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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
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DELAWARE 76-0233548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
EL PASO ENERGY BUILDING
1001 LOUISIANA
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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8 1/4% Cumulative Junior Preferred Stock, Series A.......... New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO
THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF
SUCH STOCK, AS OF THE SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.
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MARKET VALUE
CLASS OF VOTING STOCK AND NUMBER OF SHARES HELD
HELD BY NON-AFFILIATES AT MARCH 16, 1998 BY NON-AFFILIATES
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8 1/4% Cumulative Preferred Stock, Series A, 6,000,000
shares $337,500,000*
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* Based upon the closing price on the Composite Tape for the 8 1/4% Cumulative
Preferred Stock, Series A, on March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: El Paso Tennessee Pipeline Co.'s definitive Proxy Statement for
the 1998 Annual Meeting of Stockholders, to be filed not later than 120 days
after the end of the fiscal year covered by this report, is incorporated by
reference into Part III.
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EL PASO TENNESSEE PIPELINE CO.
TABLE OF CONTENTS
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Glossary............................................................... ii
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Risk Factors -- Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995............................. 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 23
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 52
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 52
Item 13. Certain Relationships and Related Transactions.............. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 53
Signatures.................................................. 56
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-K are defined below:
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DEFINITION
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ALJ............................... Administrative Law Judge
BBtu/d............................ Billion British thermal units per day
Bcf(/d)........................... Billion cubic feet (per day)
Company........................... EPTPC and those subsidiaries owned directly or indirectly by EPTPC
subsequent to the Distributions and Merger
Court of Appeals.................. United States Court of Appeals for the District of Columbia Circuit
Dakota............................ Dakota Gasification Company
East Tennessee.................... East Tennessee Natural Gas Company, a wholly owned subsidiary of
TGP
EPA............................... United States Environmental Protection Agency
EPECC............................. El Paso Energy Credit Corporation, known as Tenneco Credit
Corporation before the Merger
EPG............................... El Paso Natural Gas Company
EPTPC............................. El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an indirect
subsidiary of EPG
FERC.............................. the Federal Energy Regulatory Commission
GSR............................... Gas supply realignment
ICA............................... ICA Energy, Inc.
Iroquois.......................... Iroquois Gas Transmission System, L.P.
IRS............................... Internal Revenue Service
Kern River........................ Kern River Gas Transmission Company
Midwestern........................ Midwestern Gas Transmission Company, a wholly owned indirect
subsidiary of TGP
MMcf(/d).......................... Million cubic feet (per day)
MMdth(/d)......................... Million decatherms (per day)
MW(s)............................. Megawatt(s)
NGLs.............................. Natural gas liquids
Old Tenneco....................... Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior to the
Distributions and Merger
PASA.............................. Pipeline Authority of South Australia
PCB(s)............................ Polychlorinated biphenyl(s)
PLN............................... Perusahaan Listrik Negara, the Indonesian government owned electric
utility
PRP(s)............................ Potentially Responsible Party(ies)
SEC............................... Securities and Exchange Commission
Series A Preferred Stock.......... 8 1/4% Cumulative Preferred Stock, Series A of EPTPC
Series B Preferred Stock.......... 8 1/2% Cumulative Preferred Stock, Series B of EPTPC
Series C Preferred Stock.......... 6 1/4% Cumulative Preferred Stock, Series C of EPTPC
SFAS.............................. Statement of Financial Accounting Standards
Tenneco Ventures.................. Tenneco Ventures Corporation and Tenneco Gas Production
Corporation, collectively
TGP............................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of EPTPC
TransTexas........................ TransTexas Gas Corporation
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PART I
ITEM 1. BUSINESS
GENERAL
In 1987, Tenneco Inc. was incorporated in Delaware and acquired all of the
outstanding shares of TGP. In the Merger discussed below (i) the name Tenneco
Inc. was changed to EPTPC and (ii) EPTPC became an indirect subsidiary of EPG.
EPTPC is a holding company. The major businesses of the Company consist of the
interstate transportation of natural gas, which generally is subject to
regulation by the FERC, as well as certain other non-regulated business
operations, such as gas marketing, intrastate pipeline operations, international
pipelines and power generation operations and domestic power generation
operations. Prior to the Distributions and Merger described below, the Company
also was engaged in the manufacture and sale of automotive exhaust system parts
and ride control products; the manufacture and sale of packaging materials,
cartons, containers and specialty packaging products for consumer and commercial
markets; and the construction and repair of ships.
ACQUISITION BY EPG
On December 12, 1996, an indirect subsidiary of EPG merged into Old Tenneco
(the "Merger"), resulting in Old Tenneco becoming an indirect subsidiary of EPG.
The Merger was effected in accordance with the Amended and Restated Agreement
and Plan of Merger dated as of June 19, 1996
(the "Merger Agreement"). In the Merger, Old Tenneco changed its name to EPTPC.
Prior to the Merger, Old Tenneco and its subsidiaries effected various
intercompany transfers and distributions which restructured, divided and
separated their businesses, assets and liabilities so that all the assets,
liabilities and operations related to their automotive parts, packaging and
administrative services businesses (collectively, the "Industrial Business") and
their shipbuilding business (the "Shipbuilding Business") were spun-off to Old
Tenneco's then existing common stockholders (the "Distributions"). The entity
consisting of the Industrial Business was subsequently renamed Tenneco Inc.
("New Tenneco") and the entity consisting of the Shipbuilding Business was
subsequently renamed Newport News Shipbuilding Inc. ("Newport News"). Following
the Distributions, the remaining operations of the Company consisted primarily
of those operations related to the transmission and marketing of natural gas and
the discontinued operations of Old Tenneco. In preparation for the Merger and
Distributions, Old Tenneco initiated a realignment of the Company's indebtedness
(the "Debt Realignment"). As part of the Debt Realignment, Old Tenneco initiated
tender offers for certain issues of debt of Old Tenneco and certain of its
subsidiaries and certain other debt issues which were exchanged into New Tenneco
debt, defeased, or otherwise retired. Upon completion of the Debt Realignment
transactions, the Company is only responsible for its remaining debt which was
not tendered, exchanged, defeased or otherwise retired. As a result of the
Merger, EPG owns 100 percent of the common stock of EPTPC, representing at the
effective time of the Merger approximately 75 percent of the equity value of
EPTPC; the balance of the equity value of EPTPC is held by the holders of its
Series A Preferred Stock which was issued in a registered public offering in
November 1996 and remains outstanding. For a further discussion, see Note 1 of
Item 8, Financial Statements and Supplementary Data.
REGULATED OPERATIONS
The natural gas transmission segment is comprised of three interstate
pipeline systems: the TGP system, the Midwestern system, and the East Tennessee
system, collectively referred to as the Interstate System. The Interstate System
totals approximately 16,300 miles of transmission pipeline.
The TGP system. The TGP system consists of approximately 14,800 miles of
pipeline with a design capacity of 5,490 MMcf/d. During 1997, TGP transported
natural gas volumes averaging 87 percent of its capacity. The TGP system serves
the northeast section of the U.S., including the New York City and Boston
metropolitan areas. The multiple-line system begins in the gas-producing regions
of Texas and Louisiana, including the Gulf of Mexico.
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The Midwestern system. The Midwestern system consists of approximately 400
miles of pipeline with a design capacity of 680 MMcf/d. During 1997, Midwestern
transported natural gas volumes averaging approximately 65 percent of its
capacity. The Midwestern system extends from a connection with the TGP system at
Portland, Tennessee, to Chicago and principally serves the Chicago metropolitan
area.
The East Tennessee system. The East Tennessee system consists of
approximately 1,100 miles of pipeline with a design capacity of 630 MMcf/d.
During 1997, East Tennessee transported natural gas volumes averaging
approximately 51 percent of its capacity. The East Tennessee system serves the
states of Tennessee, Virginia and Georgia and connects with the TGP system in
Springfield and Lobelville, Tennessee.
Other. The Company owns a 17.8 percent interest in the Portland Natural Gas
Transmission ("Portland") system which is developing a 292-mile interstate
natural gas pipeline with a projected capacity of 178 MMcf/d extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. Portland
received its FERC certificate in September 1997, and is now awaiting approval
from Canada's National Energy Board. Targeted completion is November 1998, at an
estimated total cost of $366 million.
From time to time, the Company holds open seasons in an effort to
capitalize on pipeline expansion opportunities. Currently, TGP has announced the
Eastern Express Project 2000 which will provide gas transportation for the
growing markets in the northeast and mid-Atlantic regions of the United States.
TGP has also announced the Express 500 Expansion Project which is being designed
to meet the growing gas transportation demands in the Gulf of Mexico caused by
the significant increases in deepwater production. The projects are designed to
provide service to their markets beginning in the years 2000 and 1999,
respectively.
Regulatory Environment
The Interstate System is subject to the jurisdiction of FERC in accordance
with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978.
In the mid-1980s, FERC initiated a series of actions which ultimately had
the effect of substantially removing interstate pipelines from the gas purchase
and resale business and confining their role to transportation of gas owned by
others. In Order No. 436, issued in 1985, FERC began this transition by
requiring interstate pipelines to provide non-discriminatory access to their
facilities for all transporters of natural gas. This requirement enabled
consumers to purchase their own gas and have it transported on the interstate
pipeline system, rather than purchase gas from the pipelines. The transition was
completed with Order No. 636, issued in 1992, in which FERC required all
interstate pipelines to "unbundle" their sales and transportation services so
that the transportation services they provided to third parties would be
"comparable" to the transportation services provided to gas owned by themselves.
FERC's stated purpose was to ensure that the pipelines' monopoly over the
transportation of natural gas did not distort the competition in the gas
producer sales market, which had, by then, been essentially deregulated.
One of the obstacles to this transition was the existence of long-term gas
purchase contracts between pipelines and producers which required the pipelines
to take or pay for a significant percentage of the gas the producer was capable
of delivering. While FERC did not deal with this issue initially, it eventually
adopted rate recovery procedures which facilitated negotiations between
pipelines and producers to address take-or-pay issues. Such procedures were
established in Order Nos. 500, 528 and 636, in the last of which FERC provided
that pipelines could recover 100 percent of the costs prudently incurred to
terminate their gas purchase obligations. In July 1996, the Court of Appeals
issued its decision upholding, in large part, Order No. 636.
In December 1994, TGP filed for a general rate increase with FERC and in
April 1996, it filed 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. 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 that order. One party, a competitor of TGP, filed with the
Court of Appeals a Petition for Review of the FERC orders.
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For a further discussion of regulatory matters related to TGP, see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Item 8, Financial Statements and Supplementary Data.
Markets and Competition
The Interstate System faces varying degrees of competition from alternative
energy sources, such as electricity, hydroelectric power, coal, and oil. The
potential consequences of the proposed restructuring of the electric power
industry are currently unclear. It may benefit the natural gas industry by
creating more demand for gas turbine generated electric power, or it may hamper
demand by allowing more effective use of surplus electric capacity through
increased wheeling as a result of open access. At this time, the Company is not
projecting a significant change in gas demand as a result of such restructuring.
Customers of TGP include natural gas producers, marketers and end-users, as
well as other gas transmission and distribution companies, none of which
individually represents more than 10 percent of revenues on TGP's system.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. TGP is actively pursuing the renegotiation,
extension and/or replacement of these contracts. Although TGP cannot predict how
much capacity will be resubscribed, a majority of the expiring contracts cover
service to northeastern markets, where there is currently little excess
capacity. Several projects, however, have been proposed to deliver incremental
volumes to these markets.
In a number of key markets, TGP faces competitive pressure from other major
pipeline systems, enabling local distribution companies and end-users to choose
a supplier or switch suppliers based on the short-term price of gas and the cost
of transportation. Competition among pipelines is particularly intense in TGP's
supply areas, Louisiana and Texas. In some instances, TGP has had to discount
its transportation rates in order to maintain market share. The renegotiation of
TGP's expiring contracts may be impacted by the foregoing competitive factors.
NON-REGULATED OPERATIONS
Field and Merchant Services
Certain subsidiaries of EPTPC are engaged in the businesses of marketing
natural gas and owning and operating approximately 1,300 miles of gathering and
intrastate pipelines that serve the Texas Gulf Coast and West Texas markets.
The merchant service business markets and trades natural gas, NGLs, power,
crude and refined products, and participates in the development and ownership of
domestic power generation projects. In the fourth quarter of 1997 and for the
year, the Company marketed physical and financial gas volumes of over 9,500
BBtu/d and 6,600 BBtu/d, respectively.
The Company provides a broad range of energy products and services,
including supply aggregation, as well as transportation management and
integrated price risk management. The Company maintains a diverse natural gas
supplier and customer base serving producers, utilities (including local
distribution companies and power plants), municipalities, and a variety of
industrial and commercial end users. In 1997, the Company served over 400
producers/suppliers and approximately 2,000 sales customers in 26 states with
transportation of gas supplies on 65 pipelines.
Demand for natural gas products and services has primarily resulted from
the effects of FERC Order No. 636, the commercialization of natural gas, and the
intense competition within the industry. Volatility in the physical and
financial gas markets has compounded the effects of these changes creating
greater service opportunities.
In the course of business, the Company trades and develops a market in
natural gas in both the physical and financial markets, and purchases or sells
swaps and options in the over-the-counter financial markets with
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major energy merchants. The Company seeks to maintain a balanced portfolio of
supply and demand contracts and utilizes the New York Mercantile Exchange and
over-the-counter financial markets to manage price and basis risk which may
affect those obligations. To support these activities, the Company employs
centralized corporate risk management and trading strategies. For additional
information regarding the use of financial instruments, see Item 7A,
Quantitative and Qualitative Disclosures About Market Risk and Note 4 of Item 8,
Financial Statements and Supplementary Data.
The Company entered into a development agreement with Power Development
Company to jointly develop a natural gas-fired combined cycle electric
generation facility in Agawam, Massachusetts. The facility will have a normal
capacity of approximately 270 MWs. In December 1997, the entity that will own
and operate the plant completed non-recourse project financing which includes a
$50 million equity bridge loan and a 24-month $150 million construction loan. At
completion of construction, the Company will make its equity contribution of up
to $50 million, representing a 90 percent equity interest in the joint venture,
and the construction loan will convert to a 17-year $150 million term loan.
Construction of the facility began in December 1997 and it is scheduled to
commence operations in December 1999. The Company will be responsible for the
procurement and transportation of supplies of natural gas to fuel the project
and the marketing of the electric power that the plant produces. The Company is
also pursuing the development of domestic power generating facilities.
In its continued efforts to expand its power marketing and merchant
activities, the Company formed El Paso Power Services in February 1998. El Paso
Power Services will focus on helping electric utilities,
non-utility and merchant generators, fuel suppliers, and large industrial
concerns achieve lower costs in the transition to a competitive marketplace.
The merchant service business operates in a highly competitive environment
where its primary competitors include: (i) marketing affiliates of major oil and
gas producers; (ii) marketing affiliates of large local distribution companies;
(iii) marketing affiliates of other interstate and intrastate pipelines; and
(iv) independent energy marketers with varying scopes of operations and
financial resources. The Company competes on the basis of price, access to
production, imbalance management, and experience in the marketplace.
The Company's natural gas gathering and processing business provides
natural gas gathering, products extraction, dehydration, compression and
intrastate transmission services. The Company owns or has interest in
approximately 200 miles of gathering systems and approximately 1,300 miles of
intrastate transmission pipeline. In addition, the Company owns or has interest
in 7 natural gas processing facilities.
As of December 31, 1997, the gathering and transportation capacity was
1,300 MMcf/d which reflects the Company's net ownership, excluding entities
accounted for under the equity method, and is subject to increases or decreases
depending on operating pressures and point of delivery into or out of the
system. Average volume for the year ended December 31, 1997 was 440 BBtu/d.
As of December 31, 1997, the inlet capacity at the Company's net ownership
percentage in the processing facilities is approximately 200 MMcf/d. Average
inlet volume and average NGLs sales for the year ended December 31, 1997 are 101
BBtu/d and 167 thousand gallons per day, respectively.
The Company's natural gas gathering and processing business operates in a
highly competitive environment that includes independent gathering and
processing companies, intrastate pipeline companies, gas marketers, and oil and
gas producers. The Company competes for throughput primarily based on price,
efficiency of facilities, gathering system line pressures, availability of
facilities near drilling activity, service, and access to favorable downstream
markets.
In February 1994, the Company sold a 20 percent interest in its marketing
and intrastate pipeline subsidiary to Ruhrgas Aktiengesellschaft, Germany's
largest natural gas company. In anticipation of the Merger, the Company
repurchased this 20 percent interest in September 1996.
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International and Other Energy-Related Business
The Company has undertaken various activities to extend its traditional
activities in North American pipelines to international pipeline, power and
energy-related projects, with a current focus on activities in Latin America,
Southeast Asia, Australia and Europe. Set forth below are brief descriptions of
the projects that are operational or are in various stages of development.
Acquisitions and greenfield development projects are subject to a higher
level of commercial and financial risk in foreign countries. Accordingly the
Company has adopted a risk mitigation plan to reduce the risk to more acceptable
and manageable levels. The Company's practice is to select experienced partners
with a history of success in commercial operations. Selected partners will
generally be chosen based on the complementary competencies which they offer to
the various joint ventures formed or to be formed. The Company designs and
implements a formal due diligence plan on every project it pursues and contracts
are negotiated to secure fuel source, manage operation and maintenance costs
and, when possible, index revenues to the U.S. dollar. The Company will obtain
political risk insurance when deemed appropriate, through the Overseas Private
Investment Corporation, the Multilateral Investment Guarantee Agency, or some
other private insurer.
Bolivia to Brazil Pipeline -- The Company is part of a consortium that is
constructing a 2,000 mile pipeline from Santa Cruz, Bolivia to Sao Paulo,
Brazil, with a southern lateral to Porto Alegre, Brazil. The pipeline will
transport natural gas to the largest unserved market in the western hemisphere
(approximately 100 million people). The pipeline is expected to be in service by
the first quarter of 1999. The Company's interest in the project will be
approximately 10 percent.
EMA Power -- In June 1997, the Company purchased a 50 percent controlling
interest in an operating 70 MW power plant located in Danaujvaros, Hungary. The
electricity generated at the plant is consumed by Dunafer Kft., the largest
steel mill in Hungary. The acquisition agreement requires the Company to
evaluate and, if deemed economically feasible, to expand the electric generating
plant to 140 MW. The feasibility study is underway.
Australian Pipelines -- The Company owns a 30 percent interest in the
Moomba to Adelaide transmission system, a 483-mile natural gas pipeline in
southern Australia and the Ballera to Wallumbilla transmission system, a
470-mile natural gas pipeline in southwestern Queensland. Both pipelines were
operational in 1997. The Company's joint venture has been selected to construct
the 270 mile expansion project on the Dampier-to-Bunburry natural gas pipeline
in western Australia. The expansion project is expected to commence operations
in the third quarter of 1999.
Sengkang Project -- The Company has a 50 percent interest in a producing
500 Bcf gas field and a 47.5 percent interest in a 135 MW power generating plant
in Sengkang, South Sulawesi, Indonesia. The electricity produced by the power
plant is sold to PLN, the national electric utility, pursuant to a long-term
power purchase agreement. The power plant began simple cycle commercial
operation in September 1997, making it one of the first independent power plants
to operate in Indonesia. Combined cycle completion is expected in the third
quarter of 1998. For a discussion on the devaluation of the Indonesian Rupiah,
see Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Other Projects
The Company owns interests in three operating domestic power generation
plants consisting of a 17.5 percent interest in a 240 MW power plant in
Springfield, Massachusetts and a 50 percent interest in two additional
cogeneration projects in Florida with a combined capacity of 220 MW of power
generation.
OTHER
As a result of the Merger, the Company holds certain limited assets and is
responsible for certain liabilities of existing and discontinued operations and
businesses. The liabilities were approximately $600 million at the time of the
Merger.
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EPECC, an indirect subsidiary of the Company, purchases interest-bearing
and noninterest-bearing trade receivables from the Company's operating
subsidiaries. Through June 1994, it also purchased retail receivables generated
primarily by retail sales of products by Case Corporation. As part of the
intercompany transfers preceding the Merger and Distributions, these Case
Corporation retail receivables and all of the interest and obligations
associated with receivables relating to the Industrial Business were transferred
to New Tenneco.
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 December 31, 1997, the Company had a reserve of
approximately $253 million for the following environmental contingencies which
the Company anticipates incurring through 2027: (i) expected remediation costs
and associated onsite, offsite and groundwater technical studies of
approximately
$226 million; and (ii) other costs of approximately $26 million. For a further
discussion of specific environmental matters, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations; Item
3, Legal Proceedings; and Note 5 of Item 8, Financial Statements and
Supplementary Data.
EMPLOYEES
The Company had approximately 1,700 full-time employees on December 31,
1997. The Company has no collective bargaining arrangements. Since December 31,
1996, the Company has reduced its workforce by approximately 1,100 employees as
a result of a program to streamline operations and reduce operating costs. No
significant changes in the workforce have occurred since December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of EPTPC at March 16, 1998 were as follows:
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William A. Wise........................ Chairman of the Board, President and Chief Executive 52
Officer
H. Brent Austin........................ Executive Vice President and Chief Financial Officer 43
Joel Richards III...................... Executive Vice President 51
Britton White, Jr...................... Executive Vice President and General Counsel 54
</TABLE>
Mr. Wise became the Chairman of the Board, President and Chief Executive
Officer of EPTPC upon consummation of the Merger. Mr. Wise has been Chairman of
the Board of EPG since January 1994 and Chief Executive Officer since January
1990. He was President of EPG from April 1989 to April 1996. From March 1987
until April 1989, Mr. Wise was an Executive Vice President of EPG. From January
1984 to February 1987, he was a Senior Vice President of EPG. Mr. Wise is a
member of the Board of Directors of Battle Mountain Gold Company.
Mr. Austin has been Executive Vice President and Chief Financial Officer of
EPTPC since June 1997. From consummation of the Merger until June 1997, he was
Senior Vice President and Chief Financial Officer. Mr. Austin has been Executive
Vice President of EPG since May 1995. He has been Chief Financial Officer of EPG
since April 1992. He was Senior Vice President of EPG from April 1992 to April
1995. He was Vice President, Planning and Treasurer of Burlington Resources,
Inc. from November 1990 to March 1992 and Assistant Vice President, Planning of
Burlington Resources, Inc. from January 1989 to October 1990.
Mr. Richards has been Executive Vice President of EPTPC since June 1997.
From consummation of the Merger until June 1997, he was Senior Vice President.
Mr. Richards has been Executive Vice President of EPG since December 1996. From
January 1991 until December 1996, he was Senior Vice President of EPG. He was
Vice President from June 1990 to December 1990. He was Senior Vice President,
Finance and
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Human Resources of Meridian Minerals Company, a wholly owned subsidiary of
Burlington Resources, Inc., from October 1988 to June 1990.
Mr. White has been Executive Vice President and General Counsel of EPTPC
since June 1997. From consummation of the Merger until June 1997, he was Senior
Vice President and General Counsel. Mr. White has been Executive Vice President
of EPG since December 1996 and General Counsel of EPG from March 1991. He was
Senior Vice President and General Counsel of EPG from March 1991 until December
1996. From March 1991 to April 1992, he was also Corporate Secretary of EPG. For
more than five years prior to that time, Mr. White was a partner in the law firm
of Holland & Hart.
Executive officers hold offices until their successors are elected and
qualified, subject to their earlier removal.
ITEM 2. PROPERTIES
A description of the Company's properties is included in Item 1, Business,
and is incorporated by reference herein.
The Company is of the opinion that it has generally satisfactory title to
the properties owned and used in its businesses, subject to the liens for
current taxes, liens incident to minor encumbrances, and easements and
restrictions that do not materially detract from the value of such property or
the interests therein or the use of such properties in its businesses. In
addition, the Company's physical properties are adequate and suitable for the
conduct of its business in the future.
ITEM 3. LEGAL PROCEEDINGS
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) cost recovery action, United States v.
Atlantic Richfield Co., et al, against fourteen companies including TGP, EPTPC,
EPEC Corp., EPEC Polymers, Inc. and the recently dissolved Petro-Tex Chemical
Corp., relating to the Sikes Disposal Pits Superfund Site ("Sikes") located in
Harris County, Texas. Sikes was an unpermitted waste disposal site during the
1960s that accepted waste hauled from numerous Houston Ship Channel industries.
The suit alleges that the former Tenneco Chemicals, Inc. and Petro-Tex Chemical
Corp. arranged for disposal of hazardous substances at Sikes. TGP, EPTP, EPEC
Corp. and EPEC Polymers, Inc. are alleged to be derivatively liable as
successors or as parent corporations. The suit claims that the United States and
the State of Texas have expended over $125 million in remediating the site, and
seeks to recover that amount plus interest. Other companies named as defendants
include Atlantic Richfield Company, Crown Central Petroleum Corporation,
Occidental Chemical Corporation, Exxon Corporation, Goodyear Tire & Rubber
Company, Rohm & Haas Company, Shell Oil Company and Vacuum Tanks, Inc. Although
factual investigation relating to Sikes is in very preliminary stages, the
Company believes that the amount of material disposed at Sikes from the Tenneco
Chemicals, Inc. or Petro-Tex Chemical Corp. facilities, if any, was small,
possibly de minimis. However, the government plaintiffs have alleged that the
defendants are each jointly and severally liable for the entire remediation
costs and have also sought a declaration of liability for future response costs
such as groundwater monitoring. While the outcome of this matter cannot be
predicted with certainty, management does not expect this matter to have a
material adverse effect on the Company's financial position or results of
operations.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is
7
<PAGE> 11
ongoing. Management believes that the ultimate resolution of these matters will
not have a material 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 with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky stations from the agency, and continues to
work to resolve the remaining issues. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent order with
the EPA. Management believes that the resolution of this issue will not have a
material adverse effect on the Company's financial position 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 material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Following the consummation of the Merger, a subsidiary of EPG became the
sole holder of EPTPC's common stock, par value $.01 per share (the "Common
Stock"). The Common Stock was delisted from the New York Stock Exchange, and
there is no longer a trading market for such securities.
The declaration of dividends on EPTPC capital stock is at the discretion of
its Board of Directors. The Board of Directors has not adopted a dividend policy
as such; subject to legal and contractual restrictions, its decisions regarding
dividends are based on all considerations that in its business judgment are
relevant at the time, including past and projected earnings, cash flows,
economic, business and securities market conditions and anticipated developments
concerning EPTPC's business and operations. For additional information
concerning the payment of dividends by EPTPC, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
EPTPC's cash flow and the consequent ability of EPTPC to pay any dividends
on its Common Stock is substantially dependent upon EPTPC's earnings and cash
flow available after its debt service and the availability of such earnings to
EPTPC by way of dividends, distributions, loans and other advances. The
instruments setting forth the rights of the holders of the Series A Preferred
Stock contain provisions restricting EPTPC's right to pay dividends and make
other distributions on the Common Stock.
Under applicable corporate law, dividends may be paid by EPTPC out of
"surplus" (as defined under the law), or, if there is not a surplus, out of net
profits for the year in which the dividends are declared or the preceding fiscal
year. At December 31, 1997, EPTPC had surplus of approximately $1 billion for
the payment of dividends, and EPTPC will also be able to pay dividends out of
any net profits for the current and prior fiscal year.
9
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The consolidated and combined selected financial data as of December 31,
1997, 1996, 1995, and 1994 and for the years ended December 31, 1997, 1996,
1995, 1994, and 1993 were derived from the audited consolidated and combined
financial statements of the Company. The combined selected financial data as of
December 31, 1993 is unaudited and was derived from the accounting records of
Old Tenneco. In the opinion of EPTPC's management, the combined selected
financial data of the Company as of December 31, 1993 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The balance sheet of EPTPC and
consolidated subsidiaries as of
December 31, 1997 and 1996, contained herein reflects the purchase price
recorded by EPG effective as of
December 31, 1996 and is referred to herein as "Post-Acquisition Consolidated".
The combined statements of income, cash flows and changes in consolidated
stockholders' equity and combined equity for periods prior to
December 31, 1996 are referred to as "Pre-Acquisition Combined." As a result of
the change in the basis of accounting from historical cost to reflect EPG's
purchase cost, the combined financial statements for Pre-Acquisition periods are
not comparable to the Consolidated Balance Sheet for the Post-Acquisition
period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------------ ------ ------ ------ -------
POST-
ACQUISITION
CONSOLIDATED PRE-ACQUISITION COMBINED
(IN MILLIONS) ------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results Data(a):
Operating revenues.......................... $3,602 $2,708 $1,986 $2,421 $ 2,862
Extraordinary loss, net of income tax(b).... -- (234) -- -- (25)
Net income (loss)........................... 112 (105) 157 153 163
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------------ ------ ------ ------ -------
POST-ACQUISITION
CONSOLIDATED PRE-ACQUISITION COMBINED
(IN MILLIONS) --------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Financial Position Data(a):
Total assets................................ $6,550 $5,755 $5,792 $5,730 $ 4,290
Long-term debt(c)........................... 1,081 1,150 1,811 2,242 2,019
Stockholders' or combined equity(c)......... 1,462 1,234 687 382 (652)
</TABLE>
- ---------------
(a) During 1996, subsequent to the Merger, EPTPC sold 70 percent of its interest
in the Company's two Australian pipelines and completed the sale of its oil
and gas exploration, production and financing unit, Tenneco Ventures. During
1995, 1994 and 1993, EPTPC completed several acquisitions and dispositions,
the most significant of which was the acquisition of the natural gas
pipeline assets of PASA in 1995 and the disposition of its 50 percent
interest in Kern River in 1995.
(b) Reflects extraordinary losses as a result of the retirement of long-term
debt in the debt realignment preceding the Merger during 1996 and an
extraordinary loss as a result of the prepayment of long-term debt during
1993.
(c) Amounts for the pre-acquisition periods are net of allocations from Old
Tenneco to the Industrial Business and Shipbuilding Business. The allocation
is based on the portion of Old Tenneco's investment in the Industrial
Business and Shipbuilding Business that is deemed to be debt, generally
based on the ratio of the Industrial Business' and Shipbuilding Business'
net assets to Old Tenneco's consolidated net assets plus debt. Old Tenneco's
historical practice has been to incur indebtedness for its consolidated
group at the parent company level or at a limited number of subsidiaries,
rather than at the operating company level, and to centrally manage various
cash functions. Management believes that the historical allocation of
corporate debt and interest expense is reasonable; however, it is not
necessarily indicative of EPTPC's debt and interest expense which may be
incurred in the future. See Note 16 of Item 8, Financial Statements and
Supplementary Data.
10
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERGER TRANSACTION
On December 12, 1996, Old Tenneco and an indirect subsidiary of EPG
completed the Merger and Old Tenneco became an indirect subsidiary of EPG. The
Merger was effected in accordance with the Merger Agreement. In the Merger, Old
Tenneco changed its name to EPTPC. Prior to the Merger, Old Tenneco and its
subsidiaries effected various intercompany transfers and distributions which
restructured, divided and separated their businesses, assets and liabilities so
that all the assets, liabilities and operations related to the Industrial
Business and the Shipbuilding Business were spun-off to Old Tenneco's then
existing common stockholders in the Distributions. The entity consisting of the
Industrial Business was subsequently renamed Tenneco Inc. (referred to herein as
"New Tenneco") and the entity consisting of the Shipbuilding Business was
subsequently renamed Newport News Shipbuilding Inc. ("Newport News"). Following
the Distributions, the remaining operations of the Company consisted primarily
of those operations related to the transmission and marketing of natural gas and
the discontinued operations of Old Tenneco. In preparation for the Merger and
Distributions, Old Tenneco initiated the Debt Realignment. As part of the Debt
Realignment, Old Tenneco initiated tender offers for certain issues of debt of
Old Tenneco and certain of its subsidiaries and certain other debt issues which
were exchanged into New Tenneco debt, defeased, or otherwise retired. Upon
completion of the Debt Realignment transactions, the Company is only responsible
for its remaining debt which was not tendered, exchanged, defeased or otherwise
retired. As a result of the Merger, EPG owns 100 percent of the common stock of
EPTPC, representing at the effective time of the Merger approximately 75 percent
of the equity value of EPTPC; the balance of the equity value of EPTPC is held
by the holders of its Series A Preferred Stock that was issued in a registered
public offering in November 1996 and remains outstanding. For a further
discussion, see Note 1 of Item 8, Financial Statements and Supplementary Data.
RESULTS OF OPERATIONS
Results of operations comparisons have been conformed to the
reclassification of the Consolidated and Combined Statements of Income.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996
---------------- ---------------
(IN MILLIONS) POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Transportation revenue................................... $728 $712
Other revenue............................................ 70 85
---- ----
Operating revenue.............................. 798 797
Operating expenses....................................... 494 544
---- ----
Operating income......................................... $304 $253
==== ====
</TABLE>
Operating revenue for the year ended December 31, 1997, were $1 million
higher than for the same period of 1996 primarily due to new system rates on TGP
which went into effect November 1, 1996. The increase was offset by the loss of
revenues associated with the sale of the Bastian Bay assets whose revenues are
included in the 1996 total.
Operating expenses for the year ended December 31, 1997, were $50 million
lower than for the same period of 1996, primarily due to lower labor and benefit
costs attributable to a reduction in staffing levels which occurred throughout
the latter half of 1996 and the first quarter of 1997, as well as lower legal
costs and operating and maintenance costs. The decrease in operating expenses
was partially offset by an increase in
11
<PAGE> 15
depreciation expense as a result of the amortization of additional acquisition
cost assigned to utility plant, as well as new lower fuel retention rates
starting in the second quarter of 1997.
Non-Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996
---------------- ---------------
(IN MILLIONS) POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Gathering and treating margin............................ $ 12 $ 12
Processing margin........................................ 3 5
Marketing margin......................................... 28 13
Other.................................................... 18 136
---- ----
Total gross margin............................. 61 166
Operating expenses....................................... 102 237
---- ----
Operating loss........................................... $ 41 $ 71
==== ====
</TABLE>
Total gross margin and operating expenses were both lower for the year
ended December 31, 1997, than for the same period of 1996 primarily due to the
discontinuance of EPECC commercial activities and the sale of certain businesses
in the fourth quarter of 1996 whose revenues and expenses are included in the
1996 amounts. These sales included the Company's oil and gas exploration,
production and financing unit, formerly known as Tenneco Ventures, and 70
percent of the Company's interests in two natural gas pipeline systems in
Australia. Following the sale, the Australian natural gas pipelines operations
were accounted for by the equity method. The increase in marketing margin is
associated with generally higher volumes from the assignment of contracts in the
third quarter of 1997 and higher industry-wide gas marketing margins in the
third and fourth quarters of 1997. Partially offsetting this increase was lower
marketing margins in the second quarter associated with lower industry-wide gas
margins, as well as extreme market volatility which negatively impacted natural
gas marketing activities and trading positions during the first quarter. In
addition, partially offsetting the decline in total gross margin was the
consolidation during the third quarter of 1997 of the EMA Power project.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
PRE-ACQUISITION
COMBINED
----------------
1996 1995
(IN MILLIONS) ---- ----
<S> <C> <C>
Transportation revenue...................................... $712 $694
Other revenue............................................... 85 72
---- ----
Operating revenue......................................... 797 766
Operating expenses.......................................... 544 591
---- ----
Operating income............................................ $253 $175
==== ====
</TABLE>
Operating revenue for the year ended December 31, 1996, were $31 million
higher than for the same period of 1995 primarily due to the benefit derived
from the new rate structure implemented in July 1995, and an increase in
transportation volumes.
Operating expenses for the year ended December 31, 1996, were $47 million
lower than for the same period of 1995 primarily due to the benefit of a full
year in 1996 of depreciation reduction derived from the new rate structure
implemented in July 1995 and $42 million of environmental cost included in 1995
operating expenses as a result of an environmental settlement. These costs were
offset by insurance recoveries and the
12
<PAGE> 16
insurance recoveries are included in other income as discussed below. Offsetting
this decrease were 1996 transition costs related to the Merger and higher
operating costs.
Non-Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
PRE-ACQUISITION
COMBINED
----------------
1996 1995
(IN MILLIONS) ------ ------
<S> <C> <C>
Gathering and treating margin............................... $ 12 $ 6
Processing margin........................................... 5 3
Marketing margin............................................ 13 40
Other....................................................... 136 103
---- ----
Total gross margin..................................... 166 152
Operating expenses.......................................... 237 199
---- ----
Operating loss.............................................. $ 71 $ 47
==== ====
</TABLE>
Total gross margin for the year ended December 31, 1996, was $14 million
higher than for the same period of 1995. The increase was primarily due to
higher volumes and prices from Tenneco Venture's oil and gas production and a
full year operation of PASA that was acquired in June 1995. These increases were
offset by lower margins from marketing activities and lower interest revenue
from the continuing liquidation of Case Corporation receivables. In anticipation
of the Merger, Old Tenneco sold all of the Case Corporation retail receivable to
New Tenneco for amount equal to their book value. Accordingly, income from these
receivables will not be recognized in future periods.
Operating expenses for the year ended December 31, 1996, was $38 million
higher than for the same period of 1995. The increase was primarily due to
higher volumes from Tenneco Venture's oil and gas production and a full year
operation of PASA that was acquired in June 1995.
Tenneco Ventures and 70 percent of the Company's interest in the Australian
pipelines were sold in December 1996 after the Merger. Also, Tenneco Credit
Corporation commercial activities were discontinued at the Merger date.
Accordingly, income from these sources will not be recognized in future periods.
OTHER INCOME AND EXPENSE
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Other expense for the year ended 1997 was $64 million higher than for the
same period of 1996. The increase was due primarily to the recognition in 1996
of a previously deferred gain on the sale of certain investments, a gain on the
sale of the Company's 50 percent general partnership interest in Tenneco Mobile
Bay Gathering Co. in February 1996, a reduction in equity income from
unconsolidated subsidiaries in 1997, a favorable legal settlement in the second
quarter of 1996, and a decrease in interest income in 1997 offset by a loss on
sale of assets during the third quarter of 1996.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Other expense for the year ended 1996 was $31 million higher than for the
same period of 1995. The increase resulted from a $30 million gain recognized in
1995 from the sale of Kern River, the absence of earnings due to the sale of
Kern River which contributed $33 million in 1995, higher interest expense in
1996 of $20 million due to higher levels of debt, and insurance recoveries in
1995 related to environmental costs, as discussed above. Offsetting these items
were $15 million in legal settlements and the recognition of a $32 million
deferred gain on the sale of certain investments. Additionally, 1995 included a
$30 million reserve for estimated regulatory and legal settlement costs and a
$25 million reserve for the liquidation of surplus real estate holdings.
13
<PAGE> 17
Prior to the Merger, Old Tenneco's historical practice has been to incur
indebtedness for its consolidated group at the parent company level or at a
limited number of subsidiaries, rather than at an operating company level, and
to centrally manage various cash functions. Consequently, the corporate debt of
Old Tenneco and its related interest expense have been allocated to Old
Tenneco's automotive, packaging and shipbuilding businesses ("Old Tenneco's
former non-energy operations") based upon the portion of Old Tenneco's
investment in Old Tenneco's former non-energy operations which was deemed to be
debt, generally based upon the ratio of Old Tenneco's former non-energy
operations' net assets to Old Tenneco's consolidated net assets plus debt.
Interest expense was allocated at a rate equivalent to the weighted average cost
of all corporate debt, which was 8.2 percent for 1996 and 7.7 percent for 1995.
Total pre-tax interest expense allocated to Old Tenneco's former non-energy
operations was $211 million in 1996 and $180 million in 1995. Old Tenneco's
former non-energy operations have also been allocated tax benefits approximating
35 percent of the allocated pre-tax interest expense. Although interest expense
and the related tax effects have been allocated to Old Tenneco's former
non-energy operations for financial reporting on a historical basis, Old
Tenneco's former non-energy operations have not been billed for these amounts.
The changes in allocated corporate debt and the after-tax allocated interest
expense have been included as a component of the combined equity of the Company.
Although management believes that the historical allocation of corporate debt
and interest is reasonable, it is not necessarily indicative of the debt and
interest expense of the Company subsequent to the Merger or the debt that it may
incur in the future.
INCOME TAX EXPENSE (BENEFIT)
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Income tax expense for 1997 was $58 million compared to $24 million for
1996. The effective tax rate was 34 percent and 15 percent for 1997 and 1996,
respectively. The effective tax rate for 1996 was lower than 1997 primarily
because of the 1996 reversal of a $38 million valuation allowance for deferred
tax assets.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Income tax expense for 1996 was $24 million compared to a $30 million
income tax benefit for 1995. The effective tax rate was 15 percent and (24)
percent for 1996 and 1995, respectively. The effective tax rate for 1995 was
lower than 1996 primarily because of the 1995 reversal of a $72 million
valuation allowance for deferred tax assets compared to $38 million for 1996.
For an additional discussion of income taxes, see Note 7 of Item 8, Financial
Statements and Supplementary Data.
1996 EXTRAORDINARY LOSS
In 1996, in preparation for the Merger and Distributions, Old Tenneco
initiated a realignment of its indebtedness. Upon completion of the debt
realignment transactions, the Company is only responsible for its remaining debt
which was not tendered, exchanged, defeased or otherwise retired (approximately
$265 million of such debt remained outstanding immediately after the Merger).
The Company recognized an after-tax extraordinary charge of $234 million related
to the debt realignment immediately prior to the Merger.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $198 million for 1997,
compared to $27 million for 1996. The change was due primarily to income tax
refunds in 1997, higher tax payments in 1996, and other working capital changes.
The increase was partially offset by a rate refund made to TGP's customers in
the first quarter of 1997 and proceeds from a 1996 legal settlement.
14
<PAGE> 18
CASH FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $22 million for 1997,
compared to $85 million of net cash used in investing activities for 1996. The
change was due primarily to the collection of a note receivable from the
Company's partnership in a 103 MW cogeneration plant near Bartow, Florida,
return of funds invested with EPG, and a reduction in capital expenditures
during 1997. Capital expenditures were higher in 1996 due to the construction of
the Australian pipeline. Offsetting the increase in cash provided by investing
activities was net proceeds received in the first quarter of 1996 from the sale
of the Company's 50 percent interest in Kern River. In addition, 1997 includes
expenditures related to the acquisition of a 50 percent interest in a power
plant located in Hungary, the acquisition of an additional 5 percent interest in
Oasis Pipeline Company bringing the Company's ownership interest to 35 percent,
and the purchase of an annuity in the third quarter of 1997 to be used to fund
the monthly demand requirement of a long-term gas supply contract.
Funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds, available
capacity under existing credit facilities, the issuance of other long-term debt
or equity, and/or contributions from EPG.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $215 million for 1997, compared
to $177 million for 1996. The change was primarily a result of credit facility
repayments in 1997. Funds used to repay the credit facility were provided by
internally generated cash flows, the proceeds received from TGP's debt offering,
and EPTPC's Series B Preferred Stock offering in the first quarter of 1997.
Future funding for long-term debt retirements, dividends, and other
financing expenditures is expected to be provided by internally generated funds,
available capacity under existing credit facilities, the issuance of long-term
debt or equity, and/or contributions from EPG.
LIQUIDITY
In October 1997, EPG established a new $750 million 5-year revolving credit
and competitive advance facility and a new $750 million 364-day renewable
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). EPTPC and TGP are also parties to the Revolving Credit
Facility. Initially, the interest rate will be a 32.5 basis point spread over
LIBOR and the spread will vary based on EPG's long-term debt credit rating. In
connection with the establishment of the Revolving Credit Facility, EPTPC's
revolving credit facility was also terminated, and the outstanding balance of
$417 million was financed under the 5-year portion of the new Revolving Credit
Facility with TGP designated as the borrower. In addition, TGP has approximately
$100 million remaining under its February 1997 shelf registration.
COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at December 31, 1997 of
approximately $19 million. Recent economic events in Indonesia have resulted in
the devaluation of the Indonesian Rupiah and delays or cancellations of certain
infrastructure power projects in that country. The Company has met with PLN and
the Indonesian Minister of Finance to discuss the terms of its power sales
agreement in light of the economic problems. While the Company cannot predict
the ultimate outcome of Indonesia's financial difficulties or the impact of such
matters to the Company, it believes PLN, with the backing of the Office of the
Minister of Finance, will honor all current invoices on the Sengkang project in
full and therefore, the current economic difficulties in Indonesia will not have
a material adverse effect on the Company's financial position or results of
operations.
Capital Commitments
At December 31, 1997, the Company had capital and investment commitments of
$104 million, which are expected to be funded through cash provided by
operations and/or incremental borrowings. The
15
<PAGE> 19
Company's other planned capital and investment projects are discretionary in
nature, with no substantial capital commitments made in advance of the actual
expenditures.
Purchase Obligations
In connection with the financing commitments of certain joint ventures, TGP
has entered into unconditional purchase obligations for products and services
totaling $99 million at December 31, 1997. TGP's annual obligations under these
agreements are $22 million for the year 1998, $21 million for the years 1999 and
2000, $11 million for the year 2001, $4 million for the year 2002, and $20
million in total thereafter. Prior to August 1997, TGP had an obligation to
purchase 30 percent of the output of the Great Plains coal gasification
project's original design capacity through July 2009. TGP has executed a
settlement of this contract as a part of its GSR negotiations, recorded the
related liability, and, in the third quarter of 1997, purchased an annuity for
$42 million to fund the expected remaining monthly demand requirements of the
contract which, under the settlement, continue through January 2004.
Guarantees
TGP has guaranteed various obligations of its subsidiaries, which
obligations are not expected to exceed $3 million. For further information, see
Note 5 of Item 8, Financial Statements and Supplementary Data.
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery by TGP of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). In April 1997, FERC approved
the settlement and TGP implemented the settlement on May 1, 1997. Under the
terms of the GSR Stipulation and Agreement, TGP is entitled to collect from
customers up to $770 million, of which approximately $682 million has been
collected as of December 31, 1997. TGP is entitled to recover additional
transition costs, up to the remaining $88 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provide for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and an escalating rate
cap, indexed to inflation, through October 2005, for certain of TGP's customers.
In December 1994, TGP filed for a general rate increase with FERC and in
April 1996, it filed 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. 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 that order. Under the stipulation, TGP's refund obligation was
approximately $185 million, inclusive of interest, of which $161 million was
refunded to customers in March 1997 and June 1997 with the remaining $24 million
refund obligation offset against GSR recoveries in accordance with particular
customer elections. TGP had provided a reserve for these rate refunds as
revenues were collected. One party, a competitor of TGP, filed with the Court of
Appeals a Petition for Review of the FERC orders.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding ALJ the issue of proper allocation of TGP's New England lateral
costs. In the July 1997 order on rehearing, FERC clarified, among other things,
that although the ultimate resolution as to the proper allocation of costs will
be applied retroactively to July 1, 1995, the cost of service settlement does
not allow TGP to recover from other customers amounts that TGP may ultimately be
required to refund. TGP has filed with the Court of Appeals a Petition for
Review of the FERC orders on this issue. In December 1997, the ALJ issued his
decision on the proper allocation of the New England lateral costs. The decision
adopts a
16
<PAGE> 20
methodology that economically approximates TGP's current methodology. The ALJ's
decision is pending before FERC.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996. TGP previously filed cashout reports for the period
September 1993 through August 1995. TGP's October 1997 filing showed a
cumulative loss of $11 million that would be rolled forward to the next cashout
period pursuant to its tariff. FERC has requested additional information and
justification from TGP as to its cashout methodology and reports. TGP's cashout
methodology and reports are currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
materially adverse effect on the Company's financial position and results of
operations.
Legal Proceedings
See Item 3, Legal Proceedings which is incorporated herein by reference.
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 December 31, 1997, the Company had a reserve of
approximately $253 million for the following environmental contingencies which
the Company anticipates incurring through 2027: (i) expected remediation costs
and associated onsite, offsite and groundwater technical studies of
approximately $226 million; and (ii) other costs of approximately $26 million.
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 29 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. As of December 31, 1997, the
Company has estimated its share of the remediation costs at these sites to be
between $52 million and $62 million and has provided reserves that it believes
are adequate for such costs. Because the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, and because in some cases the Company has asserted a
defense to any liability, the Company's estimate of its share of remediation
costs could change. Moreover, liability under the federal Superfund statute is
joint and several, meaning that the Company could be required to pay in excess
of its pro rata share of remediation costs. The Company's understanding of the
financial strength of other PRPs has been considered, where appropriate, in its
determination of its estimated liability as described herein. The Company
presently believes that the costs associated with the current status of such
entities as PRPs at the Superfund sites referenced above will not have a
material adverse effect on the Company's financial position or results of
operations.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the
17
<PAGE> 21
Company contends that certain environmental costs and liabilities associated
with various entities or sites, including costs associated with former operating
sites, must be paid or reimbursed by certain of its historic insurers. The
proceedings are in their initial stages and accordingly, it is not possible to
predict the outcome.
For a further discussion of specific environmental matters, see Item 3,
Legal Proceedings.
OTHER
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the assessment, remediation, testing and implementation of
the necessary modifications to its key computer applications (which consist of
internally developed computer applications, third party software, hardware and
embedded chip systems) to assure that such systems and related processes will
remain functional.
The assessment phase related to internally developed computer applications
has been completed and the cost estimate for making the necessary changes to
such systems, including implementation and testing efforts, is approximately $8
million to be spent in 1998 and 1999. These estimates were based on various
factors including availability of internal and external resources and complexity
of the software applications. The recent upgrade of various systems,
particularly the financial systems, to a Year 2000 compliant client/server
platform have greatly reduced or eliminated concerns in those areas.
The assessment phase for the third party software and hardware impacts is
continuing, with completion of that phase and an estimate of costs necessary to
modify or replace those systems to be available in the second quarter of 1998.
Included in this phase of the project is the effort to obtain representations
and assurances from third party vendors that their software and hardware
products being used by the Company are or will be Year 2000 compliant.
Implementation and testing phases are expected to be completed by mid 1999.
It is the Company's goal to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems may be interrelated with systems outside the control of the
Company, there can be no assurances that all implementations will be successful.
Management does not expect the costs to modify its systems or to correct any
unsuccessful system implementations to have a material adverse impact on the
Company's financial position or results of operations.
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation
The Company's businesses that are subject to the regulations and accounting
requirements of FERC have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, which may differ from
those accounting methods used by non-regulated entities. Changes in the
regulatory and economic environment may, at some point in the future, create
circumstances in which the application of regulatory accounting principles would
no longer be appropriate. If the Company's regulated businesses fail to qualify
under these accounting principles, an amount would be charged to earnings as an
extraordinary item in accordance with SFAS No. 101, Regulated
Enterprises -- Accounting for Discontinuation of Application of SFAS No. 71. At
December 31, 1997, this amount was estimated to be approximately $15 million,
net of income taxes. Any potential charge would be non-cash and would not
directly effect the regulated companies' ability to seek recovery of the
underlying deferred costs in their future rate proceedings or their ability to
collect the rates set thereby. For a further discussion of SFAS No. 71 issues,
see Note 2 of Item 8, Financial Statements and Supplementary Data.
RECENT PRONOUNCEMENTS
In 1997, the Company adopted or applied the relevant provisions of SFAS No.
123, Accounting for Stock-Based Compensation 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, SFAS No. 128, Earning per Share, SFAS No. 129, Disclosure of
Information about Capital Structure, the Securities and Exchange Commission's
Financial Reporting Release No. 48, Disclosure
18
<PAGE> 22
of Derivative and Other Financial Instruments and Statement of Position No.
96-1, Environmental Remediation Liabilities. The adoption or application of
these pronouncements did not have a material impact on the Company's financial
position or results of operations. For further discussion, see Note 2 of Item 8,
Financial Statements and Supplementary Data.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
planning to adopt this statement in the first quarter of 1998.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes, among other things, the way that public business enterprises report
information about operating segments in annual and interim financial statements
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
pronouncement is effective for financial statements for periods beginning after
December 15, 1997. The Company is planning to adopt this statement in the first
quarter of 1998 and does not expect the number of reportable segments to change.
Pensions and Other Postretirement Benefit Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of those plans. It
is effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the effect of this pronouncement.
19
<PAGE> 23
RISK FACTORS -- CAUTIONARY STATEMENT FOR PURPOSES OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference 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 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 three years, principally in November
2000) could be adversely affected by the proposed construction by other
parties of additional pipeline capacity in the Northeast U.S., the
viability of the Company's expansion projects, reduced demand due to higher
gas prices, the availability of alternative energy sources, and other
factors that are not within its control. For a further discussion see Item
1, Business -- Regulated Operations -- Markets and Competition.
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 or if one of its counterparties fails to perform
under a contract. For additional information concerning the Company's
derivative financial instruments, see Item 7A, Quantitative and
20
<PAGE> 24
Qualitative Disclosures About Market Risks and Note 4 of Item 8, Financial
Statements and Supplementary Data.
ACQUISITIONS AND INVESTMENTS
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of such 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
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 as the recent devaluation of the Indonesian
currency and other economic problems). Such legal and regulatory events 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, 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. For additional information concerning the
Company's environmental matters, see Note 5 of Item 8, Financial Statements
and Supplementary Data.
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 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.
POTENTIAL FEDERAL INCOME TAX LIABILITIES
In connection with the Merger and Distributions, the IRS issued a
private letter ruling to Old Tenneco, in which it 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 have agreed to
indemnify EPTPC for a defined portion of such tax liabilities.
21
<PAGE> 25
FINANCING 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.
YEAR 2000
While the Company is taking steps, including the assessment,
remediation, testing and implementation of changes to applications,
hardware and software, to mitigate any adverse effects of the Year 2000
date change on its customers and business operations, the failure of
third-party entities to achieve Year 2000 compliance may adversely effect
the Company. For additional information on the Company's Year 2000
strategy, see Note 5 of Item 8, Financial Statements and Supplementary
Data.
22
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities and interest and foreign
currency exchange rates. The Company's primary market risk exposure is changing
commodity prices. The Company's policy is to manage commodity price risk through
a variety of financial instruments, which are entered into for trading purposes,
and include forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipts from)
counterparties based on the differential between a fixed and variable price for
the commodity, options, and other contractual arrangements.
The table below presents market value of commodity contracts and the
hypothetical loss of future earnings the Company would incur on such commodity
contracts should commodity prices fluctuate by 10 percent of their respective
market values as of December 31, 1997:
<TABLE>
<CAPTION>
GAIN (LOSS) FROM
10% CHANGE
MARKET VALUE IN
OF COMMODITY COMMODITY
COMMODITY TYPE CONTRACTS PRICES
-------------- ------------ ----------------
(IN MILLIONS)
<S> <C> <C>
Natural gas................................................. $ 26 $ (1)
Power....................................................... (2) 1
Petroleum products.......................................... (1) (1)
</TABLE>
The Company had no derivative financial instruments except for energy
commodity contracts disclosed above at December 31, 1997.
For a further discussion, see Note 4 of Item 8, Financial Statements and
Supplementary Data.
23
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------------- ------ ------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Operating revenues
Natural gas, liquids and power.......................... $2,799 $1,757 $1,116
Transportation.......................................... 702 681 664
Gathering and processing................................ 12 40 15
Other................................................... 89 230 191
------ ------ ------
3,602 2,708 1,986
------ ------ ------
Operating expenses
Cost of gas and other products.......................... 2,743 1,745 1,068
Operation and maintenance............................... 399 495 481
Finance charges......................................... -- 62 79
Depreciation, depletion and amortization................ 143 164 170
Taxes, other than income taxes.......................... 54 60 63
------ ------ ------
3,339 2,526 1,861
------ ------ ------
Operating income.......................................... 263 182 125
------ ------ ------
Other (income) and expense
Interest and debt expense............................... 136 142 122
Gain on sale of assets, net............................. -- (35) (11)
Other, net.............................................. (43) (78) (113)
------ ------ ------
93 29 (2)
------ ------ ------
Income before income taxes................................ 170 153 127
Income tax expense (benefit).............................. 58 24 (30)
------ ------ ------
Income before extraordinary loss.......................... 112 129 157
Extraordinary loss, net of income tax..................... -- (234) --
------ ------ ------
Net income (loss)......................................... $ 112 $ (105) $ 157
====== ====== ======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
24
<PAGE> 28
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------ ------
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments............................ $ 19 $ 14
Accounts and notes receivable, net
Customer............................................... 635 460
Affiliated companies................................... 118 170
Other.................................................. 223 326
Inventories............................................... 26 42
Deferred income tax benefit............................... 106 67
Assets from commodity price risk management activities.... 96 --
Regulatory assets......................................... 116 202
Other..................................................... 60 16
------ ------
Total current assets.............................. 1,399 1,297
------ ------
Plant, property and equipment, net.......................... 4,822 3,952
Investment in affiliated companies.......................... 173 322
Other....................................................... 156 184
------ ------
Total assets...................................... $6,550 $5,755
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings (including current maturities on
long-term debt)........................................ $ 463 $ 715
Accounts payable
Trade.................................................. 682 578
Affiliated companies................................... 99 --
Other.................................................. 84 --
Note payable to EPG....................................... 125 170
Accrual for regulatory issues............................. -- 167
Liabilities from commodity price risk management
activities............................................. 73 --
Other..................................................... 442 356
------ ------
Total current liabilities......................... 1,968 1,986
------ ------
Long-term debt, less current maturities..................... 1,081 1,150
------ ------
Deferred income taxes....................................... 1,218 769
------ ------
Postretirement benefits..................................... 285 309
------ ------
Other....................................................... 511 307
Minority interest........................................... 25 --
------ ------
Commitments and contingencies (See Note 5)
Stockholders' equity
Series A Preferred Stock.................................. 300 296
Series B Preferred Stock.................................. 152 --
Common stock, par value $.01 per share; authorized 100,000
shares; issued 1,000 shares............................ -- --
Additional paid-in capital................................ 941 938
Retained earnings......................................... 76 --
Cumulative translation adjustment......................... (7) --
------ ------
Total stockholders' equity........................ 1,462 1,234
------ ------
Total liabilities and stockholders' equity........ $6,550 $5,755
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
25
<PAGE> 29
EL PASO TENNESSEE PIPELINE CO.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------------ ------- -------
POST-
ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................................... $ 112 $ (105) $ 157
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation, depletion and amortization.................. 143 217 196
Undistributed earning in equity investments............... (2) 13 (12)
Deferred income taxes (benefit)........................... 186 (47) 88
Net gain on sale of assets................................ -- (35) (11)
Extraordinary loss, net of tax............................ -- 234 --
Cash paid for interest allocated to affiliates, net of
tax..................................................... -- (139) (117)
Net take-or-pay recoveries................................ -- 3 36
Changes in components of working capital --
Accounts and notes receivables.......................... (224) 39 451
Inventories............................................. 13 (11) --
Other current assets.................................... (23) 15 8
Net commodity price risk management activities.......... (23) -- --
Accounts payables....................................... 278 32 (25)
Accrual for regulatory issues........................... (146) 32 (156)
Current liabilities..................................... (81) (280) (114)
Decrease in long-term notes and other receivables (net)... -- 455 332
Other..................................................... (35) (396) (68)
------- ------- -------
Net cash provided by operating activities............... 198 27 765
------- ------- -------
Cash flows from investing activities
Capital expenditures...................................... (126) (323) (337)
Investment in joint ventures and equity investees......... (46) (41) (241)
Net proceeds from disposal of businesses and assets....... 9 465 17
Net change in advances to EPG............................. 170 (170) --
Collection of note receivable from partnership............ 53 -- --
Investment in annuity..................................... (40) -- --
Other..................................................... 2 (16) 24
------- ------- -------
Net cash provided by (used in) investing activities..... 22 (85) (537)
------- ------- -------
Cash flows from financing activities
Issuance of Old Tenneco common and treasury shares........ -- 164 102
Issuance of Series A Preferred Stock...................... -- 296 --
Issuance of Series B Preferred Stock...................... 150 -- --
Purchase of Old Tenneco common stock...................... -- (172) (655)
Redemption of Old Tenneco preferred stock................. -- (20) (20)
Dividends (Old Tenneco common and preferred stock)........ (36) (321) (286)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt.................... -- (410) 415
Increase (decrease) in borrowings under the Credit
Facility................................................ (1,183) 1,600 --
Increase (decrease) in note payable to affiliate.......... (45) 170 --
Issuance of other long-term debt.......................... 883 310 594
Retirement of long-term debt.............................. (15) (2,270) (497)
Net cash contributions from affiliates.................... 34 476 320
Other..................................................... (3) -- --
------- ------- -------
Net cash used in financing activities................... (215) (177) (27)
------- ------- -------
Increase (decrease) in cash and temporary cash
investments............................................... 5 (235) 201
Cash and temporary cash investments, at beginning of
period.................................................... 14 249 48
------- ------- -------
Cash and temporary cash investments, at end of period....... $ 19 $ 14 $ 249
======= ======= =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
26
<PAGE> 30
EL PASO TENNESSEE PIPELINE CO.
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND COMBINED EQUITY
(IN MILLIONS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK SERIES A SERIES B ADDITIONAL CUMULATIVE
---------------- PREFERRED PREFERRED PAID-IN RETAINED TRANSLATION COMBINED TOTAL
SHARES AMOUNT STOCK STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY EQUITY
------ ------- --------- --------- ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995
Pre-Acquisition
Combined.................. -- $ -- $ -- $ -- $ -- $ -- $ -- $ 382 $ 382
Net income................ 157 157
Cash paid for interest
allocated to affiliates,
net of tax.............. (117) (117)
Change in corporate debt
allocated to
affiliates.............. 930 930
Cash contributions from
affiliates, net......... 320 320
Noncash distributions to
affiliates, net......... (235) (235)
Distributions to Old
Tenneco stockholders,
net..................... (750) (750)
----- ------- ---- ---- ---- ------- ------- ------- -------
December 31, 1995
Pre-Acquisition
Combined.................. -- -- -- -- -- -- -- 687 687
Net loss.................. (105) (105)
Cash paid for interest
allocated to affiliates,
net of tax.............. (139) (139)
Change in corporate debt
allocated to
affiliates.............. (2,292) (2,292)
Cash distributions to
affiliates, net......... 476 476
Noncash contributions from
affiliates, net......... 2,126 2,126
Distributions to Old
Tenneco stockholders,
net..................... (267) (267)
Issuance of Series A
Preferred Stock......... 296 296
----- ------- ---- ---- ---- ------- ------- ------- -------
December 11, 1996
Pre-Acquisition
Combined.................. -- -- 296 -- -- -- -- 486 782
Merger transaction........ 1,000 486 (486) --
Acquisition adjustment to
record assets and
liabilities at fair
value................... 452 452
----- ------- ---- ---- ---- ------- ------- ------- -------
December 31, 1996
Post-Acquisition
Consolidated.............. 1,000 -- 296 -- 938 -- -- -- 1,234
Net Income.................. 112 112
Dividends................... (36) (36)
Issuance of Series B
Preferred stock........... 152 152
Translation adjustment...... (7) (7)
Other....................... 4 3 7
----- ------- ---- ---- ---- ------- ------- ------- -------
December 31, 1997
Post-Acquisition
Consolidated.............. 1,000 $ -- $300 $152 $941 $ 76 $ (7) $ -- $ 1,462
===== ======= ==== ==== ==== ======= ======= ======= =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
27
<PAGE> 31
EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. MERGER AND DISTRIBUTIONS
On December 12, 1996, EPTPC became an indirect subsidiary of EPG as a
result of the Merger between Old Tenneco and an indirect subsidiary of EPG.
Prior to the Merger, Old Tenneco and its subsidiaries effected various
intercompany transfers and distributions which restructured, divided and
separated their businesses, assets and liabilities so that all the assets,
liabilities and operations related to the Industrial Business and the
Shipbuilding Business were spun-off to Old Tenneco's then existing common
stockholders in the Distributions. The entity consisting of the Industrial
Business was subsequently renamed Tenneco Inc. and the entity consisting of the
Shipbuilding Business was renamed Newport News. Following the Distributions, the
remaining operations consisted primarily of those operations related to the
transmission and marketing of natural gas and the discontinued operations of Old
Tenneco. Pursuant to the Merger, Old Tenneco was renamed EPTPC. As a result of
the Merger, EPG indirectly owns 100 percent of the common stock of EPTPC,
representing at the effective time of the Merger approximately 75 percent of the
equity value of EPTPC; the balance of the equity value of EPTPC is held by the
holders of its Series A Preferred Stock, which was issued in a registered public
offering in November 1996 and remains outstanding.
As used in these financial statements, unless the context otherwise
requires, the "Company" refers to: (i) for periods as of and subsequent to the
Merger, EPTPC and consolidated subsidiaries; and (ii) for periods prior to the
Merger, the combined historical businesses and operations of Old Tenneco owned
directly or indirectly by EPTPC (the "Energy Businesses of EPTPC"), principally
the energy businesses and certain discontinued operations of Old Tenneco. See
also "Basis of Presentation" discussion below.
In preparation for the Merger and Distributions, Old Tenneco initiated the
Debt Realignment. As part of the Debt Realignment, Old Tenneco initiated tender
offers for certain issues of the Company's debt and certain other debt issues
were exchanged into New Tenneco debt, defeased or otherwise retired. Upon
completion of the debt realignment transactions, the Company was only
responsible for the remaining debt which was not tendered, exchanged, defeased
or otherwise retired. The Company recognized an after-tax extraordinary charge
of $234 million related to the Debt Realignment immediately prior to the Merger.
At December 31, 1996, EPTPC had approximately $1.6 billion of borrowings
under its revolving credit and competitive advance facility (the "Credit
Facility") dated as of November 4, 1996. In addition, the Company had $300
million ($296 million net book value) of Series A Preferred Stock outstanding
and $134 million aggregate principal amount of debt which was not redeemed or
retired as a part of the Debt Realignment. Borrowings under the Credit Facility
are guaranteed by EPG. The primary assets of EPTPC consist of its investment in
TGP, which holds the majority of the Company's operations, and management
anticipates that the funds necessary to service the debt and other securities of
EPTPC will be provided by EPG or the operations and asset sale or financing
transactions of TGP.
On October 30, 1996, the IRS issued a private letter ruling to Old Tenneco,
in which it 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 have agreed to
indemnify EPTPC for a defined portion of such tax liabilities.
The consideration provided in the Merger was approximately $4 billion,
including retained debt and EPG equity consideration valued at $913 million.
28
<PAGE> 32
Accounting for Acquisition by EPG
The acquisition of the Company by EPG pursuant to the Merger has been
accounted for using the purchase method of accounting and included the
application of "push down" accounting to the Company's financial statements
effective as of December 31, 1996. Accordingly, an allocation of the purchase
price has been assigned to the assets and liabilities acquired based upon the
estimated fair value of those assets and liabilities as of the acquisition date.
A substantial portion of the excess purchase price was allocated to the
property, plant and equipment of the Company's interstate pipeline systems. An
independent appraisal of the fair value of the property acquired was completed
in 1997. In addition, the Company made adjustments during 1997 to other
components of the preliminary purchase price allocation relating to regulatory,
tax, environmental or other issues based upon any changes in the Company's
preliminary assumptions or analysis. Current FERC policy does not permit the
Company to recover through its rates amounts allocated in purchase accounting to
its regulated operations in excess of original cost.
The Consolidated Balance Sheets of EPTPC and subsidiaries as of December
31, 1997 and 1996, contained herein reflects the purchase price recorded by EPG
and is referred to herein as "Post-Acquisition." The combined financial
statements of the Company for periods prior to December 31, 1996, are referred
to as "Pre-Acquisition." As a result of the change in the basis of accounting
from historical cost to reflect EPG's purchase cost, the financial statements
for Pre-Acquisition periods are not comparable to those of Post-Acquisition
periods. See also "Basis of Presentation" discussion below.
Pro Forma Information
The following unaudited pro forma information illustrates the effect of the
Merger and related transactions as if they had occurred at the beginning of
1995, after giving effect to certain pro forma adjustments including the
realignment of the Company's indebtedness, the issuance of the Series A
Preferred Stock, the removal of the results of the Company's exploration and
production business, and other adjustments based on the purchase price
allocation related to the acquisition, together with estimates of the related
income tax effects.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
(IN MILLIONS) 1996 1995
------------- ------ ------
<S> <C> <C>
Operating revenues.......................................... $2,620 $1,874
Income before extraordinary loss............................ 113 99
</TABLE>
The summarized pro forma information has been prepared for comparative
purposes only. It is not necessarily indicative of the actual operating results
that would have occurred had the Merger and related transactions been
consummated at the beginning of 1995, or the results that may be attained in the
future.
Basis of Presentation
Although the separation of the Industrial Business and Shipbuilding
Business from Old Tenneco prior to the Merger was structured as a "spin-off" of
New Tenneco and Newport News for legal, tax and other reasons, New Tenneco
succeeded to certain important aspects of the Old Tenneco business, organization
and affairs, namely: (i) New Tenneco was renamed "Tenneco Inc." subsequent to
the consummation of the Merger; (ii) New Tenneco is headquartered at Old
Tenneco's former headquarters in Greenwich, Connecticut; (iii) New Tenneco's
Board of Directors consists of those persons previously constituting the Old
Tenneco Board of Directors prior to the Merger; (iv) New Tenneco's executive
management consists substantially of the Old Tenneco executive management prior
to the Merger; and (v) the businesses conducted by New Tenneco consist largely
of the Industrial Business, which represented over half of the assets, revenues
and operating income of the businesses, operations and companies constituting
Old Tenneco and its subsidiaries prior to the Merger and Distributions. In New
Tenneco's Annual Report on Form 10-K for the year ended
29
<PAGE> 33
December 31, 1996, New Tenneco has reflected in its financial statements the
historical results of operations and financial position of the Company and the
Shipbuilding Business as discontinued operations.
Consequently, the Company has restated its historical financial statements
for periods prior to
December 31, 1996 to reflect the combined financial position, results of
operations and cash flows of the Energy Businesses of EPTPC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned and controlled subsidiaries of the Company after the elimination
of all significant intercompany accounts and transactions. Investments in
companies where the Company has the ability to exert significant influence over
operating and financial policies are accounted for using the equity method. The
financial statements for previous periods include certain reclassifications that
were made to conform to the current presentation. Such reclassifications have no
impact on reported net income or stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities that exist at
the date of the financial statements. Actual results could differ from those
estimates.
Accounting for Regulated Operations
The Company's businesses that are subject to the regulations and accounting
requirements of FERC have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, which may differ from
those accounting methods used by non-regulated entities. Transactions that have
been recorded differently as a result of regulatory accounting requirements
include: transition costs to be recovered under a volumetric surcharge; certain
benefits and other costs and taxes included in or expected to be included in
future rates, including costs to refinance debt. When the accounting method
followed is prescribed by or allowed by the regulatory authority for rate-making
purposes, such accounting conforms to the generally accepted accounting
principle of matching costs against the revenues to which they apply.
Changes in the regulatory and economic environment may, at some point in
the future, create circumstances in which the application of regulatory
accounting principles will no longer be appropriate. If the Company's regulated
business fail to qualify under these accounting principles, an amount would be
charged to earnings as an extraordinary item in accordance with SFAS No. 101,
Regulated Enterprises -- Accounting for Discontinuation of Application of SFAS
No. 71. At December 31, 1997, this amount was estimated to be approximately $15
million, net of income taxes. Any potential charge would be non-cash and would
have no 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.
Cash and Temporary Investments
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts and Notes Receivable
The Company has established a provision for losses on accounts and notes
receivable, as well as for gas imbalances due from shippers and operators, which
may become uncollectible. Collectibility is reviewed regularly, and the
allowance is adjusted as necessary primarily under the specific identification
method. The balances of this provision at December 31, 1997 and 1996, were $12
million and $45 million, respectively.
30
<PAGE> 34
Gas Imbalances
The Company values gas imbalances due to or due from shippers and operators
at the appropriate index price. The gas imbalances are settled in cash or made
up in-kind.
Inventories
Inventories, consisting of materials and supplies and gas in storage, are
valued at the lower of cost or market with cost determined using the average
cost method.
Property, Plant, and Equipment
Included in the Company's property, plant, and equipment is construction
work in progress of approximately $148 million and $110 million at December 31,
1997, and 1996, respectively. An allowance for both debt and equity funds used
during construction of regulated projects is included in the cost of the
Company's property, plant, and equipment.
Depreciation of the Company's regulated transmission facilities are
provided primarily using the composite method over the estimated useful lives of
the depreciable facilities. The rates for depreciation range from approximately
1 percent to 4 percent.
Depreciation of the Company's nonregulated properties is provided using the
straight line or composite method which, in the opinion of management, is
adequate to allocate the cost of properties over their estimated useful lives.
Additional acquisition cost assigned to utility plant represents the excess
of allocated purchase costs over historical costs that resulted from the
December 1996 acquisition by EPG of EPTPC. These costs are being amortized on a
straight-line basis over the estimated useful life of the properties.
Costs of regulated properties that are not operating units, as defined by
FERC, which are retired, sold, or abandoned are charged or credited, net of
salvage, to accumulated depreciation and amortization. Gains or losses on sales
of operating units are credited or charged to income.
The Company evaluates impairment of its property, plant, and equipment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors and include
estimates of associated legal costs. All available evidence is considered
including prior experience in remediation of contaminated sites, other
companies' clean-up experience and data released by the EPA or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the balance sheets at their undiscounted amounts. Recoveries are
evaluated separately from the liability and, when recovery is assured, are
recorded and reported separately from the associated liability in the
consolidated financial statements as a regulatory asset.
Price Risk Management Activities
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities, interest rates, and foreign
currency exchange rates. In its commodity price risk management activities, the
Company engages in both trading and non-trading activities.
31
<PAGE> 35
Activities for trading purposes consist of services provided to the energy
sector and are accounted for using the mark-to-market method of accounting. Such
trading activities are conducted through a variety of financial instruments,
including forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipts from)
counterparties based on the differential between a fixed and variable price for
the commodity, options, and other contractual arrangements.
Under mark-to-market accounting, financial instruments with third parties
are reflected at estimated market value, with resulting unrealized gains and
losses recorded in operating income in the Consolidated Statements of Income.
The net gains or losses recognized in the current period result primarily from
transactions originating within the period and the impact of price movements on
transactions originating in previous periods. The assets and liabilities
resulting from mark-to-market accounting are presented as assets from commodity
price risk management activities and liabilities from commodity price risk
management activities in the Consolidated Balance Sheets. Terms regarding cash
settlement of the contracts vary with respect to the actual timing of cash
receipts and payments. Receivables and payables resulting from these timing
differences are presented in accounts receivable, and accounts payable in the
Consolidated Balance Sheets. Cash inflows and outflows associated with these
price risk management activities are recognized in operating cash flow as the
settlements of transactions occur.
The market value of these financial instruments reflects management's best
estimate considering various factors including exchange and over-the-counter
quotations, time value and volatility factors underlying the commitments. The
values are adjusted to reflect the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under present
market conditions.
Derivative and other financial instruments are also utilized in connection
with non-trading activities. The Company enters into forwards, swaps, and other
contracts to hedge the impact of market fluctuations on assets, liabilities,
production, or other contractual commitments. Hedge accounting is applied only
if the derivative reduces the risk of the underlying hedge item, is designated
as a hedge at its inception, and is expected to result in financial impacts
which are inversely correlated to those of the item(s) being hedged. If
correlation ceases to exist, hedge accounting is terminated and mark-to-market
accounting is applied. Changes in market value of these transactions are
deferred until the gain or loss on the hedged item is recognized. If the hedged
item matures or is sold, the value of the derivative or other financial
instrument is recognized as a gain or loss in operating income in the
Consolidated Statements of Income. Cash inflows and outflows associated with
these price risk management activities are recognized in operating cash flow as
the settlements of transactions occur. See Note 4 for a further discussion of
the Company's price risk management activities.
Income Taxes
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
Old Tenneco, together with certain of its subsidiaries which were owned 80
percent or more, including subsidiaries in the Industrial Business (now held by
New Tenneco) and the Shipbuilding Business (now held by Newport News), had
entered into an agreement to file a consolidated U.S. federal income tax return.
Such agreement provided, among other things, that (i) each company in a taxable
income position would be currently charged with an amount equivalent to its
federal income tax computed on a separate return basis, and (ii) each company in
a tax loss position would be reimbursed currently to the extent its deductions,
including general business credits, were utilized in the consolidated return.
Management believes that income tax amounts reflected in the combined financial
statements of the Company prior to the Merger under the provisions of the tax
sharing arrangement would not be materially different from the income taxes
which
32
<PAGE> 36
would have been provided had the Company filed a separate consolidated tax
return. Under the tax sharing agreement, Old Tenneco paid all federal taxes
directly and billed or refunded, as applicable, its subsidiaries for the
applicable portion of the total tax payments. This tax sharing agreement remains
in effect among EPTPC and certain of its subsidiaries which are owned 80 percent
or more. EPTPC will continue to file a separate consolidated U.S. federal income
tax return subsequent to the Merger.
As a result of the Merger, the Company entered into a new tax sharing
agreement with Newport News, New Tenneco and EPG. This new tax sharing agreement
provides, among other things, for the allocation among the parties of tax assets
and liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, EPTPC will be liable for taxes imposed on itself. With
respect to periods prior to the consummation of the Distributions, in the case
of federal income taxes imposed on the combined activities of Old Tenneco and
other members of its consolidated group prior to giving effect to the
Distributions, New Tenneco and Newport News will be liable to the Company for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by EPTPC for Old
Tenneco. Pursuant to the new tax sharing agreement, the Company paid New Tenneco
in 1997 for the tax benefits realized from the deduction of 1996 taxable losses
generated by a debt realignment in accordance with the Merger.
Capital Structure Reporting
The Company's capital structure is presented in accordance with the
Financial Accounting Standards Board SFAS No. 129, Disclosure of Information
about Capital Structure.
Recent Pronouncements
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
planning to adopt this statement in the first quarter of 1998.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This pronouncement
is effective for financial statements for periods beginning after December 15,
1997. The Company is planning to adopt this statement in the first quarter of
1998 and does not expect the number of reportable segments to change.
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements, SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of those plans. It
is effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the effect of this pronouncement.
33
<PAGE> 37
Other
In 1997, the Company adopted or applied the relevant provisions of SFAS No.
123, Accounting for Stock-Based Compensation 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, SFAS No. 128, Earnings per Share, SFAS No. 129, Disclosure of
Information about Capital Structure, the Securities and Exchange Commission's
Financial Reporting Release No. 48, Disclosure of Derivative and Other Financial
Instruments and Statement of Position No. 96-1, Environmental Remediation
Liabilities. The adoption or application of these pronouncements did not have a
material impact on the Company's financial position or results of operations.
3. FINANCING TRANSACTIONS
In contemplation of the Merger and Distributions, Old Tenneco initiated a
Debt Realignment to restructure, realign, and divide the Company's indebtedness.
As part of this Debt Realignment, Old Tenneco completed certain cash tender
offers for approximately $1.5 billion aggregate principal amount of the
Company's outstanding notes and debentures. In addition, approximately $1.9
billion aggregate principal amount of Old Tenneco notes and debentures were
exchanged into notes and debentures of New Tenneco. Certain other components of
the Company's historical short-term and long-term debt were defeased, redeemed
or otherwise retired in the Debt Realignment. The cash funding requirements of
the Debt Realignment were financed with internally generated cash, new
borrowings under the Credit Facility, cash contributions from New Tenneco and
Newport News, and proceeds from the issuance of the Series A Preferred Stock.
All obligations relating to the Series A Preferred Stock, all borrowings under
the Credit Facility, and the other remaining debt of the Company, including debt
which was not tendered or exchanged in the Debt Realignment, has been retained
by the Company subsequent to the Merger. Restrictive covenants on the Company's
remaining debt which were subject to the Debt Realignment were eliminated as a
part of the Debt Realignment transactions. The Company recognized an after-tax
extraordinary charge of $234 million in 1996 (net of $126 million income tax
benefit) related to the Company's debt realignment immediately prior to the
Merger.
Subsequent to the Merger, the majority of the Company's debt consisted of
borrowings under the Credit Facility and the notes and debentures that were not
tendered or exchanged pursuant to the Debt Realignment. The long-term debt
amounts at December 31, 1996 were adjusted to fair market value in the
application of purchase accounting, as discussed in Note 1, "Merger and
Distributions."
34
<PAGE> 38
Long-term debt outstanding at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------ ------
POST-ACQUISITION
(IN MILLIONS) CONSOLIDATED
<S> <C> <C>
EPTPC
Credit Facility due 1999, average effective interest rate
of 5.9% in 1997 and 6.8% in 1996........................ $ -- $1,600
Debentures due 2008 through 2025, average effective
interest rate of 7.2% in 1997 and 8.9% in 1996.......... 55 55
Notes due 1998 through 2005, average effective interest
rate of 6.4% in 1997 and 9.6% in 1996................... 87 90
TGP
Debentures due 2011, average effective interest rate of
7.9% in 1997 and 15.1% in 1996.......................... 75 74
Debentures due 2017, average effective interest rate of
7.8% in 1997............................................ 295 --
Debentures due 2027, average effective interest rate of
7.2% in 1997............................................ 296 --
Debentures due 2037, average effective interest rate of
7.9% in 1997............................................ 293 --
El Paso Energy Credit Corporation
Senior notes due 1997 and 2001, average effective interest
rate of 6.0% in 1997 and 9.9% in 1996................... 15 30
Subordinated notes due 1998, average effective interest
rate of 6.5% in 1997 and 9.9% in 1996................... 7 7
Other Subsidiaries
Notes due 1997 through 2014, average effective interest
rate of 8.1% in 1997 and 7.6% in 1996................... 4 9
------ ------
1,127 1,865
Less current maturities................................. 46 715
------ ------
Total long-term debt.......................... $1,081 $1,150
====== ======
</TABLE>
The following are aggregate maturities of long-term debt for the next five
years and in total thereafter:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1998........................................................ $ 46
1999........................................................ 3
2000........................................................ 7
2001........................................................ 41
2002........................................................ 12
Thereafter.................................................. 1,018
------
Total long-term debt, including current
maturities...................................... $1,127
======
</TABLE>
At December 31, 1996, EPTPC had an additional $900 million outstanding
under its credit facility which was classified as long-term debt because it was
expected to be refinanced with long-term debt during the first quarter of 1997.
In March 1997, TGP issued $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. As a result of such offering, TGP has approximately
$100 million remaining under its February 1997 shelf registration.
In October 1997, EPG established a new $750 million 5-year revolving credit
and competitive advance facility and a new $750 million 364-day renewable
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). EPTPC and TGP are also parties to the Revolving Credit
Facility. Initially, the interest rate will be a 32.5 basis point spread over
LIBOR and the spread will vary based on EPG's long-term debt credit rating. In
connection with the establishment of the Revolving Credit Facility,
35
<PAGE> 39
EPTPC's revolving credit facility was also terminated, and the outstanding
balance of $417 million was financed under the 5-year portion of the new
Revolving Credit Facility with TGP designated as the borrower.
4. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the requirements of SFAS No. 107.
The estimated fair value amounts have been determined by the Company using
available market information and valuation methodologies.
As of December 31, 1997, and 1996, the carrying amounts of certain
financial instruments held by the Company, including cash, cash equivalents,
short-term borrowings and investments, and trade receivables and payables are
representative of fair value because of the short-term maturity of these
instruments. The fair value of the long-term debt has been estimated based on
quoted market prices for the same or similar issues. The fair value of all
derivative financial instruments is the estimated amount at which management
believes they could be liquidated over a reasonable period of time, based on
quoted market prices, current market conditions, or other estimates obtained
from third-party dealers.
The following table reflects the carrying amount and estimated fair value
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
Long-term debt..................................... $1,127 $1,199 $1,865 $1,865
Other financial instruments:
Trading
Futures contracts............................... (3) (3) -- --
Option contracts................................ 3 3 -- --
Swap and forwards contracts..................... 23 23 -- --
</TABLE>
Trading Commodity Activities
The Company, through its merchant services business, offers integrated
price risk management services for trading purposes to the energy sector. These
services primarily relate to energy related commodities including natural gas,
power, NGLs, refined products and crude oil. The Company provides these services
through a variety of financial instruments including forward contracts involving
cash settlements or physical delivery of an energy commodity, swap contracts,
which require payments to (or receipt of payments from) counterparties based on
the differential between a fixed and variable price for the commodity, options
and other contractual arrangements. The Company recognized gross margin of $28
million during 1997 arising from its trading activities.
The Company had no trading commodity activities during 1996 and no material
commodity hedging activities during 1996 or at December 31, 1996.
The fair value of the financial instruments as of December 31, 1997, and
the average fair value of those instruments held during the year are set forth
below (amounts in millions):
<TABLE>
<CAPTION>
AVERAGE FAIR
VALUE FOR THE
YEAR ENDED
ASSETS LIABILITIES 12/31/97(A)
------ ----------- -------------
<S> <C> <C> <C>
Futures contracts.................................... $ 4 $ 7 $--
Option contracts..................................... 15 12 2
Swap and forward contracts........................... 77 54 18
</TABLE>
- ---------------
(a) computed using the net asset balance at each month end.
36
<PAGE> 40
Notional Amounts and Terms
The notional amounts and terms of these financial instruments at December
31, 1997 are set forth below (natural gas and petroleum volumes in trillions of
British thermal unit equivalent, power volumes in millions of megawatt hours):
<TABLE>
<CAPTION>
FIXED PRICE FIXED PRICE MAXIMUM
PAYOR RECEIVER TERMS IN YEARS
----------- ----------- --------------
<S> <C> <C> <C>
Energy Commodities
Natural gas.................................. 4,079 3,584 20
Power........................................ 12 13 1
Petroleum products........................... 197 195 2
</TABLE>
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties. Accordingly, notional amounts are an
incomplete measure of the Company's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time based on the
Company's risk management needs and liquidity of the commodity market.
The volumetric weighted average maturity of the Company's entire portfolio
of price risk management activities as of December 31, 1997, was approximately
two years.
Market and Credit Risks
The Company serves a diverse customer group that includes independent power
producers, industrial companies, gas and electric utilities, oil and gas
producers, financial institutions and other energy marketers. This broad
customer mix generates a need for a variety of financial structures, products
and terms. This diversity requires the Company to manage, on a portfolio basis,
the resulting market risks inherent in these transactions subject to parameters
established by the Company's risk management committee. Market risks are
monitored by a risk control group operating separately from the units that
create or actively manage these risk exposures to ensure compliance with the
Company's stated risk management policies.
The Company measures and adjusts the risk in its portfolio in accordance
with mark-to-market and other risk management methodologies which utilize
forward price curves in the energy markets to estimate the size and probability
of future potential exposure.
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties pursuant to the terms of their
contractual obligations. The counterparties associated with the Company's assets
from price risk management activities as of December 31, 1997 are summarized as
follows (amounts in millions):
<TABLE>
<CAPTION>
ASSETS FROM PRICE RISK MANAGEMENT ACTIVITIES
AS OF DECEMBER 31, 1997
------------------------------------------------
BELOW
INVESTMENT GRADE(A) INVESTMENT GRADE TOTAL
------------------- ---------------- -----
<S> <C> <C> <C>
Energy marketers............................. $21 $ 3 $24
Financial institutions....................... 20 20
Oil and gas producers........................ 14 4 18
Gas and electric utilities................... 16 2 18
Industrials.................................. 6 1 7
Other........................................ 8 1 9
--- --- ---
Total assets from price risk
management activities............ $85 $11 $96
=== === ===
</TABLE>
- ---------------
(a) "Investment Grade" is primarily determined using publicly available credit
ratings along with consideration of collateral, which encompass standby
letters of credit, parent company guarantees and property interest,
including oil and gas reserves. Included in Investment Grade are
counterparties with a minimum Standard & Poor's or Moody's rating of BBB-
or Baa3, respectively.
37
<PAGE> 41
This concentration of counterparties may impact the Company's overall
exposure to credit risk, either positively or negatively, in that the
counterparties may be similarly affected by changes in economic, regulatory or
other conditions.
The Company maintains credit policies with regard to its counterparties to
minimize overall credit risk. These policies require an evaluation of potential
counterparties' financial condition (including credit rating), collateral
requirements under certain circumstances and the use of standardized agreements
which allow for the netting of positive and negative exposures associated with a
single counterparty.
Other Price Risk Management Activities
The Company had no derivative financial instruments except for energy
commodity contracts disclosed above at December 31, 1996 and 1997.
5. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at December 31, 1997 of
approximately $19 million. Recent economic events in Indonesia have resulted in
the devaluation of the Indonesian Rupiah and delays or cancellations of certain
infrastructure power projects in that country. The Company has met with PLN and
the Indonesian Minister of Finance to discuss the terms of its power sales
agreement in light of the economic problems. While the Company cannot predict
the ultimate outcome of Indonesia's financial difficulties or the impact of such
matters to the Company, it believes the PLN, with the backing of the Office of
the Minister of Finance, will honor all current invoices on the Sengkang project
in full and therefore, the current economic difficulties in Indonesia will not
have a material adverse effect on the Company's financial position or results of
operations.
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery by TGP of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). In April 1997, FERC approved
the settlement and TGP implemented the settlement on May 1, 1997. Under the
terms of the GSR Stipulation and Agreement, TGP is entitled to collect from
customers up to $770 million, of which approximately $682 million has been
collected as of December 31, 1997. TGP is entitled to recover additional
transition costs, up to the remaining $88 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provide for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and an escalating rate
cap, indexed to inflation, through October 2005, for certain of TGP's customers.
In December 1994, TGP filed for a general rate increase with FERC and in
April 1996, it filed 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. 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 that order. Under the stipulation, TGP's refund obligation was
approximately $185 million, inclusive of interest, of which $161 million was
refunded to customers in March 1997 and June 1997 with the remaining $24 million
refund obligation offset against GSR recoveries in accordance with particular
customer elections. TGP had provided a reserve for these rate refunds as
revenues were collected. One party, a competitor of TGP, filed with the Court of
Appeals a Petition for Review of the FERC orders.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the
38
<PAGE> 42
presiding ALJ the issue of proper allocation of TGP's New England lateral costs.
In the July 1997 order on rehearing, FERC clarified, among other things, that
although the ultimate resolution as to the proper allocation of costs will be
applied retroactively to July 1, 1995, the cost of service settlement does not
allow TGP to recover from other customers amounts that TGP may ultimately be
required to refund. TGP has filed with the Court of Appeals a Petition for
Review of the FERC orders on this issue. In December 1997, the ALJ issued his
decision on the proper allocation of the New England lateral costs. The decision
adopts a methodology that economically approximates TGP's current methodology.
The ALJ's decision is pending before FERC.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996. TGP previously filed cashout reports for the period
September 1993 through August 1995. TGP's October 1997 filing showed a
cumulative loss of $11 million that would be rolled forward to the next cashout
period pursuant to its tariff. FERC has requested additional information and
justification from TGP as to its cashout methodology and reports. TGP's cashout
methodology and reports are currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position or results of
operations.
Environmental Matters
As of December 31, 1997, the Company had a reserve of approximately $253
million to cover environmental assessments and remediation activities discussed
below.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, in order to assure that its
efforts meet regulatory requirements.
In May 1995 following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. The
Environmental Stipulation was effective July 1, 1995. As of December 31, 1997, a
balance of $27 million remains to be collected under this agreement.
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 29 sites under 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. As of December
31, 1997, the Company has estimated its share of the remediation costs at these
sites to be between $52 million and $62 million and has provided reserves that
it believes are adequate for such costs. Because the clean-up costs are
estimates and are subject to revision as more information becomes available
about the
39
<PAGE> 43
extent of remediation required, and because in some cases the Company has
asserted a defense to any liability, the Company's estimate of its share of
remediation costs could change. Moreover, liability under the federal Superfund
statute is joint and several, meaning that the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs has been considered, where
appropriate, in its determination of its estimated liability as described
herein. The Company presently believes that the costs associated with the
current status of such entities as PRPs at the Superfund sites referenced above
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
As such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. While there are still uncertainties
relating to the ultimate costs which may be incurred, based upon the Company's
evaluation and experience to date, the Company believes the recorded reserve is
adequate.
Legal Proceedings
See Item 3, Legal Proceedings, which is incorporated herein by reference.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the assessment, remediation, testing and implementation of
the necessary modifications to its key computer applications (which consist of
internally developed computer applications, third party software, hardware and
embedded chip systems) to assure that such systems and related processes will
remain functional.
The assessment phase related to internally developed computer applications
has been completed and the costs estimate for making the necessary changes to
such systems, including implementation and testing efforts, is approximately $8
million to be spent in 1998 and 1999. These estimates were based on various
factors including availability of internal and external resources and complexity
of the software applications. The recent upgrade of various systems,
particularly the financial systems, to a Year 2000 compliant client/server
platform have greatly reduced or eliminated concerns in those areas.
The assessment phase for the third party software and hardware impacts is
continuing, with completion of that phase and an estimate of costs necessary to
modify or replace those systems to be available in the second quarter of 1998.
Included in this phase of the project is the effort to obtain representations
and assurances from third party vendors that their software and hardware
products being used by the Company are or will be Year 2000 compliant.
Implementation and testing phases are expected to be completed by mid 1999.
It is the Company's goal to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems may be interrelated with systems outside the control of the
Company, there can be no assurance that all implementations will be successful.
Management does not expect the costs to modify its systems or to correct any
unsuccessful system implementations to have a material adverse impact on the
company's financial position or results of operations.
Capital Commitments
At December 31, 1997, the Company had capital or investment commitments of
$104 million, which are expected to be funded through cash provided by
operations and/or incremental borrowings. The Company's
40
<PAGE> 44
other planned capital and investment projects are discretionary in nature, with
no substantial capital commitments made in advance of the actual expenditures.
Purchase Obligations
In connection with the financing commitments of certain joint ventures, TGP
has entered into unconditional purchase obligations for products and services
totaling $99 million at December 31, 1997. TPG's annual obligations under these
agreements are $22 million for the year 1998, $21 million for the years 1999 and
2000, $11 million for the year 2001, $4 million for the year 2002, and $20
million thereafter. Payments under such obligations, including additional
purchases in excess of contractual obligations, were $26 million, $25 million
and $26 million for the years 1997, 1996 and 1995, respectively. Prior to August
1997, TGP had an obligation to purchase 30 percent of the output of the Great
Plains coal gasification project's original design capacity through July 2009.
TGP has executed a settlement of this contract as a part of its GSR
negotiations, recorded the related liability, and, in the third quarter of 1997,
purchased an annuity for $42 million to fund the expected remaining monthly
demand requirements of the contract which under the settlement continue through
January 2004.
Guarantees
At December 31, 1997 and 1996, the Company had guaranteed payment and
performance of approximately $3 million and $3 million, respectively, primarily
with respect to letters of credit and other guarantees supporting various
financing and operating activities.
Management is not aware of other commitments or contingent liabilities
which would have a material adverse effect on the Company's financial condition
or results of operations.
6. ACQUISITIONS AND DISPOSITIONS
Acquisitions
During 1995, the Company acquired the natural gas pipeline assets of PASA
which includes a 488-mile pipeline, for approximately $225 million. Also during
1995, the Company acquired a 50 percent interest in two gas-fired cogeneration
plants from ARK Energy, a privately owned power generation company, for
approximately $65 million.
In May 1996, the Company acquired a 50 percent ownership interest in a
producing gas field (approximately 500 Bcf) and a 47.5 percent ownership
interest in a 135 MW power generating plant under construction in South
Sulawesi, Indonesia.
In September 1996, the Company reacquired for $41 million the 20 percent
interest in the Company's marketing and intrastate pipeline subsidiary.
At the end of the second quarter of 1997, the Company acquired for $26
million a 50 percent legal interest and controlling voting interest in a company
that owns and operates a 70 MW power plant located in Dunaujvaros, Hungary.
Each of the acquisitions discussed above was accounted for as a purchase.
Net income would not have been significantly different from amounts reported if
the acquisitions had occurred at the beginning of each respective year.
Disposition of Assets
In December 1995, the Company sold its 50 percent interest in Kern River
for a pre-tax gain of $30 million. Kern River owns a 904-mile pipeline extending
from Wyoming to California. Also in 1995, the Company sold certain other
facilities and assets for a combined pre-tax loss of $19 million.
During 1996, TGP sold its 13.2 percent interest in Iroquois, its 50 percent
interest in Dauphin Island Gathering System and certain other assets, resulting
in a net pre-tax gain of $3 million.
41
<PAGE> 45
In December 1996, subsequent to the Merger, the Company sold 70 percent of
its interests in two natural gas pipeline systems in Australia to CNGI Australia
Pty. Limited, a wholly-owned indirect subsidiary of Consolidated Natural Gas
Company, and four Australian investors for approximately $400 million, inclusive
of related debt financing involving these projects, and completed the sale of
its oil and gas exploration, production and financing unit, formerly known as
Tenneco Ventures, in a $105 million transaction. There was no gain or loss
recognized on these transactions due to the Merger and the application of
pushdown accounting to the Company. The net proceeds from these transactions
were utilized to retire outstanding borrowings under the Credit Facility in
1997.
7. INCOME TAXES
Following are the analysis of the components of the post-acquisition income
tax expense for the year ended December 31, 1997 and comparative analyses of the
components of pre-acquisition combined income tax expense (benefit) for the
years 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
POST-ACQUISITION PRE-ACQUISITION
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C> <C>
Current
Federal ........................................ $ (93) $ 27 $ (96)
State and local................................. (35) 44 (22)
----- ---- -----
(128) 71 (118)
----- ---- -----
Deferred
Federal ........................................ 153 (25) 76
State and local................................. 33 (22) 12
----- ---- -----
186 (47) 88
----- ---- -----
Income tax expense (benefit)...................... $ 58 $ 24 $ (30)
===== ==== =====
</TABLE>
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35 percent for all years presented) to the income
tax expense (benefit) reflected in the Post-Acquisition Consolidated Statement
of Income for the year 1997 and in the Pre-Acquisition Combined Statements of
Income for the years 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
POST-ACQUISITION PRE-ACQUISITION
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal
income tax rate.................................. $ 59 $ 54 $ 44
Increases (reductions) in income tax expense
resulting from:
State and local taxes on income, net of U.S.
federal income tax benefit.................... (1) 14 (6)
Permanent differences on sales of assets......... -- 8 12
Realization of unrecognized deferred tax
assets........................................ -- (38) (72)
Net reversal of tax reserves..................... -- (4) --
Other............................................ -- (10) (8)
----- ---- ----
Income tax expense (benefit)....................... $ 58 $ 24 $(30)
===== ==== ====
</TABLE>
Current U.S. income tax expense (benefit) for the years ended December 31,
1996 and 1995, includes a reduction in current tax amounts of $74 million and
$63 million, respectively, related to the allocation of corporate interest
expense to the Industrial Business and the Shipbuilding Business. Reference is
made to Note 16 for information concerning corporate debt and interest allocated
to the Industrial Business and the Shipbuilding Business from the Company.
42
<PAGE> 46
The components of the Company's net deferred tax liability at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
------------- ------ -----
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
Deferred tax assets
U.S. net operating loss carryforwards..................... $ 92 $ --
Postretirement benefits other than pensions............... 122 124
Regulatory issues......................................... 69 235
Environmental reserve..................................... 99 71
Other..................................................... 226 202
------ -----
Total deferred tax asset.................................. 608 632
------ -----
Deferred tax liabilities
Tax over book depreciation................................ 1,461 1,001
Regulatory issues......................................... 70 158
Book versus tax gains and losses on asset disposals....... 3 39
Other..................................................... 190 136
------ -----
Total deferred tax liability.............................. 1,724 1,334
------ -----
Net deferred tax liability(1)............................... $1,116 $ 702
====== =====
</TABLE>
- ---------------
(1) As of December 31, 1997, $4 million of current deferred state income taxes
are included in other current liabilities on the balance sheet.
The cumulative undistributed earnings of certain foreign subsidiaries and
foreign corporate joint ventures were approximately $3 million as of December
31, 1997. Since the earnings have been or are intended to be indefinitely
reinvested in foreign operations, no provision has been made for any U.S. taxes
or foreign withholding taxes that may be applicable. If a distribution of such
earnings were to be made, the Company may be subject to both foreign withholding
tax and U.S. income taxes, net of any allowable foreign tax credits or
deduction, however, an estimate of such taxes is not practicable.
As of December 31, 1997, approximately $263 million of net operating losses
were available to offset future tax liabilities through the year 2012. Usage of
the carryover is subject to the limitations provided for under Section 382 of
the IRS Code as well as the separate return limitation year rules of IRS
regulations.
EPG and EPTPC each file a separate consolidated federal income tax return
which includes the operations of their respective subsidiaries as they existed
at the time of the Merger. Deferred taxes corresponding to the allocation of the
purchase price to the assets and liabilities acquired, have been reflected in
the Consolidated Balance Sheets at December 31, 1996, and 1997.
8. EMPLOYEE BENEFITS
Postretirement Benefits, Other than Pension
As part of the Distributions and Merger, the Company assumed responsibility
for certain benefits for former employees of Old Tenneco and the postretirement
health care plans for the Company's employees were significantly changed. The
Company will be responsible for benefits for both the Company's former employees
and former employees of operations previously disposed of by Old Tenneco.
Employees who retired before July 1, 1997 received the same benefits as former
employees. While employees who retire on or after July 1, 1997 will continue to
receive $10,000 of postretirement life insurance, they will not receive any
employer subsidized postretirement health care benefits. All of these benefits
may be subject to deductibles, co-payment provisions and other limitations. The
Company has reserved the right to change these benefits.
43
<PAGE> 47
The majority of the Company's postretirement benefit plans are not funded.
In June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of TGP. The contributions are collected from customers
in FERC approved rates. Plan assets consist principally of fixed income
securities.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the Consolidated Balance Sheets at December 31, 1997 and
1996, as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
------------- ----- -----
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
Accumulated postretirement benefit obligation............... $ 350 $ 353
Plan assets at fair value................................... 7 4
----- -----
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 343 349
Unrecognized net (gain) loss resulting from plan experience
and changes in actuarial assumptions...................... (17) 1
----- -----
Accrued postretirement benefit cost......................... $ 326 $ 350
===== =====
</TABLE>
As of December 31, 1997 and 1996, the current portion of the postretirement
benefits was $41 million and $41 million, respectively.
In December 1992, FERC issued a statement of policy which allows
jurisdictional pipelines to recognize allowances for prudently incurred costs of
postretirement benefits other than pensions on an accrual basis consistent with
the accounting principles set forth in SFAS No. 106. The Company believes that
all costs of providing postretirement benefits to its employees are necessary
and prudent operating expenses and that such costs are recoverable in rates.
Accordingly, postretirement benefit costs related to FERC regulated operations
have been deferred as a regulatory asset. At December 31, 1997 the balance of
this regulatory asset was $26 million and is being recovered through rates.
The net periodic postretirement benefit cost for the years 1997, 1996 and
1995 consists of the following components:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
------------- ---------------- ----- -----
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Service cost for benefits earned during the year.... $ -- $ 1 $ 1
Interest cost on accumulated postretirement benefit
obligation........................................ 26 25 26
Net amortization of unrecognized amounts............ (1) (12) (13)
---- ---- ----
Net periodic postretirement benefit cost............ $ 25 $ 14 $ 14
==== ==== ====
</TABLE>
Actuarial estimates for the Company's plans assumed a weighted average
annual rate of increase in the per capita costs of covered health care benefits
of 5 percent for 1998, and remaining at that level thereafter. Increasing the
assumed health care cost trend rate by one percentage-point in each year would
increase the 1997 accumulated postretirement benefit obligations by
approximately $3 million, and would increase the aggregate of the service cost
and interest cost components of the net postretirement benefit cost for 1997 by
approximately $.2 million.
The discount rates (which are based on long-term market rates) used in
determining the 1997 and 1996 accumulated postretirement benefit obligations
were 7.00 percent and 7.75 percent, respectively.
Pension Plans
In conjunction with the Distributions in December 1996, benefit accruals
for Company employees in the Old Tenneco Retirement Plan (the "TRP") were frozen
as of the last day of December 1996 and all benefits were fully vested. New
Tenneco became the sole sponsor of the TRP such that the Company is not
responsible for any benefits accrued before the last day of December 1996. The
Company employees became participants
44
<PAGE> 48
in the new EPG Cash Balance Pension Plan as of January 1, 1997 with no account
balances credited for prior service.
During 1997, the Company offered special termination benefits to employees
who were at least 55 years old on December 31, 1996 and who were vested in the
TRP. The 220 employees accepting this offer received an enhanced cash balance
equivalent to and in lieu of severance benefits provided pursuant to the merger
agreement at a cost of $11 million. The Company had accrued for these benefits
in December 1996.
9. MINORITY INTEREST
At the end of the second quarter of 1997, the Company acquired for $25
million a 50 percent legal interest and controlling voting interest in a company
that owns and operates a 70 MW power plant located in Dunaujvaros, Hungary.
During the third quarter the Company began consolidating this investment.
Accordingly, the assets and liabilities of the acquired company are reflected in
the Consolidated Balance Sheets, while the equity not owned by the Company is
included in minority interest in the Consolidated Balance Sheets. Revenues and
expenses of the acquired company are reflected in the Consolidated Statements of
Income. Contractually, the Company is entitled to receive 100 percent of the
income of the acquired company, and the other equity owners are income
participants only to the extent they receive reduced electricity rates;
therefore, no minority interest is presented in the Consolidated Statements of
Income.
10. PREFERRED STOCK
At December 31, 1997, EPTPC had authorized 20 million shares of preferred
stock. In November 1996, the Company issued 6 million shares of Series A
Preferred Stock. The Series A Preferred Stock is not convertible into shares of
any other class or series of stock of the Company and it has no maturity date.
Holders of shares of Series A Preferred Stock are entitled to receive cash
dividends payable quarterly at the rate of 8 1/4% of the stated value of $50 per
share. It is not redeemable at the option of EPTPC prior to December 31, 2001,
unless one or more amendments to the Internal Revenue Code are enacted that
reduce the percentage of the dividends received deduction as specified in
Section 243(a)(1) of the Internal Revenue Code. On or after December 31, 2001,
the Series A Preferred Stock is redeemable at the option of the Company, in
whole or in part, upon not less than 30 days' notice at a redemption price of
$50 per share, plus unpaid dividends.
In March 1997, the Company issued approximately 3 million shares of Series
B Preferred Stock, which is subordinated to the Series A Preferred Stock, to EPG
in exchange for cancellation of indebtedness owed to EPG of approximately $152
million. EPG is entitled to receive cash dividends payable annually at the rate
of 8 1/2% 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 the Company, in
whole or in part, upon not less than 30 days' notice at a redemption price of
$50 per share, plus unpaid dividends.
In March 1998, the Company will issue up to 1.1 million shares of Series C
Preferred Stock, which is subordinated to the Series A Preferred Stock, to El
Paso Energy Corporation in exchange for EPG's merchant services activities and
related assets and liabilities for a value of up to approximately $55 million.
El Paso Energy Corporation is entitled to receive cash dividends payable
annually at the rate of 6 1/4% of the stated value of $50 per share.
45
<PAGE> 49
11. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
POST-ACQUISITION
(IN MILLIONS) CONSOLIDATED
<S> <C> <C>
Materials and supplies...................................... $16 $19
Gas in storage.............................................. 10 23
--- ---
Total............................................. $26 $42
=== ===
</TABLE>
12. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
POST-ACQUISITION
(IN MILLIONS) CONSOLIDATED
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,518 $2,371
Less accumulated depreciation and depletion................. 120 --
------ ------
2,398 2,371
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,424 1,581
------ ------
Total property, plant and equipment, net.......... $4,822 $3,952
====== ======
</TABLE>
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.
13. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The principal equity method investments were
the Company's investments in international pipelines, interstate pipelines,
power generation plants, gathering systems and natural gas storage facilities.
These investments were subject to certain purchase accounting adjustments at
December 31, 1996, as discussed in Note 1, "Merger and Distributions."
At December 31, 1997 and 1996, the Company's consolidated stockholders'
equity included equity in undistributed earnings from equity method investments
of $2 million and $12 million, respectively. Dividends and distributions
received from affiliates accounted for on the equity method were $17 million,
$43 million and $53 million during 1997, 1996 and 1995, respectively.
46
<PAGE> 50
Summarized financial information of the Company's proportionate share of 50
percent or less owned companies accounted for by the equity method of accounting
as of December 31, 1997, 1996 and 1995, and for the years then ended is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ----------------
POST-ACQUISITION PRE-ACQUISITION
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C> <C>
Current assets.......................... $ 49 $ 46 $ 60
Non-current assets...................... 501 545 543
Short-term debt......................... 10 18 122
Other current liabilities............... 28 37 24
Long-term debt.......................... 317 244 152
Other non-current liabilities........... 51 39 25
Equity in net assets.................... 143 253 280
Revenues and other income............... 101 98 184
Costs and expenses...................... 81 68 119
Net income.............................. 20 30 65
</TABLE>
14. NATURE OF OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company is principally engaged in the transportation, gathering,
processing and marketing of natural gas. For the year ended December 31, 1997,
the Company's operating revenues were predominately derived from the
transportation and marketing of natural gas and other commodities. The Company's
principal end markets for the transportation of natural gas are the Northeast
and Midwest United States. Prior to the Merger, EPECC, a Company subsidiary, was
engaged in financing, on a nonrecourse basis, receivables of other operating
divisions of Old Tenneco. El Paso Energy Credit Corporation continues to sell
certain energy receivables in the ordinary course of its business subsequent to
the Merger.
The Company did not have gross revenues from any customer equal to, or in
excess of, 10 percent of the combined operating revenues for the years ended
December 31, 1997, 1996, and 1995.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----- ------
POST-ACQUISITION PRE-ACQUISITION
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C> <C>
Interest............................................. $ 130 $491 $ 420
Income tax payments (refunds)........................ (72) 251 (123)
</TABLE>
16. TRANSACTIONS WITH AFFILIATES
Combined Equity
The "Combined Equity" caption in the accompanying combined financial
statements represents Old Tenneco's cumulative investment in the combined
businesses of the Company prior to the Merger. Changes in the "Combined Equity"
caption represent the net income (loss) of the Company, cash paid for interest
allocated to affiliates, net of tax, changes in corporate debt allocated to
affiliates, contributions from (distributions to) Old Tenneco stockholders, and
net cash and noncash contributions from (distributions to) affiliates. Reference
is made to the statements of changes in consolidated stockholders' equity and
combined equity for an analysis of activity in the "Pre-Acquisition Combined
Equity" caption for each of the two years in the period ended December 31, 1996.
General and Administrative Expenses
Included in the total operation and maintenance expenses for 1996 and 1995,
is $17 million and $16 million, respectively, which represents the Company's
share of Old Tenneco's corporate general and
47
<PAGE> 51
administrative costs for legal, financial, communication and other
administrative services. Old Tenneco's corporate general and administrative
expenses have been allocated based on the estimated level of effort devoted to
Old Tenneco's various operations and relative size based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable and that
total general and administrative expenses reflected in the accompanying
pre-acquisition combined statements of income are reasonable when compared with
the total general and administrative costs the Company would have incurred on a
stand-alone basis.
Corporate Debt and Interest Allocations
The Company's practice before the Merger was to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries rather than at the operating company level, and to centrally manage
various cash functions. Consequently, corporate debt of the Company and its
related interest expense have been allocated to Old Tenneco's automotive,
packaging, and shipbuilding businesses ("Old Tenneco's non-energy operations")
based upon the portion of Old Tenneco's investment in Old Tenneco's non-energy
operations that is deemed to be debt, generally based upon the ratio of Old
Tenneco's non-energy operations' net assets to Old Tenneco's consolidated net
assets plus debt. Interest expense was allocated at a rate equivalent to the
weighted-average cost of all corporate debt, which was 8.2 percent and 7.7
percent for 1996 and 1995, respectively. Total pre-tax interest expense
allocated to Old Tenneco's non-energy operations in 1996 and 1995 was $211
million and $180 million, respectively. Old Tenneco's non-energy operations have
also been allocated tax benefits totaling approximately 35 percent of the
allocated pre-tax interest expense. Although interest expense, and the related
tax effects, have been allocated to Old Tenneco's non-energy operations for
financial reporting on a historical basis, Old Tenneco's non-energy operations
have not been billed for these amounts. The changes in allocated corporate debt
and the after-tax allocated interest expense have been included as a component
of the Company's combined equity. Although management believes that the
historical allocation of corporate debt and interest expense is reasonable, it
is not necessarily indicative of the debt currently borrowed by the Company or
the debt which the Company may incur in the future.
Notes and Advances Receivable or Payable with Affiliates
For the years 1996 and 1995 cash contributions from (distributions to)
affiliates in the Statements of Changes in Consolidated Stockholders' Equity and
Combined Equity consist of net cash changes in notes and advances receivable or
payable between the Company and the Industrial Business and Shipbuilding
Business which have been included in combined equity. Historically, Old Tenneco
has utilized notes and advances to centrally manage cash funding requirements
for its consolidated group.
The "Note payable to EPG" balance at December 31, 1997 and 1996 relates to
an interest-bearing demand loan first made to TGP from EPG in December 1996
subsequent to the Merger.
Accounts Receivable and Accounts Payable -- Affiliated Companies
Balances in accounts receivable and accounts payable -- affiliated
companies relate to activities in the normal course of business. Amounts consist
of cash advances and amounts associated with marketing contracts transferred to
the Company's marketing subsidiaries effective April 1997.
Employee Benefits
Certain employees of the Company participated in Old Tenneco's employee
stock ownership and employee stock purchase plans. The Old Tenneco employee
stock ownership plan provided for the grant of Old Tenneco common stock options
and other stock awards at a price not greater than market value at the date of
grant. The Old Tenneco employee stock purchase plan allowed employees to
purchase Old Tenneco common stock at a 15 percent discount subject to certain
thresholds. Certain employees of the Industrial
48
<PAGE> 52
Business and Shipbuilding Business also participated in Old Tenneco's employee
stock ownership and employee stock purchase plans. The cost of stock issued to
these employees was billed to the Industrial Business and Shipbuilding Business.
In connection with the Distributions, outstanding options on Old Tenneco common
stock held by the Company's employees were vested so that they became fully
exercisable prior to the Merger. If not exercised prior to the Merger, such
options were cancelled upon consummation of the Merger. Outstanding options on
Old Tenneco common stock held by the Industrial Business and Shipbuilding
Business employees were converted into new options of New Tenneco and Newport
News as applicable, so as to preserve the aggregate value of the options held
prior to the Distributions.
Employees of the Company also participated in certain Old Tenneco
postretirement and pension plans. Reference is made to Note 8, "Employee
Benefits," for a further discussion of the plans.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER OPERATING OPERATING NET
(IN MILLIONS) REVENUES INCOME INCOME (LOSS)
------------- --------- --------- -------------
POST-ACQUISITION CONSOLIDATED
<S> <C> <C> <C>
1997 1st.............................................. $ 689 $ 76 $ 30
2nd............................................. 785 52 17
3rd............................................. 851 62 25
4th............................................. 1,277 73 40
------ ---- -----
$3,602 $263 $ 112
====== ==== =====
PRE-ACQUISITION COMBINED
1996 1st.............................................. $ 754 $ 63 $ 49
2nd............................................. 626 35 24
3rd............................................. 616 52 22
4th............................................. 712 32 (200)
------ ---- -----
$2,708 $182 $(105)
====== ==== =====
</TABLE>
- ---------------
NOTE: See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 3, 6, and 7 of the notes to
consolidated and combined financial statements for significant issues
affecting comparability of quarterly results.
49
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To El Paso Tennessee Pipeline Co.:
We have audited the consolidated and combined financial statements and the
financial statement schedule of El Paso Tennessee Pipeline Co. listed in Item
14(a) of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of El Paso
Tennessee Pipeline Co. as of December 31, 1997 and 1996, the consolidated
results of its operations and its cash flows for the year ended December 31,
1997, and the combined results of its operations and its cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 12, 1998
50
<PAGE> 54
SCHEDULE II
EL PASO TENNESSEE PIPELINE CO.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ----------------------- -------- --------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts....... $ 49 $ 21 $ -- 51(a) $19
1996
Allowance for doubtful accounts....... $ 49 $ 19 $ 8 $ 27 $49
1995
Allowance for doubtful accounts....... $ 21 $ 26 $ 9 $ 7 $49
</TABLE>
- ---------------
(a) Primarily accounts written off.
51
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Proposal No. 1 -- Nominee for
Election of Director by Series A Preferred Stockholders" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in EPTPC's proxy statement for the
1998 Annual Meeting of Stockholders is incorporated herein by reference.
Information regarding executive officers of EPTPC is presented in Item 1 of this
Form 10-K under the caption "Executive Officers of the Registrant" and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in EPTPC's
proxy statement for the 1998 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Security Ownership of Certain
Beneficial Owners of the Company " in EPTPC's proxy statement for the 1998
Annual Meeting of Stockholders is incorporated herein by reference. Information
appearing under the caption "Security Ownership of Directors and Executive
Officers" in EPTPC's proxy statement for the 1998 Annual Meeting of Stockholders
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Relationships with El Paso Energy
Corporation and El Paso Natural Gas Company" in EPTPC's proxy statement for the
1998 Annual Meeting of Stockholders is incorporated herein by reference.
52
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial statements.
The following consolidated and combined financial statements of the Company
are included in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated and Combined Statements of Income......... 24
Consolidated Balance Sheets............................ 25
Consolidated and Combined Statements of Cash Flows..... 26
Statements of Changes in Consolidated Stockholders'
Equity and Combined Equity............................ 27
Notes to Consolidated and Combined Financial
Statements............................................ 28
Report of independent accountants...................... 50
</TABLE>
2. Financial statement schedules and supplementary information required to
be submitted.
<TABLE>
<S> <C>
Schedule II -- Valuation and qualifying accounts....... 51
Schedules other than that listed above are omitted
because they are not applicable
3. Exhibit list............................................ 54
</TABLE>
(b) Reports on Form 8-K:
None
53
<PAGE> 57
EL PASO TENNESSEE PIPELINE CO.
EXHIBIT LIST
DECEMBER 31, 1996
The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, or are incorporated herein by reference
(exhibits designated by an asterisk are filed with this Report; all other
exhibits are incorporated herein by reference to a prior filing):
<TABLE>
<C> <S>
2.A -- Amended and Restated Merger Agreement dated as of June
19, 1996, among EPG, El Paso Merger Company and Old
Tenneco (Exhibit 2.A to Registration No. 333-10911).
2.B -- Distribution Agreement, dated as of November 1, 1996,
among Old Tenneco, New Tenneco Inc. and Newport News
Shipbuilding Inc. (Exhibit 2.2 to the Form 8-K of EPG
dated December 26, 1996, File No. 1-2700). Amendment No.
1 to Distribution Agreement entered into as of December
11, 1996, by and among Old Tenneco, New Tenneco Inc. and
Newport News Shipbuilding Inc. (Exhibit 2.3 to the Form
8-K/A of EPG dated January 21, 1997, File No. 1-2700).
3.A -- Certificate of Incorporation as amended and supplemented
as of March 1, 1995 (Exhibit 3(a)(1) to Form 10-K of
Tenneco Inc. for the fiscal year ended December 31, 1994,
File No. 1-9864). Certificate of Retirement of Preferred
Stock Redeemed or Purchased, dated February 16, 1996;
Certificate of Elimination of the Series A Cumulative
Preferred Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Elimination of the Variable Rate Preferred
Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Elimination of the Participating Preferred
Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Designation, Preferences and Rights of
8 1/4% Cumulative Junior Preferred Stock, Series A, dated
November 18, 1996; Certificate of Amendment of
Certificate of Incorporation, dated December 11, 1996;
Certificate of Merger dated December 11, 1996; and
Certificate of Designation, Preferences and Rights of
8 1/2% Cumulative Junior Preferred Stock, Series B, dated
March 5, 1997.
*3.A .1 -- Certificate of Designation, Preferences and Rights of
6 1/4% Cumulative Junior Preferred Stock, Series C, dated
March 4, 1998.
*3.B -- By-laws of EPTPC, as amended March 1, 1998.
4.A -- Indenture dated as of March 4, 1997, between TGP and The
Chase Manhattan Bank (Exhibit 4.1 to EPTP's Form 10-K
filed March 14, 1997).
4.B -- First Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.2 to EPTP's Form 10-K filed
March 14, 1997).
4.C -- Second Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.3 to EPTP's Form 10-K filed
March 14, 1997).
4.D -- Third Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.4 to EPTP's Form 10-K filed
March 14, 1997).
*21 -- List of Subsidiaries and Affiliates of El Paso Tennessee
Pipeline Co.
*27 -- Financial Data Schedule.
</TABLE>
54
<PAGE> 58
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.
55
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, El Paso Tennessee Pipeline Co. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on the
23rd day of March 1998.
EL PASO TENNESSEE PIPELINE CO.
By: /s/ WILLIAM A. WISE
------------------------------------
William A. Wise
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, as
amended, this report has been signed below by the following persons on behalf of
El Paso Tennessee Pipeline Co. and in the capacities and on the dates as
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM A. WISE Chairman of the Board, President, March 23, 1998
- -------------------------------------------- Chief Executive Officer and
William A. Wise Director
/s/ H. BRENT AUSTIN Executive Vice President, Chief March 23, 1998
- -------------------------------------------- Financial Officer and Director
H. Brent Austin
/s/ JOEL RICHARDS III Executive Vice President and March 23, 1998
- -------------------------------------------- Director
Joel Richards III
/s/ BRITTON WHITE, JR. Executive Vice President, General March 23, 1998
- -------------------------------------------- Counsel and Director
Britton White, Jr.
/s/ JEFFREY I. BEASON Vice President, Controller and March 23, 1998
- -------------------------------------------- Director
Jeffrey I. Beason
/s/ KENNETH L. SMALLEY Director March 23, 1998
- --------------------------------------------
Kenneth L. Smalley
</TABLE>
56
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.A -- Amended and Restated Merger Agreement dated as of June
19, 1996, among EPG, El Paso Merger Company and Old
Tenneco (Exhibit 2.A to Registration No. 333-10911).
2.B -- Distribution Agreement, dated as of November 1, 1996,
among Old Tenneco, New Tenneco Inc. and Newport News
Shipbuilding Inc. (Exhibit 2.2 to the Form 8-K of EPG
dated December 26, 1996, File No. 1-2700). Amendment No.
1 to Distribution Agreement entered into as of December
11, 1996, by and among Old Tenneco, New Tenneco Inc. and
Newport News Shipbuilding Inc. (Exhibit 2.3 to the Form
8-K/A of EPG dated January 21, 1997, File No. 1-2700).
3.A -- Certificate of Incorporation as amended and supplemented
as of March 1, 1995 (Exhibit 3(a)(1) to Form 10-K of
Tenneco Inc. for the fiscal year ended December 31, 1994,
File No. 1-9864). Certificate of Retirement of Preferred
Stock Redeemed or Purchased, dated February 16, 1996;
Certificate of Elimination of the Series A Cumulative
Preferred Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Elimination of the Variable Rate Preferred
Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Elimination of the Participating Preferred
Stock of Tenneco Inc. dated February 27, 1996;
Certificate of Designation, Preferences and Rights of
8 1/4% Cumulative Junior Preferred Stock, Series A, dated
November 18, 1996; Certificate of Amendment of
Certificate of Incorporation, dated December 11, 1996;
Certificate of Merger dated December 11, 1996; and
Certificate of Designation, Preferences and Rights of
8 1/2% Cumulative Junior Preferred Stock, Series B, dated
March 5, 1997.
*3.A .1 -- Certificate of Designation, Preferences and Rights of
6 1/4% Cumulative Junior Preferred Stock, Series C, dated
March 4, 1998.
*3.B -- By-laws of EPTPC, as amended March 1, 1998.
4.A -- Indenture dated as of March 4, 1997, between TGP and The
Chase Manhattan Bank (Exhibit 4.1 to EPTP's Form 10-K
filed March 14, 1997).
4.B -- First Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.2 to EPTP's Form 10-K filed
March 14, 1997).
4.C -- Second Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.3 to EPTP's Form 10-K filed
March 14, 1997).
4.D -- Third Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.4 to EPTP's Form 10-K filed
March 14, 1997).
*21 -- List of Subsidiaries and Affiliates of El Paso Tennessee
Pipeline Co.
*27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.A.1
EL PASO TENNESSEE PIPELINE CO.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF PREFERRED STOCK
BY RESOLUTION OF THE BOARD OF DIRECTORS
PROVIDING FOR AN ISSUE OF 1,210,000
SHARES OF PREFERRED STOCK DESIGNATED
"6 1/4% CUMULATIVE JUNIOR PREFERRED STOCK, SERIES C"
-------------------------
I, David L. Siddall, Corporate Secretary of El Paso Tennessee Pipeline
Co. (hereinafter referred to as the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 151 thereof, DO HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors by
the Certificate of Incorporation, as amended, of said Corporation, the Board of
Directors, by unanimous written consent, pursuant to Section 141(f) of the
General Corporation Law of the State of Delaware, dated as of February 26,
1998, adopted a resolution providing for the issuance of a series of Preferred
Stock, to be designated "6 1/4% Cumulative Junior Preferred Stock, Series C,"
which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, as amended
(as such may be further amended from time to time, the "Certificate of
Incorporation"), a series of Preferred Stock, par value $0.01 per share, of the
Corporation (the "Preferred Stock") be, and hereby is, created to be designated
"6 1/4% Cumulative Junior Preferred Stock, Series C" (hereinafter referred to
as the "Series C Preferred Stock"), consisting of 1,210,000 shares, and the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series C Preferred Stock
are hereby fixed and stated to be as follows (all terms used herein that are
defined in the Certificate of Incorporation shall be deemed to have the
meanings provided therein):
SECTION 1. Dividends. (a) The dividend rate on the Series C Preferred
Stock shall be 6 1/4% of $50 per share of Series C Preferred Stock per annum.
Dividends on shares of the Series C Preferred Stock shall accrue, whether or
not declared, on a daily basis from the date of issuance of such shares.
Accrued but unpaid dividends shall not bear interest.
(b) Dividends on the Series C Preferred Stock shall be payable, when,
as and if declared by the Board of Directors of the Corporation out of assets
legally available therefor, annually on the last day of January in each year
(each, a "Dividend Payment Date"), with the first dividend payment date being
the next Dividend Payment Date following the date of issuance. Dividends on
each Dividend Payment Date will be payable to holders of record of the Series C
Preferred Stock as they appear on the stock books of the Corporation on a
record date, not more than 60 days preceding such Dividend Payment Date, fixed
for such purpose by the Board of Directors in advance of such Dividend Payment
Date. Dividends payable on the Series C Preferred Stock for any period shorter
than a year shall be computed on the basis of a 360-day year of twelve 30-day
months. The Series C Preferred Stock shall rank on a parity with each other
series of Preferred Stock as to the payment of dividends, except to the extent
otherwise provided in Section 5 hereof or in the resolution or resolutions
providing for the issuance of such other series.
SECTION 2. Voting. The Series C Preferred Stock shall not have any
voting rights except as required by law or the Certificate of Incorporation, or
as hereinafter set forth:
<PAGE> 2
(a) Whenever, at any time or times, dividends payable on the Series C
Preferred Stock shall be in arrears for dividend periods, whether or not
consecutive, containing in the aggregate a number of days equivalent to six
calendar quarters, the holders of outstanding Series C Preferred Stock shall
have the exclusive right, voting as a separate series from all other series of
Preferred Stock and classes of capital stock of the Corporation, at each
meeting of the stockholders held for the purpose of electing directors, to
elect two directors of the Corporation, until such time as all dividends
accumulated on the Series C Preferred Stock and in arrears shall have been paid
in full or declared and set apart for payment, at which time the right of the
holders of the Series C Preferred Stock to vote pursuant to the provisions of
this paragraph (a) shall terminate, subject to revesting in the event of each
and every subsequent default of the character and for the time above mentioned.
At any time when voting rights shall, pursuant to the provisions of
this paragraph (a), be vested in the Series C Preferred Stock, the number of
directors of the Corporation shall be automatically increased, to the extent
necessary, so that two directors may be elected by the holders of the Series C
Preferred Stock and a proper officer of the Corporation shall, upon the written
request of the holders of record of at least ten percent in aggregate
liquidation value of the Series C Preferred Stock then outstanding, addressed
to the Secretary of the Corporation, call a special meeting of holders of the
Series C Preferred Stock. Such meeting shall be held at the earliest
practicable date but in no event shall a special meeting be held if the annual
meeting of stockholders of the Corporation is to be held within 90 days of the
receipt by the Secretary of the Corporation of such request. If such meeting
shall not be called by the proper officer of the Corporation as required within
20 days after personal service of the said written request upon the Secretary
of the Corporation, or within 20 days after mailing the same within the United
States of America by certified or registered mail, return receipt requested,
addressed to the Secretary of the Corporation at its principal office (such
mailing to be evidenced by the registry receipt issued by the postal
authorities), then the holders of record of at least ten percent in aggregate
liquidation value of the Series C Preferred Stock then outstanding may
designate in writing one of their number to call such meeting, and such meeting
may be called by such person designated upon the notice required for annual
meetings of stockholders but in no event shall a special meeting be held if the
annual meeting of stockholders of the Corporation is to be held within 90 days
of the receipt by the Secretary of the Corporation of such request. Any holder
of the Series C Preferred Stock so designated shall have access to the stock
books of the Corporation for the purpose of causing a meeting of stockholders
to be called pursuant to these provisions. Upon any termination of the right
of the holders of the Series C Preferred Stock to vote for directors as a class
as described in this paragraph (a), the term of office of the directors so
elected as described in this paragraph (a) shall automatically terminate and
the number of directors shall be reduced accordingly.
(b) At any meeting so called pursuant to paragraph (a) above, and at
any other meeting of stockholders held for the purpose of electing directors at
which the holders of the Series C Preferred Stock shall have the right to elect
directors as provided in paragraph (a) above, the presence in person or by
proxy of a majority in voting power of the outstanding shares of the Series C
Preferred Stock shall be required to constitute a quorum thereof for the
election of any director by the holders of the Series C Preferred Stock.
At any such meeting or adjournment thereof, (x) the absence of the
required quorum of the Series C Preferred Stock shall not prevent the election
of directors other than those to be elected by the Series C Preferred Stock and
the absence of a quorum for the election of such other directors shall not
prevent the election of the directors to be elected by the Series C Preferred
Stock, and (y) in the absence of the required quorum of the Series C Preferred
Stock, a majority in voting power of the holders of Series C Preferred Stock
present in person or by proxy shall have power to adjourn the meeting, subject
to applicable law, but
<PAGE> 3
only with respect to the election of directors which they are entitled to elect
from time to time without notice other than announcement at the meeting until a
quorum shall be present.
(c) If by reason of any resignation, retirement, disqualification,
death or removal there are not in office all such directors that the holders of
the Series C Preferred Stock are entitled to elect pursuant to paragraph (a)
above, then any such vacancy shall be filled only by the remaining director
elected by such holders or, only in the event there is no such remaining
director, by the holders of the Series C Preferred Stock entitled to vote
thereon.
Promptly after the right of the holders of the Series C Preferred
Stock to fill any vacancy as set forth in the immediately preceding paragraph
arises, the Board of Directors may cause a special meeting of the holders of
Series C Preferred Stock entitled to vote thereon to be held for the purpose of
filling such vacancy, and such vacancy shall be filled at any such special
meeting. Such meeting shall be held at the earliest practicable date, but in no
event shall a special meeting be held if the annual meeting of stockholders of
the Corporation is to be held within 90 days of the occurrence of such vacancy.
Notwithstanding the immediately preceding paragraph, at any time after
the right of the holders of the Series C Preferred Stock to fill any vacancy as
set forth above in the first paragraph of this paragraph (c) arises, a proper
officer of the Corporation shall, upon the written request of the holders of
record of at least ten percent in aggregate liquidation value of the Series C
Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of holders of the Series C Preferred Stock.
Such meeting shall be held at the earliest practicable date but in no event
shall a special meeting be held if the annual meeting of stockholders of the
Corporation is to be held within 90 days of the occurrence of such vacancy. If
such meeting shall not be called by the proper officer of the Corporation as
required within 20 days after personal service of the said written request upon
the Secretary of the Corporation, or within 20 days after mailing the same
within the United States of America by registered mail addressed to the
Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
holders of record of at least ten percent in aggregate liquidation value of the
Series C Preferred Stock then outstanding may designate in writing one of their
number to call such meeting, and such meeting may be called by such person
designated upon the notice required for annual meetings of stockholders and
shall be held at the place at which the last preceding annual meeting of the
stockholders of the Corporation was held. Any holder of the Series C Preferred
Stock so designated shall have access to the stock books of the Corporation for
the purpose of causing a meeting of stockholders to be called pursuant to these
provisions.
SECTION 3. Restrictions on Dividends and Stock Repurchases. Subject to
any additional restrictions or limitations contained in the Certificate of
Incorporation, if any, so long as any shares of Series C Preferred Stock remain
outstanding, unless full cumulative dividends on the outstanding shares of
Series C Preferred Stock for all past dividend periods have been paid, or
declared and set apart for payment, dividends may not be paid or declared and
other distributions may not be made upon any class or series of stock of the
Corporation ranking junior to or on a parity with the Series C Preferred Stock
as to dividends or rights upon dissolution, liquidation or winding up of the
Corporation nor may any such class or series of stock of the Corporation be
redeemed, purchased, retired or otherwise acquired by the Corporation, in
either case without the consent, given in person or by proxy, either in writing
or by vote at any annual meeting or at a special meeting called for that
purpose, of the holders of at least a majority in voting power of the
outstanding shares of Series C Preferred Stock present in person or by proxy at
such meeting, provided that a quorum, consisting of at least a majority in
voting power of the then outstanding shares of Series C Preferred Stock is
present; provided, however, that, notwithstanding the foregoing provisions of
this Section 3 (but subject to any restrictions or limitations to the contrary
contained in the
<PAGE> 4
Certificate of Incorporation), the Corporation may at any time redeem, purchase
or acquire, out of funds legally available therefor, shares of stock ranking
junior to or on a parity with the Series C Preferred Stock as to dividends and
rights upon liquidation, dissolution and winding up of the Corporation in
exchange for, or out of net cash proceeds from a substantially concurrent sale
of, other shares of any stock of the Corporation ranking junior to the Series C
Preferred Stock as to dividends and rights upon liquidation, dissolution and
winding up.
SECTION 4. Ranking. (a) Any class or series of stock of the
Corporation shall be deemed to rank: (i) prior to the Series C Preferred Stock
as to the payment of dividends or as to distributions of assets upon
liquidation, dissolution or winding up, as the case may be, if the holders of
such class or series shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of Series C Preferred Stock;
(ii) on a parity with the Series C Preferred Stock as to the payment of
dividends, whether or not the dividend rates or dividend payment dates thereof
be different from those of the Series C Preferred Stock, if the holders of such
class or series of stock and the holders of the Series C Preferred Stock shall
be entitled to the receipt of dividends in proportion to their respective
amounts of accrued and unpaid dividends per share, without preference or
priority one over the other, and on a parity with the Series C Preferred Stock
as to the distribution of assets upon liquidation, dissolution or winding up,
whether or not the liquidation prices per share thereof be different from those
of the Series C Preferred Stock, if the holders of such class or series of
stock and the holders of the Series C Preferred Stock shall be entitled to the
receipt of amounts distributable upon liquidation, dissolution or winding up in
proportion to their respective liquidation preferences, without preference or
priority one over the other; and (iii) junior to the Series C Preferred Stock
as to the payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, as the case may be, if the holders of
Series C Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of shares of such class or
series.
(b) Except for the Common Stock, par value $0.01 per share, of the
Corporation (as such may be constituted from time to time, the "Common Stock"),
each other class and series of stock of the Corporation existing on the date of
the adoption of this Certificate of Designation, Preferences and Rights of
Preferred Stock shall be deemed to rank prior to the Series C Preferred Stock
both as to the payment of dividends and as to the distribution of assets upon
liquidation, dissolution or winding up. The Common Stock shall be deemed to
rank junior to the Series C Preferred Stock both as to the payment of
dividends and as to the distribution of assets upon liquidation, dissolution or
winding up.
SECTION 5. Liquidation Rights. (a) The amount that the holders of
Series C Preferred Stock shall be entitled to receive in the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary (collectively, a "Liquidation"), shall be
$50.00 per share, plus an amount equal to all accrued and unpaid dividends to
the date of Liquidation, and no more. After such amount is paid in full, no
further distributions or payments shall be made in respect of shares of Series
C Preferred Stock, such shares of Series C Preferred Stock shall no longer be
deemed to be outstanding or be entitled to any powers, preferences, rights or
privileges, including any voting rights, and certificates representing such
shares of Series C Preferred Stock shall be surrendered for cancellation to the
Corporation.
(b) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, then, before any distribution or payment shall be
made to the holders of any class or series of stock of the Corporation ranking
junior to the Series C Preferred Stock, the holders of the Series C Preferred
Stock (subject to the rights of the holders of any stock ranking prior to the
Series C Preferred Stock as to rights
<PAGE> 5
on liquidation, dissolution and winding up) shall be entitled to be paid in
full the amounts set forth in paragraph (a) of this Section 5. After such
payment shall have been made in full to the holders of the Series C Preferred
Stock, the remaining assets and funds of the Corporation shall be distributed
among the holders of the stock of the Corporation ranking junior in respect
thereof to the Series C Preferred Stock according to their respective rights.
In the event that the assets of the Corporation available for distribution to
holders of Series C Preferred Stock shall not be sufficient to make the payment
herein required to be made in full and to pay in full the liquidation
preference on all other shares of stock of the Corporation ranking on a parity
with the Series C Preferred Stock as to amounts distributable upon dissolution,
liquidation or winding up of the Corporation, such assets shall be distributed
to the holders of the respective shares of Series C Preferred Stock and any
such other parity stock pro rata in proportion to the full amounts payable upon
the shares of Series C Preferred Stock and any such other parity stock if all
amounts payable thereon were paid in full.
SECTION 6. Maturity. Unless otherwise redeemed as provided herein, the
term of the Series C Preferred Stock shall be perpetual.
IN WITNESS WHEREOF, said El Paso Tennessee Pipeline Co. has caused
this Certificate of Designation, Preferences and Rights of Preferred Stock to
be signed by David L. Siddall, as Corporate Secretary, this 4th day of March
1998.
EL PASO TENNESSEE PIPELINE CO.
By:
--------------------------------
David L. Siddall
Corporate Secretary
<PAGE> 1
EXHIBIT 3.B
BY-LAWS
OF
EL PASO TENNESSEE PIPELINE CO.
(FORMERLY TENNECO INC.)
(A DELAWARE CORPORATION)
As Amended March 1, 1998
<PAGE> 2
BY-LAWS
OF
EL PASO TENNESSEE PIPELINE CO.
(FORMERLY TENNECO INC.)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1 - Registered Office and Agent . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2 - Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1 - Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2 - Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3 - Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 4 - Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5 - Fixing of Record Date for Determining Stockholders . . . . . . . . . . . . . . 2
Section 6 - Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7 - Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8 - Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9 - Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 10 - List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 11 - Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III. BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1 - Number, Qualification and Term of Office . . . . . . . . . . . . . . . . . . . 6
Section 2 - Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3 - Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4 - Removals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5 - Place of Meetings; Books and Records . . . . . . . . . . . . . . . . . . . . . 8
Section 6 - Annual Meeting of the Board . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 7 - Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 8 - Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 9 - Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 10 - Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 11 - Consent of Directors in Lieu of Meeting . . . . . . . . . . . . . . . . . . . 9
Section 12 - Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 13 - Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 14 - Interested Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV. COMMITTEES OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1 - Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2 - Finance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3 - Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4 - Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5 - Committee Chairman, Books and Records . . . . . . . . . . . . . . . . . . . . 12
Section 6 - Alternates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 7 - Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8 - Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 1 - Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2 - Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3 - Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4 - Removals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5 - Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6 - Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7 - Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8 - President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 9 - Vice Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 10 - Chief Operating Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 11 - Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 12 - Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 13 - General Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 14 - Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 15 - Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 16 - Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 17 - Absence or Disability of Officers . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VI. STOCK CERTIFICATES AND TRANSFER THEREOF . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 1 - Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 2 - Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 3 - Transfer Agents and Registrars . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4 - Additional Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5 - Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VII. DIVIDENDS, SURPLUS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII. SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE IX. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE X. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 1 - General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2 - Actions by or in the Right of the Corporation . . . . . . . . . . . . . . . . 21
</TABLE>
ii
<PAGE> 4
<TABLE>
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Section 3 - Indemnification in Certain Cases . . . . . . . . . . . . . . . . . . . . . . . 22
Section 4 - Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5 - Advances for Expenses and Costs . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6 - Remedies in Cases of Determination
not to Indemnify or to Advance Expenses . . . . . . . . . . . . . . . . . . . 24
Section 7 - Rights Non-Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8 - Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9 - Surviving of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 10 - Indemnification of Employees and Agents of the Corporation . . . . . . . . . . 26
Section 11 - Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XI. CHECKS, DRAFTS, BANK ACCOUNTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 1 - Checks, Drafts, Etc.; Loans . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2 - Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XII. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
iii
<PAGE> 5
BY-LAWS
OF
EL PASO TENNESSEE PIPELINE CO.
(FORMERLY TENNECO INC.)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE AND AGENT
The registered office of the corporation is located at Corporation Trust
Center, 1209 Orange Street in the City of Wilmington, County of New Castle,
State of Delaware, and the name of its registered agent at such address is The
Corporation Trust Company.
SECTION 2. OTHER OFFICES
The corporation may have offices at such other places both within and
without the State of Delaware as the Board of Directors (the "Board") may from
time to time determine or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS
A meeting of the stockholders for the purpose of electing Directors and
for the transaction of such other business as may properly be brought before
the meeting shall be held annually at 10:00 a.m. on the third Thursday of
April, or at such other time on such other date as shall be fixed by resolution
of the Board. If the day fixed for the annual meeting shall be a legal holiday
such meeting shall be held on the next succeeding business day.
SECTION 2. SPECIAL MEETINGS
Special meetings of the stockholders for any purpose or purposes may be
called only by a majority of the Board, the Chairman of the Board, the Chief
Executive Officer, the President or the Vice Chairman of the Board.
<PAGE> 6
SECTION 3. PLACE OF MEETINGS
The annual meeting of the stockholders of the corporation shall be held at
the general offices of the corporation in the City of Houston, State of Texas,
or at such other place in the United States as may be stated in the notice of
the meeting. All other meetings of the stockholders shall be held at such
places within or without the State of Delaware as shall be stated in the notice
of the meeting.
SECTION 4. NOTICE OF MEETINGS
4.1 GIVING OF NOTICE. Except as otherwise provided by statute, written
notice of each meeting of the stockholders, whether annual or special, shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting. If mailed, notice shall
be given when deposited in the United States mails, postage prepaid, directed
to such stockholder at his address as it appears in the stock ledger of the
corporation. Each such notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called.
4.2 NOTICE OF ADJOURNED MEETINGS. When a meeting is adjourned to another
time and place, notice of the adjourned meeting need not be given if the time
and place thereof are announced at the meeting at which the adjournment is
given. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
4.3 WAIVER OF NOTICE
4.3.1 Whenever any notice is required to be given to any stockholder
under the provisions of these By-laws, the Certificate of Incorporation or the
general Corporation Law of the State of Delaware, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, shall be deemed equivalent to the giving of such
notice.
4.3.2 The attendance of a stockholder at a meeting shall constitute a
waiver of notice of such meeting, except when a stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 5. FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS
5.1 MEETINGS. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board, and
which record date shall not be more than sixty nor less than ten days before
the date of such meeting. If no record date is fixed by the Board, the record
date for determining stockholders shall be at the close of business on the day
next preceding the day on
2
<PAGE> 7
which notice is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at the meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
5.2 DIVIDENDS, DISTRIBUTIONS AND OTHER RIGHTS. For the purpose of
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board may fix a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted, and which record date shall be not more than sixty
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto.
SECTION 6. QUORUM
A majority of the outstanding shares of stock of the corporation entitled
to vote, present in person or represented by proxy, shall constitute a quorum
at a meeting of the stockholders; provided that where a separate vote by a
class or classes or by a series of a class is required, a majority of the
outstanding shares of such class or classes or of such series of a class,
present in person or represented by proxy at the meeting, shall constitute a
quorum entitled to take action with respect to the vote on that matter. Shares
of stock will be counted toward a quorum if they are either (i) present in
person at the meeting or (ii) represented at the meeting by a valid proxy,
whether the instrument granting such proxy is marked as casting a vote or
abstaining, is left blank or does not empower such proxy to vote with respect
to some or all matters to be voted upon at the meeting. If less than a
majority of the outstanding shares entitled to vote are represented at a
meeting, a majority of the shares so represented may adjourn the meeting from
time to time without further notice. If a quorum is present or represented at
a reconvened meeting following such an adjournment, any business may be
transacted that might have been transacted at the meeting as originally called.
The stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 7. ORGANIZATION
At each meeting of the stockholders, the Chairman of the Board, or in his
absence the Chief Executive Officer, the President or the Vice Chairman of the
Board, or if all of the said officers are absent, a person designated by the
Board, the Chairman of the Board, the Chief Executive Officer, the President or
the Vice Chairman of the Board, or in the absence of such designated person, a
person elected by the holders of a majority in number of shares of stock
present in person or represented by proxy and entitled to vote, shall act as
chairman of the meeting.
The Secretary, or in his absence or in the event he shall be presiding
over the meeting in accordance with the provisions of this Section, an
Assistant Secretary or, in the absence of the
3
<PAGE> 8
Secretary and all of the Assistant Secretaries, any person appointed by the
chairman of the meeting, shall act as secretary of the meeting.
SECTION 8. VOTING
8.1 GENERAL PROVISIONS. Unless otherwise provided in the Certificate of
Incorporation or a resolution of the Board creating a series of stock, at each
meeting of the stockholders, each holder of any share of any series or class of
stock entitled to vote at such meeting shall be entitled to one vote for each
share of stock having voting power in respect of each matter upon which a vote
is to be taken, standing in his name on the stock ledger of the corporation on
the record date fixed as provided in these By-laws for determining the
stockholders entitled to vote at such meeting. In all matters other than the
election of Directors, if a quorum is present, the affirmative vote of the
majority of the shares present in person or represented by proxy at the meeting
and entitled to vote on the subject matter shall be the act of the
stockholders, unless the vote of a greater number is required by these By-laws,
the Certificate of Incorporation or the General Corporation Law of the State of
Delaware. In determining the number of votes cast for or against a proposal,
shares abstaining from voting on a matter (including elections) will not be
treated as a vote for or against the proposal. A non-vote by a broker will be
treated as if the broker never voted, but a non-vote by a stockholder will be
counted as a vote "for" the management's position. Where a separate vote by a
class or classes or by a series of a class is required, if a quorum is present,
the affirmative vote of the majority of shares of such class or classes or
series of a class present in person or represented by proxy at the meeting
shall be the act of such class or classes or series of a class. The provisions
of this Section will govern with respect to all votes of stockholders except as
otherwise provided for in these By-laws, the Certificate of Incorporation or
the General Corporation Law of the State of Delaware.
8.2 VOTING FOR DIRECTORS. At each election of Directors the voting shall
be by written ballot. Directors shall be elected by a plurality of the votes
of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of Directors.
8.3 SHARES HELD OR CONTROLLED BY THE CORPORATION. Shares of its own
capital stock belonging to the corporation, or to another corporation if a
majority of the shares entitled to vote in the election of Directors of such
other corporation is held by the corporation, shall neither be entitled to vote
nor counted for quorum purposes.
8.4 PROXIES. A stockholder may vote by proxy executed in writing by the
stockholder or by his attorney-in-fact. Such proxy shall be filed with the
Secretary of the corporation before or at the time of the meeting. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the corporation. A proxy shall become invalid three years after the date of
its execution, unless otherwise provided in the proxy. A proxy with respect to
a specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
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SECTION 9. INSPECTORS
Prior to each meeting of stockholders, the Board shall appoint at least
one Inspector who is not a Director, candidate for Director or officer of the
corporation, who shall receive and determine the validity of proxies and the
qualifications of voters, and receive, inspect, count and report to the meeting
in writing the votes cast on all matters submitted to a vote at such meeting.
In case of failure of the Board to make such appointment or in case of failure
of any Inspector so appointed to act, the Chairman of the Board shall make such
appointment or fill such vacancies. Each Inspector, immediately before
entering upon his duties, shall subscribe to an oath or affirmation faithfully
to execute the duties of Inspector at such meeting with strict impartiality and
according to the best of his ability.
SECTION 10. LIST OF STOCKHOLDERS
The Secretary or other officer or agent having charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at said meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares of each class and series registered in the
name of each such stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. Such list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present. The stock ledger shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by this section, or the books of the corporation, or
to vote in person or by proxy at any such meeting.
SECTION 11. STOCKHOLDER PROPOSALS
At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before the annual meeting of stockholders (a) by, or at the
direction of, the Board or (b) by a stockholder of the corporation who complies
with the procedures set forth in this Section 11. For business or a proposal
to be properly brought before an annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the corporation. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal executive offices of
the corporation not less than 60 days nor more than 90 days prior to the
scheduled date of the annual meeting, regardless of any postponement, deferral
or adjournment of that meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so delivered or received not later than the close of business on
the 10th day following the earlier of (i) the day on which such notice of the
date of the meeting was mailed, or (ii) the day on which such public disclosure
was made.
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A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before an annual meeting of stockholders (i) a
description, in 500 words or less, of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholders known by such stockholder to be supporting such proposal,
(iii) the class and number of shares of the corporation which are beneficially
owned by such stockholder on the date of such stockholder's notice and by any
other stockholders known by such stockholder to be supporting such proposal on
the date of such stockholder's notice, (iv) a description, in 500 words or less,
of any interest of the stockholder in such proposal, and (v) a representation
that the stockholder is a holder of record of stock of the corporation and
intends to appear in person or by proxy at the meeting to present the proposal
specified in the notice. Notwithstanding anything in these By-laws to the
contrary, no business shall be conducted at a meeting of stockholders except in
accordance with the procedures set forth in this Section 11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by this Section 11, and if
he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing, nothing in this Section 11 shall be interpreted
or construed to require the inclusion of information about any such proposal in
any proxy statement distributed by, at the direction of, or on behalf of, the
Board.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. NUMBER, QUALIFICATION AND TERM OF OFFICE
The business, property and affairs of the corporation shall be managed by
a Board consisting of not less than one Director. The Board shall from time to
time by a vote of a majority of the Directors then in office fix the specific
number of Directors to constitute the Board. At each annual meeting of
stockholders a Board shall be elected by the stockholders for a term of one
year. Each Director shall serve until his successor is duly elected and shall
qualify.
SECTION 2. VACANCIES
Vacancies in the Board and newly created directorships resulting from any
increase in the authorized number of Directors may be filled by a vote of the
majority of the Directors then in office, although less than a quorum, or by a
sole remaining Director, at any regular or special meeting of the Board.
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SECTION 3. NOMINATIONS OF DIRECTORS
Subject to the rights, if any, of the holders of any series of preferred
stock then outstanding, only persons nominated in accordance with the procedures
set forth in this Section 3 shall be eligible for election as Directors.
Nominations of persons for election to the Board may be made at an annual
meeting of stockholders or special meeting of stockholders called by the Board
for the purpose of electing Directors (i) by or at the direction of the Board or
(ii) by any stockholder of the corporation entitled to vote for the election of
Directors at such meeting who complies with the notice procedure set forth in
this Section 3. Such nominations, other than those made by or at the direction
of the Board, shall be made pursuant to timely notice in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 60 days nor more than 90 days prior to the scheduled
date of the meeting, regardless of any postponement, deferral or adjournment of
that meeting to a later date; provided, however, that if less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so delivered or
received not later than the close of business on the 10th day following the
earlier of (i) the day on which such notice of the date of the meeting was
mailed, or (ii) the day on which such public disclosure was made.
A stockholder's notice to the Secretary shall set forth: (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
Director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the corporation which are beneficially owned by such
person on the date of such stockholder's notice, and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or any successor statute thereto (the "Exchange Act") (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); (ii) as to the
stockholder giving the notice (a) the name and address, as they appear on the
corporation's (or its agent's) books, of such stockholder and any other
stockholders known by such stockholder to be supporting such nominee(s), (b) the
class and number of shares of the corporation which are beneficially owned by
such stockholder on the date of such stockholder's notice and by any other
stockholders known by such stockholder to be supporting such nominee(s) on the
date of such stockholder's notice (c) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; and (iii) a description of all
arrangements or understandings between the stockholder and each nominee and
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder.
No person shall be eligible for election as a Director of the corporation
unless nominated in accordance with the procedures set forth in this Section 3.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in
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accordance with the procedures prescribed by this Section 3 and if he should so
determine, he shall so declare to the meeting and the defective nomination
shall be disregarded.
SECTION 4. RESIGNATIONS
Any Director may resign at any time upon written notice to the Board, the
Chairman of the Board, the Chief Executive Officer, the President, the Vice
Chairman of the Board or the Secretary of the corporation. Such resignation
shall take effect on the date of receipt of such notice or at any later time
specified therein; and the acceptance of such resignation, unless otherwise
required by the terms thereof, shall not be necessary to make it effective.
When one or more Directors shall resign effective at a future date, a majority
of the Directors then in office, including those who have resigned, shall have
power to fill such vacancy or vacancies to take effect when such resignation or
resignations shall become effective.
SECTION 5. REMOVALS
Subject to the rights, if any, of the holders of any series of preferred
stock then outstanding, any Director may be removed, with or without cause, at
any special meeting of the stockholders called for that purpose, by the
affirmative vote of the holders of a majority in number of shares of the
corporation entitled to vote for the election of such Director, and the vacancy
in the Board caused by any such removal may be filled by the stockholders at
such a meeting.
SECTION 6. PLACE OF MEETINGS; BOOKS AND RECORDS
The Board may hold its meetings, and have an office or offices, at such
place or places within or without the State of Delaware as the Board from time
to time may determine.
The Board, subject to the provisions of applicable statutes, may authorize
the books and records of the corporation, and offices or agencies for the
issue, transfer and registration of the capital stock of the corporation, to be
kept at such place or places outside of the State of Delaware as, from time to
time, may be designated by the Board.
SECTION 7. ANNUAL MEETING OF THE BOARD
The first meeting of each newly elected Board, to be known as the Annual
Meeting of the Board, for the purpose of electing officers, designating
committees and the transaction of such other business as may come before the
Board, shall be held as soon as practicable after the adjournment of the annual
meeting of stockholders, and no notice of such meeting shall be necessary to
the newly elected Directors, provided a quorum shall be present. In the event
such meeting is not held due to the absence of a quorum, the meeting may be
held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the Board, or as shall be
specified in a written waiver signed by all of the newly elected Directors.
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SECTION 8. REGULAR MEETINGS
The Board shall provide for regular meetings of the Board at such times
and at such places as it deems desirable. Notice of regular meetings need not
be given.
SECTION 9. SPECIAL MEETINGS
Special meetings of the Board may be called by the Chairman of the Board,
the Chief Executive Officer, the President or the Vice Chairman of the Board
and shall be called by the Secretary on the written request of three Directors
on such notice as the person or persons calling the meeting shall deem
appropriate in the circumstances. Notice of each such special meeting shall be
mailed to each Director or delivered to him by telephone, telegraph or any
other means of electronic communication, in each case addressed to his
residence or usual place of business, or delivered to him in person or given to
him orally. The notice of meeting shall state the time and place of the
meeting but need not state the purpose thereof. Whenever any notice is
required to be given to any Director under the provisions of these By-laws, the
Certificate of Incorporation or the General Corporation Law of the State of
Delaware, a waiver thereof in writing, signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be
deemed equivalent to the giving of such notice. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
or any committee appointed by the Board need be specified in the waiver of
notice of such meeting. Attendance of a Director at any meeting shall
constitute a waiver of notice of such meeting except when a Director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened.
SECTION 10. QUORUM AND MANNER OF ACTING
Except as otherwise provided by statute, the Certificate of Incorporation,
or these By-laws, the presence of a majority of the total number of Directors
shall constitute a quorum for the transaction of business at any regular or
special meeting of the Board, and the act of a majority of the Directors
present at any such meeting at which a quorum is present shall be the act of
the Board. In the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum is present. Notice of
any such adjourned meeting need not be given.
SECTION 11. ORGANIZATION
At every meeting of the Board, the Chairman of the Board or in his absence
the Chief Executive Officer, the President or the Vice Chairman of the Board,
or if all of the said officers are absent, a chairman chosen by a majority of
the Directors present shall act as chairman of the meeting. The Secretary, or
in his absence, an Assistant Secretary, or in the absence of the Secretary and
all the Assistant Secretaries, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting.
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SECTION 12. CONSENT OF DIRECTORS IN LIEU OF MEETING
Unless otherwise restricted by the Certificate of Incorporation or by
these By-laws, any action required or permitted to be taken at any meeting of
the Board, or any committee designated by the Board, may be taken without a
meeting if all members of the Board or committee consent thereto in writing,
and such written consent is filed with the minutes of the proceedings of the
Board or committee.
SECTION 13. TELEPHONIC MEETINGS
Members of the Board, or any committee designated by the Board, may
participate in any meeting of the Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in such a
meeting shall constitute presence in person at such meeting.
SECTION 14. COMPENSATION
Each Director, who is not a full-time salaried officer of the corporation
or any of its wholly owned subsidiaries, when authorized by resolution of the
Board, may receive as a Director a stated salary or an annual retainer, and any
other benefits as the Board may determine, and in addition may be allowed a
fixed fee or reimbursement of his reasonable expenses for attendance at each
regular or special meeting of the Board or any committee thereof.
SECTION 15. INTERESTED DIRECTORS
No contract or transaction between the corporation and one or more of its
Directors or officers, or between the corporation and any other corporation,
partnership, association or other organization in which one or more of its
Directors or officers are Directors or officers of this corporation, or have a
financial interest in such contract or transaction, shall be void or voidable
solely for this reason, or solely because the Director or officer is present at
or participates in the meeting of the Board or committee thereof which
authorizes the contract or transaction, or solely because his or their votes
are counted for such purpose, if: (1) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested Directors, even though the disinterested
Directors be less than a quorum; or (2) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (3) the contract or transaction is fair as to the corporation as of the time
it is authorized, approved or ratified by the Board, a committee thereof or the
stockholders. Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board or of a committee which
authorizes the contract or transaction.
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ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. EXECUTIVE COMMITTEE
The Board may, in its discretion, designate an Executive Committee,
consisting of such number of Directors as the Board may from time to time
determine. The committee shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
corporation and may authorize the seal of the corporation to be affixed to all
papers which may require it, but the committee shall have no power or authority
to amend the Certificate of Incorporation (except that the committee may, to
the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board, fix the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series). The committee shall have
such other powers as the Board may from time to time prescribe.
SECTION 2. FINANCE COMMITTEE
The Board may, in its discretion, designate a Finance Committee,
consisting of such number of Directors as the Board may from time to time
determine. The committee shall monitor, review, appraise and recommend to the
Board appropriate action with respect to the corporation's capital structure,
its source of funds and its financial position; review and recommend
appropriate delegations of authority to management on expenditures and other
financial commitments; review terms and conditions of financing plans; develop
and recommend dividend policies and recommend to the Board specific dividend
payments; and review the performance of the trustee of the corporation's
pension trust fund, and any proposed change in the investment policy of the
trustee with respect to such fund. The committee shall have such other duties,
functions and powers as the Board may from time to time prescribe.
SECTION 3. AUDIT COMMITTEE
The Board may designate annually an Audit Committee consisting of not less
than two Directors as it may from time to time determine, none of whom shall be
officers or employees of the corporation. The committee shall review with the
independent accountants the corporation's financial statements, basic
accounting and financial policies and practices, adequacy of controls, standard
and special tests used in verifying the corporation's statements of account and
in determining the soundness of the corporation's financial condition, and the
committee shall report to the Board the results of such reviews; review the
policies and practices pertaining to publication of quarterly and annual
statements to assure consistency with audited results and the implementation of
policies and practices recommended by the independent accountants; ensure that
suitable independent audits are made of the operations and results of
subsidiary corporations
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and affiliates; and monitor compliance with the corporation's code of business
conduct. The committee shall have such other duties, functions and powers as
the Board may from time to time prescribe.
SECTION 4. COMPENSATION COMMITTEE
The Board may designate annually a Compensation Committee consisting of
not less than two Directors as it may from time to time determine, none of whom
shall be officers or employees of the corporation. The committee shall
administer the corporation's executive compensation plans and programs. In
addition, the committee shall consider proposals with respect to the creation
of and changes to executive compensation plans and will review appropriate
criteria for establishing certain performance measures and determining annual
corporate and executive performance ratings under applicable corporation plans
and programs. The committee shall have such other duties, functions and powers
as the Board may from time to time prescribe.
SECTION 5. COMMITTEE CHAIRMAN, BOOKS AND RECORDS
Each committee shall elect a chairman to serve for such term as it may
determine, shall fix its own rules of procedure and shall meet at such times
and places and upon such call or notice as shall be provided by such rules. It
shall keep a record of its acts and proceedings, and all action of the
committee shall be reported to the Board at the next meeting of the Board.
SECTION 6. ALTERNATES
Alternate members of the committees prescribed by this Article IV may be
designated by the Board from among the Directors to serve as occasion may
require. Whenever a quorum cannot be secured for any meeting of any such
committee from among the regular members thereof and designated alternates, the
member or members of such committee present at such meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of such absent or disqualified member.
Alternative members of such committees shall receive a reimbursement for
expenses and compensation at the same rate as regular members of such
committees.
SECTION 7. OTHER COMMITTEES
The Board may designate such other committees, consisting of such number
of Directors as the Board may from time to time determine, and each such
committee shall serve for such term and shall have and may exercise, during
intervals between meetings of the Board, such duties, functions and powers as
the Board may from time to time prescribe.
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SECTION 8. QUORUM AND MANNER OF ACTING
At each meeting of any committee the presence of a majority of the members
of such committee, whether regular or alternate, shall be necessary to
constitute a quorum for the transaction of business, and if a quorum is present
the concurrence of a majority of those present shall be necessary for the
taking of any action; provided, however, that no action may be taken by the
Executive Committee or the Finance Committee when one or more officers of the
corporation are present as members at a meeting of either such committee unless
such action shall be concurred in by the vote of at least one member of such
committee who is not an officer of the corporation.
ARTICLE V
OFFICERS
SECTION 1. NUMBER
The officers of the corporation shall consist of such of the following as
the Board may from time to time elect or appoint, or as the Chairman of the
Board may from time to time appoint pursuant to Section 6 of this Article V: a
Chairman of the Board, a Chief Executive Officer, a President, a Vice Chairman
of the Board, a Chief Operating Officer, a Chief Financial Officer, a General
Counsel, a Secretary, a Treasurer, a Controller and one or more of the
following: Executive Vice President, Senior Vice President, Vice President,
Assistant Vice President, Associate or Assistant General Counsel, Assistant
Secretary, Assistant Treasurer, Assistant Controller and such other officers
with such titles and powers and/or duties as the Board or the Chairman of the
Board, as the case may be, shall from time to time determine. Officers of the
corporation may simultaneously serve as officers of subsidiaries or divisions
thereof. Any number of offices may be held by the same person.
SECTION 2. ELECTION
The officers of the corporation, except those who may be appointed by the
Chairman of the Board as provided in Section 6 of this Article V, shall be
elected or appointed as soon as practicable after the annual meeting of
stockholders in each year to hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his election, or until
his successor is elected and qualified or until his earlier death, resignation
or removal.
SECTION 3. RESIGNATIONS
Any elected or appointed officer may resign at any time upon written
notice to the Chairman of the Board or the Secretary of the corporation. Such
resignation shall take effect upon the date of its receipt or at such later
time as may be specified therein, and unless otherwise required by the terms
thereof, no acceptance of such resignation shall be necessary to make it
effective.
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SECTION 4. REMOVALS
Any elected or appointed officer may be removed, with or without cause, by
the Board at any regular or special meeting of the Board, and in the case of an
officer appointed pursuant to Section 6 of this Article V, may be so removed by
the Chairman of the Board. Any such removal shall be without prejudice to the
contractual rights of such officer, if any, with the corporation, but the
election or appointment of any officer shall not of itself create contractual
rights.
SECTION 5. VACANCIES
Any vacancy occurring in any office by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board at
any regular or special meeting or as otherwise provided in these By-laws.
SECTION 6. CHAIRMAN OF THE BOARD
The Chairman of the Board shall, when present, preside at all meetings of
the stockholders and the Board; have authority to call special meetings of the
stockholders and of the Board; have authority to sign and acknowledge in the
name and on behalf of the corporation all stock certificates, contracts or
other documents and instruments except where the signing thereof shall be
expressly delegated to some other officer or agent by the Board or required by
law to be otherwise signed or executed and, unless otherwise provided by law or
by the Board may authorize any officer, employee or agent of the corporation to
sign, execute and acknowledge in his place and stead all such documents and
instruments; he shall fix the compensation of officers of the corporation,
other than his own compensation, and the compensation of officers of its
principal operating subsidiaries reporting directly to him unless such
authority is otherwise reserved to the Board or a committee thereof; and he
shall approve proposed employee compensation and benefit plans of subsidiary
companies not involving the issuance or purchase of capital stock of the
corporation. He shall have the power to appoint and remove any Vice President,
Controller, General Counsel, Secretary or Treasurer of the corporation. He
shall also have the power to appoint and remove such associate or assistant
officers of the corporation with such titles and duties as he may from time to
time deem necessary or appropriate. He shall have such other powers and
perform such other duties as from time to time may be assigned to him by the
Board or the Executive Committee.
The Chairman of the Board is hereby authorized, without further approval
of the Finance Committee or the Board:
(a) To approve individual expenditures by the corporation of up to $20
million each for individual expenditures in categories not presented
to the Board in the annual budget or plan, including but not limited
to individual expenditures pertaining to operating expenses,
purchases, leases, options to purchase or lease assets, investments,
business acquisitions, land purchases, products or services
acquisitions, bid or performance bonds (provided however, that the
authority to issue such a bond shall not be deemed to
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authorize the activity covered thereby unless such activity would
itself be authorized hereunder), litigation settlements, charitable
donations and political contributions.
(b) To approve expenditures by the corporation for the amounts (subject
to subparagraph (c) below) presented to the Board in the annual
budget or plan, including but not limited to individual expenditures
pertaining to operating and capital expenses, purchases, leases,
options to purchase or lease assets, investments, business
acquisitions, land purchases, products or services acquisitions, bid
or performance bonds (provided however, that the authority to issue
such a bond shall not be deemed to authorize the activity covered
thereby unless such activity would itself be authorized hereunder),
litigation settlements, charitable donations and political
contributions.
(c) To approve individual cost overruns of up to 10% of any amounts
approved by or presented to the Board.
(d) To enter into leases or extensions thereof and other agreements with
respect to the assets of the corporation, including interests in
minerals and real estate, for a term of not more than 10 years or
for an unlimited term if the aggregate initial rentals, over the
term of the lease, including renewal options, do not exceed $20
million.
(e) To approve capital contributions to the corporation's subsidiaries
and to enter into performance and financial guarantees for the
benefit of the corporation's subsidiaries.
(f) To approve disposition of assets and interests in securities of
subsidiaries or related commitments, provided that the aggregate
market value of the assets being disposed of in any one such
transaction does not exceed $20 million.
(g) To approve increases in the capital budgets of the corporation's
operating subsidiaries provided such increases in the aggregate do
not exceed 10% of the corporation's capital budget for the fiscal
year.
(h) To approve in emergency situations commitments in excess of the
above-described limits provided they are in the interests of the
corporation.
The above delegation of authority does not authorize the corporation or its
subsidiaries to make a significant change in its business or to issue the
corporation's capital stock without the specific approval of the Board.
Notwithstanding the foregoing limitations, the Chairman of the Board shall have
such power and authority as is usual, customary and desirable to perform all
the duties of the office (including, but not limited to, the approval of
payments or arrangements made in connection with the corporation's debt,
interest, tax, contractual, and regulatory obligations) necessary to, and
consistent with, the businesses of the corporation and its subsidiaries. The
Chairman of the Board (and other officers of the corporation as delegated by
the Chairman of the Board or as authorized in these By-laws) may delegate the
foregoing authorization to other officers, employees, and agents of the
corporation by either written authorization (including
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powers of attorney) or otherwise, unless such authorization is expressly
reserved for the Chairman of the Board or other officer, as applicable.
SECTION 7. CHIEF EXECUTIVE OFFICER
The Chief Executive Officer shall assist the Chairman of the Board in the
performance of his duties and shall perform those duties assigned to him in
other provisions of the By-laws and such other duties as may from time to time
be assigned to him by the Board or the Chairman of the Board. In the absence
or disability of the Chairman of the Board, or at his request, the Chief
Executive Officer may preside at any meeting of the stockholders or of the
Board and, in such circumstances, may exercise any of the other powers or
perform any of the other duties of the Chairman of the Board. Subject to
delegations by the Chairman of the Board pursuant to Section 6 of this Article
V, the Chief Executive Officer may sign or execute, in the name of the
corporation, all stock certificates, deeds, mortgages, bonds, contracts or
other documents and instruments, except in cases where the signing or execution
thereof shall be required by law or shall have been expressly delegated by the
Board or these By-laws to some other officer or agent of the corporation.
SECTION 8. PRESIDENT
The President shall have general authority over the property, business and
affairs of the corporation, and over all subordinate officers, agents and
employees of the corporation, subject to the control and direction of the
Board, the Executive Committee, the Chairman of the Board and the Chief
Executive Officer, including the power to sign and acknowledge in the name and
on behalf of the corporation all stock certificates, deeds, mortgages, bonds,
contracts or other documents and instruments except when the signing thereof
shall be expressly delegated to some other officer or agent by the Board or
required by law to be otherwise signed or executed and, unless otherwise
provided by law or by the Board, may delegate to any officer, employee or agent
of the corporation authority to sign, execute and acknowledge in his place and
stead all such documents and instruments.
SECTION 9. VICE CHAIRMAN OF THE BOARD
The Vice Chairman of the Board shall assist the Chairman of the Board, the
Chief Executive Officer and the President, in the performance of their duties
and shall perform those duties assigned to him in other provisions of the
By-laws and such other duties as may from time to time be assigned to him by
the Board, the Chairman of the Board, the Chief Executive Officer or the
President. In the absence or disability of the Chairman of the Board, the
Chief Executive Officer or the President, or at the request of any of them, the
Vice Chairman of the Board may preside at any meeting of the stockholders or of
the Board and, in such circumstances, may exercise any of the other powers or
perform any of the other duties of the Chairman of the Board, the Chief
Executive Officer or the President. Subject to delegations by the Chairman of
the Board pursuant to Section 6 of this Article V, the Vice Chairman of the
Board may sign or execute, in the name of the corporation, all stock
certificates, deeds, mortgages, bonds, contracts or other documents
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and instruments, except in cases where the signing or execution thereof shall
be required by law or shall have been expressly delegated by the Board or these
By-laws to some other officer or agent of the corporation.
SECTION 10. CHIEF OPERATING OFFICER
The Chief Operating Officer shall have direct management responsibility
for the general business operations of the corporation, and he shall have such
powers and perform such duties as may be incident to the office of chief
operating officer of a corporation, those duties assigned to him by other
provisions of the By-laws, and such other duties as may from time to time be
assigned to him either directly or indirectly by the Board, the Chairman of the
Board, the Chief Executive Officer, the President or the Vice Chairman of the
Board. Subject to delegations by the Chairman of the Board pursuant to Section
6 of this Article V, the Chief Operating Officer may sign or execute, in the
name of the corporation, all stock certificates, deeds, mortgages, bonds,
contracts or other documents and instruments, except in cases where the signing
or execution thereof shall be required by law or shall have been expressly
delegated by the Board or these By-laws to some other officer or agent of the
corporation.
SECTION 11. CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall have responsibility for development and
administration of the corporation's financial plans and all financial
arrangements, its cash deposits and short term investments, its accounting
policies and its federal and state tax returns. The Chief Financial Officer
shall also be responsible for the corporation's internal control procedures and
for its relationship with the financial community. The Chief Financial Officer
shall perform all the duties incident to the office of chief financial officer
of a corporation, those duties assigned to him by other provisions of these
By-laws and such other duties as may be assigned to him either directly or
indirectly by the Board, the Chairman of the Board, the Chief Executive
Officer, the President, the Vice Chairman of the Board or the Chief Operating
Officer, or as may be provided by law.
SECTION 12. VICE PRESIDENTS
Each Executive Vice President, Senior Vice President and Vice President
shall have such powers and perform such duties as may from time to time be
assigned to him, directly or indirectly, either generally or in specific
instances, by the Board, the Chairman of the Board, the Chief Executive
Officer, the President, the Vice Chairman of the Board or the Chief Operating
Officer.
Subject to delegations by the Chairman of the Board pursuant to Section 6
of this Article V, each Executive Vice President, Senior Vice President and
Vice President shall perform all duties incident to the office of vice
president of a corporation and shall have authority to sign or execute, in the
name of the corporation, all stock certificates, deeds, mortgages, bonds,
contracts or other documents or instruments, except in cases where the signing
or execution thereof shall have been expressly delegated by the Board or these
By-laws to some other officer or agent of the corporation.
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SECTION 13. GENERAL COUNSEL
The General Counsel shall be the chief legal advisor of the corporation
and shall have responsibility for the management of the legal affairs and
litigation of the corporation and, in general, he shall perform the duties
incident to the office of general counsel of a corporation and such other
duties as may be assigned to him either directly or indirectly by the Board,
the Chairman of the Board, the Chief Executive Officer, the President or the
Vice Chairman of the Board, or as may be provided by law.
SECTION 14. SECRETARY
The Secretary shall keep the minutes of meetings of the stockholders and
of the Board in books provided for the purpose; he shall see that all notices
are duly given in accordance with the provisions of these By-laws or as
required by law; he shall be custodian of the records and of the corporate seal
or seals of the corporation; he shall see that the corporate seal is affixed to
all documents requiring same, the execution of which, on behalf of the
corporation, under its seal, is duly authorized, and when said seal is so
affixed he may attest same; and, in general, he shall perform all duties
incident to the office of the secretary of a corporation, and such other duties
as from time to time may be assigned to him directly or indirectly by the
Board, the Chairman of the Board, the Chief Executive Officer, the President,
the Vice Chairman of the Board or the General Counsel, or as may be provided by
law. Any Assistant Secretary may perform any of the duties or exercise any of
the powers of the Secretary at the request of, or in the absence or disability
of, the Secretary or otherwise as occasion may require in the administration of
the business and affairs of the corporation.
SECTION 15. TREASURER
The Treasurer shall have charge of and be responsible for all funds,
securities, receipts and disbursements of the corporation, and shall deposit,
or cause to be deposited, in the name of the corporation, all moneys or other
valuable effects in such banks, trust companies or other depositaries as shall,
from time to time, be selected by or under authority of the Board; if required
by the Board, he shall give a bond for the faithful discharge of his duties,
with such surety or sureties as the Board may determine; he shall keep or cause
to be kept full and accurate records of all receipts and disbursements in books
of the corporation; and, in general, he shall perform the duties incident to
the office of treasurer of a corporation and such other duties as may be
assigned to him directly or indirectly by the Board, the Chairman of the Board,
the Chief Executive Officer, the President, the Vice Chairman of the Board, the
Chief Operating Officer or the Chief Financial Officer, or as may be provided
by law. Any Assistant Treasurer may perform any of the duties or exercise any
of the powers of the Treasurer at the request of, or in the absence or
disability of, the Treasurer or otherwise as occasion may require in the
administration of the business and affairs of the corporation.
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SECTION 16. CONTROLLER
The Controller shall be the chief accounting officer of the corporation.
He shall keep full and accurate accounts of the assets, liabilities,
commitments, receipts, disbursements and other financial transactions of the
corporation; shall cause regular audits of the books and records of account of
the corporation and shall supervise the preparation of the corporation's
financial statements; and, in general, he shall perform the duties incident to
the office of controller of a corporation and such other duties as may be
assigned to him directly or indirectly by the Board, the Audit Committee, the
Chairman of the Board, the Chief Executive Officer, the President, the Vice
Chairman of the Board, the Chief Operating Officer or the Chief Financial
Officer, or as may be provided by law.
SECTION 17. ABSENCE OR DISABILITY OF OFFICERS
In the absence or disability of the Chairman of the Board, the Chief
Executive Officer, the President or the Vice Chairman of the Board, the Board
or a committee thereof may designate individuals to perform the duties of those
absent or disabled.
ARTICLE VI
STOCK CERTIFICATES AND TRANSFER THEREOF
SECTION 1. STOCK CERTIFICATES
Except as otherwise permitted by statute, the Certificate of Incorporation
or resolution or resolutions of the Board, every holder of stock in the
corporation shall be entitled to have a certificate, signed by or in the name
of the corporation by the Chairman of the Board, the Chief Executive Officer,
the President, the Vice Chairman of the Board, the Chief Operating Officer, the
Chief Financial Officer or any Vice President and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation, certifying the number of shares, and the class and series thereof,
owned by him in the corporation. Any and all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue. The Board or the Chairman of the Board shall determine the form of
stock certificate of the corporation.
SECTION 2. TRANSFER OF STOCK
Transfer of shares of the capital stock of the corporation shall be made
only on the books of the corporation by the holder thereof, or by his attorney
duly authorized, and on surrender of the certificate or certificates for such
shares. A person in whose name shares of stock stand on the books of the
corporation shall be deemed the owner thereof as regards the corporation, and
the
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corporation shall not, except as expressly required by statute, be bound to
recognize any equitable or other claim to, or interest in, such shares on the
part of any other person whether or not it shall have express or other notice
thereof.
SECTION 3. TRANSFER AGENTS AND REGISTRARS
The Board or the Chairman of the Board, as appropriate, may appoint
responsible banks or trust companies from time to time to act as transfer
agents and registrars of the stock of the corporation, as may be required by
and in accordance with applicable laws, rules and regulations. Except as
otherwise provided by resolution of the Board or the Chairman of the Board, as
appropriate, in respect of temporary certificates, no certificates for shares
of capital stock of the corporation shall be valid unless countersigned by a
transfer agent and registered by one of such registrars.
SECTION 4. ADDITIONAL REGULATIONS
The Board may make such additional rules and regulations as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of the capital stock of the corporation.
SECTION 5. LOST, STOLEN OR DESTROYED CERTIFICATES
The Board or the Chairman of the Board may provide for the issuance of new
certificates of stock to replace certificates of stock lost, stolen or
destroyed, or alleged to be lost, stolen or destroyed, upon such terms and in
accordance with such procedures as the Board or the Chairman of the Board shall
deem proper and prescribe.
ARTICLE VII
DIVIDENDS, SURPLUS, ETC.
Except as otherwise provided by statute or the Certificate of
Incorporation, the Board may declare dividends upon the shares of its capital
stock either (1) out of its surplus, or (2) in case there shall be no surplus,
out of its net profits for the fiscal year, whenever, and in such amounts as,
in its opinion, the condition of the affairs of the corporation shall render it
advisable. Dividends may be paid in cash, in property, or in shares of the
capital stock of the corporation.
ARTICLE VIII
SEAL
The corporation may have a corporate seal which shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The
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corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of January
of each year, or on such other day as may be fixed from time to time by the
Board.
ARTICLE X
INDEMNIFICATION
SECTION 1. GENERAL
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any contemplated, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative ("Proceeding") (other than a Proceeding by or
in the right of the corporation to procure a judgment in its favor) in whole or
in part attributable to (i) the fact that he is or was a director or officer of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise ("Indemnitee"), or
(ii) anything done or not done by such Indemnitee in any such capacity, against
expenses (including attorneys' fees) and losses, claims, liabilities,
judgments, fines and amounts paid in settlement incurred by him or on his
behalf in connection with such Proceeding ("Losses") if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal Proceeding, had
no reasonable cause to believe his conduct was unlawful; provided, however,
that except as provided in Section 6 of this Article X, the corporation shall
indemnify any such Indemnitee in connection with a Proceeding initiated by such
Indemnitee only if such Proceeding was authorized by the Board of Directors.
SECTION 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is made a party or
is threatened to be made a party to any pending, completed or threatened
Proceeding brought by or in the right of the corporation to procure a judgment
in its favor in whole or in part attributable to (i) the fact that he is or was
a director or officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (also an
"Indemnitee") or (ii) anything done or not done by such Indemnitee in any such
capacity, against expenses (including attorneys' fees) actually incurred by him
or on his behalf in connection with such action or suit if he acted in good
faith and in a
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manner he reasonably believed to be in or not opposed to the best interests of
the corporation, provided that no such indemnification shall be made in respect
of any claim, issue or matter as to which Delaware law expressly prohibits such
indemnification by reason of an adjudication of liability of such person to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine such indemnification to be equitable under the circumstances.
SECTION 3. INDEMNIFICATION IN CERTAIN CASES
Notwithstanding any other provision of this Article X, to the extent that
an Indemnitee has been wholly successful on the merits or otherwise in defense
of any Proceeding referred to in Sections 1 or 2 of this Article X or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the corporation shall indemnify
Indemnitee, to the maximum extent permitted by law, against expenses (including
attorneys' fees) actually incurred by Indemnitee in connection with each
successfully resolved claim, issue or matter. For purposes of this Section 3
and without limitation, the termination of any such claim, issue or matter by
dismissal with or without prejudice shall be deemed to be a successful
resolution as to such claim, issue or matter.
SECTION 4. PROCEDURE
4.1 Any indemnification under Sections 1 and 2 of this Article X (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the Indemnitee is
proper (except that the right of Indemnitee to receive payments pursuant to
Section 5 of this Article X shall not be subject to this Section 4) in the
circumstances because he has met the applicable standard of conduct set forth in
such Sections 1 and 2, as applicable. When seeking indemnification, Indemnitee
shall submit a written request for indemnification to the corporation. Such
requests shall include documentation or information which is necessary for the
corporation to make a determination of Indemnitee's entitlement to
indemnification and what is reasonably available to Indemnitee. Such
determination shall be made promptly, but in no event later than 30 days after
receipt by the corporation of Indemnitee's written request for indemnification.
The Secretary of the corporation shall, promptly upon receipt of Indemnitee's
request for indemnification, advise the Board of Directors that Indemnitee has
made such request for indemnification.
4.2 The entitlement of Indemnitee to indemnification shall be determined
in the specific case by a majority vote of the directors who are Disinterested
Directors, even though less than a quorum, except that such determination shall
be made by Independent Legal Counsel, if either there are no Disinterested
Directors or a majority of such Disinterested Directors so directs.
4.3 In the event the determination of entitlement is to be made by
Independent Legal Counsel, such Independent Legal Counsel shall be selected by
the Board of Directors and approved by Indemnitee. Upon failure of the Board
of Directors to so select such Independent
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Legal Counsel or upon failure of Indemnitee to so approve, such Independent
Legal Counsel shall be selected by the Chancellor of the State of Delaware or
such other person as such Chancellor shall designate to make such selection.
4.4 If the Board of Directors or Independent Legal Counsel shall have
determined that Indemnitee is not entitled to indemnification to the full extent
of Indemnitee's request, Indemnitee shall have the right to seek entitlement to
indemnification in accordance with the procedures set forth in Section 6 of this
Article X.
4.5 If the person or persons empowered pursuant to Section 4.2 of this
Article X to make a determination with respect to entitlement to indemnification
shall have failed to make the requested determination within 90 days after
receipt by the corporation of such request, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be absolutely entitled to such indemnification, absent (A)
misrepresentation by Indemnitee of a material fact in the request for
indemnification or (B) a final judicial determination that all or any part of
such indemnification is expressly prohibited by law.
4.6 The termination of any Proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, adversely affect the rights of Indemnitee to indemnification hereunder
except as may be specifically provided herein, or create a presumption that
Indemnitee did not act in good faith and in a manner which Indemnitee reasonably
believed to be in or not opposed to the best interests of the corporation or
create a presumption that (with respect to any criminal action or proceeding)
Indemnitee had reasonable cause to believe that Indemnitee's conduct was
unlawful.
4.7 For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if Indemnitee's action
is based on the records or books of account of the corporation or an Affiliate,
including financial statements, or on information supplied to Indemnitee by the
officers of the corporation or an Affiliate in the course of their duties, or
on the advice of legal counsel for the corporation or an Affiliate or by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the corporation or an Affiliate. The
provisions of this Section 4.7 of this Article X shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met the applicable standard of conduct set
forth in these By-laws.
4.8 The knowledge and/or actions, or failure to act, of any director,
officer, agent or employee of the corporation or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under these By-laws.
4.9 Without limiting the generality of the foregoing, in the event any
Indemnitee is made a party or is threatened to be made a party to any
Proceeding:
(A) the Indemnitee may retain counsel satisfactory to him with the
consent of the corporation, which may not be unreasonably withheld or
delayed;
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(B) the corporation shall pay all fees and expenses of such counsel for
the Indemnitee promptly as statements therefor are received; and
(C) the corporation will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that the corporation shall not
be liable for any settlement effected without its written consent, which
consent, however, shall not be unreasonably withheld.
Any Indemnitee wishing to claim indemnification under this Article X, upon
notice that such person has been made or is threatened to be made a party to
any such Proceeding, shall notify the corporation (but any failure so to notify
shall not relieve the corporation from any liability which it may have under
this Article X, except to the extent such failure materially prejudices the
corporation) and shall deliver to the corporation any undertaking required by
Section 145(e) of the Delaware General Corporation Law. The Indemnitees as a
group may retain only one law firm to represent them with respect to each such
Proceeding unless there is, under applicable standards of professional conduct,
a conflict on any significant issue between the positions of any two or more
Indemnitees.
SECTION 5. ADVANCES FOR EXPENSES AND COSTS
All expenses (including attorneys' fees) incurred by or on behalf of
Indemnitee (or reasonably expected by Indemnitee to be incurred by Indemnitee
within three months) in connection with any Proceeding shall be paid by the
corporation in advance of the final disposition of such Proceeding within 20
days after the receipt by the corporation of a statement or statements from
Indemnitee requesting from time to time such advance or advances whether or not
a determination to indemnify has been made under Section 4 of this Article X
(and even if the Disinterested Directors or Independent Legal Counsel has
determined, pursuant to Section 4, that Indemnitee is not entitled to
indemnification by reason of their conclusions that Indemnitee (i) did not act
in good faith or in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the corporation or (ii) had reasonable cause
to believe his conduct was unlawful, but not after the conclusion of judicial
proceedings under Section 6). Indemnitee's entitlement to such advancement of
expenses shall include those incurred in connection with any Proceeding by
Indemnitee seeking an adjudication or award in arbitration pursuant to these
By-laws. Such statement or statements shall evidence such expenses incurred
(or reasonably expected to be incurred) by Indemnitee in connection therewith
and shall include or be accompanied by a written undertaking by or on behalf of
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified therefor pursuant to the terms of
this Section 5 of this Article X. The financial ability of an Indemnitee to
repay an advance shall not be a prerequisite to the making of such an advance.
SECTION 6. REMEDIES IN CASES OF DETERMINATION NOT TO INDEMNIFY OR TO
ADVANCE EXPENSES
6.1 In the event that (A) a determination is made that Indemnitee is not
entitled to indemnification hereunder, (B) advances are not made pursuant to
Section 5 of this Article X or (C) payment has not been timely made following a
determination of entitlement to indemnification
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pursuant to Section 4 of this Article X, Indemnitee shall be entitled to seek a
final adjudication in an appropriate court of the State of Delaware or any
other court of competent jurisdiction of Indemnitee's entitlement to such
indemnification or advance.
6.2 In the event a determination has been made in accordance with the
procedures set forth in Section 4 of this Article X, in whole or in part, that
Indemnitee is not entitled to indemnification, any judicial proceeding referred
to in Section 6.1 of this Article X shall be de novo and Indemnitee shall not be
prejudiced by reason of any such prior determination that Indemnitee is not
entitled to indemnification.
6.3 If a determination is made or deemed to have been made pursuant to
the terms of Sections 4 or 6 of this Article X that Indemnitee is entitled to
indemnification, the corporation shall be bound by such determination in any
judicial proceeding in the absence of (A) a misrepresentation of a material fact
by Indemnitee or (B) a final judicial determination that all or any part of such
indemnification is expressly prohibited by law.
6.4 To the extent deemed appropriate by the court, interest shall be
paid by the corporation to Indemnitee at a reasonable interest rate for amounts
which the corporation indemnifies or is obliged to indemnify Indemnitee for the
period commencing with the date on which Indemnitee requested indemnification
(or reimbursement or advance of expenses) and ending with the date on which such
payment is made to Indemnitee by the corporation.
SECTION 7. RIGHTS NON-EXCLUSIVE
The rights of indemnification and advancement of expenses provided by,
or granted pursuant to, this Article X shall not be deemed exclusive of any
rights to which any person seeking indemnification or advancement of expenses
may be entitled under any law, certificate of incorporation, by-law, agreement,
vote of stockholders or resolution of directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office. No amendment, alteration, rescission or replacement of these
By-laws or any provision hereof shall be effective as to Indemnitee with
respect to any action taken or omitted by such Indemnitee in Indemnitee's
position with the corporation or an Affiliate or any other entity which
Indemnitee is or was serving at the request of the corporation prior to such
amendment, alteration, rescission or replacement.
SECTION 8. INSURANCE
The corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article X.
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SECTION 9. SURVIVING OF RIGHTS
The indemnification and advancement of expenses provided by, or granted
pursuant to this Article X shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 10. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board of Directors from time to
time, grant rights to indemnification and advancement of expenses to employees
and agents of the corporation, with the same scope and effect as the provisions
of this Article X with respect to the indemnification of directors and officers
of the corporation.
SECTION 11. DEFINITIONS
For purposes of this Article X:
(a) "Affiliate" includes any corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise directly or indirectly
owned by the corporation.
(b) "Corporation" includes all constituent corporations absorbed in a
consolidation or merger as well as the resulting or surviving corporation so
that any person who is or was a director, officer, employee or agent of such a
constituent corporation or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise shall stand
in the same position under the provisions of this Article X with respect to
the resulting or surviving corporation as he would if he had served the
resulting or surviving corporation in the same capacity.
(c) "Disinterested Director" shall mean a director of the corporation
who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Indemnitee.
(d) "Independent Legal Counsel" shall mean a law firm or lawyer that
neither is presently nor in the past five years has been retained to
represent: (i) the corporation or Indemnitee in any matter material to either
such party or (ii) any other party to the Proceeding giving rise to a claim
for indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Counsel" shall not include any firm or person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the corporation or Indemnitee in
an action to determine Indemnitee's right to indemnification under these By-
laws. All fees and expenses of the Independent Counsel incurred in connection
with acting pursuant to these By-laws shall be borne by the corporation.
26
<PAGE> 31
ARTICLE XI
CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. CHECKS, DRAFTS, ETC.; LOANS
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, agent or agents of the corporation and in
such manner as shall, from time to time, be determined by resolution of the
Board. No loans shall be contracted on behalf of the corporation unless
authorized by the Board. Such authority may be general or confined to specific
circumstances.
SECTION 2. DEPOSITS
All funds of the corporation shall be deposited, from time to time, to the
credit of the corporation in such banks, trust companies or other depositories
as the Board may select, or as may be selected by any officer or officers,
agent or agents of the corporation to whom such power may, from time to time,
be delegated by the Board; and for the purpose of such deposit, the Chairman of
the Board, the Chief Executive Officer, the President, the Vice Chairman of the
Board, any Executive Vice President, any Senior Vice President, any Vice
President, the Treasurer or any Assistant Treasurer, or any other officer or
agent to whom such power may be delegated by the Board, may endorse, assign and
deliver checks, drafts and other order for the payment of money which are
payable to the order of the corporation.
ARTICLE XII
AMENDMENTS
These By-laws may be altered or repealed and new By-laws may be made by
the affirmative vote, at any meeting of the Board, of a majority of the entire
Board, subject to the rights of the stockholders of the corporation to amend or
repeal By-laws made or amended by the Board by the affirmative vote of the
holders of record of a majority in number of shares of the outstanding stock of
the corporation present or represented at any meeting of the stockholders and
entitled to vote thereon, provided that notice of the proposed action be
included in the notice of such meeting.
ARTICLE XIII
MISCELLANEOUS
All references and uses herein of the masculine pronouns "he" or "his"
shall have equal applicability to and shall also mean their feminine
counterpart pronouns, such as "she" or "her."
27
<PAGE> 1
EXHIBIT 21
EL PASO TENNESSEE PIPELINE CO.
SUBSIDIARIES AND AFFILIATES
AS OF FEBRUARY 1, 1997
<TABLE>
<S> <C>
EL PASO TENNESSEE PIPELINE CO. (Delaware)
Tennessee Gas Pipeline Company (Delaware) .................................. 100 %
Altamont Service Corporation (Delaware) ................................. 100
Altamont Gas Transmission Canada Limited (Canada) ................... 100
Border Gas Inc. (Delaware) .............................................. 37.5
East Tennessee Natural Gas Company (Tennessee) .......................... 100
EPEC East Natural Gas L.P. (Delaware L.P.) .......................... 1
Eastern Insurance Company Limited (Bermuda) ............................. 100
El Paso Energy Credit Corporation (Delaware) ............................ 100
EPEC Fac Corporation (Delaware) ..................................... 100
El Paso Energy Holdings Inc. (Delaware) ................................. 100
EPEC EIS Company (Delaware) ......................................... 100
EPEC EIS Canada Ltd. (Alberta) ................................. 100
EPEC Gas Transportation Company (Delaware) .......................... 100
Energy TRACS, Inc. (Delaware) ........................................... 100
EPEC Alaska, Inc. (Alaska) .............................................. 100
EPEC-Altamont Corporation (Delaware) .................................... 100
Altamont Gas Transmission Company (Delaware Joint Venture) .......... 53.34
EPEC Argentina Corporation (Delaware) ................................... 100
EPEC Baja California Corporation (Delaware) ............................. 100
EPEC Canada Ltd. (Canada) ............................................... 100
EPEC Communications Corporation (Delaware) .............................. 100
EPEC Chase Inc. (Texas) ................................................. 100
EPEC Corporation (Delaware) ............................................. 100
Channel Industries Gas Company (Delaware) ........................... 100
Channel Gas Marketing Company (Delaware) ....................... 100
The Oasis Company (Delaware) ............................... 30
Deepsea Ventures, Inc. (Delaware) .............................. 25
EPEC Cogeneration Company (Delaware) ........................... 100
EPEC Ethanol Company (Delaware) ............................ 100
EPEC Ethanol Services Company (Delaware) ................... 100
EPEC Hungary Inc. (Delaware) ............................... 100
EPIC Energy Hungary B.V. (Netherlands) ..................... 100
Orange Acquisition, Inc. (Delaware) ........................ 100
Orange Cogeneration Limited Partnership (Delaware L.P.) 49.5
Orange Cogeneration GP II, Inc. (Delaware) ................. 50
Orange Cogeneration G.P., Inc. (Delaware) ............. 100
Polk Power GP II, Inc. (Delaware) .......................... 50
Polk Power GP, Inc. (Delaware) ........................ 100
Polk Power Partners, L.P. (Delaware L.P.) ......... 1
West Campus Cogeneration Company (Delaware) ................ 100
</TABLE>
1
<PAGE> 2
El PASO TENNESSEE PIPELINE CO.
SUBSIDIARIES AND AFFILIATES
AS OF FEBRUARY 1, 1997
<TABLE>
<S> <C>
El Paso Tennessee Pipeline Co. (continued)
Tennessee Gas Pipeline Company (continued)
EPEC Corporation (continued)
Channel Industries Gas Company (continued)
EPEC Gas Processing Company (Delaware) ................. 100 %
EPEC Independent Power I Company (Delaware) ............ 100
MASSPOWER (Massachusetts General Partnership) ...... 17
EPEC Independent Power II Company (Delaware) ........... 100
EPEC Insurance Ventures Inc. (Delaware) ................ 100
EPEC Offshore Gathering Company (Delaware) ............. 100
EPEM Marketing Company (Kentucky) ...................... 100
Creole Gas Pipeline Corporation (Louisiana) ........ 100
Entrade Pipeline Company (Kentucky) ................ 100
Tennessee Gas Marketing Company (Delaware) ............. 100
Midwestern Gas Transmission Company (Delaware) .............. 100
Entrade Engine Company (Kentucky) ...................... 100
EPEC Midwest Natural Gas L.P. (Delaware L.P.) .......... 99
EPEC Minerals Company - California (Delaware) .......... 100
EPEC Minerals Company - Nevada (Delaware) .............. 100
EPEC OCS Company, Inc. (Delaware) ...................... 100
EPEC Oil Company (Delaware) ............................ 100
EPEC Polymers, Inc. (Delaware) ......................... 100
EPEC Eastern Realty, Inc. (New Jersey) ............. 100
New Midwestern Inc. (Delaware) ......................... 100
SWL Security Corp. (Texas) ............................. 100
Tennessee Overthrust Gas Company (Delaware) ............ 100
Overthrust Pipeline Company (Delaware Partnership) . 18
TGP Corporation (Delaware) ............................. 100
EPEC Deepwater Gathering Company (Delaware) ..................... 100
EPEC Delta XII Gas Co., Inc. (Delaware) ......................... 100
EPEC East Corporation (Delaware) ................................ 100
EPEC East Natural Gas L.P. (Delaware L.P.) .................. 99
EPEC Econ Services, Inc. (Delaware) ............................. 100
EPEC Technology Consulting Services Inc. (Delaware) ......... 100
EPEC Europe Inc. (Delaware) ..................................... 100
EPEC Gas Australia Inc. (Delaware) .............................. 100
Epic Energy Pty. Ltd. (Australia) ........................... 30
Epic Energy Australia Pty. Limited (Australia) ......... 99.9
Epic Energy Queensland Pty. Limited (Australia) .... 99.8
Epic Energy South Australia Pty. Limited (Australia) 99.98
</TABLE>
2
<PAGE> 3
El PASO TENNESSEE PIPELINE CO
SUBSIDIARIES AND AFFILIATES
AS OF FEBRUARY 1, 1997
<TABLE>
<S> <C>
El Paso Tennessee Pipeline Co. (continued)
Tennessee Gas Pipeline Company (continued)
EPEC Gas Australia Inc.(continued)
Epic Energy Pty. Ltd. (continued)
Epic Energy Northern Territory Pty. Limited (Australia) .... 100 %
Epic Energy Operations and Maintenance Pty. Ltd. (Australia) 99.9
Epic Energy Western Australia Pty. Limited (Australia) ..... 100
Galtee Limited (Cayman Islands) ................................. 100
Ventures Holdings Pty. Ltd. (Australia) .................... 100
EPIC Sulawesi Gas Pty. Ltd. (Australia) ................ 100
Energy Equity EPIC (Sengkang) Pty. Ltd. (Australia) 50
Sulawesi Energy Pty Ltd. (Australia) ................... 50
PT Energi Sengkang (Indonesia) .................... 95
EPEC Gas Canada, Ltd. (Ontario) ..................................... 100
EPEC Gas International Inc. (Delaware) .............................. 100
El Paso Energia Mexico S.A. de C.V. (Mexico) .................... 0.1
EPEC China Inc. (Delaware) ...................................... 100
EPEC Gas Brazil Corporation (Delaware) .......................... 100
EPIC Gas International Servicos do Brasil Ltda (Brazil) .... 100
EPEC Gas Chile Corporation (Delaware) ........................... 100
Gas de Chile S.A. (Chile) .................................. 45
Gasoduco Transandino S.A. (Chile) .......................... 50
EPEC Gas Latin America Inc. (Delaware) .......................... 100
El Paso Energia Mexico, S.A. de C.V. (Mexico) .............. 99.9
Pasotronica, S.A. de C.V. (Mexico) ..................... 50
EPEC Gas Services (Chile) Corporation (Delaware) ................ 100
EPIC Gas Transportes S.A. (Chile) .......................... 99.9
EPEC International (East Asia/Pacific) Inc. (Delaware) .......... 100
EPEC Gas Louisiana Inc. (Delaware) .................................. 100
Martin Exploration Company (Delaware) ........................... 100
EPEC Gas Properties Inc. (Delaware) ................................. 100
EPEC Gas Services, Inc. (Delaware) .................................. 100
EPEC Gas Supply Corporation (Delaware) .............................. 100
EPEC International Inc. (Delaware) .................................. 100
EPEC Nederland B.V. (Netherlands) ............................... 100
EPEC Offshore Netherlands Company (Delaware) .................... 100
EPEC Liquids Corporation (Delaware) ................................. 100
EPEC Midwest Corporation (Delaware) ................................. 100
EPEC Midwest Natural Gas L.P. (Delaware L.P.) ................... 99
EPEC MLP Inc. (Delaware) ............................................ 100
Polk Power Partners, L.P. (Delaware L.P.) ....................... 45.75
</TABLE>
3
<PAGE> 4
El PASO TENNESSEE PIPELINE CO.
SUBSIDIARIES AND AFFILIATES
AS OF FEBRUARY 1, 1997
<TABLE>
<S> <C>
El Paso Tennessee Pipeline Co. (continued)
Tennessee Gas Pipeline Company (continued)
EPEC MTBE, Inc. (Delaware) ........................................... 100 %
EPEC Pittsfield Corporation (Delaware) ............................... 100
EPEC Portland Corporation (Delaware) ................................. 100
EPEC Realty, Inc. (Delaware) ......................................... 100
EPEC Services Company (Delaware) ..................................... 100
EPEC AIRCO Inc. (Delaware) ....................................... 100
EPEC OGS Inc. (Delaware) ......................................... 100
EPEC TEPSCO Inc. (Delaware) ...................................... 100
Tellepsen Pipeline Services Company (Texas Partnership) ..... 49
GreyStar Corporation (Texas) ..................................... 50
EPEC SNG Inc. (Delaware) ............................................. 100
EPEC Texas Acquisition Inc. (Delaware) ............................... 100
EPEC Trinidad LNG, Inc. (Delaware) ................................... 100
EPEC Ventures Bolivia Corporation (Delaware) ......................... 100
EPEC Ventures Poland Corporation (Delaware) .......................... 100
Wielkopulska Energia S.A. (Poland) ............................... 50
EPEC Western Market Center Corporation (Delaware) .................... 100
The Western Market Center Joint Venture (Wyoming Joint Venture) .. 50
EPEC Western Market Center Service Corporation (Delaware) ............ 100
EPEM Marketing Services Company (Delaware) ........................... 100
Green Canyon Gathering Company (Delaware) ............................ 100
Kern County Land Company (Delaware) .................................. 100
EPEC Equipment Corporation (Delaware) ............................ 100
EPEC Equipment Holding I Company (Delaware) ................. 100
EPEC Equipment Holding II Company (Delaware) ................ 100
EPEC Equipment Holding III Company (Delaware) ............... 100
EPEC Equipment Holding V Company (North Dakota) ......... 100
EPEC Equipment Holding IV Company (Wisconsin) ............... 100
EPEC Equipment Holding VI Company (Illinois) ................ 100
Marlin Drilling Co., Inc. (Delaware) ........................ 100
Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) .... 99.84
Bluefin Supply Company (Delaware) ....................... 100
Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) 0.16
EPEC West, Inc. (Delaware) ....................................... 100
Kern River Corporation (Delaware) .................................... 100
Land Ventures, Inc. (Delaware) ....................................... 100
Midwestern Gas Marketing Company (Delaware) .......................... 100
Mont Belvieu Land Company (Delaware) ................................. 100
</TABLE>
4
<PAGE> 5
El PASO TENNESSEE PIPELINE CO.
SUBSIDIARIES AND AFFILIATES
AS OF FEBRUARY 1, 1997
<TABLE>
<S> <C>
El Paso Tennessee Pipeline Co. (continued)
Tennessee Gas Pipeline Company (continued)
Sandbar Petroleum Company (Delaware) ..................... 100 %
S.K. Petroleum Company (Delaware) ........................ 100
Tennessee Gas Transmission Company (Delaware) ............ 100
Tennessee Storage Company (Delaware) ..................... 100
Tennessee Trailblazer Gas Company (Delaware) ............. 100
The Fontanelle Corporation (Louisiana) ................... 100
The F and E Oyster Partnership (Louisiana Partnership) 64
The LaChute Corporation (Louisiana) ...................... 100
Travis Place Parking Garage Inc. (Delaware) .............. 100
</TABLE>
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 976
<ALLOWANCES> 0<F1>
<INVENTORY> 26
<CURRENT-ASSETS> 1,399
<PP&E> 4,822
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 6,550
<CURRENT-LIABILITIES> 1,968
<BONDS> 1,081
0
0
<COMMON> 0
<OTHER-SE> 1,462
<TOTAL-LIABILITY-AND-EQUITY> 6,550
<SALES> 0
<TOTAL-REVENUES> 3,602
<CGS> 0
<TOTAL-COSTS> 3,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> 170
<INCOME-TAX> 58
<INCOME-CONTINUING> 112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
