<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9864
---------------------
EL PASO TENNESSEE PIPELINE CO.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0233548
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
----- -----------
<S> <C>
Common Stock, par value $.01 per
share, as of May 14, 1998 1,000 shares
</TABLE>
================================================================================
<PAGE> 2
GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<TABLE>
<CAPTION>
DEFINITIONS
-----------
<S> <C>
ALJ....................... Administrative Law Judge
Company................... El Paso Tennessee Pipeline Co. and its subsidiaries
Court of Appeals.......... United States Court of Appeals for the District of Columbia
Circuit
EPA....................... United States Environmental Protection Agency
EPG....................... El Paso Natural Gas Company
EPTPC..................... El Paso Tennessee Pipeline Co., an indirect subsidiary of El
Paso Natural Gas Company
FERC...................... The Federal Energy Regulatory Commission
GSR....................... Gas supply realignment
PCB(s).................... Polychlorinated-biphenyl(s)
PLN....................... Perusahaan, Listrik Negra, the Indonesian government-owned
electric utility
PRP(s).................... Potentially responsible party(ies)
SFAS...................... Statement of Financial Accounting Standards
TGP....................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO TENNESSEE PIPELINE CO.
CONDENSED COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1998 1997
------ ------
PRE-EXCHANGE
COMBINED
<S> <C> <C>
Operating revenues.......................................... $1,455 $1,595
------ ------
Operating expenses..........................................
Cost of gas and other products............................ 1,210 1,385
Operation and maintenance................................. 106 94
Depreciation, depletion, and amortization................. 39 44
Taxes, other than income taxes............................ 13 16
------ ------
1,368 1,539
------ ------
Operating income............................................ 87 56
------ ------
Other (income) and expense
Interest and debt expense................................. 34 35
Other -- net.............................................. (13) (8)
------ ------
21 27
------ ------
Income before income taxes.................................. 66 29
Income tax expense.......................................... 22 11
------ ------
Net income.................................................. $ 44 $ 18
====== ======
Comprehensive income........................................ $ 43 $ 18
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
1
<PAGE> 4
EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------------- ----------------
POST-EXCHANGE PRE-EXCHANGE
CONSOLIDATED COMBINED
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 21 $ 34
Accounts and notes receivable, net........................ 835 894
Inventories............................................... 25 41
Deferred income tax benefit............................... 105 106
Other..................................................... 299 276
------ ------
Total current assets.............................. 1,285 1,351
Property, plant, and equipment, net......................... 4,773 4,833
Other....................................................... 410 380
------ ------
Total assets...................................... $6,468 $6,564
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 714 $ 835
Short-term borrowings (including current maturities of
long-term debt)........................................ 462 463
Note payable to EPG....................................... 125 125
Other..................................................... 493 514
------ ------
Total current liabilities......................... 1,794 1,937
------ ------
Long-term debt, less current maturities..................... 1,081 1,081
------ ------
Deferred income taxes....................................... 1,232 1,215
------ ------
Other....................................................... 795 798
------ ------
Commitments and contingencies (See Note 4)
Minority interest........................................... 25 25
------ ------
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, no par; 6,000,000 shares issued; stated at
liquidation value.................................... 300 300
Series B, par value $0.01 per share; 3,036,600 shares
issued; stated at liquidation value.................. 152 152
Series C, par value $0.01 per share; 934,238 shares
issued; stated at liquidation value.................. 47 46
Common stock, par value $0.01 per share; authorized 1,000
shares; issued 1,000 shares............................ -- --
Additional paid-in capital................................ 941 941
Retained earnings......................................... 109 76
Accumulated other comprehensive income.................... (8) (7)
------ ------
Total stockholders' equity........................ 1,541 1,508
------ ------
Total liabilities and stockholders' equity........ $6,468 $6,564
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
2
<PAGE> 5
EL PASO TENNESSEE PIPELINE CO.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
---------------
1998 1997
---- -------
PRE-EXCHANGE
COMBINED
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 44 $ 18
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 39 44
Deferred income taxes.................................. 18 44
Other.................................................. (4) (2)
Working capital changes................................... (83) 110
Other..................................................... 13 (22)
---- -------
Net cash provided by operating activities......... 27 192
---- -------
Cash flows from investing activities
Capital expenditures...................................... (19) (16)
Investment in joint ventures and equity investees......... (23) --
Net change in advances to EPG............................. 1 (125)
Collection of note receivable from partnership............ -- 53
Other..................................................... 7 3
---- -------
Net cash used in investing activities............. (34) (85)
---- -------
Cash flows from financing activities
Net proceeds from long-term debt issuance................. -- 883
Net proceeds from Series B Preferred Stock issuance....... -- 150
Revolving credit repayments............................... -- (1,083)
Repayment of note payable to EPG.......................... -- (45)
Preferred stock dividends paid............................ (6) (6)
---- -------
Net cash used in financing activities............. (6) (101)
---- -------
Increase (decrease) in cash and temporary investments....... (13) 6
Cash and temporary investments
Beginning of period............................... 34 19
---- -------
End of period..................................... $ 21 $ 25
==== =======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
3
<PAGE> 6
EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. CHANGE IN REPORTING ENTITY
In March 1998, El Paso Management Company, a subsidiary of EPG and parent
of EPTPC, exchanged all the common stock of El Paso Marketing Services Company
("EPMSC") for approximately 934,000 shares of 6 1/4% Cumulative Junior Preferred
Stock, Series C ("Series C Preferred Stock") of EPTPC for a total value of $47
million representing the net book value of EPMSC at the exchange date (See Note
5, Preferred Stock). EPTPC, in turn, contributed the common stock of EPMSC to
TGP. This exchange resulted in a change in reporting entity as defined in
Accounting Principles Board Opinion No. 20, Accounting Changes, requiring a
restatement in order to show financial information for the new reporting entity
for all periods presented. The condensed consolidated balance sheet at March 31,
1998, contained herein reflects the exchange of EPMSC and is referred to as
"Post-Exchange Consolidated". The combined financial statements of the Company
for periods prior to March 31, 1998, are referred to as "Pre-Exchange Combined".
The pre-exchange combined financial statements have been prepared as though the
exchange had occurred January 1, 1997, and the value assigned to the Series C
Preferred Stock was $58 million, the book value of the net assets of EPMSC at
January 1, 1997. Earnings in each respective period from January 1, 1997, to the
exchange date are reflected as an increase or decrease in the assigned value of
Series C Preferred Stock. Net income excluding the effects of the exchange of
EPMSC for the quarters ended March 31, 1998 and 1997, would have been $43
million and $30 million, respectively.
2. BASIS OF PRESENTATION
The 1997 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated and combined
financial statements at March 31, 1998 and December 31, 1997, and for the
quarters ended March 31, 1998, and 1997, are unaudited. These financial
statements do not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all material adjustments
necessary to present fairly the results of operations for such periods have been
included. All such adjustments are of a normal recurring nature. Results of
operations for any interim period are not necessarily indicative of the results
of operations for the entire year due to the seasonal nature of the Company's
businesses.
Comprehensive Income
In compliance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Combined Statements
of Income. The only component of comprehensive income is the cumulative
translation adjustment which results from differences in the translation of
foreign currencies. This amount is reflected as accumulated other comprehensive
income in the Condensed Consolidated and Combined Balance Sheets.
3. SEGMENTS
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods.
The Regulated segment includes the interstate pipeline systems of TGP,
Midwestern Gas Transmission Company, and East Tennessee Natural Gas Company. The
segment transports natural gas to the northeast section of the United States
including the states of Tennessee, Virginia, and Georgia as well as New York
City, Chicago, and Boston metropolitan areas. The Non-Regulated segment provides
natural gas gathering,
4
<PAGE> 7
products extraction, dehydration, purification, compression and intrastate
transmission services. The
Non-Regulated segment also markets and trades natural gas, power, and petroleum
products, and develops and operates energy infrastructure facilities worldwide.
The accounting policies of the individual segments are the same as those of the
Company, as a whole, as summarized in Note 2, Basis of Presentation.
<TABLE>
<CAPTION>
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) --------- --------- ------
PRE-EXCHANGE COMBINED
<S> <C> <C> <C>
Revenues from external customers................... $ 203 $1,252 $1,455
Intersegment revenue............................... 9 -- 9
Operating income (loss)............................ 94 (7) 87
POST-EXCHANGE CONSOLIDATED
Segment assets..................................... 5,294 1,048 6,342
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) --------- --------- ------
PRE-EXCHANGE COMBINED
<S> <C> <C> <C>
Revenues from external customers................... $ 205 $1,390 $1,595
Intersegment revenue............................... 10 -- 10
Operating income (loss)............................ 80 (24) 56
Segment assets..................................... 4,802 1,331 6,133
</TABLE>
The reconciliations of operating income to income before income taxes are
presented below for the quarters ended March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
PRE-EXCHANGE
COMBINED
<S> <C> <C>
Operating income............................................ $ 87 $ 56
Interest and debt expense................................... (34) (35)
Other -- net................................................ 13 8
---- ----
Income before income taxes.................................. $ 66 $ 29
==== ====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at March 31, 1998 of
approximately $20 million. Current 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 current Indonesian 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 obligations
on the Sengkang project in full. The Company believes the current economic
difficulties in Indonesia will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows. As of April
30, 1998, all amounts billed and due had been paid in full.
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery of its GSR and other transition costs and related proceedings (the
"GSR Stipulation and Agreement"). In April 1997, FERC approved the settlement
and TGP implemented the settlement on May 1, 1997. Under the terms of the
5
<PAGE> 8
GSR Stipulation and Agreement, TGP is entitled to collect from customers up to
$770 million, of which approximately $701 million has been collected as of March
31, 1998. TGP is entitled to recover additional transition costs, up to the
remaining $69 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
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. Under
the settlement, 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 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, results of
operations, or cash flows.
6
<PAGE> 9
Environmental Matters
As of March 31, 1998, the Company had a reserve of approximately $245
million to cover environmental assessments and remediation activities discussed
below.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, to assure that its efforts meet
regulatory requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. The
Environmental Stipulation was effective July 1, 1995. As of March 31, 1998, a
balance of $20 million remains to be collected under the stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they may be designated, or have been asked for information
to determine whether they could be designated as a PRP with respect to 29 sites
under the Comprehensive Environmental Response, Compensation and Liability Act
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Company's allocable share of
remediation costs. Because the clean-up costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required, and because in some cases the Company has asserted a defense to any
liability, the Company's estimate of its share of remediation costs could
change. Moreover, liability under the federal Superfund statute is joint and
several, meaning that the Company could be required to pay in excess of its pro
rata share of remediation costs. The Company's understanding of the financial
strength of other PRPs has been considered, where appropriate, in its
determination of its estimated liability as described herein. The Company
presently believes that the costs associated with the current status of such
entities as PRPs at the sites referenced above will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. While there are still uncertainties
relating to the ultimate costs which may be incurred, based upon the Company's
evaluation and experience to date, the Company believes the recorded reserve is
adequate.
Legal Proceedings
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al against fourteen companies including the following
affiliates of EPG: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved
7
<PAGE> 10
Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits Superfund
Site ("Sikes") located in Harris County, Texas. Sikes was an unpermitted waste
disposal site during the 1960s that accepted waste hauled from numerous Houston
Ship Channel industries. The suit alleges that the former Tenneco Chemicals,
Inc. and Petro-Tex Chemical Corporation arranged for disposal of hazardous
substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC Polymers, Inc. are
alleged to be derivatively liable as successors or as parent corporations. The
suit claims that the United States and the State of Texas have expended over
$125 million in remediating the site, and seeks to recover that amount plus
interest. Other companies named as defendants include Atlantic Richfield
Company, Crown Central Petroleum Corporation, Occidental Chemical Corporation,
Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas Company, Shell
Oil Company and Vacuum Tanks, Inc. These defendants have filed their answers and
third-party complaints have been filed seeking contribution from twelve other
entities believed to be PRPs at Sikes. Although factual investigation relating
to Sikes is in very preliminary stages, the Company believes that the amount of
material disposed at Sikes from the Tenneco Chemicals, Inc. or Petro-Tex
Chemical Corporation 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, results of operations, or cash flows.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky stations from the agency, and continues to
work to resolve the remaining issues. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent order with
the EPA. Management believes that the resolution of this issue will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the 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.
8
<PAGE> 11
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 $4
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 has greatly reduced or eliminated concerns in those areas.
The assessment phase for the third party software, hardware, and embedded
chip systems 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, hardware products, and embedded chip systems 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, results of operations, or cash flows.
5. PREFERRED STOCK
In March 1998, the Company issued approximately 934,000 shares of Series C
Preferred Stock, which is subordinated to the Series A Preferred Stock, to El
Paso Management Company in exchange for EPG's merchant services activities and
related assets and liabilities for a value of approximately $47 million. El Paso
Management Company is entitled to receive cash dividends payable annually at the
rate of 6 1/4% of the stated value of $50 per share. As discussed in Note 1,
Change In Reporting Entity, Series C Preferred Stock is reflected at $46 million
in the December 31, 1997, Pre-Exchange Combined Balance Sheet.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1998, and December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
(IN MILLIONS)
<CAPTION>
POST-EXCHANGE PRE-EXCHANGE
CONSOLIDATED COMBINED
<S> <C> <C>
Property, plant, and equipment, at cost.................. $2,504 $2,534
Less accumulated depreciation and depletion.............. 150 125
------ ------
2,354 2,409
Additional acquisition cost assigned to utility plant,
net of accumulated amortization........................ 2,419 2,424
------ ------
Total property, plant, and equipment, net...... $4,773 $4,833
====== ======
</TABLE>
7. INVENTORIES
Inventories at March 31, 1998, and December 31, 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
(IN MILLIONS)
POST-EXCHANGE PRE-EXCHANGE
CONSOLIDATED COMBINED
<S> <C> <C>
Materials and supplies...................................... $ 16 $ 16
Gas in storage.............................................. 9 25
----- -----
$ 25 $ 41
===== =====
</TABLE>
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
9
<PAGE> 12
8. RECENT PRONOUNCEMENTS
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employer's 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 effects of this pronouncement.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance for
accounting of such costs, and also defines internal-use computer software. It is
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the effects of this pronouncement.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. It is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
effects of this pronouncement.
10
<PAGE> 13
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim condensed consolidated and combined financial statements
and accompanying notes presented in Item 1 of this Form 10-Q.
CHANGE IN REPORTING ENTITY
In March 1998, El Paso Management Company, a subsidiary of EPG and the
parent of EPTPC, exchanged all the common stock of EPMSC for approximately
934,000 shares of Series C Preferred Stock of EPTPC for a total value of $47
million. EPTPC, in turn, contributed the common stock of EPMSC to TGP. This
exchange resulted in a change in reporting entity as defined in Accounting
Principles Board Opinion No. 20, Accounting Changes, requiring a restatement in
order to show financial information for the new reporting entity for all periods
presented. The management's discussion and analysis of financial condition and
results of operations below is based on restated information for the new
reporting entity.
RESULTS OF OPERATIONS
GENERAL
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods. Operating revenues by segment include intersegment sales which
are eliminated in consolidation. For a further discussion of the individual
segments, see Note 3 of Item 1, Financial Statements.
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
SEGMENT RESULTS
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1998 1997
----- -----
(IN MILLIONS)
PRE-EXCHANGE
COMBINED
<S> <C> <C>
OPERATING INCOME
Regulated................................................... $94 $80
Non-Regulated............................................... (7) (24)
--- ---
Total operating income............................ $87 $56
=== ===
</TABLE>
Operating income for the quarter ended March 31, 1998, was $31 million
higher than for the same period of 1997 as discussed below.
Regulated Operations
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1998 1997
----- -----
<S> <C> <C>
(IN MILLIONS)
<CAPTION>
PRE-EXCHANGE
COMBINED
<S> <C> <C>
Operating revenues.......................................... $ 212 $ 215
Operating expenses.......................................... (118) (135)
----- -----
Operating income.......................................... $ 94 $ 80
===== =====
</TABLE>
11
<PAGE> 14
Operating revenues for the quarter ended March 31, 1998 were $3 million
lower than for the same period of 1997 primarily because of lower transportation
volumes resulting from warmer average temperatures in the northeastern and
midwestern markets.
Operating expenses for the quarter ended March 31, 1998 were $17 million
lower than for the same period of 1997 primarily due to lower fuel costs
associated with the change in throughput attributable to warmer average
temperatures in the northeast and midwest in the first quarter of 1998. Also
contributing to the decrease in operating expenses were lower labor costs,
benefit costs, and payroll taxes which resulted from the reduction in staffing
levels which occurred during the first quarter of 1997. Depreciation expense was
also lower in the first quarter of 1998 due to the finalization of the
adjustments to the purchase price amount allocated to property, plant and
equipment based on the completion of an independent asset appraisal in the
fourth quarter of 1997.
Non-Regulated Operations
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1998 1997
----- -----
(IN MILLIONS)
PRE-EXCHANGE
COMBINED
<S> <C> <C>
Gathering and treating margin............................... $ 3 $ 2
Processing margin........................................... 1 3
Natural gas and petroleum marketing margin.................. 6 (5)
Power margin................................................ 7 --
--- ----
Total gross margin................................ 17 --
Other revenues.............................................. 15 --
Operating expenses.......................................... 39 24
--- ----
Operating loss.............................................. $(7) $(24)
=== ====
</TABLE>
Total gross margin (revenue less cost of sales) for the quarter ended March
31, 1998 was $17 million higher than for the same period of 1997. The increase
is primarily due to the income recognition from long-term natural gas and
electric power contracts closed during the quarter. The Company's energy
marketing operations have been negatively impacted by low natural gas and power
trading margins, which are expected to continue.
Other revenues for the quarter ended March 31, 1998, were $15 million
higher than for the same period of 1997. The increase was due primarily to the
acquisition of a controlling interest in the EMA Power project in June 1997.
Operating expenses for the quarter ended March 31, 1998, were $15 million
higher than for the same period of 1997 primarily due to cost related to the EMA
Power project, increased costs associated with the Company's marketing
activities, and higher international project development costs.
OTHER INCOME AND EXPENSE
Other expense for the quarter ended March 31, 1998 was $6 million lower
than for the same period of 1997 primarily due to increased earnings from equity
investments.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $165 million lower for the
quarter ended March 31, 1998, compared to the same period of 1997. The decrease
was due primarily to changes in working capital in 1998 and an income tax refund
in the first quarter of 1997. The decrease was partially offset by a rate refund
in the first quarter of 1997.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $51 million lower for the quarter
ended March 31, 1998, compared to the same period of 1997. The decrease was due
primarily to an increase in advances to EPG during 1997, partially offset by
increased investment expenditures during 1998 related to international
activities and the 1997 collection of a note receivable from the Company's
partnership in a 103 megawatt cogeneration plant near Bartow, Florida.
Future funding for capital expenditures, acquisitions, and other investing
expenditures are expected to be provided by internally generated funds,
available capacity under existing credit facilities, and/or contributions from
EPG.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $95 million lower for the quarter
ended March 31, 1998, compared to the same period of 1997. The change was
primarily a result of credit facility repayments from the proceeds received from
TGP's debt offering and EPTPC's Series B Preferred Stock offering in the first
quarter of 1997.
Future funding for long-term debt retirements, dividends, and other
financing expenditures will be provided by internally generated funds, available
capacity under existing credit facilities, and/or contributions from EPG.
COMMITMENTS AND CONTINGENCIES
INDONESIAN ECONOMIC DIFFICULTIES.
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
RATES AND REGULATORY MATTERS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
ENVIRONMENTAL MATTERS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
YEAR 2000
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
13
<PAGE> 16
OTHER
PORTLAND
The Company increased its ownership interest in the Portland Natural Gas
Transmission ("Portland") system from 17.8 percent to approximately 19 percent
in April 1998. Portland is developing a 292-mile interstate natural gas pipeline
with a projected capacity of 178 million cubic feet per day extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. Also in
April 1998, Portland secured $256 million in non-recourse project financing.
Targeted completion for the project is November 1998.
RECENT PRONOUNCEMENTS
See Part I, Financial Information, Note 8, which is incorporated by
reference herein.
14
<PAGE> 17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from the actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the company's industry, the timing and extent of changes in commodity
prices for natural gas and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to acquisitions, including EPG's
acquisition of the Company, political and economic risks associated with current
and future operations in foreign countries, conditions of the equity and other
capital markets during the periods covered by the forward-looking statements,
and other risks, uncertainties and factors discussed more completely in the
Company's other filings with the Securities and Exchange Commission, including
its Annual Report on Form 10-K for the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
15
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned, EPTPC, hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of EPTPC and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPTPC and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EL PASO TENNESSEE PIPELINE CO.
Date: May 15, 1998
/s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 15, 1998
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
17
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 835
<ALLOWANCES> 0<F1>
<INVENTORY> 25
<CURRENT-ASSETS> 1,285
<PP&E> 4,773
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 6,468
<CURRENT-LIABILITIES> 1,794
<BONDS> 1,081
0
499
<COMMON> 0
<OTHER-SE> 1,042
<TOTAL-LIABILITY-AND-EQUITY> 6,468
<SALES> 0
<TOTAL-REVENUES> 1,455
<CGS> 0
<TOTAL-COSTS> 1,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 66
<INCOME-TAX> 22
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>NOT SEPARATELY IDENTIFIED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR
ACCOMPANYING NOTES THERETO.
</FN>
</TABLE>
