<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
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 1-4101
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TENNESSEE GAS PIPELINE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1056569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TENNECO BUILDING, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
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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 $5 per
share, 200 shares as of September 30, 1994.
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I--Financial Information
Tennessee Gas Pipeline Company and Consolidated Subsidiaries--
Statements of Income.................................................. 2
Statements of Cash Flows.............................................. 3
Balance Sheets........................................................ 4
Statements of Changes in Stockholder's Equity......................... 6
Notes to Financial Statements......................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
Part II--Other Information
Item 1. Legal Proceedings............................................... 17
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... *
Item 6. Exhibits and Reports on Form 8-K................................ 18
</TABLE>
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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
<PAGE>
PART I--FINANCIAL INFORMATION
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
THREE
MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
------------ --------------
1994 1993 1994 1993
----- ----- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Net sales and operating revenues--
Natural gas pipelines........................ $ 549 $ 690 $1,847 $2,173
Farm and construction equipment.............. -- 246 518 775
Automotive parts............................. 478 400 1,416 1,250
Shipbuilding................................. 424 436 1,291 1,351
Packaging.................................... 562 513 1,580 1,531
Chemicals.................................... 243 223 715 685
Other........................................ (2) (2) (6) (4)
----- ----- ------ ------
2,254 2,506 7,361 7,761
Other income--
Interest income.............................. 91 59 203 183
Other income, net............................ 29 71 35 103
----- ----- ------ ------
2,374 2,636 7,599 8,047
----- ----- ------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown
below)........................................ 1,307 1,447 4,339 4,454
Operating expenses............................. 435 569 1,489 1,739
Selling, general and administrative............ 166 188 552 568
Finance charges of Tennessee's finance
subsidiaries.................................. -- 4 8 17
Depreciation, depletion and amortization....... 74 103 249 312
----- ----- ------ ------
1,982 2,311 6,637 7,090
----- ----- ------ ------
Income Before Interest Expense and Income Taxes.. 392 325 962 957
Interest Expense (net of interest capitalized)... 67 71 200 212
----- ----- ------ ------
Income Before Income Taxes....................... 325 254 762 745
Income Tax Expense............................... 102 76 299 281
----- ----- ------ ------
Income From Continuing Operations................ 223 178 463 464
Loss From Discontinued Operations, Net of Income
Tax............................................. -- (1) (23) (2)
----- ----- ------ ------
Income Before Extraordinary Loss................. 223 177 440 462
Extraordinary Loss, Net of Income Tax............ -- (2) -- (24)
----- ----- ------ ------
Income Before Cumulative Effect of Change in
Accounting Principle............................ 223 175 440 438
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax.................... -- -- (13) --
----- ----- ------ ------
Net Income....................................... $ 223 $ 175 $ 427 $ 438
===== ===== ====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
statements of income.)
2
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1994 1993
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Income from continuing operations.......................... $ 463 $ 464
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations--
Depreciation, depletion and amortization................. 249 312
Deferred income taxes.................................... (71) (25)
Changes in components of working capital--
(Increase) decrease in receivables..................... (3) 258
(Increase) decrease in Tenneco Inc. receivables........ (2,067) 427
(Increase) decrease in inventories..................... (82) (13)
(Increase) decrease in prepayments and other current
assets................................................ 37 (8)
Increase (decrease) in payables........................ (163) (265)
Increase (decrease) in taxes accrued................... 144 143
Increase (decrease) in interest accrued................ 4 6
Increase (decrease) in restructuring liability......... (10) (19)
Increase (decrease) in natural gas pipeline revenue
reservation........................................... (96) 97
Increase (decrease) in other current liabilities....... 102 (24)
(Increase) decrease in long-term notes and other
receivables............................................. 4 9
(Increase) decrease in notes receivable from other
affiliates.............................................. 1,755 41
Take-or-pay (refunds to customers) recoupments, net...... 15 (43)
Other.................................................... 13 (120)
------- -------
Cash provided (used) by continuing operations............ 294 1,240
Cash provided (used) by discontinued operations.......... (6) (11)
------- -------
Net Cash Provided (Used) by Operating Activities............. 288 1,229
------- -------
Cash Flows from Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations................................... (15) (40)
Proceeds from sale of businesses and assets................ 223 94
Expenditures for plant, property and equipment--
Continuing operations.................................... (374) (296)
Discontinued operations.................................. (1) (2)
Acquisitions of businesses................................. (4) (21)
Investments and other...................................... (49) (8)
------- -------
Net Cash Provided (Used) by Investing Activities............. (220) (273)
------- -------
Cash Flows from Financing Activities:
Issuance of long-term debt................................. 2 3
Retirement of long-term debt............................... (139) (823)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt...................... 249 (184)
------- -------
Net Cash Provided (Used) by Financing Activities............. 112 (1,004)
------- -------
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments............................................ 13 3
------- -------
Increase (Decrease) in Cash and Temporary Cash Investments... 193 (45)
Cash and Temporary Cash Investments, January 1............... 220 108
------- -------
Cash and Temporary Cash Investments, September 30 (Note)..... $ 413 $ 63
======= =======
Cash Paid During the Period for Interest..................... $ 203 $ 225
Cash Paid During the Period for Income Taxes (net of
refunds).................................................... $ 227 $ 300
</TABLE>
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NOTE: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
(The accompanying notes to financial statements are an integral part of these
statements of cash flows.)
3
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
ASSETS 1994 1993 1993
------ ------------- ------------ -------------
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments. $ 413 $ 220 $ 63
Receivables--
Customer notes and accounts (net). 694 783 1,167
Affiliated companies.............. 342 716 372
Gas transportation and exchange... 330 228 233
Other............................. 142 88 83
Notes receivable from Tenneco Inc... 2,812 745 790
Inventories......................... 812 932 1,027
Deferred income taxes............... 90 26 74
Prepayments and other............... 261 321 336
------- ------- -------
5,896 4,059 4,145
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies.. 588 410 426
Other investments, at cost.......... 54 60 47
Long-term notes and other
receivables (net).................. 324 221 189
Notes receivable from other
affiliates......................... 15 1,770 1,880
Investment in subsidiaries in excess
of net assets at date of
acquisition, less amortization..... 279 273 199
Deferred income taxes............... 54 38 37
Other............................... 698 901 843
------- ------- -------
2,012 3,673 3,621
------- ------- -------
Plant, Property and Equipment, at
cost................................. 10,484 10,345 10,269
Less--Reserves for depreciation,
depletion and amortization......... 5,614 5,573 5,562
------- ------- -------
4,870 4,772 4,707
------- ------- -------
$12,778 $12,504 $12,473
======= ======= =======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
4
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993 1993
------------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
Current Liabilities:
Short-term debt (including current
maturities on long-term debt)...... $ 250 $ 121 $ 268
Payables--
Trade............................. 896 1,005 992
Affiliated companies.............. 84 263 128
Gas transportation and exchange... 218 136 180
Taxes accrued....................... 340 218 368
Interest accrued.................... 60 43 78
Restructuring liability............. 12 95 74
Natural gas pipeline revenue
reservation........................ 182 291 253
Other............................... 824 815 807
------- ------- -------
2,866 2,987 3,148
------- ------- -------
Long-term Debt........................ 874 1,086 1,089
------- ------- -------
Deferred Income Taxes................. 1,233 1,262 1,194
------- ------- -------
Deferred Credits and Other
Liabilities.......................... 859 823 910
------- ------- -------
Commitments and Contingencies
Stockholder's Equity:
Common stock, par value $5 per
share, authorized, issued and
outstanding 200 shares............. -- -- --
Premium on common stock and other
capital surplus.................... 3,494 3,494 3,494
Cumulative translation adjustments.. (124) (297) (280)
Retained earnings................... 3,576 3,149 2,918
------- ------- -------
6,946 6,346 6,132
------- ------- -------
$12,778 $12,504 $12,473
======= ======= =======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
5
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS EXCEPT SHARE
AMOUNTS)
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1994 1993
------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Common Stock:
Balance January 1 and September 30............. 200 $ -- 200 $ --
=== ------ === ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1 and September 30............. 3,494 3,494
------ ------
Cumulative Translation Adjustments:
Balance January 1.............................. (297) (218)
Translation of foreign currency statements... 174 (65)
Hedges of net investment in foreign
subsidiaries (net of income taxes).......... (1) 3
------ ------
Balance September 30........................... (124) (280)
------ ------
Retained Earnings:
Balance January 1.............................. 3,149 2,480
Net income................................... 427 438
------ ------
Balance September 30........................... 3,576 2,918
------ ------
Total........................................ $6,946 $6,132
====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part
of these statements of changes in stockholder's equity.)
6
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of Tennessee Gas Pipeline Company (the "Company"), the
accompanying unaudited financial statements of Tennessee Gas Pipeline Company
and Consolidated Subsidiaries ("Tennessee") contain all adjustments necessary
to present fairly the financial position as of September 30, 1994, and the
results of operations; changes in stockholder's equity; and cash flows for the
periods indicated.
Prior year's financial statements have been reclassified to conform to 1994
presentations.
(2) Pursuant to Order 636 issued by the Federal Energy Regulatory Commission
("FERC") on April 8, 1992, the Company implemented revisions to its tariff
which put into effect on September 1, 1993, the restructuring of its
transportation, storage and sales services. Pursuant to the provisions of Order
636 allowing for the recovery of transition costs related to the restructuring,
the Company has made filings to recover gas production costs related to its
Bastian Bay facilities, the remaining balance of purchased gas ("PGA") costs,
stranded transportation ("TBO") costs, and gas supply realignment ("GSR") costs
resulting from remaining gas purchase obligations.
The Company's filings to recover production costs related to its Bastian Bay
facilities have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of the
Company to file for the recovery of losses upon disposition of these assets.
The Company has filed for appellate review of the FERC actions and is confident
that the Bastian Bay costs will ultimately be recovered as transition costs
directly related to Order 636, and no FERC order has questioned the ultimate
recoverability of these costs.
The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted effective September 1, 1993, and made subject to
refund pending FERC review: 1) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; 2) recovery of TBO costs,
which the Company is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually; and 3) GSR
cost recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers.
Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which will
resolve, if approved, the recovery of PGA costs of approximately $100 million
and the recovery of costs associated with the transfer of storage gas inventory
to new storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. The Company
believes that the PGA Stipulation will not have a material adverse effect on
Tennessee's consolidated financial position or results of operations.
The Company is recovering TBO costs formerly incurred to perform its sales
functions, subject to refund, pending review of data submitted by the Company
through technical conference proceedings. The Company believes that annual TBO
costs will not exceed $35 million in 1994, decreasing each year thereafter over
the term of the contracts involved.
In connection with the Company's GSR cost recovery discussed below, the
Company along with three other pipelines, executed four separate settlement
agreements with Dakota Gasification Company and the U.S. Department of Energy
and initiated four separate proceedings at the FERC seeking approval to
implement the settlement agreements. The settlement resolved litigation
concerning purchases made by the Company of synthetic gas from the Great Plains
Coal Gasification plant ("Great Plains"). On October 18,
7
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge who is to issue his initial decision by
December 31, 1995. The FERC order clearly stated that the costs related to the
Great Plains project are eligible for recovery through GSR and other special
recovery mechanisms and that the costs are eligible for recovery for the
duration of the term of the original gas purchase agreements. The hearing will
be limited to the issue of whether the settlement agreements are prudent.
Also in connection with the Company's GSR cost recovery discussed below, on
October 14, 1993, the Company was sued in the State District Court of Ector
County, Texas by ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas"). In that suit, ICA and TransTexas contended that the Company had
an obligation to purchase gas production which TransTexas thereafter attempted
to add unilaterally to the reserves originally dedicated to a 1979 gas
contract. On two subsequent occasions, TransTexas gave the Company notice that
it was adding new production and/or acreage "to the contract." A recent
amendment to the pleadings seeks $1.5 billion from the Company for alleged
damages caused by the Company's refusal to purchase gas produced from the
TransTexas bases covering the new production and lands. Neither ICA nor
TransTexas were parties to that contract. However, they contend that any
stranger acquiring a fractional interest in the original committed reserves,
thereby obtains a right to add to the contract unlimited volumes of gas
production from unspecified locations in South Texas. The Company believes it
has meritorious defenses to the claims of ICA and TransTexas, which defenses it
will vigorously assert.
As of September 30, 1994, the Company deferred GSR costs yet to be recovered
from its customers of approximately $179 million, net of $141 million
previously collected from its customers, subject to refund. Proceedings have
commenced to review the recovery of these GSR costs; however, FERC has also
generally encouraged pipelines to settle such issues through negotiations with
customers.
Although Order 636 contemplates the complete recovery by pipelines of
qualified transition costs, the Company has initiated settlement discussions
with its customers concerning the amount of recoverable GSR costs in response
to recent FERC and customer statements acknowledging the desirability of such
settlements. The Company is also engaged in separate settlement and contract
reformation discussions with holders of certain gas purchase contracts who have
sued the Company, although the Company believes that its defenses in the
underlying gas purchase contract actions are meritorious.
On April 5, 1994, the FERC issued a final order approving the Company's
Stipulation and Agreement partially resolving its current rate case. Pursuant
to this final FERC order, rates for the period February 1, 1992, through August
31, 1993, were approved, and the Company paid refunds for this period on June
3, 1994. The refunds had no material effect on reported net income. Also
pursuant to the Company's Stipulation and Agreement, refunds for the period
after September 1, 1993, will be paid by the Company within 60 days
of receipt of a final FERC order resolving issues related to this period. The
Company has recorded a liability which is adequate to cover these estimated
refunds. The Stipulation and Agreement obligates the Company to file another
rate case by the end of 1994.
In addition, the Stipulation and Agreement established procedures for
resolving the recovery of certain environmental expenditures. These
environmental costs are currently being collected in the Company's rates
subject to further review in the rate case and possible refund. A hearing
concerning these costs is scheduled to commence no later than January 31, 1995.
The Company intends to pursue full recovery of the costs at issue in this
hearing. The Company is also currently pursuing the possibility of a global
settlement with its customers that would not only address recovery of the
environmental costs currently being recovered in its rates, but would also
establish a mechanism for recovering a substantial portion of the environmental
costs
8
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
discussed in Note (4) that will be expended in the future. The total amount of
and timing for any recovery pursuant to such a global settlement will depend
upon the results of the Company's negotiations with its customers and will be
subject to FERC approval.
Given the current uncertainty over the results of ongoing discussions between
the Company and its customers over the recovery of the GSR and environmental
costs referenced in this Note (2) and settlement and contract reformation
discussions with holders of gas purchase contracts, the Company is unable to
predict the timing or the ultimate impact on Tennessee's consolidated financial
position or results of operations of any such settlements.
(3) The Company and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. The Company believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on the financial position or results of operations of
Tennessee Gas Pipeline Company and its consolidated subsidiaries.
(4) In 1988, the Company initiated an internal project to identify and deal
with the presence of polychlorinated biphenyls ("PCBs") at compressor stations
operated by both its interstate and intrastate natural gas pipeline systems.
This situation arose as a result of the use of a PCB-containing lubricant,
purchased between 1953 and the early 1970's, in air compressors which are used
to start the main gas compressor engines (lubricants containing PCBs were not
used in the main gas compressor engines themselves). The project was
subsequently expanded to include a screening for the presence of any substances
included on the U.S. Environmental Protection Agency ("EPA") List of Hazardous
Substances ("HS List"). The Company conducted the project with frequent contact
with federal and state regulatory agencies, both through informal negotiation
and formal entry of consent orders, in order to assure that site
characterization efforts met regulatory requirements.
In 1991, upon the conclusion of a comprehensive study to estimate remediation
costs for its compressor sites and all other sites on the Company's interstate
and intrastate pipeline systems at which listed substances had then been
identified, Tennessee recorded a reserve of $260 million for estimated future
environmental expenses including: 1) expected remediation expense and
associated onsite, offsite and groundwater technical studies; 2) legal fees;
and 3) settlement of third party and governmental litigation, including civil
penalties. Through September 30, 1994, Tennessee has charged $80 million
against this environmental reserve. Of the remaining reserve, $30 million has
been recorded on the balance sheet under "Payables--Trade" and $150 million
under "Deferred Credits and Other Liabilities."
As a result of its recent negotiations with federal and state regulatory
agencies, including the recently-executed remediation agreement with the EPA
discussed in Item 1, Legal Proceedings, the Company anticipates that it will
perform further testing for and characterization of substances on the HS List,
and other substances of concern to it and those agencies, at its compressor
sites and other sites on its interstate pipeline systems. Due to the current
uncertainty regarding the regulatory requirements for site characterization,
the actual presence of such substances at the sites, and the final, site-
specific clean-up decisions to be made with respect to clean-up levels and
remediation technologies, the Company cannot at this time project what
additional costs may result. While there are still many uncertainties relating
to the ultimate costs which may be incurred, based upon the Company's
continuing evaluation and experience to date, Tennessee continues to believe
that the amount of the reserve is appropriate.
Tennessee believes that a substantial portion of these costs, which will be
expended over the next five to ten years, will be recovered from customers of
its natural gas pipelines. The estimated costs expected to be recovered,
amounting to $230 million, were recorded in 1991 as an asset ($30 million in
"Current Assets"
9
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and $200 million in "Investments and Other Assets"). An estimated unrecoverable
portion, amounting to $30 million, was charged against income in 1991. The
Company is currently recovering environmental expenses annually in its rates.
For more information regarding recovery of environmental costs, see Note (2)
above. A significant portion of these expenses remains subject to review and
refund in the Company's pending rate case. As of September 30, 1994, the asset
balance is $142 million ($34 million in "Current Assets" and $108 million in
"Investments and Other Assets").
Tennessee believes that its liability insurance policies in effect during the
period in which the environmental issues occurred provide coverage for
remediation costs and related claims. In 1991, the Company commenced litigation
in a Louisiana state court against 26 of its insurance carriers during this
period, seeking recovery of losses which the Company incurred. The issues in
dispute involve determining: 1) whether the presence of PCBs and other
substances at each compressor station constituted a separate occurrence for
purposes of the per-occurrence limits of the policies; 2) the applicability of
the pollution exclusions in certain policies issued after 1971; 3) the
applicability of provisions which exclude the environmental impacts located
solely on the insured's property; 4) whether the term "property damage" in the
policies will cover the cost of compliance with governmental clean-up
directives; 5) the allocation of costs to the various policies in effect during
the period the environmental impact occurred; 6) the applicability of
provisions excluding pollution that is "expected or intended"; and 7) the
adequacy of notice of claims to insurance carriers. This environmental
insurance coverage litigation remains pending. Tennessee has completed
settlements with and received payment from six of the defendant carriers and
believes that the likelihood of recovery against the remaining defendant
carriers is reasonably possible.
In July 1994, the Company commenced litigation in a Kentucky state court
against the manufacturer of the PCB-containing lubricant used by the Company,
seeking reimbursement of sums the Company has and will incur in the defense and
settlement of PCB-related claims brought by state and federal agencies, private
individuals, and others. The Company anticipates that the defendant will raise
a variety of issues in dispute of the Company's claims.
While Tennessee believes its legal position to be meritorious, Tennessee has
not adjusted its environmental reserve to reflect any anticipated insurance
recoveries or recoveries from the manufacturer of the PCB-containing lubricant.
Tennessee has identified other sites in its various operating divisions where
environmental remediation expense may be required should there be a change in
ownership, operations or applicable regulations. These possibilities cannot be
predicted or quantified at this time and accordingly, no provision has been
recorded. However, provisions have been made for all instances where it has
been determined that the incurrence of any material remedial expense is
reasonably possible.
(5) In June 1994, Tenneco Inc. and its subsidiaries ("Tenneco") announced
that its Tenneco Automotive subsidiary entered into an agreement in principle
to sell its brakes division to an individual for approximately $39 million. The
brakes division manufactures asbestos-free brake friction products for the
automotive and heavy duty markets and sells a broad line of brake components
and accessories. The transaction is expected to close in the fourth quarter of
1994. Tennessee has recorded as part of discontinued operations an after-tax
loss estimated at $20 million, net of $15 million of income tax benefits, on
the sale of this business.
(6) On October 6, 1994, Tenneco announced that Tenneco Power Generation
Company, a division of Tenneco Gas, signed a letter of intent to complete the
acquisition of ARK Energy, Inc., for $60 million in Tenneco Inc. common stock
and other considerations by year-end. ARK Energy, Inc. is a privately-owned
power generation company.
10
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) On October 26, 1994, Tenneco announced that its Tenneco Automotive
subsidiary reached an agreement to acquire Heinrich Gillet GmbH & Company in a
transaction valued at $113 million in cash and assumed debt. Heinrich Gillet
GmbH & Company has been the leading manufacturer of original equipment exhaust
systems and components for European auto makers.
(8) On October 28, 1994, Tenneco announced a secondary public offering of
15.6 million shares of the common stock of Case Corporation, the holder of
Tenneco's Farm and construction equipment segment. Tenneco expects the offering
to reduce its holdings in the Farm and construction equipment segment from
approximately 71 percent to approximately 49 percent. Of the remaining 49
percent, less than 3 percent will be held by Tennessee. It is expected that the
proposed offering would not have a material effect on Tenneco's earnings in
1994.
(The above notes are an integral part of the foregoing financial statements.)
11
<PAGE>
TENNESSEE GAS PIPELINE COMPANY
AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENT
In June 1994, Tenneco completed an initial public offering ("IPO") of
approximately 29 percent of the common stock of Case Corporation, a newly
organized corporation formed to acquire Tenneco's Farm and construction
equipment segment ("Case"), resulting in proceeds of $382 million. Prior to the
IPO, Tenneco reorganized this segment resulting in Tennessee transferring all
of its Case assets to Case Corporation for consideration of common stock and
cash.
On October 28, 1994, Tenneco announced a secondary public offering of 15.6
million shares of the common stock of Case Corporation, the holder of Tenneco's
Farm and construction equipment segment. Tenneco expects the offering to reduce
its holdings in the Farm and construction equipment segment from approximately
71 percent to approximately 49 percent. Of the remaining 49 percent, less than
3 percent will be held by Tennessee. It is expected that the proposed offering
would not have a material effect on Tenneco's earnings in 1994.
THREE MONTH RESULTS
REVENUES
Revenues for the third quarter of 1994 were $2.25 billion, down from $2.51
billion in the third quarter of 1993. Revenues were down primarily due to the
sale of Case. Each division reported improved revenues for the quarter with the
exception of natural gas pipelines where revenues decreased $141 million or 20
percent and shipbuilding where revenues decreased $12 million or 3 percent.
Higher revenues were reported for automotive parts (up $78 million or 20
percent), packaging (up $49 million or 10 percent) and chemicals (up $20
million or 9 percent).
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES ("OPERATING INCOME")
Operating income for the third quarter of 1994 was $392 million, up $67
million or 21 percent, compared with $325 million for the third quarter of
1993.
Natural gas pipelines reported operating income for the third quarter of 1994
of $97 million compared with $94 million in the 1993 third quarter. Revenues
for the third quarter of 1994 decreased to $549 million compared with $690
million in the third quarter of 1993, mainly due to changes in operations under
the Federal Energy Regulatory Commission ("FERC") Order No. 636 which commenced
September 1, 1993. Under FERC Order No. 636, regulated pipeline revenues no
longer include gas sales since this business includes primarily transportation
revenues, and will reflect a smoother quarterly earnings stream with the switch
to a non-seasonal rate structure. Third quarter 1994 operating income included
a $16 million benefit resulting from the early settlement of a firm
transportation contract running through the year 1999. Operating income also
increased due to improved non-regulated earnings and from lower operating
expenses, primarily the result of continuing efforts to control cost. The third
quarter 1993 operating income included $34 million resulting from a favorable
rate decision that allows collection from customers of the transition
obligation that was established at the time of adoption of Financial Accounting
Standard No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions" for domestic operations. This benefit was partially offset by a $10
million reserve established for costs which may be absorbed by the Company to
resolve the pass through of the costs of implementing Order 636. Reference is
made to Note 2 in the "Notes to Financial Statements" for additional
information of FERC matters.
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Automotive parts reported third quarter 1994 operating income of $67 million
compared with $55 million recorded in the same quarter a year ago. Revenues for
the third quarter of 1994 totaled $478 million compared with $400 million in
last year's third quarter, primarily due to higher North American original
equipment sales in the Walker exhaust segment, reflecting stronger new car and
truck production. Aftermarket sales of ride control products in North America
increased as a result of the continuing success of Monroe's new Sensa-Trac
ride-control product. Improving economic conditions in Europe led to a 23
percent increase in overall European revenues. Operating income increased
primarily as a result of higher aftermarket sales and margins in the ride
control segment and the benefit of quality program initiatives.
Shipbuilding reported third quarter operating income of $52 million, up
slightly from $51 million in the 1993 third quarter. Revenues decreased to $424
million in the third quarter of 1994 compared with $436 million in the same
period a year ago primarily due to lower volumes on submarine construction
contracts and the loss of revenues from the Sperry Marine business. The Sperry
Marine business was sold in the fourth quarter of 1993. The backlog at the end
of the third quarter of 1994 stood at just under $3 billion and included
construction contracts for four LOS ANGELES class submarines, two NIMITZ class
aircraft carriers, the recently awarded contract to defuel and deactivate the
nuclear cruiser LONG BEACH and the conversion contract for two fast SEALIFT
ships.
Third quarter 1994 operating income for packaging was $63 million, up from
$51 million generated in the 1993 third quarter. Excluding $24 million in non-
recurring gains on asset sales in the year-ago quarter, operating income more
than doubled. Revenues for the third quarter of 1994 were $562 million compared
with $513 million in the same period last year. The higher revenues and
operating income were primarily the result of strengthening containerboard
pricing due to stronger demand and productivity gains at packaging's paper
mills. Operating income from the containerboard segment was $41 million in the
third quarter of 1994 compared to $2 million in the third quarter of 1993 due
to the sharp increase in containerboard prices. Partially offsetting this
increase was lower operating income in the specialty segment due to higher raw
material costs, particularly for aluminum and recycled paper and competitive
pricing pressures on molded fibre, recycled paperboard and aluminum products.
Chemicals reported third quarter 1994 operating income of $16 million down
from $20 million in the same period last year. Operating income decreased due
to lower sales margins and a one-time provision of $4 million to cover audit
adjustments in Germany and Belgium partially offset by higher income from
increased sales volumes. Revenues increased 9 percent to $243 million in the
1994 third quarter compared with $223 million in the 1993 period. The
improvement in revenues resulted from higher sales volumes and the favorable
impact of a weakening U.S. dollar on currency transactions.
INTEREST EXPENSE
Interest expense decreased from $72 million in the 1993 third quarter to $68
million in the third quarter of 1994. Interest capitalized was $1 million in
both periods. The decline was primarily attributable to lower debt levels that
resulted from long-term debt retirements.
INCOME TAXES
Income tax expense for the third quarter of 1994 was $102 million compared
with $76 million reported in the 1993 third quarter. This increase was
primarily due to higher pre-tax income in 1994, partially offset by lower
levels of unbenefitted foreign losses.
DISCONTINUED OPERATIONS
In June 1994, Tennessee announced that its Tenneco Automotive subsidiary
entered into an agreement in principle to sell its brakes division for
approximately $39 million. The brakes division manufactures asbestos-free brake
friction products for the automotive and heavy duty markets and sell a broad
line of brake components and accessories. The transaction is expected to close
in the fourth quarter of 1994.
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The third quarter of 1993 Statement of Income reflects the loss from the
discontinued brakes operations of $1 million.
EXTRAORDINARY LOSS
The extraordinary loss of $2 million (net of $1 million tax benefit) for the
third quarter of 1993 resulted from the redemption premium associated with the
prepayment of long-term debt.
NET INCOME
Income from continuing operations for the third quarter of 1994 was $223
million compared with income from continuing operations of $178 million in the
1993 third quarter.
Loss from discontinued operations for the third quarter of 1993 was $1
million. Extraordinary loss for the third quarter of 1993 was $2 million. Net
income for the third quarter of 1994 was $223 million compared to net income of
$175 million for the third quarter of 1993.
NINE MONTH RESULTS
REVENUES
Revenues for the first nine months of 1994 were $7.36 billion, down from
$7.76 billion reported in the same 1993 period. Higher revenues for automotive
parts (up $166 million or 13 percent), packaging (up $49 million or 3 percent)
and chemicals (up $30 million or 4 percent) were offset by lower revenues for
natural gas pipelines (down $326 million or 15 percent), and shipbuilding (down
$60 million or 4 percent). Revenues were also down due to the sale of Case.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES ("OPERATING INCOME")
Operating income for the first nine months of 1994 was $962 million compared
with $957 million reported for the same period of 1993.
Natural gas pipelines reported operating income of $291 million for the first
nine months of 1994, no change from the same period of 1993. Revenues decreased
to $1.85 billion compared to $2.17 billion in the first nine moths of 1993. The
changes in revenues and operating income were due principally to the factors
discussed under "Three Month Results" above.
Farm and construction equipment reported a year-to-date 1994 operating loss
of $4 million, up $1 million from the $5 million operating loss reported for
the first nine months of 1993. Year-to-date revenues were $518 million, down
from $775 million reported in the first nine months of 1993. Revenues were down
primarily due to the sale of Case.
Automotive parts reported operating income of $190 million for the first nine
months of 1994 compared with $167 million recorded in the same period a year
ago. Year-to-date revenues for 1994 totaled $1.42 billion as compared with last
year's reported amount of $1.25 billion. Higher revenues were reported for
exhaust products in North American original equipment markets, buoyed by
increased new car and light truck production and for ride control products in
North America. Overall revenues were also up in Europe due to the improving
market conditions which also contributed to higher operating income. The
improvement in the first nine months of 1994 operating income also resulted
from higher aftermarket revenues for ride control products in North America,
combined with aggressive cost management and quality program initiatives. These
improvements more than offset the effects of the weaker North American exhaust
aftermarket conditions.
Shipbuilding reported operating income of $153 million for the first nine
months of 1994 compared with $159 million in the same period in 1993. Revenues
were $1.29 billion for the first nine months of 1994 compared with $1.35
billion in the comparable 1993 period. Revenues and operating income decreases
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resulted from lower volumes on submarine construction contracts and the loss of
revenues from the Sperry Marine business. The Sperry Marine business was sold
in the fourth quarter of 1993. These decreases were partially offset by
increased SEALIFT volumes.
Packaging had operating income of $127 million in the first nine months of
1994 versus $118 million in the same period of the prior year. Revenues in the
first nine months of 1994 were $1.58 billion compared with $1.53 billion in the
same 1993 period. Higher revenues and operating income due to strengthening
containerboard pricing in the second and third quarters of 1994 were partially
offset by lower first quarter revenues and operating income. The lower
operating income in the first quarter of 1994 was primarily the result of
severe winter weather and the California earthquake which curtailed plant
operations and delayed customer shipments.
Chemicals reported year-to-date 1994 operating income of $46 million, down
from $55 million in the same period in 1993. Revenues in the first nine months
of 1994 were $715 million compared to $685 million in the same period of the
prior year. The lower operating income was primarily the result of a $7 million
charge to increase the efficiency of the surfactants operation and to reduce
costs at the Whitehaven, United Kingdom site recorded in the first quarter of
1994 and a third quarter provision of $4 million for audit adjustments in
Germany and Belgium.
INTEREST EXPENSE
Interest expense decreased from $214 million in the first nine months of 1993
to $203 million in the first nine months of 1994, while interest capitalized
increased from $2 million to $3 million in the same periods. The year-to-year
change in interest expense was due to the same reason discussed under "Three
Month Results" above.
INCOME TAXES
Income tax expense for the first nine months of 1994 was $299 million versus
$281 million in the same period of 1993. Income tax expense increased in 1994
primarily due to higher pre-tax income and tax expense of $19 million
attributable to the loss on the Case reorganization and IPO partially offset by
lower levels of unbenefitted foreign losses.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the first nine months of 1994 of $23
million included a $20 million loss (net of income tax benefit of $15 million)
on the pending sale of Tenneco's brakes business and a loss of $3 million (net
of income tax benefit of $4 million) from the brakes operations. Loss from
discontinued operations of $2 million (net of income tax benefit of $2 million)
for the first nine months of 1993 reflects the loss from the brakes operations.
The sale is expected to close in the fourth quarter of 1994.
EXTRAORDINARY LOSS
The extraordinary loss for the first nine months of 1993 of $24 million
resulted from the redemption premium associated with the prepayment of long-
term debt.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, Tennessee adopted Statement of Financial
Accounting Standards ("FAS") No. 112, Employers' Accounting for Postemployment
Benefits. This new standard was adopted using the cumulative catch-up method
and requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. As a result of the adoption of this
statement, the Statement of Income for the nine months ended September 30,
1994, includes an after-tax charge of $13 million for the cumulative effect of
the accounting change.
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NET INCOME
Net income for the first nine months of 1994 was $427 million compared with
net income of $438 million in the same 1993 period. The first nine months of
1994 net income includes income from continuing operations of $463 million,
loss from discontinued operations of $23 million and the charge of $13 million
(net of income tax) relating to the cumulative effect of the change in
accounting principle. The first nine months of 1993 net income includes income
from continuing operations of $464 million, loss from discontinued operations
of $2 million and the extraordinary loss of $24 million.
CAPITAL EXPENDITURES
Expenditures for plant, property and equipment from continuing operations for
the first nine months of 1994 were $374 million compared to $296 million for
the first nine months of 1993. Increased expenditures for packaging ($23
million), natural gas pipelines ($50 million), chemicals ($11 million) and
automotive parts ($6 million) were partially offset by declines for farm and
construction equipment ($2 million) and shipbuilding ($10 million).
OTHER MATTERS
On October 26, 1994, Tenneco Inc. announced that it reached an agreement to
acquire Heinrich Gillet GmbH & Company, a family-owned German firm that has
been the leading manufacturer of original equipment exhaust systems and
components for European auto makers. The acquisition is valued at $113 million
in cash and assumed debt and is expected to be completed by year-end.
Tenneco Gas has entered into an agreement to acquire ARK Energy, Inc., an
established company in the power cogeneration operation and development
business. The acquisition is valued at $60 million in stock and cash and is
also expected to be completed by year-end.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(1) Environmental Proceedings.
The Company is a party in proceedings involving federal and state authorities
regarding the past use by the Company of a lubricant containing polychlorinated
biphenyls ("PCBs") in its starting air systems.
On January 13, 1992, the United States Environmental Protection Agency
("EPA") filed an administrative complaint alleging that the Company violated
the Toxic Substances Control Act between 1980 and 1990 by engaging in the
unauthorized use and disposal of materials containing PCBs. The complaint
addresses PCB-related activity at 26 compressor stations in five states
(Alabama, Mississippi, Kentucky, Tennessee and Ohio). A civil penalty of
$15,678,000 was sought. The Company and the EPA have executed a final
settlement agreement under which the Company paid $6.4 million to resolve all
alleged civil penalties under the Toxic Substances Control Act arising from the
Company's prior use of PCBs at compressor stations throughout its system. This
agreement covers 42 Company compressor stations in nine states and five EPA
regions. The Company's separate negotiations with EPA on the remediation of its
compressor stations in Regions IV, V, and VI are also complete and the parties
have executed a consent order governing this remediation. With respect to the
nine stations in Regions II and III, EPA has advised the Company that it is
deferring to the Pennsylvania and New York environmental agencies to specify
the remediation requirements applicable to the Company. The Company anticipates
that it will soon reach an agreement with the Pennsylvania Department of
Environmental Resources ("PaDER") and will enter into a consent order on
remediation at the Pennsylvania stations (under which Tennessee also agrees to
pay a civil penalty and to make a contribution for environmental projects);
meanwhile, the Company will continue its negotiations with the New York
Department of Environmental Conservation on remediation at the New York
stations. Tennessee believes that the ultimate resolution of this matter will
not have a material adverse effect on the financial condition or results of
operations of the Company and its consolidated subsidiaries.
(2) Other Proceedings.
On October 14, 1993, the Company was sued in the State District Court of
Ector County, Texas by ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas"). In that suit, ICA and TransTexas contended that the Company had
an obligation to purchase gas production which TransTexas thereafter attempted
to add unilaterally to the reserves originally dedicated to a 1979 gas
contract. On two subsequent occasions, TransTexas gave the Company notice that
it was adding new production and/or acreage "to the contract". A recent
amendment to the pleadings seeks $1.5 billion from the Company for alleged
damages caused by the Company's refusal to purchase gas produced from the
TransTexas bases covering the new production and lands. Neither ICA nor
TransTexas were parties to that contract. However, they contend that any
stranger acquiring a fractional interest in the original committed reserves,
thereby obtains a right to add to the contract unlimited volumes of gas
production from unspecified locations in South Texas. The Company believes it
has meritorious defenses to the claims of ICA and TransTexas, which defenses it
will vigorously assert.
(3) Potential Superfund Liability.
At June 30, 1994, Tennessee was designated as a potentially responsible party
in 70 "Superfund" sites. With respect to its pro rata share of the remediation
costs of certain sites, Tennessee is fully indemnified by third parties. With
respect to certain other sites, Tennessee has sought to resolve its liability
through payments to the other potentially responsible parties. For the
remaining sites, Tennessee has estimated its share of the remediation costs to
be between $13 million and $72 million or 0.4% to 2.2% of the total remediation
costs for those sites and has provided reserves that it believes are adequate
for such costs. Because the clean-up
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costs are estimates and are subject to revision as more information becomes
available about the extent of remediation required, Tennessee's estimate of its
share of remediation costs could change. Moreover, liability under the
Comprehensive Environmental Response, Compensation and Liability Act is joint
and several, meaning that Tennessee could be required to pay in excess of its
pro rata share of remediation costs. Tennessee's understanding of the financial
strength of other potentially responsible parties has been considered, where
appropriate, in Tennessee's determination of its estimated liability. Tennessee
does not believe that the costs associated with its current status as a
potentially responsible party in the Superfund sites described above will be
material to its financial position or results of operations.
For additional information concerning environmental matters, see Note 4 in
the "Notes to Financial Statements" of Tennessee Gas Pipeline Company and
Consolidated Subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27--Financial Data Schedule
(b) Reports on Form 8-K. Tennessee Gas Pipeline Company did not file any
Current Reports on Form 8-K during the quarter ended September 30, 1994.
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SIGNATURE
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.
TENNESSEE GAS PIPELINE COMPANY
Robert T. Blakely
By __________________________________
Robert T. Blakely
Senior Vice President--Principal
Financial
and Accounting Officer
Date: November 10, 1994
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Tennessee Gas Pipeline Company and consolidated subsidiaries financial
statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
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<INVENTORY> 812
<CURRENT-ASSETS> 5,896
<PP&E> 10,484
<DEPRECIATION> 5,614
<TOTAL-ASSETS> 12,778
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<OTHER-SE> 6,946
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<CGS> 5,828
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