and
5.8% at September 30, 1999 and December 31, 1998, respectively. The Company had
short-term borrowings, including current maturities of long-term debt, at
September 30, 1999 and December 31, 1998, as follows:
1999 1998
----- -----
(IN MILLIONS)
Commercial paper............................................ $20 $190
Current maturities of other long-term debt.................. 4 4
--- ----
$24 $194
=== ====
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 1999 and December 31, 1998,
consisted of the following:
1999 1998
------ ------
(IN MILLIONS)
Property, plant, and equipment, at cost
Tennessee Gas Pipeline.................................... $2,460 $2,438
El Paso Field Services.................................... 1,131 1,117
El Paso Merchant Energy................................... 15 15
El Paso Energy International.............................. 295 162
Corporate and Other....................................... 78 73
------ ------
3,979 3,805
Less accumulated depreciation and depletion................. 620 577
------ ------
3,359 3,228
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,364 2,400
------ ------
Total property, plant, and equipment, net................... $5,723 $5,628
====== ======
Current FERC policy does not permit the Company to recover amounts in
excess of original cost allocated in purchase accounting to its regulated
operations through rates.
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7. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
using the equity method of accounting. The principal equity method investments
are the Company's investments in international pipelines, interstate pipelines,
power generation plants, gathering systems and natural gas storage facilities.
Summarized financial information of the Company's proportionate share of 50
percent or less owned companies and majority owned unconsolidated subsidiaries
accounted for by the equity method of accounting is as follows:
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(IN MILLIONS)
Operating results data:
Revenues and other income............................ $88 $64 $248 $148
Costs and expenses................................... 76 53 198 113
Income from continuing operations.................... 12 11 50 35
Net income........................................... 8 10 46 33
8. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards 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. This pronouncement
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 was amended by Statement of Financial Accounting Standards No. 137
issued in June 1999. The amendment defers the effective date to fiscal years
beginning after June 15, 2000. The Company is currently evaluating the effects
of this pronouncement.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
GENERAL
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal reorganization in which certain energy marketing operations of EPME,
certain field services operations of EPFS, and certain international operations
of El Paso Energy International were transferred to EPTPC. The transactions were
treated as a transfer of ownership between entities under common control and
were accounted for in a manner similar to a pooling of interests. Accordingly,
the information for the quarter and nine months ended September 30, 1998,
presented in the Management's Discussion and Analysis of Financial Condition and
Results of Operations has been restated as though the transactions occurred on
January 1, 1998.
As a result of a Federal Trade Commission order related to the merger of
Sonat Inc. into EPEC, the Company must dispose of certain operations, including
its wholly owned East Tennessee Natural Gas Company. The impact of the required
divestiture is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.
RESULTS OF OPERATIONS
SEGMENT RESULTS
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(IN MILLIONS)
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Tennessee Gas Pipeline................................ $ 76 $ 82 $302 $252
El Paso Field Services................................ 20 13 73 54
El Paso Merchant Energy............................... 2 -- 19 --
El Paso Energy International.......................... 12 12 31 23
Corporate expenses, net............................... (4) (7) (13) (10)
---- ---- ---- ----
Total EBIT.................................. $106 $100 $412 $319
==== ==== ==== ====
TENNESSEE GAS PIPELINE
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(IN MILLIONS)
Operating revenues................................ $ 180 $ 180 $ 577 $ 570
Operating expenses................................ (107) (109) (291) (340)
Other, net........................................ 3 11 16 22
----- ----- ----- -----
EBIT............................................ $ 76 $ 82 $ 302 $ 252
===== ===== ===== =====
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16
Third Quarter 1999 Compared to Third Quarter 1998
Operating expenses for the quarter ended September 30, 1999, were $2
million lower than for the same period of 1998. This decrease was attributable
to lower system fuel usage associated with operating efficiencies achieved as a
result of lower throughput levels and lower direct operating and maintenance
costs.
Other, net for the quarter ended September 30, 1999, was $8 million lower
than for the same period of 1998 primarily due to interest income on a favorable
sales and use tax settlement received in the third quarter of 1998 and lower
earnings from equity investments in the third quarter of 1999.
Nine Months Ended 1999 Compared to Nine Months Ended 1998
Operating revenues for the nine months ended September 30, 1999, were $7
million higher than for the same period of 1998 primarily due to the favorable
resolution of regulatory issues during 1999 and the impact of a downward
revision in the amount of recoverable interest on GSR costs in 1998. The
increase was partially offset by a favorable customer settlement in the second
quarter of 1998 and lower system throughput in 1999 due to milder temperatures.
Operating expenses for the nine months ended September 30, 1999, were $49
million lower than for the same period of 1998. The decrease was primarily due
to the favorable resolution of certain regulatory issues during 1999 and lower
fuel usage associated with operating efficiencies achieved as a result of lower
system throughput.
Other, net for the nine months ended September 30, 1999, was $6 million
lower than for the same period of 1998 primarily due to interest income received
in the third quarter of 1998 on a favorable sales and use tax settlement and
lower earnings from equity investments during 1999. The decrease was partially
offset by the impact of a favorable settlement of a regulatory issue in the
first quarter of 1999.
EL PASO FIELD SERVICES
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
1999 1998 1999 1998
----- ----- ---- -----
(IN MILLIONS)
Gathering and treating margin........................ $ 39 $ 34 $115 $ 111
Processing margin.................................... 12 10 32 36
Other margin......................................... 3 -- 7 2
---- ---- ---- -----
Total gross margin......................... 54 44 154 149
Operating expenses................................... (37) (35) (110) (106)
Other, net........................................... 3 4 29 11
---- ---- ---- -----
EBIT....................................... $ 20 $ 13 $ 73 $ 54
==== ==== ==== =====
Third Quarter 1999 Compared to Third Quarter 1998
Total gross margin for the quarter ended September 30, 1999, was $10
million higher than for the same period of 1998. The increase in the gathering
and treating margin is primarily due to higher volumes and average gathering
rates in the San Juan basin, partially offset by the sale of assets in the
Anadarko Basin in September 1998. The increase in the processing margin resulted
from higher volumes and realized liquids prices during the third quarter of 1999
compared to the same period of 1998. The increase in other margin resulted from
the acquisition of EnCap in the first quarter of 1999.
Operating expenses for the quarter ended September 30, 1999, were $2
million higher than for the same period of 1998 due to an increase in
amortization and depreciation expense attributable to acquisitions.
14
17
Other, net for the quarter ended September 30, 1999, was $1 million lower
than for the same period of 1998 due to a decrease in earnings on equity
investments.
Nine Months Ended 1999 Compared to Nine Months Ended 1998
Total gross margin for the nine months ended September 30, 1999, was $5
million higher than for the same period of 1998. The increase in the gathering
and treating margin is primarily due to higher volumes in the San Juan basin.
The increase was partially offset by the sale of assets in the Anadarko Basin in
September 1998. The decrease in the processing margin resulted from lower
realized liquids prices in 1999 compared to the same period of 1998. The
increase in other margin resulted from the acquisition of EnCap in the first
quarter of 1999.
Operating expenses for the nine months ended September 30, 1999, were $4
million higher than for the same period of 1998 primarily due to an increase in
amortization and depreciation expense attributable to acquisitions.
Other, net for the nine months ended September 30, 1999, was $18 million
higher than for the same period of 1998 primarily due to net gains on the sale
of assets in 1999.
EL PASO MERCHANT ENERGY
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(IN MILLIONS)
Natural gas margin..................................... $10 $13 $ 40 $ 11
Power margin........................................... -- (4) -- 15
--- --- ---- ----
Total gross margin........................... 10 9 40 26
Operating expenses..................................... (7) (9) (22) (30)
Other, net............................................. (1) -- 1 4
--- --- ---- ----
EBIT......................................... $ 2 $-- $ 19 $ --
=== === ==== ====
Third Quarter 1999 Compared to Third Quarter 1998
Total gross margin for the quarter ended September 30, 1999, was $1 million
higher than for the same period of 1998. The decrease in the natural gas margin
was primarily due to decreased physical trading margins coupled with increases
in broker expenses resulting from increases in financial volumes and positions.
These decreases were partially offset by income recognition on long-term gas
contracts closed in the quarter. The power margin was zero in 1999 compared to a
loss of $4 million in 1998 due to the January 1999 transfer of EPME's power
trading activities to El Paso Power Services Company, a wholly owned direct
subsidiary of EPEC.
Operating expenses for the quarter ended September 30, 1999, were $2
million lower than for the same period of 1998 due to a decrease in general and
administrative expenses, principally those associated with the transfer of power
trading activities to El Paso Power Services Company.
Nine Months Ended 1999 Compared to Nine Months Ended 1998
Total gross margin for the nine months ended September 30, 1999, was $14
million higher than for the same period of 1998. The increase in the natural gas
margin was primarily due to the income recognition from long-term natural gas
transactions closed during 1999. The increase was partially offset by increased
broker expenses resulting from increases in financial volumes and positions. The
power margin was zero in 1999 compared to income of $15 million in 1998 due to
the January 1999 transfer of EPME's power trading activities to El Paso Power
Services Company, a wholly owned direct subsidiary of EPEC.
15
18
Operating expenses for the nine months ended September 30, 1999, were $8
million lower than for the same period of 1998 primarily due to a decrease in
general and administrative expenses, including those associated with power
trading activities transferred to El Paso Power Services Company.
Other, net for the nine months ended September 30, 1999, was $3 million
lower than for the same period of 1998 primarily due to a gain on the sale of
assets in the second quarter of 1998.
EL PASO ENERGY INTERNATIONAL
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(IN MILLIONS)
Operating revenues.................................... $ 14 $ 15 $ 43 $ 43
Operating expenses.................................... (25) (24) (77) (65)
Other, net............................................ 23 21 65 45
---- ---- ---- ----
EBIT................................................ $ 12 $ 12 $ 31 $ 23
==== ==== ==== ====
Third Quarter 1999 Compared to Third Quarter 1998
Operating revenues for the quarter ended September 30, 1999, were $1
million lower than for the same period of 1998 primarily due to a decrease in
revenues from EMA Power, partially offset by revenues on
Rio Negro which was consolidated in the third quarter of 1999.
Operating expenses for the quarter ended September 30, 1999, were $1
million higher than for the same period of 1998 primarily due to higher
operating expenses on consolidated projects. The increase was largely offset by
lower project development costs.
Other, net for the quarter ended September 30, 1999, was $2 million higher
than for the same period of 1998 due to higher earnings on equity investments,
principally the Samalayuca Power, East Asia Power, and Kladno projects. The 1998
earnings included a gain on the sale of surplus power equipment and a loss on an
equity swap agreement.
Nine Months Ended 1999 Compared to Nine Months Ended 1998
Operating expenses for the nine months ended September 30, 1999, were $12
million higher than for the same period of 1998 primarily due to an increase in
operating expenses in consolidated projects partially offset by lower project
development costs.
Other, net for the nine months ended September 30, 1999, was $20 million
higher than for the same period of 1998 primarily due to higher earnings from
equity investments, principally the Samalayuca Power and East Asia Power
projects. The 1998 earnings included certain gains from project-related
activities and a gain on the sale of surplus power equipment in 1998.
16
19
CORPORATE EXPENSES, NET
Third Quarter 1999 Compared to Third Quarter 1998
Net corporate expenses for the quarter ended September 30, 1999, were $3
million lower than for the same period of 1998 primarily due to the timing of
corporate allocations in the third quarter of 1999.
Nine Months Ended 1999 Compared to Nine Months Ended 1998
Net corporate expenses for the nine months ended September 30, 1999, were
$3 million higher than for the same period of 1998. The change was primarily due
to lower income from investments in 1999 partially offset by the timing of
corporate allocations in 1999.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the quarter and nine months
ended September 30, 1999, was higher than for the same period of 1998 due to
increased borrowings related to acquisitions, capital expenditures, and other
investing expenditures.
AFFILIATED INTEREST EXPENSE, NET
Affiliated interest expense, net for the quarter and nine months ended
September 30, 1999, was lower than for the same period of 1998, primarily due to
reduction in affiliated average debt balance.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $154 million for the nine
months ended September 30, 1999, compared to $268 million for the same period of
1998. Higher income was offset by lower GSR recoveries in 1999, tax refunds
received in 1998, and higher receivable balances in 1999.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $70 million for the nine months
ended September 30, 1999. Expenditures related to joint ventures and equity
investments were primarily attributable to the acquisition of an 82 percent
ownership interest in EAPRC. Other investment activity included expenditures for
expansion and construction projects, as well as the acquisition of EnCap.
Internally generated funds and advances from EPEC, supplemented by other
financing activities, were used to fund these expenditures.
Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds,
commercial paper issuances, available capacity under existing credit facilities,
and/or contributions from EPEC.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $88 million for the nine months
ended September 30, 1999. Long-term borrowings, supplemented by internally
generated funds, were used to reduce short-term borrowings, pay dividends, fund
capital and equity investments, and for other corporate purposes.
In August 1999, EPEC established a new $1,250 million 364-day renewable
revolving credit and competitive advance facility. As of September 30, 1999,
EPEC's interest rate for borrowing under this facility was equal to LIBOR plus
50 basis points. The rate will vary based on EPEC's long-term unsecured debt
rating. This facility replaced EPEC's $750 million 364-day renewable revolving
credit and competitive advance facility established in October 1997. TGP is a
designated borrower under this credit facility. As of September 30, 1999, no
amounts were outstanding under this facility.
17
20
Future funding for long-term debt retirements, dividends, and other
financing expenditures is expected to be provided by internally generated funds,
commercial paper issuances, available capacity under existing credit facilities,
and/or contributions from EPEC.
COMMITMENTS AND CONTINGENCIES
See Note 3, which is incorporated herein by reference.
OTHER
In October 1999, the Company agreed to acquire Crystal Gas Storage, Inc.
for approximately $220 million. The transaction will be accounted for as a
purchase. Crystal Gas Storage owns and operates two natural gas storage
facilities near Hattiesburg, Mississippi and holds interests in natural gas
producing properties in northern Louisiana and southern Arkansas.
In October 1999, the Company acquired for $13 million the remaining
interest in Interenergy Company from Clan Energy International. Interenergy is a
Cayman company that holds a 38 percent interest in Triunion Energy Company
("Triunion"). This increased the Company's ownership in Triunion to 71 percent.
As a result, the Company will begin to consolidate Triunion in the fourth
quarter of 1999. Triunion's principle asset is a 21 percent interest in the
Argentina to Chile pipeline. With the acquisition, the Company's overall
interest in the Argentina to Chile pipeline increased to 15 percent.
In October 1999, the Company acquired a 25 percent interest in a 762
megawatt coal-fired power plant in the People's Republic of China. The Meizhou
Wan power plant, located in the Fujian Province, is expected to be operational
in the first quarter of 2001.
YEAR 2000
EPEC has established an executive steering committee and a project team to
coordinate the phases of its Year 2000 project to assure that the Company's key
automated systems, equipment, and related processes will remain functional
through the Year 2000. Those phases are: (i) awareness; (ii) assessment; (iii)
remediation; (iv) testing; (v) implementation of the necessary modifications and
(vi) contingency planning. The Company has participated in EPEC's Year 2000
project as described below.
In recognition of the importance of Year 2000 issues and their potential
impact on the Company, the initial phase of the Year 2000 project involved the
establishment of a company-wide awareness program. The awareness program is
directed by the executive steering committee and project team and includes
participation of senior management in each core business area. The awareness
phase is substantially completed, although the Company will continually update
awareness efforts for the duration of the Year 2000 project.
The Company's assessment phase consists of conducting a company-wide
inventory of its key automated systems and related processes, analyzing and
assigning levels of criticality to those systems and processes, identifying and
prioritizing resource requirements, developing validation strategies and testing
plans, and evaluating business partner relationships. The assessment phase is
substantially complete. 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. Increasingly, the
responses from such third parties are generally encouraging. Nonetheless, many
of these responses lack the substantive detail to allow the Company to make a
meaningful evaluation of such third-parties' Year 2000 readiness. Furthermore,
in some circumstances, third parties are refusing to provide any response beyond
those contained in their publicly-disseminated information. As a result, the
overall evaluation of the Company's business partners' Year 2000 readiness
remains inconclusive. Accordingly, the Company cannot predict the potential
consequences if these or other third parties or their products are not Year 2000
compliant. The Company continues to evaluate the exposure associated with such
business partner
18
21
relationships, and will use the contingency planning process to attempt to
mitigate the uncertainty concerning third-party readiness.
The remediation phase involves converting, modifying, replacing or
eliminating key automated systems identified in the assessment phase. The
testing phase involves the validation of the identified key automated systems.
The Company is utilizing test tools and written test procedures to document and
validate, as necessary, its unit, system, integration and acceptance testing.
The implementation phase involves placing the converted or replaced key
automated systems into operation. One system that was not substantially complete
with respect to Year 2000 issues as of June 30, 1999, was the nominations,
scheduling and volume accounting applications utilized by TGP. That system is
now substantially complete. In October 1999, the Company, in cooperation with
other Interstate Natural Gas Association of America members, reported that its
regulated pipelines, Tennessee Gas Pipeline, East Tennessee Natural Gas Pipeline
and Midwestern Gas Transmission, will be Year 2000 compliant on the rollover
date of January 1, 2000. The Company is substantially complete with its
remediation, testing and implementation phases for domestic systems.
The Company had previously identified the contingency planning phase as a
subset of the implementation phase, but has now established the process as its
own phase of the overall Year 2000 program. The contingency planning phase
consists of developing a risk profile of the Company's critical business
processes and then providing for actions the Company will pursue to keep such
processes operational in the event of Year 2000 disruptions. The focus of such
contingency planning is on prompt response to any Year 2000 events, and a plan
for subsequent resumption of normal operations. The plan attempts to assess the
risk of a significant failure to critical processes performed by the Company,
and to address the mitigation of those risks. The plan will also consider any
significant failures related to the most reasonably likely worst case scenario,
discussed below, as they may occur. In addition, the plan attempts to factor in
the severity and duration of the impact of a significant failure. The Company
has developed contingency plans for each business unit and significant business
process. By September 30, 1999, the Company had conducted desk-top testing of
its contingency plans and had conducted drills and mock outages, including some
testing with certain customers and other significant third parties. The Year
2000 contingency plans will continue to be tested, modified and adjusted
throughout the year as additional information becomes available.
The goal of the Year 2000 project is to ensure that all of the critical
systems and processes which are under the Company's direct control remain
functional. Certain systems and processes may be interrelated with or dependent
upon systems outside the Company's control. However, systems within the
Company's control may also have unpredicted problems. Accordingly, there can be
no assurance that significant disruptions will be avoided. The Company's present
analysis of its most reasonably likely worst case scenario for Year 2000
disruptions includes sporadic Year 2000 failures in the telecommunications and
electricity industries, as well as interruptions from suppliers that might cause
disruptions in the Company's operations, thus causing temporary financial losses
and an inability to deliver products and services to customers. Virtually all of
the natural gas transported through the Company's interstate pipelines is owned
by third parties. Accordingly, failures of natural gas producers to be ready for
the Year 2000 could significantly disrupt the flow of product to the Company's
customers. In many cases, the producers have no direct contractual relationship
with the Company, and the Company relies on its customers to verify the Year
2000 readiness of the producers from whom they purchase natural gas. Since most
of the Company's revenues from the delivery of natural gas are based upon fees
paid by its customers for the reservation of capacity, and not based upon the
volume of actual deliveries, short-term disruptions in deliveries caused by
factors beyond the Company's control should not have a significant financial
impact on the Company, although it could cause operational problems for the
Company's customers. Longer-term disruptions, however, could materially impact
the Company's results of operations, financial condition, and cash flows.
While the Company owns or controls most of its domestic facilities and
projects, nearly all of the Company's international investments have been made
in conjunction with unrelated third parties. In many cases, the operators of
such international facilities are not under the sole or direct control of the
Company. As a consequence, the Year 2000 programs instituted at some of the
international facilities may be different from the Year 2000 program implemented
by the Company domestically, and the party responsible for the results of such
program may not be under the direct or indirect control of the Company. In
addition, many foreign
19
22
countries appear to be substantially behind the United States in addressing
potential Year 2000 disruption of critical infrastructure and in developing a
framework governing the reporting requirements and relative liabilities of
business entities. Accordingly, the Year 2000 risks posed by international
operations as a whole are different than those presented domestically. While
management believes that most of the international facilities in which it has
significant investments are addressing Year 2000 issues in an adequate manner,
it is possible that some of them may experience significant Year 2000
disruption, and that the aggregate effect of problems experienced at multiple
international locations may be material and adverse. The Company is
incorporating this possibility into the relevant contingency plans.
While the total cost of the Company's Year 2000 project continues to be
evaluated, the Company estimates that the costs remaining to be incurred in 1999
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software will be between $2 million and $5 million. Of
these estimated costs, the Company expects between $1 million and $2 million to
be capitalized and the remainder to be expensed. As of September 30, 1999, the
Company has incurred expenses of approximately $9 million and has capitalized
costs of approximately $4 million. The Company has previously only traced
incremental expenses related to its Year 2000 project. This means that the costs
of the Year 2000 project related to salaried employees of the Company, including
their direct salaries and benefits, are not available, and have not been
included in the estimated costs of the project. Since the earlier phases of the
project primarily involved work performed by such salaried employees, the costs
expended to date do not reflect the percentage completion of the project. The
Company anticipates that it will expend a substantial amount of the remaining
costs in the contingency planning phase of the project, including the potential
acquisition of back-up assets and systems that may be deployed in the event
primary systems fail to perform fully according to expectations.
Furthermore, for the Company's international investments, the Company
understands that many of the operators of such foreign facilities are incurring
Year 2000 costs but obtaining detailed information regarding Year 2000
international cost expenditures has been slow and, at times, difficult. For this
reason, the Year 2000 costs incurred may fall somewhat short of the estimated
costs discussed above.
Although the Company does not expect the costs of its Year 2000 project to
have a material adverse effect on its financial position, results of operations,
or cash flows, based on information available at this time, the Company cannot
conclude that disruption caused by internal or external Year 2000 related
failures will not have such an effect. Specific factors which might affect the
success of the Company's Year 2000 efforts and the frequency or severity of a
Year 2000 disruption or the amount of expense include the 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, the
failure of the Company or its outside consultants to complete the remediation in
a timely manner (due to shortages of qualified labor or other factors), the
failure of other parties to joint ventures in which the Company is involved to
meet their obligations, both financial and operational, under the relevant joint
venture agreements to remediate assets used by the joint venture, unforeseen
expenses related to the remediation of existing systems or the transition to
replacement systems, the failure of third parties to become Year 2000 compliant
or to adequately notify the Company of potential noncompliance and the effects
of any significant disruption at international facilities in which the Company
has significant investments.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in the
Company's -- or an affiliate's -- equity or debt securities, this disclosure is
made for the SOLE PURPOSE of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See Note 8, which is incorporated herein by reference.
20
23
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 customer
contract expirations on the TGP pipeline system, uncertainties associated with
acquisitions and joint ventures, potential environmental liabilities, potential
contingent liabilities and tax liabilities related to the Company's
acquisitions, 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 U.S.
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 1998.
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, 1998, in addition to
the interim consolidated financial statements, accompanying notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Items 1 and 2 of this Quarterly Report on 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, 1998.
21
24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, 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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.A -- $1,250,000,000 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of August 16, 1999,
by and among EPEC, EPNG, TGP, the several banks and other
financial institutions from time to time parties to the
Agreement, The Chase Manhattan Bank, as administrative
agent and as CAF Advance Agent for the Lenders
thereunder, Citibank N.A. and ABN Amro Bank, N.V. as
co-documentation agents for the Lenders and Bank of
America, N.A. as syndication agent for the Lenders.
27 -- Financial Data Schedule.
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of EPTPC and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPTPC and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
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25
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, 1999 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 12, 1999 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.A -- $1,250,000,000 364-Day Revolving Credit and Competitive
Advance Facility Agreement dated as of August 16, 1999,
by and among EPEC, EPNG, TGP, the several banks and other
financial institutions from time to time parties to the
Agreement, The Chase Manhattan Bank, as administrative
agent and as CAF Advance Agent for the Lenders
thereunder, Citibank N.A. and ABN Amro Bank, N.V. as
co-documentation agents for the Lenders and Bank of
America, N.A. as syndication agent for the Lenders.
27 -- Financial Data Schedule.