<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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 MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9864
---------------------
EL PASO TENNESSEE PIPELINE CO.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0233548
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 757-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
----- -----------
<S> <C>
Common Stock, par value $.01 per
share, as of May 12, 1997 1,000 shares
</TABLE>
================================================================================
<PAGE> 2
GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<TABLE>
<CAPTION>
DEFINITIONS
-----------
<S> <C>
Company................... El Paso Tennessee Pipeline Co. and its subsidiaries
Court of Appeals.......... United States Court of Appeals for the District of Columbia
Circuit
Distributions............. Various intercompany transfers and distributions which
restructured, divided and separated the businesses, assets
and liabilities of Old Tenneco and its subsidiaries so that
all the assets, liabilities and operations related to the
automotive parts, packaging and administrative services
businesses and the shipbuilding businesses were spun-off to
Old Tenneco's then existing common stockholders.
EPG....................... El Paso Natural Gas Company, unless the context otherwise
requires
EPTPC..................... El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an
indirect subsidiary of El Paso Natural Gas Company
FERC...................... The Federal Energy Regulatory Commission
GSR....................... Gas supply realignment
Merger.................... The acquisition of El Paso Tennessee Pipeline Co. by El Paso
Natural Gas Company in December 1996
New Tenneco............... Tenneco Inc., subsequent to the Merger and Distributions,
consisting of the automotive parts, packaging and
administrative services businesses
Old Tenneco............... Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior
to its acquisition by El Paso Natural Gas Company
PCB(s).................... Polychlorinated-biphenyl(s)
PRP(s).................... Potentially responsible party(ies)
SFAS...................... Statement of Financial Accounting Standards
TGP....................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
-------------------------------------
1997 1996
---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Operating revenues.......................................... $689 $754
------ ----
Operating expenses..........................................
Cost of gas and other products............................ 463 486
Operation and maintenance................................. 92 130
Finance charges........................................... -- 17
Depreciation, depletion, and amortization................. 43 41
Taxes, other than income taxes............................ 15 17
------ ----
613 691
------ ----
Operating income............................................ 76 63
------ ----
Other (income) and expense
Interest and debt expense................................. 35 35
Gain on sale of assets, net............................... -- (42)
Other -- net.............................................. (8) (11)
------ ----
27 (18)
------ ----
Income before income taxes.................................. 49 81
Income taxes................................................ 19 32
------ ----
Net income.................................................. $ 30 $ 49
====== ====
</TABLE>
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
1
<PAGE> 4
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 25 $ 14
Accounts and notes receivable, net........................ 821 956
Inventories............................................... 35 42
Deferred income tax benefit............................... 40 67
Other..................................................... 236 218
------ ------
Total current assets.............................. 1,157 1,297
Property, plant, and equipment, net......................... 4,196 3,952
Other....................................................... 411 506
------ ------
Total assets...................................... $5,764 $5,755
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 580 $ 578
Short-term borrowings (including current maturities of
long-term debt)........................................ 532 715
Note payable to EPG....................................... 125 170
Accrual for regulatory issues............................. -- 167
Other..................................................... 387 356
------ ------
Total current liabilities......................... 1,624 1,986
------ ------
Long-term debt, less current maturities..................... 1,134 1,150
------ ------
Deferred income taxes, less current portion................. 936 769
------ ------
Other....................................................... 657 616
------ ------
Commitments and contingent liabilities (See Note 2)
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, par value $0.01 per share; 6,000,000 shares
issued; stated at liquidation value................... 300 296
Series B, par value $0.01 per share; 3,036,600 shares
issued; stated at liquidation value................... 152 --
Common stock, par value $0.01 per share; authorized 1,000
shares; issued 1,000 shares............................ -- --
Additional paid-in capital................................ 938 938
Retained earnings......................................... 23 --
------ ------
Total stockholders' equity........................ 1,413 1,234
------ ------
Total liabilities and stockholders' equity........ $5,764 $5,755
====== ======
</TABLE>
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
2
<PAGE> 5
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------------
1997 1996
------------ -----------
POST- PRE-
ACQUISITION ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 30 $ 49
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 43 41
Deferred income taxes (benefit)........................ 44 (69)
Working capital changes................................ 63 (705)
Other.................................................. (24) 20
------- -----
Net cash provided by (used in) operating
activities...................................... 156 (664)
------- -----
Cash flows from investing activities
Capital expenditures...................................... (16) (55)
Increase in cash funding to EPG........................... (84) --
Collection of note receivable from partnership............ 53 --
Net proceeds from disposal of businesses and assets....... 3 244
Other..................................................... -- 14
------- -----
Net cash provided by (used in) investing
activities...................................... (44) 203
------- -----
Cash flows from financing activities
Net proceeds from long-term debt issuance................. 883 --
Net proceeds from Series B Preferred Stock issuance....... 150 --
Revolving credit (repayments) borrowings.................. (1,083) 38
Repayment of note payable to EPG.......................... (45) --
Issuance of Old Tenneco common and treasury shares........ -- 18
Purchase of Old Tenneco common stock...................... -- (61)
Redemption of Old Tenneco preferred stock................. -- (20)
Preferred stock dividends paid............................ (6) (81)
Net cash contribution from affiliates..................... -- 468
------- -----
Net cash provided by (used in) financing
activities...................................... (101) 362
------- -----
Increase (decrease) in cash and temporary investments....... 11 (99)
Cash and temporary investments
Beginning of period............................... 14 249
------- -----
End of period..................................... $ 25 $ 150
======= =====
</TABLE>
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
3
<PAGE> 6
EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1996 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated and combined
financial statements at March 31, 1997, and for the quarters ended March 31,
1997, and 1996, are unaudited. The condensed consolidated balance sheet at
December 31, 1996, is derived from audited financial statements. The Company has
restated its historical financial statements for the quarter ended March 31,
1996, to reflect the Distributions. These financial statements do not include
all disclosures required by generally accepted accounting principles. In the
opinion of management, all material adjustments necessary to present fairly the
results of operations for such periods have been included. All such adjustments
are of a normal recurring nature. Results of operations for any interim period
are not necessarily indicative of the results of operations for the entire year
due to the cyclical nature of the Company's businesses. Financial statements for
the previous periods include certain reclassifications which were made to
conform to current presentation. Such reclassifications have no effect on
reported net income or stockholders' equity.
2. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
On February 28, 1997, TGP filed with FERC a proposed settlement of all
issues related to the recovery by TGP of its GSR and other transition costs and
related proceedings (the "GSR Stipulation and Agreement"). On April 16, 1997,
FERC approved the settlement and TGP implemented the settlement on May 1, 1997.
Under the terms of the GSR Stipulation and Agreement, TGP will be entitled to
collect from customers a total of $770 million, of which approximately $625
million has been collected as of March 31, 1997. The remaining $145 million will
be collected through a two-year demand transportation surcharge and an
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 provide a rate cap, indexed to inflation,
through October 31, 2005, for certain of TGP's customers.
In January 1995, FERC accepted TGP's rate case filed in December 1994,
suspended its effectiveness for the maximum period of five months pursuant to
the normal regulatory process, and set the matter for hearing. On July 1, 1995,
TGP began collecting rates, subject to refund, reflecting an $87 million
increase in TGP's annual revenue requirement. A stipulation was filed with an
Administrative Law Judge in this proceeding in April 1996. This stipulation
resolves the rates that are the subject of the December 1994 rate case,
including a structural rate design change that results in a larger proportion of
TGP's transportation revenues being dependent upon throughput. In October 1996,
FERC approved the stipulation with certain modifications and clarifications
which are not material. In January 1997, FERC issued an order denying requests
for rehearing of the October 1996 order. Under the stipulation agreement, TGP's
refund obligation was approximately $185 million, inclusive of interest, of
which $152 million was refunded to customers in March 1997 with the remaining
$33 million offset against GSR recoveries per customer election. TGP had
provided for these rate refunds. One party to the rate proceeding, a competitor
of TGP, filed with the Court of Appeals a Petition for Review of the FERC orders
approving the stipulation. The Company believes the FERC orders will be upheld.
Environmental Matters
As of March 31, 1997, the Company had a reserve of approximately $205
million related to the environmental assessments and remediation activities
discussed below.
4
<PAGE> 7
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 United States Environmental Protection Agency List of
Hazardous Substances, at compressor stations and other facilities operated by
both its interstate and intrastate natural gas pipeline systems. While there are
still uncertainties relating to the ultimate costs which may be incurred, based
upon the Company's evaluation and experience to date, the Company believes that
the recorded estimate for the reserve is adequate.
Following negotiations with its customers, TGP in May 1995 filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
established a mechanism for recovering a substantial portion of the
environmental costs. In November 1995, FERC issued an order approving the
Environmental Stipulation. Although one shipper filed for rehearing, FERC denied
rehearing of its order in February 1996. This shipper filed a Petition of Review
in April 1996 in the Court of Appeals; TGP believes the FERC order approving the
Environmental Stipulation will be upheld on appeal. The Environmental
Stipulation, which was effective July 1, 1995, had no material effect on the
Company's financial position or results of operations. As of March 31, 1997, a
balance of $43 million remains to be collected.
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 27 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for payment of
the Company's allocable share of remediation costs. Because the clean-up costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required, the Company's estimate of its share of
remediation costs could change. Moreover, liability under the federal Superfund
statute is joint and several, meaning that the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs has been considered, where
appropriate, in its determination of its estimated liability as described
herein. The Company presently believes that the costs associated with the
Superfund sites referenced above will not have a materially adverse effect on
the Company's financial position or results of operations.
In addition, the Company has identified a number of formerly owned or
leased sites, and certain other sites associated with its discontinued
operations, where environmental remediation may be required. The Company
presently believes that the costs to remediate these sites will not have a
materially adverse effect on its financial position or results of operations.
Legal Proceedings
In July 1996, TGP was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District Court for
the District of Columbia (the "Court"). The plaintiff filed this action under
the False Claims Act against most interstate pipelines and others alleging that
the defendants mismeasured natural gas produced from federal and Indian land,
which deprived the United States of royalties otherwise due it. Among other
things, the plaintiff sought to recover unspecified treble damages on behalf of
the United States. The plaintiff also sought to recover his finder's fee and
attorneys' fees. In response to motions filed by most defendants, the Court, on
March 27, 1997, issued an order dismissing the complaint without prejudice
because the defendants had not been properly joined and because the complaint
did not plead fraud with the requisite specificity. TGP cannot predict what
action the plaintiff will take in response to the Court's order. Based on
information available at this time, TGP does not believe that the ultimate
resolution of this matter will have a materially adverse effect on the Company's
financial position or results of operations.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders
5
<PAGE> 8
with the agency to resolve many of the issues raised in the original
allegations, has received water discharge permits for its Kentucky stations from
the agency, and continues to work to resolve the remaining issues. Management
believes that the resolution of this issue will not have a materially adverse
effect on the Company's financial position or results of operations.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial position
or results of operations.
3. FINANCING TRANSACTIONS
The Company had short-term borrowings at March 31, 1997 and December 31,
1996, of $517 million and $700 million, respectively.
At December 31, 1996, EPTPC had an additional $900 million outstanding
under its credit facility which was classified as long-term debt.
In March 1997, TGP closed the sale of $300 million aggregate principal of
7 1/2% debentures due 2017, $300 million aggregate principal of 7% debentures
due 2027, and $300 million aggregate principal of 7 5/8% debentures due 2037.
Proceeds of approximately $883 million, net of issuance costs, were used to
repay a portion of EPTPC's credit facility and for general corporate purposes.
4. PREFERRED STOCK
In March 1997, EPTPC authorized and issued to EPG 3,036,600 shares of
Series B Preferred Stock. The Series B Preferred Stock is not convertible into
shares of any other class or series of stock of the Company and it has no
maturity date. The holder of the Series B Preferred Stock is entitled to receive
cash dividends payable quarterly at the rate of 8 1/2 percent of the stated
value of $50 per share. On or after December 31, 2001, the Series B Preferred
Stock is redeemable at the option of EPTPC, in whole or in part, upon not less
than 30 days' notice at a redemption price of $50 per share, plus unpaid
dividends. Proceeds of approximately $150 million were used to pay down EPTPC's
credit facility.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1997, and December 31, 1996,
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,419 $2,371
Less accumulated depreciation and depletion................. 33 --
------ ------
2,386 2,371
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 1,810 1,581
------ ------
Total property, plant, and equipment, net......... $4,196 $3,952
====== ======
</TABLE>
The increase in additional acquisition cost assigned to plant is a result
of the Company's continuing efforts to evaluate the fair market value of the
assets and liabilities acquired in conjunction with the Merger.
6
<PAGE> 9
6. INVENTORIES
Inventories at March 31, 1997, and December 31, 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Materials and supplies...................................... $ 19 $ 19
Gas in storage.............................................. 16 23
------ ------
$ 35 $ 42
====== ======
</TABLE>
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
7. ACCOUNTING FOR REGULATED OPERATIONS
The Company's businesses that are subject to the regulations and accounting
requirements of FERC have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects off Certain Types of Regulation, which accounting
methods may differ from those used by non-regulated entities. Changes in the
regulatory and economic environment may, at some point in the future, create
circumstances in which the application of regulatory accounting principles would
no longer be appropriate. During the first quarter of 1997, FERC approved TGP's
GSR Stipulation and Agreement (discussed previously in Rates and Regulatory
Matters of Note 2). The Company is currently evaluating the impact the FERC
approval may have on the continued application of regulatory accounting
principles. If these accounting principles should no longer be applied, an
amount would be charged to earnings as an extraordinary item. At March 31, 1997,
this amount was estimated to be approximately $62 million, net of income taxes.
Any potential charge would be non-cash and would not have a direct effect on the
regulated companies' ability to seek recovery of the underlying deferred costs
in their future rate proceedings or on their ability to collect the rates set
thereby.
8. RECENT PRONOUNCEMENTS
Earnings per share
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which establishes new guidelines for calculating
earnings per share. This pronouncement applies only to entities with publicly
held common stock and, therefore, does not apply to EPTPC.
Capital structure
In March 1997, the Financial Accounting Standards Board issued SFAS No.
129, Disclosure of Information about Capital Structure, which consolidates
capital structure reporting requirements previously required by other accounting
standards. This pronouncement, which will become effective for reporting periods
ending after December 15, 1997, will have no impact on the Company's disclosure
of capital structure information.
Other
The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, and
Statement of Position No. 96-1, Environmental Remediation Liabilities, effective
January 1, 1997. These pronouncements did not have a material impact on the
Company's financial position or results of operations.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Regulated Operations
<TABLE>
<CAPTION>
FIRST QUARTER
------------------------------------
1997 1996
---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED
<S> <C> <C>
Operating revenues....................................... $215 $213
Operating expenses....................................... 135 142
------ ----
Operating income......................................... $ 80 $ 71
====== ====
</TABLE>
Operating revenues for the quarter ended March 31, 1997, were $2 million
higher than for the same period of 1996. The increase was primarily due to new
system rates on TGP which went into effect November 1, 1996.
Operating expenses for the quarter ended March 31, 1997, were $7 million
lower than for the same period in 1996, primarily due to lower labor and benefit
costs attributable to a reduction in staffing levels which occurred throughout
the latter half of 1996, as well as lower legal costs and operating and
maintenance costs. The decrease in operating expenses was partially offset by an
increase in depreciation expense as a result of the amortization of additional
acquisition cost assigned to utility plant.
Non-Regulated Operations
<TABLE>
<CAPTION>
FIRST QUARTER
-----------------------------------
1997 1996
---------------- ---------------
IN MILLIONS POST-ACQUISITION PRE-ACQUISITION
----------- CONSOLIDATED COMBINED
<S> <C> <C>
Gathering and treating margin.......................... $ 2 $ 3
Processing margin...................................... 3 1
Marketing margin....................................... 8 8
Other.................................................. -- 42
------ ----
Total gross margin........................... 13 54
Operating expenses..................................... 17 62
------ ----
Operating loss......................................... $ (4) $ (8)
====== ====
</TABLE>
Total gross margin (revenue less cost of sales) and operating expense were
both lower for the quarter ended March 31, 1997, than for the same quarter of
1996 primarily due to the discontinuance of Tenneco Credit Corporation (now
renamed El Paso Energy Credit Corporation) activities and the sale of certain
businesses in the fourth quarter of 1996. These sales included the sale of
EPTPC's oil and gas exploration, production and financing unit, formerly known
as Tenneco Ventures, and 70 percent of EPTPC's interests in two natural gas
pipeline systems in Australia. Following the sale, the Australian natural gas
pipelines operations were accounted for by the equity method.
8
<PAGE> 11
Other Income and Expense
Other expense for the quarter ended March 31, 1997, was $45 million higher
than for the same period of 1996. The increase was due primarily to the
recognition of a deferred gain on the sale of certain investments in 1996, a
gain on the sale of the Company's 50 percent general partnership interest in
Tenneco Mobile Bay Gathering Co. in February 1996, and a reduction in equity
income from unconsolidated subsidiaries and other income in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash From Operating Activities
Net cash provided by operating activities was $156 million for the quarter
ended March 31, 1997, compared to $664 million net cash used in operating
activities for the same period of 1996. The increase was due primarily to an
income tax refund in 1997, higher tax payments in 1996, a reduction in the level
of trade receivables sold in 1996, and other working capital changes. The
increase was partially offset by a rate refund made to TGP's customers in the
first quarter of 1997.
Cash From Investing Activities
Net cash used in investing activities was $44 million for the quarter ended
March 31, 1997, compared to $203 million net cash provided by investing
activities for the same period of 1996. The decrease was due primarily to the
net proceeds received in the first quarter of 1996 from the sale of the
Company's 50 percent interest in Kern River Gas Transmission Company. The
decrease was partially offset by a collection of a note receivable from the
Company's partnership in a 103 megawatt cogeneration plant near Bartow, Florida
and a reduction in capital expenditures during 1997. Capital expenditures were
higher in the first quarter of 1996 due to the construction of the Australian
pipeline.
Future funding for capital expenditures, acquisitions, and other investing
expenditures are expected to be provided by internally generated funds,
available credit facilities and/or contributions from EPG.
Cash From Financing Activities
Net cash used in financing activities was $101 million for the quarter
ended March 31, 1997, compared to $362 million of net cash provided by financing
activities for the same period of 1996. The decrease was primarily a result of
increased credit facility repayments from the proceeds received from TGP's debt
offering and EPTPC's Series B Preferred Stock offering in the first quarter of
1997 and a net cash contribution from affiliates in the first quarter of 1996.
Future funding for long-term debt retirements, dividends, and other
financing expenditures will be provided by internally generated funds, available
credit facilities and/or contributions from EPG.
COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Legal Proceedings
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
Environmental Matters
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
9
<PAGE> 12
OTHER
Future Projects
Hungary Project. The Company's acquisition of a 50 percent controlling
interest in an operating 70 megawatt power plant located in Dunaujvaros,
Hungary, is now scheduled to close in the second quarter of 1997.
Eastern Express Project. The Eastern Express Project involves expansion of
TGP's system at an estimated cost of up to $400 million. At this time,
preliminary plans call for adding compression, pipeline looping and an
approximate 35-mile pipeline segment extension to the Leidy market hub located
near central Pennsylvania. The final design of the project will be based on the
results of an open season being held through June 16, 1997, the results of a
separate capacity turn back open season, and the execution of precedent
agreements.
Purchase Price Allocation
The Company is continuing to evaluate the fair market value of the assets
and liabilities acquired in conjunction with the Merger. Management believes
that the final adjustments to the purchase price allocation will not have a
material impact on the Company's financial position or results of operations.
Accounting for Regulated Operations
EPTPC's interstate pipelines are subject to the regulations and accounting
procedures of FERC, and therefore, continue to follow the reporting and
accounting requirements of SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation. For a further discussion, see Part I, Financial
Information, Note 7, which is incorporated herein by reference.
Recent Pronouncements
See Part I, Financial Information, Note 8, which is incorporated by
reference herein.
10
<PAGE> 13
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from the actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
Highly Competitive Industry
The ability to maintain or increase current transmission, gathering,
processing, and sales volumes, or to remarket unsubscribed capacity, can be
subject to the impact of future weather conditions, including those that favor
other alternative energy sources, price competition; drilling activity and
supply availability; and service competition. Future profitability also may be
affected by the Company's ability to compete with the services offered by other
energy enterprises which may be larger, offer more services, and possess greater
resources. The ability of TGP to negotiate new contracts and to renegotiate
existing contracts (70 percent of which are expiring over the next four years,
principally in November 2000) could be adversely affected by the proposed
construction of additional pipeline capacity in the Northeast U.S., reduced
demand due to higher gas prices, the availability of alternative energy sources,
and other factors that are not within its control.
Impact of Natural Gas and Natural Gas Liquids Prices
The value of natural gas transmission services is based on an all-in cost,
including the cost of the natural gas. Therefore, the Company's ability to
compete with other transporters is impacted by natural gas prices in the supply
basins connected to its pipeline systems compared to prices in other gas
producing regions, especially Canada. Additionally, revenues generated by the
Company from its gathering and processing contracts are dependent upon volumes
and rates, both of which can be affected by the prices of natural gas and
natural gas liquids. Fluctuations in energy prices are caused by a number of
factors, including regional, domestic and international demand, availability and
adequacy of transportation facilities, energy legislation, federal or state
taxes, if any, on the sale or transportation of natural gas and natural gas
liquids and the price and abundance of supplies of alternative energy sources.
Use of Derivative Financial Instruments
In the ordinary course and conduct of its business, some of the Company's
non-regulated subsidiaries are engaged in the gathering, processing and
marketing of natural gas and other energy commodities and utilize futures and
option contracts traded on the New York Mercantile Exchange and over-the-counter
options and price and basis swaps with other gas merchants and financial
institutions. The Company could incur financial losses in future periods as a
result of volatility in the market values of the underlying commodities.
Acquisitions and Investments
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of acquisitions and joint
ventures within and outside the U.S. may be subject to the effects of, and
changes in, U.S. and foreign trade and monetary policies, laws and regulations,
political and economic developments, inflation rates, and the effects of taxes
and operating conditions. Activities in areas
11
<PAGE> 14
outside the U.S. also are subject to the risks inherent in foreign operations,
including loss of revenue, property and equipment as a result of hazards such as
expropriation, nationalization, wars, insurrection and other political risks,
and the effects of currency fluctuations and exchange controls. Such legal and
regulatory delays and other unforeseeable obstacles may be beyond the Company's
control or ability to manage.
Potential Environmental Liabilities
The Company may incur significant costs and liabilities in order to comply
with existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulation and
enforcement polices thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future.
Operating Hazards and Uninsured Risks
While the Company maintains insurance against certain of the risks normally
associated with the transportation, gathering and processing of natural gas,
including explosions, pollution and fires, the occurrence of a significant event
that is not fully insured against could have a material adverse effect on the
Company.
Potential Liabilities Related to the Merger
The amount of the actual and contingent liabilities of EPTPC, which
remained the liabilities of the Company after the Merger, could vary materially
from the amount estimated by the Company, which was based upon assumptions which
could prove to be inaccurate. If New Tenneco or Newport News Shipbuilding Inc.
were unable or unwilling to pay their respective liabilities, a court could
require the Company, under certain legal theories which may or may not be
applicable to the situation, to assume responsibility for such obligations,
which could have a material adverse effect on the Company.
Uncertainty Surrounding Integration of Operations
The Company has begun to integrate the business and operations of EPTPC and
its subsidiaries to increase operating and administrative efficiency through
consolidation and reengineering of facilities, workforce reductions and
coordination of purchasing, sales and marketing activities. Management
anticipates that the complementary interstate and intrastate pipeline operations
and energy marketing activities of the combined company should provide increased
operating flexibility and access to additional customers and markets, although
the amount and timing of the realization of such benefits will depend upon the
Company's ability to integrate successfully the businesses and operations of the
companies, and the time period over which such integration is effected.
Potential Federal Income Tax Liabilities
In connection with the Merger and Distributions, the Internal Revenue
Service issued a private letter ruling to Old Tenneco, in which the Internal
Revenue Service ruled that for U.S. federal income tax purposes (i) the
Distributions would be tax-free to Old Tenneco and, except to the extent cash
was received in lieu of fractional shares, to its then existing stockholders,
(ii) the Merger would constitute a tax-free reorganization, and (iii) that
certain other transactions effected in connection with the Merger and
Distributions would be tax-free. If the Distributions were not to qualify as
tax-free distributions, then a corporate level federal income tax would be
assessed to the consolidated group of which Old Tenneco was the common parent.
This corporate level federal income tax would be payable by EPTPC. Under certain
limited circumstances, however, New Tenneco and Newport News Shipbuilding Inc.
have agreed to indemnify EPTPC for a defined portion of such tax liabilities.
12
<PAGE> 15
Refinancing and Interest Rate Exposure Risks
The business and operating results of the Company can be adversely affected
by factors such as the availability or cost of capital, changes in interest
rates, changes in the tax rates due to new tax laws, market perceptions of the
natural gas industry or the Company, or credit ratings.
Potential for Changes in Accounting Standards
Authoritative generally accepted accounting principles or policy changes
from such standard setting bodies as the Financial Accounting Standards Board,
FERC, and the Securities and Exchange Commission may affect the Company's
results of operations or financial position.
13
<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned, EPTPC, hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of EPTPC and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPTPC and its consolidated subsidiaries.
b. Reports on Form 8-K
During the quarter ended March 31, 1997, EPTPC filed with the
Securities and Exchange Commission the following Current Reports on Form
8-K:
1. Current Report on Form 8-K/A dated January 21, 1997, amending its
Current Report on Form 8-K dated December 26, 1996. In this report, EPTPC
(i) described under Item 2 therein its acquisition by EPG and its
disposition of certain assets in connection with such acquisition and (ii)
filed under Item 7 therein pro forma financial statements.
2. Current Report on Form 8-K dated March 21, 1997, in which EPTPC
described under Item 5 therein its change in auditors from Arthur Andersen
LLP to Coopers & Lybrand L.L.P.
14
<PAGE> 17
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: May 14, 1997 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Senior Vice President and
Chief Financial Officer
Date: May 14, 1997 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) 1ST QTR 10Q.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 821
<ALLOWANCES> 0<F1>
<INVENTORY> 35
<CURRENT-ASSETS> 1,157
<PP&E> 4,196
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 5,764
<CURRENT-LIABILITIES> 1,624
<BONDS> 1,134
<COMMON> 0
0
452
<OTHER-SE> 961
<TOTAL-LIABILITY-AND-EQUITY> 5,764
<SALES> 0
<TOTAL-REVENUES> 689
<CGS> 0
<TOTAL-COSTS> 613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 49
<INCOME-TAX> 19
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>NOT SEPARATELY IDENTIFIED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR
ACCOMPANYING NOTES THERETO.
</FN>
</TABLE>
