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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9864
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EL PASO TENNESSEE PIPELINE CO.
(Exact Name of Registrant as Specified in its Charter)
<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 STREET
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.
Common Stock, par value $.01 per share. Shares outstanding on May 12, 1999:
1,971
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<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
EBIT...................... Earnings before interest expense and income taxes, excluding
affiliate interest income
EPA....................... United States Environmental Protection Agency
EPEC...................... El Paso Energy Corporation, the parent of El Paso Tennessee
Pipeline Co.
EPEI...................... El Paso Energy International Company, a wholly owned
subsidiary of El Paso Tennessee Pipeline Co.
EPEM...................... El Paso Energy Marketing Company, a wholly owned indirect
subsidiary of El Paso Tennessee Pipeline Co.
EPFS...................... El Paso Field Services Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
EPNG...................... El Paso Natural Gas Company, a wholly owned subsidiary of El
Paso Energy Corporation
EPTPC..................... El Paso Tennessee Pipeline Co., a direct subsidiary of El
Paso Energy Corporation
FERC...................... Federal Energy Regulatory Commission
GSR....................... Gas supply realignment
PCB(s).................... Polychlorinated-biphenyl(s)
PLN....................... Perusahaan, Listrik Negra, the Indonesian government-owned
electric utility
PRP(s).................... Potentially responsible party(ies)
TGP....................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
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<S> <C> <C>
Operating revenues.......................................... $1,016 $1,505
------ ------
Operating expenses..........................................
Cost of gas and other products............................ 714 1,208
Operation and maintenance................................. 129 128
Depreciation, depletion, and amortization................. 52 49
Taxes, other than income taxes............................ 17 15
------ ------
912 1,400
------ ------
Operating income............................................ 104 105
------ ------
Other (income) and expense
Non-affiliated interest and debt expense.................. 36 32
Affiliated interest expense, net.......................... 4 6
Other -- net.............................................. (34) (19)
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6 19
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Income before income taxes and cumulative effect of
accounting change......................................... 98 86
Income tax expense.......................................... 32 29
------ ------
Income before cumulative effect of accounting change........ 66 57
Cumulative effect of accounting change, net of income tax... (13) --
------ ------
Net income.................................................. $ 53 $ 57
====== ======
Comprehensive income........................................ $ 44 $ 56
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 29 $ 28
Accounts and notes receivable, net........................ 508 433
Materials and supplies.................................... 19 21
Assets from price risk management activities.............. 118 151
Other..................................................... 113 118
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Total current assets.............................. 787 751
Property, plant, and equipment, net......................... 5,604 5,628
Investment in unconsolidated affiliates..................... 702 579
Other....................................................... 555 476
------ ------
Total assets...................................... $7,648 $7,434
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 958 $1,200
Short-term borrowings (including current maturities of
long-term debt)........................................ 528 194
Liabilities from price risk management activities......... 69 102
Other..................................................... 381 369
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Total current liabilities......................... 1,936 1,865
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Long-term debt, less current maturities..................... 1,519 1,467
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Deferred income taxes....................................... 1,296 1,277
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Other....................................................... 631 607
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Commitments and contingencies (See Note 3)
Minority interest........................................... 65 65
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Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
Series A, no par; 6,000,000 shares issued; stated at
liquidation value..................................... 300 300
Common stock, par value $0.01 per share; authorized
100,000 shares; issued 1,971 shares.................... -- --
Additional paid-in capital................................ 1,550 1,540
Retained earnings......................................... 374 327
Accumulated comprehensive income.......................... (23) (14)
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Total stockholders' equity........................ 2,201 2,153
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Total liabilities and stockholders' equity........ $7,648 $7,434
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
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1999 1998
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<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 53 $ 57
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 52 49
Deferred income taxes.................................. 18 10
Undistributed earnings in equity investees............. (14) (4)
Cumulative effect of accounting change, net of income
tax................................................... 13 --
Working capital changes, net of the effect of
acquisitions........................................... 171 (142)
Other..................................................... (50) 13
----- -----
Net cash provided by (used in) operating
activities....................................... 243 (17)
----- -----
Cash flows from investing activities
Capital expenditures...................................... (32) (42)
Investment in joint ventures and equity investees......... (189) (278)
Net change in advances (to) from EPEC..................... (316) 322
Acquisition of EnCap Investments L.C. .................... (36) --
Restricted cash deposited in escrow related to equity
investee............................................... (53) --
Other..................................................... 4 8
----- -----
Net cash provided by (used in) investing
activities....................................... (622) 10
----- -----
Cash flows from financing activities
Net commercial paper borrowings........................... 334 --
Net proceeds from long-term note payable.................. 53 --
Preferred stock dividends paid............................ (6) (6)
Other..................................................... (1) --
----- -----
Net cash provided by (used in) financing
activities....................................... 380 (6)
----- -----
Increase (decrease) in cash and temporary investments....... 1 (13)
Cash and temporary investments
Beginning of period............................... 28 35
----- -----
End of period..................................... $ 29 $ 22
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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EL PASO TENNESSEE PIPELINE CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1998 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at March 31, 1999, and for the quarters ended March 31,
1999, and 1998, are unaudited. The condensed balance sheet at December 31, 1998,
is derived from audited financial statements. 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, except for those relating to the change in Company structure as
described below, are of a normal recurring nature. Results of operations for any
interim period are not necessarily indicative of the results of operations for
the entire year due to the seasonal nature of the Company's businesses.
Financial statements for the previous periods include certain reclassifications
which were made to conform to current presentation. Such reclassifications have
no effect on reported net income or stockholders' equity.
Change in Company Structure
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal restructuring in which certain energy marketing operations of EPEM,
certain field services operations of EPFS, and certain international operations
of EPEI were transferred to EPTPC. The restructuring transactions were treated
as a transfer of ownership between entities under common control and were
accounted for in a manner similar to a pooling of interests. Accordingly, the
information for the quarter ended March 31, 1998, in these financial statements
has been restated as though the transactions occurred on January 1, 1998.
Cumulative Effect of Accounting Change
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs be expensed as incurred. In addition, it requires that any
such cost that exists on the balance sheet be expensed upon adoption of this
pronouncement. The Company adopted this pronouncement effective January 1, 1999,
and reported a charge of $13 million, net of income taxes, in the first quarter
of 1999 as a cumulative effect of a change in accounting principle.
2. ACQUISITIONS
In February 1999, the Company acquired a 51 percent ownership interest in
East Asia Power Resources Corporation ("EAPRC"), a publicly traded company in
the Philippines, for approximately $70 million. Since the Company's majority
ownership is expected to be temporary, the investment is accounted for under the
equity method of accounting. EAPRC owns and operates three power generation
facilities in the Philippines and owns an interest in one power generation
facility in China, with a total generating capacity of 289 megawatts. Electric
power generated by the facilities is supplied to a diversified base of customers
including National Power Corporation, the state-owned utility, private
distribution companies and industrial users.
In March 1999, EPFS acquired EnCap Investments L.C., ("EnCap"), a Texas
limited liability company, for $52 million, net of cash acquired. The purchase
price included $17 million in Company common stock, of which $7 million is
issuable upon the occurrence of certain events. The acquisition was accounted
for as a purchase. EnCap is an institutional funds management firm specializing
in financing independent oil and gas producers. EnCap manages three separate
institutional oil and gas investment funds in the U.S., and serves as
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investment advisor to Energy Capital Investment Company PLC, a publicly traded
investment company in the United Kingdom.
In March 1999, the Company increased its ownership interest from 30 percent
to 40 percent in the Samalayuca Power project for approximately $22 million. In
addition, the Company made a $48 million equity contribution replacing equity
financing which was established in the second quarter of 1996.
3. COMMITMENTS AND CONTINGENCIES
Indonesia
The Company owns a 47.5 percent ownership interest in a power generating
plant in Sengkang, South Sulawesi, Indonesia. Under the terms of the project's
power purchase agreement, PLN purchases power from the Company in Indonesian
rupiah indexed to the U.S. dollar at the date of payment. Due to the devaluation
of the rupiah, the cost of power to PLN has significantly increased. PLN is
currently unable to pass this increase in cost on to its customers without
creating further political instability. PLN has requested financial aid from the
Minister of Finance to help ease the effects of the devaluation. PLN has been
paying the Company in rupiah indexed to the U.S. dollar at the rate in effect
prior to the rupiah devaluation, with a commitment to pay the balance when
financial aid is received. The difference between the current and prior exchange
rate has resulted in an outstanding balance due from PLN of $12 million at March
31, 1999. Recently, the Company met and discussed its situation and concerns
with the World Bank, the International Monetary Fund, the Overseas Private
Investment Corporation, and the U.S. Treasury Department in an attempt to
achieve a resolution through the Indonesian Minister of Finance. The Company met
with PLN in April 1999 to discuss payments in arrears and the terms of a
contract rationalization process proposed by PLN. The Company informed PLN that
all payments in arrears must first be received as a prerequisite to any further
discussions on contract rationalization. The Company continues to meet with PLN
on a regular basis to resolve the payment in arrears issue but has been
unsuccessful to date. The Company cannot predict with certainty the outcome of
such discussions. The total investment in the Sengkang project was approximately
$26 million at March 31, 1999. Additionally, the Company has provided specific
recourse guarantees of up to $6 million for loans from the project lenders. All
other project debt is non-recourse. The Company has political risk insurance on
the Sengkang project. The Company believes the current economic difficulties in
Indonesia will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Brazil
The Company owns 100 percent of a 250 megawatt power generating plant in
Manaus, Brazil. Power from the plant is currently sold under a four-year
contract to a subsidiary of Centrais Electricas do Norte do Brazil, S.A.,
("Electronorte"), denominated in Brazilian real. In January 1999, the real was
devalued. Under a provision in the contract, the Company is entitled to recover
a substantial portion of any devaluation. In April 1999, the contract with
Electronorte was amended to extend the term from four to six years. The Company
believes the current economic difficulties in Brazil will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
The contract for the Manaus power project provides for delay damages to be
paid to Electronorte if the specified construction schedule is not met.
Completion of the project was delayed beyond the originally scheduled completion
dates provided in the contract and such delays have resulted in claims by
Electronorte for delay damages. The Company believes that any delay damages for
which it may ultimately be responsible will not have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
Rates and Regulatory Matters
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. Among
other things, the NOPR proposes the following: (i) removing the price cap for
the short-term capacity market; (ii) establishing procedures to make pipeline
and shipper-owned capacity
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comparable; (iii) auctioning all available short-term pipeline capacity on a
daily basis with the pipeline unable to set a reserve price above variable
costs; (iv) changing policies or pipeline penalties, nomination procedures and
services; (v) increasing pipeline reporting requirements; (vi) permitting the
negotiation of terms and conditions of service; and (vii) potentially modifying
the procedures for certificating new pipeline construction. Also in July 1998,
FERC issued a Notice of Inquiry ("NOI") seeking comments on FERC's policy for
pricing long-term capacity. The Company provided comments on the NOPR and NOI in
April 1999. It is not known when FERC will act on the NOPR and NOI.
In February 1997, TGP filed a settlement with FERC 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.
Under the terms of the GSR Stipulation and Agreement, TGP is entitled to collect
up to $770 million from its customers, $693 million through a demand surcharge
and $77 million through an interruptible transportation surcharge. As of March
31, 1999, the demand portion had been fully collected and $43 million of the
interruptible transportation portion had been collected. 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 accordance with the terms of the GSR Stipulation and Agreement,
TGP filed a GSR Reconciliation Report with FERC on March 31, 1999. Upon approval
of this report, TGP will refund approximately $14 million to its firm customers,
which represents the amount collected in excess of the $693 million recovered
through the demand surcharge. TGP will also be required to refund to firm
customers amounts collected in excess of each firm customer's share of the final
transition costs based on the final GSR Reconciliation Report which will be
filed on March 31, 2001. Any future refund is not expected to have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved a settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. One
party, a competitor of TGP, filed a Petition for Review of the FERC orders with
the Court of Appeals. The Court of Appeals remanded the case to FERC to respond
to the competitor's argument that TGP's cost allocation methodology deterred the
development of market centers (centralized locations where buyers and sellers
can physically exchange gas). At FERC's request, comments were filed in January
1999.
All cost of service issues related to TGP's 1991 general rate proceeding
were resolved pursuant to a settlement agreement approved by FERC in an order
which now has become final. However, cost allocation and rate design issues
remained unresolved. In July 1996, following an ALJ's decision on these cost and
design issues, FERC ruled on certain issues but remanded to the ALJ the issue of
the proper allocation of TGP's New England lateral costs. In July 1997, FERC
issued an order denying rehearing of its July 1996 order but clarifying that,
among other things, although the ultimate resolution as to the proper allocation
of costs would be applied retroactively to July 1, 1995, the cost of service
settlement does not allow TGP to recover from other customers any amounts that
TGP may ultimately be required to refund. In February 1999, petitions for review
of the July 1996 and July 1997 FERC orders were denied by the Court of Appeals.
In the remand proceeding, the ALJ issued his decision on the proper allocation
of the New England lateral costs in December 1997. That decision adopts a
methodology that economically approximates the one currently used by TGP. In
October 1998, FERC issued an order affirming the ALJ's decision and, in April
1999, FERC denied requests for rehearing of the October 1998 order.
TGP has filed cash out reports for the period September 1993 through August
1998. TGP's filings showed a cumulative loss through August of 1998 of $3
million. The reports, as well as the accounting for customer imbalances, were
previously challenged by TGP's customers. In April 1999, FERC approved a
settlement that resolved outstanding FERC proceedings relating to the filed
cashout reports, subject to rehearing. The settlement provides a new mechanism
for accounting for TGP's cash out program.
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 expire by
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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.
In a November 1997 order, FERC reversed its previous decision and found
that EPNG's Chaco Station should be functionalized as a gathering, not
transmission, facility and should be transferred to EPFS.
In accordance with the FERC orders, the Chaco Station was transferred to EPFS in
April 1998. EPNG
and two other parties filed petitions for review with the Court of Appeals. EPNG
and others contested FERC's functionalization ruling and other parties contested
FERC's determination of the impact of the
functionalization ruling on the treatment of the Chaco Station costs in the rate
settlement. The matter has been briefed and will be argued in September 1999.
As an interstate pipeline, TGP is subject to FERC audits of its books and
records. As part of an industry-wide initiative, TGP's property retirements are
currently under review by the FERC audit staff.
As the aforementioned rate and regulatory matters are fully and
unconditionally resolved, the Company may either recognize an additional refund
obligation or a non-cash benefit to finalize previously estimated liabilities.
Management believes the ultimate resolution of these matters, which are in
various stages of finalization, will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Legal Proceedings
In February 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPEC: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved 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 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, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or
Petro-Tex Chemical Corporation facilities 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
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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 November 1988, the Kentucky environmental agency filed a complaint in a
Kentucky state court, Commonwealth of Kentucky, Natural Resources and
Environmental Protection Cabinet v. Tennessee Gas Pipeline Company, alleging
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky compressor stations from the agency, and
continues to work to resolve the remaining issues. The relevant Kentucky
compressor stations are scheduled to be characterized and remediated under the
consent order with the EPA. Management believes that the resolution of this
issue will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
A number of subsidiaries of EPTPC, both wholly and partially owned, have
been named defendants in actions brought by Jack Grynberg on behalf of the U.S.
Government under the false claims act. Generally, the complaints allege an
industry-wide conspiracy to underreport the heating value as well as the volumes
of the natural gas produced from federal and Indian lands, thereby depriving the
U.S. Government of royalties. In April 1999, the U.S. Government filed a notice
that it does not intend to intervene in these actions. The Company believes the
complaint to be without merit.
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.
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 March 31, 1999, the Company had reserves of
approximately $144 million for expected environmental costs.
In addition, the Company estimates that its subsidiaries will make capital
expenditures for environmental matters of approximately $6 million for the
remainder of 1999. Capital expenditures are expected to range from approximately
$75 million to $100 million in the aggregate for the years 2000 through 2007.
These expenditures primarily relate to compliance with air regulations and, to a
lesser extent, control of water discharges.
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 Stipulation and Agreement (the "Environmental Stipulation") that establishes a
mechanism for recovering a substantial portion of the environmental costs
identified in the internal project. The Environmental Stipulation was effective
July 1, 1995. As of March 31, 1999, all amounts have been collected under the
Environmental Stipulation. Refunds may be required to the extent actual eligible
expenditures are less than estimated eligible expenditures used to determine
amounts to be collected under the Environmental Stipulation.
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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 12 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. Since the clean-up costs are
estimates and are subject to revision as more information becomes available
about the extent of remediation required, and because in some cases the Company
has asserted a defense to any liability, the Company's estimate of its share of
remediation costs could change. Moreover, liability under the federal Superfund
statute is joint and several, meaning that the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs has been considered, where
appropriate, in its determination of its estimated liability as described
herein. The Company presently believes that the costs associated with the
current status of such other entities as PRPs at the Superfund sites referenced
above will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in the
discovery stage, and it is not yet possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or other relevant developments occur,
related accrual amounts will be adjusted accordingly. While there are still
uncertainties relating to the ultimate costs which may be incurred, based upon
the Company's evaluation and experience to date, the Company believes the
recorded reserve is adequate.
For a further discussion of other environmental matters, see Legal
Proceedings above.
Other than the items discussed above, management is not aware of any other
commitments or contingent liabilities which would have a material adverse effect
on the Company's financial condition, results of operations, or cash flows.
4. SEGMENT INFORMATION
<TABLE>
<CAPTION>
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1999
---------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD ENERGY ENERGY
PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
--------- -------- --------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.... $ 201 $ 61 $ 737 $ 17 $1,016
Intersegment revenue................ 7 17 2 -- 26
Operating income (loss)............. 103 13 9 (16) 109
EBIT................................ 113 17 10 3 143
Segment assets...................... 4,887 1,036 486 1,029 7,438
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
SEGMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
---------------------------------------------------------
TENNESSEE EL PASO EL PASO EL PASO
GAS FIELD ENERGY ENERGY
PIPELINE SERVICES MARKETING INTERNATIONAL TOTAL
--------- -------- --------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.... $ 203 $ 59 $1,227 $ 12 $1,501
Intersegment revenue................ 9 9 4 -- 22
Operating income (loss)............. 94 20 -- (7) 107
EBIT................................ 98 24 -- 2 124
Segment assets...................... 5,137 916 536 653 7,242
</TABLE>
The reconciliations of EBIT to income before income taxes and cumulative
effect of accounting change are presented below for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Total EBIT for segments..................................... $ 143 $ 124
Corporate expenses, net..................................... (5) --
Non-affiliated interest and debt expense.................... (36) (32)
Affiliated interest expense, net............................ (4) (6)
------ ------
Income before income taxes and cumulative effect of
accounting change......................................... $ 98 $ 86
====== ======
</TABLE>
5. FINANCING TRANSACTIONS
The average interest rate of short-term borrowings was 5.1% and 6.0% at
March 31, 1999, and December 31, 1998, respectively. The Company had short-term
borrowings, including current maturities of long-term debt at March 31, 1999 and
December 31, 1998 as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $ 524 $ 190
Current maturities of other long-term debt.................. 4 4
------ ------
$ 528 $ 194
====== ======
</TABLE>
In May 1999, EPEC issued $500 million aggregate principal amount of 6.75%
Senior Notes due 2009. Approximately $80 million of the proceeds were used to
repay a portion of TGP's outstanding commercial paper.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $3,858 $3,805
Less accumulated depreciation and depletion................. 648 577
------ ------
3,210 3,228
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,394 2,400
------ ------
Total property, plant, and equipment, net................... $5,604 $5,628
====== ======
</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.
10
<PAGE> 13
7. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This pronouncement
requires that an entity classify all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (iii) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
quarters in fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of this pronouncement.
11
<PAGE> 14
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
GENERAL
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal reorganization in which certain energy marketing operations of EPEM,
certain field services operations of EPFS, and certain international operations
of EPEI were transferred to EPTPC. The restructuring transactions were treated
as a transfer of ownership between entities under common control and were
accounted for in a manner similar to a pooling of interests. Accordingly, the
information for the quarter ended March 31, 1998, presented in the Management's
Discussion and Analysis of Financial Condition and Results of Operations has
been restated as though the transactions occurred on January 1, 1998.
RESULTS OF OPERATIONS
Consolidated EBIT for the quarter ended March 31, 1999, increased 11
percent to $138 million from $124 million in the first quarter of 1998.
Variances are discussed in the segment results below.
SEGMENT RESULTS
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Tennessee Gas Pipeline...................................... $113 $ 98
El Paso Field Services...................................... 17 24
El Paso Energy Marketing.................................... 10 --
El Paso Energy International................................ 3 2
Corporate expenses, net..................................... (5) --
---- ----
Total EBIT........................................ $138 $124
==== ====
</TABLE>
Tennessee Gas Pipeline
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $ 208 $ 212
Operating expenses.......................................... (105) (118)
Other -- net................................................ 10 4
----- -----
EBIT...................................................... $ 113 $ 98
===== =====
</TABLE>
Operating revenues for the quarter ended March 31, 1999, were $4 million
lower than for the same period of 1998 primarily due to lower GSR revenue in
1999, a favorable customer settlement in the first quarter of 1998, and lower
miscellaneous operating revenue. The decrease was partially offset by the
favorable resolution of a regulatory issue.
Operating expenses for the quarter ended March 31, 1999, were $13 million
lower than for the same period of 1998 primarily due to lower system fuel costs
associated with operating efficiencies related to lower throughput levels, the
favorable resolution of certain regulatory issues and lower operating expenses.
12
<PAGE> 15
Other -- net for the quarter ended March 31, 1999, was $6 million higher
than for the same period of 1998 primarily due to the favorable resolution of
regulatory and contractual issues and higher earnings from equity investments.
El Paso Field Services
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
---------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Gathering and treating margin............................... $ 40 $ 39
Processing margin........................................... 9 14
Other margin................................................ -- 2
---- ----
Total gross margin................................ 49 55
Operating expenses.......................................... (36) (35)
Other -- net................................................ 4 4
---- ----
EBIT.............................................. $ 17 $ 24
==== ====
</TABLE>
Total gross margin for the quarter ended March 31, 1999, was $6 million
lower than for the same period of 1998 primarily due to a decrease in the
processing margin. The decrease resulted from lower liquids prices during the
first quarter of 1999 compared to the same period of 1998. The slight increase
in the gathering and treating margin primarily resulted from higher volumes
attributable to the global compression project which was completed in September
1998. This increase was offset by lower volumes attributable to the sale of the
natural gas gathering and treating assets in the Anadarko Basin in September
1998.
El Paso Energy Marketing
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
---------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Natural gas margin.......................................... $ 17 $ 6
Power margin................................................ -- 7
---- ----
Total gross margin................................ 17 13
Operating expenses.......................................... (8) (13)
Other -- net................................................ 1 --
---- ----
EBIT.............................................. $ 10 $ --
==== ====
</TABLE>
Total gross margin for the quarter ended March 31, 1999, was $4 million
higher than for the same period of 1998. The increase in the natural gas margin
was primarily due to the income recognition from long-term natural gas
transactions closed during the quarter. The decrease in power margin was due to
the January 1999 transfer of EPEM's power activities to El Paso Power Services
Company, a wholly owned indirect subsidiary of EPEC.
Operating expenses for the quarter ended March 31, 1999, were $5 million
lower than for the same period of 1998 primarily due to lower administrative
costs associated with power activities transferred to El Paso Power Services
Company.
13
<PAGE> 16
El Paso Energy International
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $ 17 $ 12
Operating expenses.......................................... (33) (19)
Other -- net................................................ 19 9
---- ----
EBIT.............................................. $ 3 $ 2
==== ====
</TABLE>
Operating revenues for the quarter ended March 31, 1999, were $5 million
higher than for the same period of 1998 primarily due to the consolidation for
financial reporting purposes of the Manaus Power project in May 1998.
Operating expenses for the quarter ended March 31, 1999, were $14 million
higher than for the same period of 1998 due to the consolidation of the Manaus
Power project and an increase in general and administrative expenses primarily
attributable to higher project development costs reflecting increased
project-related activities.
Other -- net for the quarter ended March 31, 1999, was $10 million higher
than for the same period of 1998 primarily due to higher earnings from equity
investments.
Corporate expenses, net
Net corporate expenses for the quarter ended March 31, 1999, were $5
million higher than for the same period of 1998 primarily due to the recognition
of income from investments in the first quarter of 1998.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the first quarter ended March
31, 1999, was $4 million higher than for the same period of 1998 primarily due
to increased borrowings related to acquisitions, capital expenditures, and other
investing expenditures.
AFFILIATED INTEREST EXPENSE, NET
Affiliated interest expense, net for the first quarter ended March 31,
1999, was $2 million lower than for the same period in 1998 primarily due to a
reduction in the affiliated average debt balance.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $260 million higher for the
quarter ended March 31, 1999, compared to the same period of 1998. The increase
was primarily due to changes in working capital accounts, partially offset by
lower GSR collections in 1999.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $622 million for the quarter
ended March 31, 1999. Expenditures related to joint ventures and equity
investments were primarily attributable to the El Paso Energy International
segment. Other investment activity included the acquisition of EnCap. Internally
generated funds, supplemented by other financing activities, were used to fund
these expenditures.
14
<PAGE> 17
Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds, available
capacity under existing credit facilities, and/or contributions from EPEC.
CASH FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $380 million for the quarter
ended March 31, 1999. Short-term and long-term borrowings, supplemented by
internally generated funds, were used for dividend payments, investing
activities, and other corporate purposes.
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, and/or contributions from
EPEC.
In May 1999, EPEC issued $500 million aggregate principal amount of 6.75%
Senior Notes due 2009. Approximately $80 million of the proceeds were used to
repay a portion of TGP's outstanding commercial paper.
COMMITMENTS AND CONTINGENCIES
See Note 3, which is incorporated herein by reference.
OTHER
PPN POWER PROJECT
In March 1999, the Company signed a sale and purchase agreement, subject to
the project lenders' consent, to acquire a 26 percent interest in a $295 million
power plant in Tamil Nadu, India. The project consists of a 346 megawatt
combined cycle power plant which will serve as a base load facility and sell
power to the state-owned Tamil Nadu Electricity Board under a thirty-year power
purchase agreement. Construction began in January 1999, and operations are
expected to commence in early 2001. The transaction is expected to close before
the end of the second quarter of 1999.
YEAR 2000
EPEC has established an executive steering committee and a project team to
coordinate the phases of its Year 2000 project to assure that its key automated
systems, equipment, and related processes will remain functional through the
year 2000. Those phases are: (i) awareness; (ii) assessment; (iii) remediation;
(iv) testing; (v) implementation of the necessary modifications and (vi)
contingency planning. The Company has participated in EPEC's Year 2000 project
as described below.
In recognition of the importance of Year 2000 issues and their potential
impact to EPEC, the initial phase of the Year 2000 project involved the
establishment of a company-wide awareness program. The awareness program is
directed by the executive steering committee and project team and includes
participation of senior management in each core business area. The awareness
phase is substantially completed, although EPEC will continually update
awareness efforts for the duration of the Year 2000 project.
The Company's assessment phase consists of conducting a company-wide
inventory of its key automated systems and related processes, analyzing and
assigning levels of criticality to those systems and processes, identifying and
prioritizing resource requirements, developing validation strategies and testing
plans, and evaluating business partner relationships. The portion of the
assessment phase related to internally developed computer applications, hardware
and equipment, third-party-developed software, and embedded chips is
substantially complete. The assessment phase of the project, among other things,
involves efforts to obtain representations and assurances from third parties,
including third party vendors, that their hardware and equipment products,
embedded chip systems, and software products being used by or impacting the
Company are or will be modified to be Year 2000 compliant. To date, the
responses from such third parties, although
15
<PAGE> 18
generally encouraging, are inconclusive. As a result, the Company cannot predict
the potential consequences if these or other third parties or their products are
not Year 2000 compliant. The Company continues to evaluate the exposure
associated with such business partner relationships.
The remediation phase involves converting, modifying, replacing or
eliminating key automated systems identified in the assessment phase. The
testing phase involves the validation of the identified key automated systems.
The Company is utilizing test tools and written test procedures to document and
validate, as necessary, its unit, system, integration and acceptance testing.
The Company estimates that approximately one-fourth of the work of these phases
remains, and expects each to be substantially completed by mid-1999.
The implementation phase involves placing the converted or replaced key
automated systems into operation. In some cases, this phase will also involve
the implementation of contingency plans needed to support business functions and
processes that may be interrupted by Year 2000 failures that are outside of the
Company's control. The Company has completed more than three-fourths of the
implementation phase, which is expected to be substantially completed by
mid-1999.
The contingency planning phase consists of developing a risk profile of the
Company's critical business processes and then providing for actions the Company
will pursue to keep such processes operational in the event of Year 2000
disruptions. The focus of such contingency planning is on prompt response to any
Year 2000 events, and a plan for subsequent resumption of normal operations. The
plan is expected to assess the risk of a significant failure to critical
processes performed by the Company, and to address the mitigation of those
risks. The plan will also consider any significant failures related to the most
reasonably likely worst case scenario, discussed below, as they may occur. In
addition, the plan is expected to factor in the severity and duration of the
impact of a significant failure. The Company plans to have its contingency plan
completed by mid-1999. The Year 2000 contingency plan will continue to be
modified and adjusted throughout the year as additional information becomes
available.
The goal of the Year 2000 project is to ensure that all of the critical
systems and processes which are under the Company's direct control remain
functional. Certain systems and processes may be interrelated with or dependent
upon systems outside the Company's control. However, systems within the
Company's control may also have unpredicted problems. Accordingly, there can be
no assurance that significant disruptions will be avoided. The Company's present
analysis of its most reasonably likely worst case scenario for Year 2000
disruptions includes Year 2000 failures in the telecommunications and
electricity industries, as well as interruptions from suppliers that might cause
disruptions in the Company's operations, thus causing temporary financial losses
and an inability to deliver products and services to customers. Virtually all of
the natural gas transported through the Company's interstate pipelines is owned
by third parties. Accordingly, failures of natural gas producers to be ready for
the Year 2000 could significantly disrupt the flow of product to the Company's
customers. In many cases, the producers have no direct contractual relationship
with the Company, and the Company relies on its customers to verify the Year
2000 readiness of the producers from whom they purchase natural gas. Since most
of the Company's revenues from the delivery of natural gas are based upon fees
paid by its customers for the reservation of capacity, and not based upon the
volume of actual deliveries, short term disruptions in deliveries caused by
factors beyond the Company's control should not have a significant financial
impact on the Company, although it could cause operational problems for the
Company's customers. Longer-term disruptions, however, could materially impact
the Company's results of operations, financial condition, and cash flows.
While the Company owns or controls most of its domestic facilities and
projects, nearly all of the Company's international investments have been made
in conjunction with unrelated third parties. In many cases, the operators of
such international facilities are not under the sole or direct control of the
Company. As a consequence, the Year 2000 programs instituted at some of the
international facilities may be different from the Year 2000 program implemented
by the Company domestically, and the party responsible for the results of such
program may not be under the direct or indirect control of the Company. In
addition, the "non-controlled" programs may not provide the same degree of
communication, documentation and coordination as the Company achieves in its
domestic Year 2000 program. Moreover, the regulatory and legal environment in
which such international facilities operate makes analysis of possible
disruption and associated
16
<PAGE> 19
financial impact difficult. Many foreign countries appear to be substantially
behind the United States in addressing potential Year 2000 disruption of
critical infrastructure and in developing a framework governing the reporting
requirements and relative liabilities of business entities. Accordingly, the
Year 2000 risks posed by international operations as a whole are different than
those presented domestically. As part of its Year 2000 effort, the Company is
assessing the differences between the non-controlled programs and its domestic
Year 2000 project, and has formulated and instituted a program for identifying
such risks and preparing a response to such risks. While the Company believes
that most of the international facilities in which it has significant
investments are addressing Year 2000 issues in an adequate manner, it is
possible that some of them may experience significant Year 2000 disruption, and
that the aggregate effect of problems experienced at multiple international
locations may be material and adverse. The Company is incorporating this
possibility into the relevant contingency plans.
While the total cost of the Company's Year 2000 project continues to be
evaluated, the Company estimates that the costs remaining to be incurred in 1999
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software will be between $10 million and $15 million. Of
these estimated costs, the Company expects between $4 million and $7 million to
be capitalized and the remainder to be expensed. As of March 31, 1999, the
Company has incurred expenses of approximately $6 million and has capitalized
costs of approximately $2 million. The Company has previously only traced
incremental expenses related to its Year 2000 project. This means that the costs
of the Year 2000 project related to salaried employees of the Company, including
their direct salaries and benefits, are not available, and have not been
included in the estimated costs of the project. Since the earlier phases of the
project mostly involved work performed by such salaried employees, the costs
expended to date do not reflect the percentage completion of the project. The
Company anticipates that it will expend most of the costs reported above in the
remediation, implementation and contingency planning phases of the project. As
described herein, the Company and Sonat have entered into an agreement which, if
approved, will result in the merger of the Company and Sonat. If the merger is
consummated, Sonat's Year 2000 risks, liabilities and expenses will be assumed
by the Company. Based on its due diligence investigation in connection with the
merger, the Company is not aware of any material Year 2000 risks, liabilities,
or expenses that are not disclosed in Sonat's filings with the U.S. Securities
and Exchange Commission. It is possible the Company may need to reassess its
estimate of Year 2000 costs in the event the Company completes an acquisition
of, or makes a material investment in, substantial facilities or another
business entity.
Although the Company does not expect the costs of its Year 2000 project to
have a material adverse effect on its financial position, results of operations,
or cash flows, based on information available at this time the Company cannot
conclude that disruption caused by internal or external Year 2000 related
failures will not have such an effect. Specific factors which might affect the
success of the Company's Year 2000 efforts and the frequency or severity of a
Year 2000 disruption or the amount of expense include the failure of the Company
or its outside consultants to properly identify deficient systems, the failure
of the selected remedial action to adequately address the deficiencies, the
failure of the Company or its outside consultants to complete the remediation in
a timely manner (due to shortages of qualified labor or other factors), the
failure of other parties to joint ventures in which the Company is involved to
meet their obligations, both financial and operational, under the relevant joint
venture agreements to remediate assets used by the joint venture, unforeseen
expenses related to the remediation of existing systems or the transition to
replacement systems, the failure of third parties to become Year 2000 compliant
or to adequately notify the Company of potential noncompliance and the effects
of any significant disruption at international facilities in which the Company
has significant investments.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in the
Company's -- or an affiliate's -- equity or debt securities, this disclosure is
made for
17
<PAGE> 20
the SOLE PURPOSE of communicating or disclosing information aimed at correcting,
helping to correct and/or avoiding Year 2000 failures.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See Note 7, which is incorporated by reference herein.
18
<PAGE> 21
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, political and economic
risks associated with current and future operations in foreign countries,
conditions of the equity and other capital markets during the periods covered by
the forward-looking statements, and other risks, uncertainties and factors,
including the effect of the Year 2000 date change, discussed more completely in
the Company's other filings with the U.S. Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, in addition to
the interim consolidated financial statements, accompanying notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.
There have been no material changes in market risks faced by the Company
from those reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
19
<PAGE> 22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.A -- Restated Certificate of Incorporation, dated May 11,
1999.
27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of EPTPC and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of EPTPC and its consolidated subsidiaries.
b. Reports on Form 8-K
EPTPC filed a report under Item 2 on Form 8-K, dated January 14, 1999, and
on March 15, 1999, filed an amendment to that report with respect to the
tax-free internal reorganization.
20
<PAGE> 23
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 13, 1999
/s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 13, 1999
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.A -- Restated Certificate of Incorporation, dated May 11,
1999.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.A
RESTATED
CERTIFICATE OF INCORPORATION
OF
EL PASO TENNESSEE PIPELINE CO.
EL PASO TENNESSEE PIPELINE CO., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is El Paso Tennessee Pipeline Co.
(the "Corporation"). The Corporation was incorporated under
the name Tenneco Holdings, Inc., on October 7, 1987, which
name was changed to Tenneco Inc., on December 8, 1987, and to
El Paso Tennessee Pipeline Co., on December 11, 1996. The
original certificate of incorporation was filed with the
Secretary of State of the State of Delaware on October 7,
1987.
2. This Restated Certificate of Incorporation restates but does
not further amend the Certificate of Incorporation as
heretofore amended, of the Corporation and has been adopted
and approved in accordance with Section 245 of the General
Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation, as heretofore
amended, is hereby restated to read in its entirety as
follows:
FIRST: The name of the Corporation is El Paso Tennessee Pipeline Co.
SECOND: The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall be authorized to issue is 20,000,000 shares of Preferred
Stock, par value $.01 per share (herein called "Preferred Stock"), and 100,000
shares of Common Stock, of the par value of $.01 per share (herein called
"Common Stock").
-1-
<PAGE> 2
I.
1. The Board of Directors of the Corporation is hereby expressly
authorized, by resolution or resolutions thereof, to provide, out of the
unissued shares of Preferred Stock, for series of Preferred Stock and, with
respect to each such series, to fix the number of shares constituting such
series and the designation of such series, the voting powers (if any) of the
shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications, limitations
or restrictions thereof, of the shares of such series. The powers, preferences
and relative, participating, optional and other special rights of each series
of Preferred Stock, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any time
outstanding.
2. Except as otherwise provided in any resolution of the Board of
Directors providing for the issuance of any particular series of Preferred
Stock, shares of Preferred Stock redeemed or otherwise acquired by the
Corporation shall, upon the filing of any required certificates with the
Secretary of State of Delaware, assume the status of authorized but unissued
Preferred Stock and may thereafter, subject to the provisions of this Part I of
Article FOURTH and of any restrictions contained in any resolution of the Board
of Directors providing for the issue of any particular series of Preferred
Stock, be reissued in the same manner as other authorized but unissued
Preferred Stock.
Preferred Stock Designated 8 1/4% Cumulative Preferred Stock, Series A
Pursuant to the authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation, as amended (as such may be
amended from time to time, the "Certificate of Incorporation") and authority
vested by such Board of Directors in a Preferred Stock Issuance Committee, all
of the members of which are members of the Board of Directors, a series of
Preferred Stock of the Corporation be, and hereby is, created to be designated
"8 1/4% Cumulative Preferred Stock, Series A" (hereinafter referred to as the
"Series A Preferred Stock"), consisting of 6,000,000 shares, and the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series A Preferred Stock
are hereby fixed and stated to be as follows (all terms used herein which 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 A Preferred
Stock shall be 8 1/4% of $50 per share of Series A Preferred Stock per
annum (2.0625% per quarter annum). Dividends (including Additional DRD
Dividends (as defined in Section 2)) on shares of the Series A 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 A Preferred Stock shall be payable, when,
as and if declared by the Board of Directors of the Corporation out of
assets legally available therefor, quarter-yearly on the last days of
March, June, September and December in each
2
<PAGE> 3
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 A 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 A
Preferred Stock for any period shorter than a quarter-yearly dividend
period shall be computed on the basis of a 360-day year of twelve 30-day
months. The Series A 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 7 hereof or in the resolution or
resolutions providing for the issuance of such other series.
(c) If (x) the Stock Issuance (as defined in the Amended and Restated
Agreement and Plan of Merger, dated as of June 19, 1996, as such may be
amended or supplemental from time to time (the "Merger Agreement") among
the Corporation, El Paso Natural Gas Company, a Delaware corporation ("El
Paso") and El Paso Merger Company, a Delaware corporation) is not approved
by the stockholders of El Paso at a special meeting of El Paso
stockholders (including any adjournments or postponements thereof, the "El
Paso Special Meeting") called to approve such issuance, (y) the Merger (as
defined in the Merger Agreement) is effected, and (z) on or before the
90th day after the date of the El Paso Special Meeting, either Standard &
Poor's Corp. ("S&P") or Moody's Investors Service, Inc. ("Moody's")
downgrades the rating previously given by it to the Series A Preferred
Stock, the annual dividend rate set forth in (a) above will be
automatically subjected to a one-time upward adjustment to the rate set
forth in the table below opposite the applicable ratings which are given
to the Series A Preferred Stock by each of Moody's and S&P as of the 90th
day after the El Paso Special Meeting, effective as of the date of
original issuance of the Series A Preferred Stock.
<TABLE>
<CAPTION>
ANNUAL
DIVIDEND
REVISED RATINGS (MOODY'S/S&P) RATE
----------------------------- --------
<S> <C>
Ba1/BB+ ................................ 9.000%
Ba2/BB+ or Ba1/BB ...................... 9.125%
Ba2/BB ................................. 9.250%
Ba3/BB or Ba2/BB- ...................... 9.500%
Ba3/BB- ................................ 10.000%
</TABLE>
If any such adjustment to the annual dividend rate occurs after a
Dividend Payment Date as to which the Corporation previously paid dividends
on the Series A Preferred Stock, additional dividends will be payable, out
of funds legally available therefor, on each share of Series A Preferred
Stock on the next succeeding Dividend Payment Date (or if such adjustment
occurs after the dividend payable on the next succeeding Dividend Payment
Date has been declared, on the second succeeding Dividend Payment Date
following the date of such adjustment) to the holder of record of such
share of Series A Preferred Stock as of the record date established for
such succeeding Dividend Payment
3
<PAGE> 4
Date (or second succeeding Dividend Payment Date, as the case may be) in an
amount equal to the excess of (x) the aggregate amount of dividends that
would have been payable on such share on all Dividend Payment Dates as to
which the Corporation previously paid dividends on the Series A Preferred
Stock if dividends had accrued from the date of issuance of the Series A
Preferred Stock at the adjusted annual dividend rate, over (y) the
aggregate amount of dividends actually paid with respect to such share of
Series A Preferred Stock. If the annual dividend rate is adjusted as
provided above, the Corporation will cause notice of such adjustment to be
sent to the holders of record of the Series A Preferred Stock as they
appear in the stock register of the Corporation.
Section 2. Changes in the Dividends Received Percentage. (a)
Notwithstanding Section 1 hereof, if one or more amendments to the
Internal Revenue Code of 1986, as amended (the "Code"), are enacted that
reduce the percentage of the dividends received deduction as specified in
Section 243(a)(1) of the Code or any successor provision (the "Dividends
Received Percentage") to below 70%, the amount of each dividend payable
per share of the Series A Preferred Stock for dividend payments made on or
after the effective date of such change (or the second succeeding dividend
payment after such effective date, as herein described) will be adjusted
by multiplying the amount of the dividend payable pursuant to Section 1
(before adjustment pursuant to this Section 2) by a factor, which will be
the number determined in accordance with the following formula (the "DRD
Formula"), and rounding the result to the nearest cent:
1 - (.35(1 - .70))
------------------
1 - (.35(1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends
Received Percentage applicable to the dividend in question. No amendments
to the Code, other than a change in the percentage of the dividends
received deduction set forth in Section 243 (a)(1) of the Code or any
successor provision, will give rise to an adjustment. Notwithstanding the
foregoing provisions of this Section 2, in the event that, with respect to
any such amendment, the Corporation receives either an unqualified opinion
of nationally recognized independent tax counsel selected by the
Corporation or a private letter ruling or similar form of authorization
from the Internal Revenue Service to the effect that such an amendment
would not apply to dividends payable on the Series A Preferred Stock, then
any such amendment will not result in the adjustment provided for pursuant
to the DRD Formula. The opinion referenced in the previous sentence must
be based upon a specific exception in the legislation amending the DRP or
upon a published pronouncement of the Internal Revenue Service addressing
such legislation. The Corporation's calculation of the dividends payable,
as so adjusted and as certified accurate as to calculation and reasonable
as to method by the independent public accountants then regularly engaged
by the Corporation, will be final and not subject to review absent
manifest error.
(b) If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on Dividend
Payment Date has been declared but prior to the applicable Dividend
Payment Date, the amount of dividend
4
<PAGE> 5
payable on such Dividend Payment Date will not be increased. Instead,
an amount, equal to the excess of (x) the product of the dividends
paid by the Corporation on such Dividend Payment Date and the factor
derived from the DRD Formula (where the DRP used in the DRD Formula
would be equal to the reduced Dividends Received Percentage for such
dividends), over (y) the dividends paid by the Corporation on such
Dividend Payment Date, will be payable, out of funds legally available
therefor, to holders of record as of the record date established for
the next succeeding Dividend Payment Date in addition to any other
amounts payable on such date. Notwithstanding the foregoing, no such
additional dividend will be payable pursuant to this Section 2 if the
such amendment to the Code would not result in an adjustment to the
DRD Formula due to the Corporation having received either an opinion
of counsel or tax ruling referred to in paragraph (a) of this Section 2.
(c) If, prior to March 31, 1997, an amendment to the Code is enacted
that reduces the Dividends Received Percentage to below 70% and such
reduction retroactively applies to a Dividend Payment Date as to which the
Corporation previously paid dividends on the Series A Preferred Stock
(each an "Affected Dividend Payment Date"), additional dividends (the
"Additional DRD Dividends") will be payable out of funds legally available
therefor on the next succeeding Dividend Payment Date (or if such
amendment is enacted after the dividend payable on such Dividend Payment
Date has been declared, on the second succeeding Dividend Payment Date
following the date of enactment) to holders of record as of the record
date established for such succeeding Dividend Payment Date (or second
succeeding Dividend Payment Date, as the case my be) in an amount equal to
the excess of (x) the product of the dividends paid by the Corporation on
each Affected Dividend Payment Date and the factor derived from the DRD
Formula (where the DRP used in the DRD Formula would be equal to the
reduced Dividends Received Percentage applied to each Affected Dividend
Payment Date), over (y) the dividends paid by the Corporation on all
Affected Dividend Payment Dates.
(d) Additional DRD Dividends will not be payable in respect of the
enactment of any amendment to the Code on or after March 31, 1997 which
retroactively reduces the Dividends Received Percentage to below 70%, or
if enacted prior to March 31, 1997, which would not result in an
adjustment due to the Corporation having received either an opinion of
counsel or tax ruling referred to in paragraph (a) of this Section 2. The
Corporation shall only be required to make one payment of Additional DRD
Dividends.
(e) In the event that the amount of dividends payable per share of the
Series A Preferred Stock are adjusted pursuant to the DRD Formula and/or
Additional DRD Dividends are to be paid, the Corporation shall cause
notice of each such adjustment and, if applicable, any Additional DRD
Dividends to be sent to the holders of record of the Series A Preferred
Stock as they appear in the stock register of the Corporation.
Section 3. Optional Redemption. (a) At any time or from time to time,
on or after December 31, 2001, the Series A Preferred Stock may be
redeemed at the option of the Corporation, in whole or in part, out of
funds legally available therefor, at a redemption
5
<PAGE> 6
price equal to $50.00 per share plus an amount equal to accrued and
unpaid dividends (whether or not declared) to but excluding the date
fixed for redemption including any changes in dividends payable due to
changes in the annual dividend rate or Dividends Received Percentage,
and Additional DRD Dividends, if any. In addition to any restrictions
or limitations contained in the Certificate of Incorporation, if any,
if full cumulative dividends on the Series A Preferred Stock for all
past dividend periods have not been paid or declared and set apart for
payment, the Series A Preferred Stock may be redeemed only in full
(but not in part) by the Corporation pursuant to this paragraph (a)
and the Corporation shall not purchase or acquire any shares of Series
A Preferred Stock other than pursuant to Section 4 hereof or pursuant
to a purchase or exchange offer made on the same terms to all holders
of the Series A Preferred Stock. If fewer than all the outstanding
shares of Series A Preferred Stock are to be redeemed, the Corporation
will select those to be redeemed pro rata, by lot or by a
substantially equivalent method.
(b) If the Dividends Received Percentage is equal to or less than 40%
and, as a result, the amount of dividends on the Series A Preferred Stock
payable on any Dividend Payment Date will be or is adjusted upwards as
provided in Section 2, the Corporation, at its option, may redeem all, but
not less than all, of the outstanding shares of the Series A Preferred
Stock, out of funds legally available therefor, provided that within 60
days of the date on which an amendment to the Code is enacted which
reduces the Dividends Received Percentage to 40% or less, the Corporation
gives notice of redemption as provided in paragraph (d) of this Section 3
to all holders of record of the Series A Preferred Stock. A redemption of
the Series A Preferred Stock in accordance with this paragraph (b) shall
be at the applicable redemption price set forth in the following table, in
each case plus an amount equal to accrued and unpaid dividends (whether or
not declared) thereon to but excluding the date fixed for redemption,
including any changes in dividends payable due to changes in the annual
dividend rate or Dividends Received Percentage, and Additional DRD
Dividends, if any:
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
REDEMPTION PERIOD SHARE
----------------- ----------
<S> <C>
November 18, 1996 to December 30, 1997 ................... $ 52.50
December 31, 1997 to December 30, 1998 ................... 52.00
December 31, 1998 to December 30, 1999 ................... 51.50
December 31, 1999 to December 30, 2000 ................... 51.00
December 31, 2000 to December 30, 2001 ................... 50.50
December 31, 2001 and thereafter ......................... 50.00
</TABLE>
(c) If at any time fewer than 600,000 shares of Series A Preferred
Stock remain outstanding, the Corporation, at its option, may redeem all,
but not less than all, of the outstanding Series A Preferred Stock. A
redemption of the Series A Preferred Stock in accordance with this
paragraph (c) shall be at the applicable redemption price set forth in the
following table, in each case plus an amount equal to accrued but unpaid
dividends (whether or not declared) thereon to but excluding the date
fixed for redemption, including
6
<PAGE> 7
any changes in dividends payable due to changes in the annual dividend
rate or the Dividends Received Percentage, and Additional DRD Dividends,
if any:
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
REDEMPTION PERIOD SHARE
----------------- ----------
<S> <C>
November 18, 1996 to December 30, 1997 ................... $ 52.50
December 31, 1997 to December 30, 1998 ................... $ 52.00
December 31, 1998 to December 30, 1999 ................... $ 51.50
December 31, 1999 to December 30, 2000 ................... $ 51.00
December 31, 2000 to December 30, 2001 ................... $ 50.50
December 31, 2001 and thereafter ......................... $ 50.00
</TABLE>
(d) Notice of redemption pursuant to paragraph (a), (b) or (c) of this
Section 3 will be given by mail, (i) not less than 30 days prior to the
date fixed for redemption thereof in the case of paragraph (a) and (ii)
not less than 30 nor more than 60 days prior to the date fixed for
redemption thereof, in the case of paragraphs (b) and (c), in each case to
each record holder of the shares of Series A Preferred Stock to be
redeemed at the address of such holder in the stock register of the
Corporation. If a notice of redemption has been given, from and after the
specified redemption date (unless the Corporation defaults in making
payment of the redemption price), dividends on the Series A Preferred
Stock so called for redemption will cease to accrue, such shares will no
longer be deemed to be outstanding, and all rights of the holders thereof
as stockholders of the Corporation (except the right to receive the
redemption price) will cease. Subject to applicable escheat and similar
abandoned property laws, any moneys set aside by the Corporation for such
redemption and unclaimed at the end of six months from the redemption date
shall revert to the general funds of the Corporation, after which
reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the
amounts payable upon such redemption. Any interest accrued on funds so
deposited shall be paid to the Corporation from time to time.
Section 4. Mandatory Redemption. Subject to the rights of the holders
of any class or series of stock ranking prior to the Series A Preferred
Stock, upon the occurrence of a Mandatory Redemption Event, the
Corporation shall redeem out of funds legally available therefor all of
the outstanding shares of Series A Preferred Stock on a date (the
"Mandatory Redemption Date") not more than 60 days after the date of such
Mandatory Redemption Event a redemption price of $50.50 per share plus an
amount equal to accrued and unpaid dividends (whether or not declared)
thereon to but excluding the Mandatory Redemption Date, including any
changes in dividends payable due to changes in the annual dividend rate or
Dividends Received Percentage, and Additional DRD Dividends, if any.
A "Mandatory Redemption Event" shall mean the earliest to occur of the
following events:
7
<PAGE> 8
(i) the Transaction (as defined below) shall have been voted upon
by the stockholders of the Corporation and shall not have been
approved at the special meeting of Tenneco stockholders presently
scheduled to be held on December 10, 1996 for the purpose of
considering and voting upon the Transaction (such meeting having been
finally adjourned): (ii) the Transaction shall not have been approved
by the requisite vote of the stockholders of the Corporation entitled
to vote thereon on or prior to March 31, 1997; or (iii) the
Corporation shall not have accepted on or prior to March 31, 1997 any
indebtedness of the Corporation and its subsidiaries tendered to it
pursuant to the cash tender offers made by it pursuant to the
Transaction.
"Transaction" means the reorganization of the Corporation pursuant to
which (i) the Corporation and its subsidiaries will, pursuant to a
Distribution Agreement dated as of November 1, 1996 (as such may be
amended, supplemented or modified from time to time) among the
Corporation, New Tenneco Inc., a newly formed wholly-owned subsidiary of
the Corporation ("New Tenneco"), and Newport News Shipbuilding Inc., a
wholly-owned subsidiary of the Corporation ("Newport News"), undertake
various intercompany transfers and distributions designed to restructure,
divide and separate their various businesses and assets so that all of the
assets, liabilities and operations of (A) their automotive parts,
packaging and administrative services businesses ("Industrial Business")
are owned and operated by New Tenneco, and (B) their shipbuilding business
("Shipbuilding Business") are owned and operated by Newport News; (ii) the
Corporation will then distribute pro rata to holders of the common stock
of the Corporation all of the outstanding common stock of New Tenneco and
Newport News; and (iii) thereafter a subsidiary of El Paso will merge with
and into the Corporation, which will then consists of the remaining
existing and discontinued operations of the Corporation and its
subsidiaries other than those relating to the Industrial Business or the
Shipbuilding Business, including the transmission and marketing of natural
gas, pursuant to the Merger Agreement.
Notice of redemption pursuant to this Section 4 will be given by mail,
not less than 30 nor more than 60 days prior to the Mandatory Redemption
Date to each record holder of shares of Series A Preferred Stock at the
address of such holder in the stock register of the Corporation. If a
notice of redemption has been given, from and after the Mandatory
Redemption Date (unless the Corporation defaults in making payment of the
redemption price), dividends on the Series A Preferred Stock will cease to
accrue, such shares will no longer be deemed to be outstanding, and all
rights of the holders thereof as stockholders of the Corporation (except
the right to receive the redemption price) will cease. Subject to
applicable escheat and similar abandoned property laws, and moneys set
aside by the Corporation for such redemption and unclaimed at the end six
months from the Mandatory Redemption Date shall revert to the general
funds of the Corporation, after which reversion the holders of such shares
so called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon such redemption.
Any interest accrued on funds so deposited shall be paid to the
Corporation from time to time.
Section 5. Voting. The Series A Preferred Stock shall not have any
voting rights except as required by law or the Certificate of
Incorporation, or as hereinafter set forth:
8
<PAGE> 9
(a) Each share of Series A Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
holders of Series A Preferred Stock.
(b) The holders of Series A Preferred Stock, voting as separate
series from all other series of Preferred Stock and classes of capital
stock, shall be entitled, at each annual meeting of stockholders of
the Corporation, to elect a number of directors of the Corporation
equivalent to the smallest number representing at least one-sixth of
the number of members of the Board of Directors as if there were no
vacancies or unfilled newly created directorships on such Board,
without giving effect to any directorships created or directors
elected pursuant to paragraph (c) below. Any director so elected shall
hold office until the next annual meeting and until his or her
successor shall be elected and qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from
office. So long as any shares of Series A Preferred Stock are
outstanding, the number of members of the Board of Directors of the
Corporation (as if there were no vacancies or unfilled newly created
directorships on such Board, without giving effect to any
directorships created or directors elected pursuant to paragraph (c)
below) shall be set at an integral multiple of six.
A director elected pursuant to the terms of this paragraph (b)
may be removed without cause only by the holders of a majority in
voting power of the outstanding Series A Preferred Stock.
At such time as all shares of the Series A Preferred Stock shall
cease to be outstanding, the term of office of any director elected
pursuant to this paragraph (b), or his or her successor, shall
automatically terminate.
(c) Whenever, at any time or times, dividends payable on the
Series A Preferred Stock shall be in arrears for dividend periods,
whether or not consecutive, containing in the aggregate a number days
equivalent to six calendar quarters, the holders of outstanding Series
A Preferred Stock shall have the exclusive right, in addition to the
rights under (b) above, 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 A 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 A Preferred Stock to vote pursuant to the provisions of this
paragraph (c) 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 (c), be vested in the Series A 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 A Preferred Stock and a proper
officer of the Corporation shall, upon the written request of the
holders of record of at
9
<PAGE> 10
least ten percent in aggregate liquidation value of the Series A
Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of holders of the Series A
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 the 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 of the aggregate liquidation value of the
Series A 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 A 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 A
Preferred Stock to vote for directors as a class as described in this
paragraph (c), the term of office of the directors so elected as
described in this paragraph (c) shall automatically terminate and the
number of directors shall be reduced accordingly.
(d) At any meeting so called pursuant to paragraph (c) above, and
at any other meeting of stockholders held for the purpose of electing
directors at which the holders of the Series A Preferred Stock shall
have the right to elect directors as provided in paragraph (b) or
paragraph (c) above, the presence in person or by proxy of a majority
in voting power of the outstanding shares of the Series A Preferred
Stock, shall be required to constitute a quorum thereof for the
election of any director by the holders of the Series A Preferred
Stock.
At any such meeting or adjournment thereof, (x) the absence of
the required quorum of the Series A Preferred Stock shall not prevent
the election of directors other than those to be elected by the Series
A 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 A Preferred Stock, and (y) in the absence of
either or both such quorums, a majority in voting power of the holders
present in person or by proxy of the stock or stocks which lack a
quorum shall have power to adjourn the meeting, subject to applicable
law, for 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.
10
<PAGE> 11
(e) 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 A Preferred Stock are
entitled to elect pursuant to paragraph (c), then any such vacancy
shall be filled only by the remaining director or directors elected by
such holders or, only in the event there is no such remaining
director, by the holders of the Series A Preferred Stock entitled to
vote thereon. 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 A Preferred Stock are
entitled to elect pursuant to paragraph (b), then any such vacancy
shall be filled only by a majority of the remaining directors elected
by such holders or, in the event there are no such remaining
directors, by the majority vote of the remaining directors then
constituting the Board of Directors.
Promptly after the right of the holders of the Series A Preferred
Stock to fill any vacancy as set forth in the first sentence of the
immediately preceding paragraph arises, the Board of Directors may
cause a special meeting of the holders of Series A 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 A Preferred Stock to fill
any vacancy as set forth above in the first sentence of the first
paragraph of this paragraph (e) 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 A
Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of holders of the Series A
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 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 as 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 of the aggregate liquidation value of the Series A 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 A 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.
11
<PAGE> 12
(f) In addition to any other vote or consent of stockholders
required by law or the Certificate of Incorporation, if any, so long
as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without the consent of the holders of at least
a majority in voting power of the outstanding shares of Series A
Preferred Stock, given in person or by proxy, either in writing or by
vote at annual meeting or a special meeting called for that purpose:
(A) issue any additional shares of Series A Preferred Stock
(other than the 6,000,000 shares of Series A Preferred Stock
authorized hereby), or issue any shares of any class or series of
stock ranking prior to or on parity with the Series A Preferred
Stock as to the payment of dividends or as to the distribution of
assets on liquidation, dissolution or winding up:
(B) issue any obligations or security convertible into share
of stock ranking prior to or on parity with the Series A
Preferred Stock as to the payment of dividends or as the
distribution of assets on liquidation, dissolution or winding up;
or
(C) amend the Certificate of Incorporation or the Certificate
of Designation if the amendment would alter or change the powers,
preferences or special rights of the shares of Series A Preferred
Stock so as to affect such shares adversely.
Section 6. 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 A Preferred Stock
remain outstanding, unless full cumulative dividends on the outstanding
shares of Series A Preferred Stock for all past dividend periods have been
paid, or declared and set apart for payment, and the Corporation shall not
be in default with respect to its obligations under Section 4 hereof,
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 A 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 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 as a special meeting called for that purpose, of the
holders of at least a majority in voting power of the outstanding shares
of Series A Preferred Stock present in person or by proxy at such meeting,
provided that quorum, consisting of at least a majority in voting power of
the then outstanding shares of Series A Preferred Stock is present;
provided, however, that, notwithstanding the foregoing provisions of this
Section 6 (but subject to any restrictions or limitations to the contrary
contained in the Certificate of Incorporation), the Corporation may 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 A
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
12
<PAGE> 13
Corporation ranking junior to the Series A Preferred Stock as to
dividends and rights upon liquidation, dissolution and winding up.
Section 7. Ranking. (a) Any class or series of stock of the
Corporation shall be deemed to rank:
(i) prior to the Series A 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 A
Preferred Stock:
(ii) on a parity with the Series A 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 A
Preferred Stock, if the holders of such class or series of stock and
the holders of the Series A 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 A 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 A Preferred Stock, if the holders
of such class or series of stock and the holders of the Series A
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 A 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 A 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 $5.00 per share, of the
Corporation (as such may be constituted from time to time, the "Common
Stock") and the Series A Participating Junior Preferred Stock, without par
value, of the Corporation (the "Participating Junior Preferred Stock"),
each other class and series of stock of the Corporation existing on the
date of the adoption of this Certificate shall be deemed to rank prior to
the Series A 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 and the Participating Junior Preferred Stock shall be
deemed to rank junior to the Series A Preferred Stock both as to the
payment of dividends and as to the distribution of assets upon
liquidation, dissolution or winding up.
Section 8. Liquidation Rights. (a) The amount that the holders of
Series A 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
13
<PAGE> 14
"Liquidation"), shall be $50.00 per share, plus an amount equal to all
accrued and unpaid dividends to the date of Liquidation including any
changes in dividends payable due to changes in the annual dividend
rate of Dividends Received Percentage, and Additional DRD Dividends,
if any, and no more. After such amount is paid in full, no further
distributions or payments shall be made in respect of shares of Series
A Preferred Stock, such shares of Series A Preferred Stock shall no
longer be deemed to be outstanding or be entitled to any powers,
preferences, rights or privileges, including voting rights, and such
shares of Series A 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 A Preferred Stock, the holders of the Series
A Preferred Stock (subject to the rights of the holders of any stock
ranking prior to the Series A Preferred Stock as to the rights on
liquidation, dissolution and winding up) shall be entitled to be paid in
full the amounts set forth in paragraph (a) of this Section 8. After such
payment shall have been made in full to the holders of the Series A
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 A Preferred Stock according to
their respective rights. In the event that the assets of the Corporation
available for distribution to holders of Series A 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 A 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 A Preferred Stock and any such other parity
stock pro rata in proportion to the full amounts payable upon the shares
of Series A Preferred Stock and any such other parity stock if all amounts
payable thereon were paid in full.
Section 9. Maturity. Unless otherwise redeemed as provided herein,
the term of the Series A Preferred Stock shall be perpetual.
FIFTH: (A) The number of directors which shall constitute the whole
Board of Directors shall be as determined from time to time by resolution
adopted by the affirmative vote of a majority of the Board of Directors;
provided that until otherwise determined by the Board of Directors in
accordance herewith, the number of directors shall be six (6).
(B) In furtherance and not in limitation of the powers which are now
or may hereafter be conferred by statute or the By-Laws of the Corporation, the
Board of Directors is expressly authorized:
(a) To fix, determine and vary from time to time the amount to be
maintained as surplus and the amount or amounts to be set apart as working
capital.
14
<PAGE> 15
(b) To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purposes and/or to abolish
any such reserve in the manner in which it was created.
(c) To make, amend, alter, change, add to or repeal By-Laws for the
Corporation, without any action on the part of the stockholders. The By-Laws
made by the Board of Directors may be amended, altered, changed, added to or
repealed by the stockholders.
(d) To authorize and cause to be executed mortgages and liens, without
limit as to amount, upon the real and personal property of the Corporation.
(e) From time to time to determine whether and to what extent, at what
time and place, and under what conditions and regulations the accounts and
books of the Corporation or any of them, shall be open to the inspection of any
stockholder, and no stockholder shall have any right to inspect any account or
book or document of the Corporation except as conferred by statute or the
By-Laws or as authorized by a resolution of the stockholders or the Board of
Directors.
(f) To authorize the payment of compensation to the directors for
services to the Corporation, including fees for attendance at meetings of the
Board of Directors, and of any committees, and to determine the amount of such
compensation and fees.
(g) To designate by resolution or resolutions, passed by a majority of
the whole Board of Directors, one or more committees, which, to the extent
provided in said resolution or resolutions or in the By-laws of the
Corporation, shall have and may exercise the powers of the Board of Directors
in the management of the business and affairs of the Corporation and may have
power to authorize the seal of the Corporation to be affixed to all papers
which may require it.
(h) At any time or from time to time (without any action by the
stockholders of the Corporation) to create and issue, whether or not in
connection with the issue and sale of any shares of stock of other securities
of the Corporation, rights or options entitling the holders thereof to purchase
from the Corporation any shares of its capital stock of any class or classes or
of any series of any class or classes, such rights or options to be evidenced
by or in such instrument or instruments as shall be approved by the Board of
Directors. The terms upon which, the time or times, which may be limited or
unlimited in duration, at or within which, and the price or prices at which any
such shares may be purchased from the Corporation upon the exercise of any such
right or option shall be such as shall be fixed and stated in the resolution or
resolutions adopted by the Board of Directors providing for the creation and
issue of such rights or options and, in every case, set forth or incorporated
by reference in the instrument or instruments evidencing such rights or
options.
SIXTH: Omitted.
SEVENTH: The Corporation is to have perpetual existence.
15
<PAGE> 16
EIGHTH: A director of this corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit.
IN WITNESS WHEREOF, El Paso Tennessee Pipeline Co., has caused this
Restated Certificate of Incorporation to be signed by a duly authorized officer
this 11th day of May 1999.
EL PASO TENNESSEE PIPELINE CO.
By: /s/ Jeffrey I. Beason
------------------------------
Jeffrey I. Beason
Vice President and Controller
16
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 508
<ALLOWANCES> 0<F1>
<INVENTORY> 19
<CURRENT-ASSETS> 787
<PP&E> 5,604
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 7,648
<CURRENT-LIABILITIES> 1,936
<BONDS> 1,519
0
300
<COMMON> 0
<OTHER-SE> 1,901
<TOTAL-LIABILITY-AND-EQUITY> 7,648
<SALES> 0
<TOTAL-REVENUES> 1,016
<CGS> 0
<TOTAL-COSTS> 912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 98
<INCOME-TAX> 32
<INCOME-CONTINUING> 66
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (13)
<NET-INCOME> 53
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
