<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 JUNE 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
----------------
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
----------------
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 June 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................................................ 11
Part II--Other Information
Item 1. Legal Proceedings............................................... 15
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................................ *
</TABLE>
- --------
* 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 SIX MONTHS
ENDED JUNE ENDED JUNE
30, 30,
-------------- --------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Net sales and operating revenues--
Natural gas pipelines...................... $ 605 $ 665 $1,298 $1,483
Farm and construction equipment............ 277 301 518 529
Automotive parts........................... 506 458 938 850
Shipbuilding............................... 464 463 867 915
Packaging.................................. 527 514 1,018 1,018
Chemicals.................................. 251 242 472 462
Other...................................... (2) -- (4) (2)
------ ------ ------ ------
2,628 2,643 5,107 5,255
Other income--
Interest income............................ 57 60 112 124
Other income (loss), net................... (13) 20 6 32
------ ------ ------ ------
2,672 2,723 5,225 5,411
------ ------ ------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation
shown below)................................ 1,597 1,574 3,032 3,007
Operating expenses........................... 514 548 1,054 1,170
Selling, general and administrative.......... 194 196 386 380
Finance charges of Tennessee's finance
subsidiaries................................ 4 5 8 13
Depreciation, depletion and amortization..... 67 104 175 209
------ ------ ------ ------
2,376 2,427 4,655 4,779
------ ------ ------ ------
Income Before Interest Expense and Income
Taxes......................................... 296 296 570 632
Interest Expense (net of interest capitalized). 68 69 133 141
------ ------ ------ ------
Income Before Income Taxes..................... 228 227 437 491
Income Tax Expense............................. 118 91 197 205
------ ------ ------ ------
Income From Continuing Operations.............. 110 136 240 286
Income (Loss) From Discontinued Operations, Net
of Income Tax................................. (21) 1 (23) (1)
------ ------ ------ ------
Income Before Extraordinary Loss............... 89 137 217 285
Extraordinary Loss, Net of Income Tax.......... -- (22) -- (22)
------ ------ ------ ------
Income Before Cumulative Effect of Change in
Accounting Principle.......................... 89 115 217 263
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax.................. -- -- (13) --
------ ------ ------ ------
Net Income..................................... $ 89 $ 115 $ 204 $ 263
====== ====== ====== ======
</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)
SIX MONTHS
ENDED
JUNE 30,
---------------
1994 1993
------- ------
<S> <C> <C>
Cash Flows from Operating Activities:
Income from continuing operations........................... $ 240 $ 286
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations--
Depreciation, depletion and amortization.................. 175 209
Deferred income taxes..................................... (11) (14)
Changes in components of working capital--
(Increase) decrease in receivables...................... 206 235
(Increase) decrease in Tenneco Inc. receivables......... (2,109) 547
(Increase) decrease in inventories...................... (96) (29)
(Increase) decrease in prepayments and other current
assets................................................. 40 (18)
Increase (decrease) in payables......................... 83 (152)
Increase (decrease) in taxes accrued.................... 3 60
Increase (decrease) in interest accrued................. (19) (19)
Increase (decrease) in restructuring liability.......... (8) (9)
Increase (decrease) in natural gas pipeline revenue
reservation............................................ (157) 75
Increase (decrease) in other current liabilities........ 109 (19)
(Increase) decrease in long-term notes and other
receivables.............................................. 4 8
(Increase) decrease in notes receivable from other
affiliates............................................... 1,755 61
Take-or-pay (refunds to customers) recoupments, net....... 4 (30)
Other..................................................... (49) 3
------- ------
Cash provided (used) by continuing operations............. 170 1,194
Cash provided (used) by discontinued operations........... (6) (8)
------- ------
Net Cash Provided (Used) by Operating Activities.............. 164 1,186
------- ------
Cash Flows from Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations.................................... (5) (34)
Proceeds from sale of businesses and assets................. 199 51
Expenditures for plant, property and equipment--
Continuing operations..................................... (208) (161)
Discontinued operations................................... -- (1)
Acquisitions of businesses.................................. -- (21)
Investments and other....................................... (9) 2
------- ------
Net Cash Provided (Used) by Investing Activities.............. (23) (164)
------- ------
Cash Flows from Financing Activities:
Issuance of long-term debt.................................. 2 2
Retirement of long-term debt................................ (134) (817)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt............................... 233 (178)
------- ------
Net Cash Provided (Used) by Financing Activities.............. 101 (993)
------- ------
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments............................................. 2 2
------- ------
Increase (Decrease) in Cash and Temporary Cash Investments.... 244 31
Cash and Temporary Cash Investments, January 1................ 220 108
------- ------
Cash and Temporary Cash Investments, June 30 (Note)........... $ 464 $ 139
======= ======
Cash Paid During the Period for Interest...................... $ 160 $ 174
Cash Paid During the Period for Income Taxes (net of refunds). $ 201 $ 268
</TABLE>
- --------
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)
JUNE 30, DECEMBER 31, JUNE 30,
ASSETS 1994 1993 1993
------ -------- ------------ --------
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments........... $ 464 $ 220 $ 139
Receivables--
Customer notes and accounts (net)........... 694 783 1,211
Affiliated companies........................ 271 716 325
Gas transportation and exchange............. 295 228 241
Other....................................... 174 88 85
Interest-bearing notes receivable from Tenneco
Inc. ........................................ 2,556 447 372
Demand notes receivable from Tenneco Inc. .... 298 298 298
Inventories................................... 819 932 1,032
Deferred income taxes......................... 43 26 108
Prepayments and other......................... 274 321 316
------- ------- -------
5,888 4,059 4,127
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies............ 555 410 429
Other investments, at cost.................... 56 60 79
Long-term notes and other receivables (net)... 163 221 212
Notes receivable from other affiliates........ 15 1,770 1,860
Investment in subsidiaries in excess of net
assets at date of acquisition, less
amortization................................. 280 273 204
Deferred income taxes......................... 41 38 --
Other......................................... 778 901 758
------- ------- -------
1,888 3,673 3,542
------- ------- -------
Plant, Property and Equipment, at cost.......... 10,212 10,345 10,184
Less--Reserves for depreciation, depletion and
amortization................................. 5,554 5,573 5,502
------- ------- -------
4,658 4,772 4,682
------- ------- -------
$12,434 $12,504 $12,351
======= ======= =======
</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)
JUNE 30, DECEMBER 31, JUNE 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)........................... $ 229 $ 121 $ 102
Payables--
Trade....................................... 980 1,005 1,007
Affiliated companies........................ 247 263 212
Gas transportation and exchange............. 208 136 180
Taxes accrued................................. 194 218 286
Interest accrued.............................. 40 43 52
Restructuring liability....................... 13 95 84
Natural gas pipeline revenue reservation...... 118 291 231
Other......................................... 829 815 835
------- ------- -------
2,858 2,987 2,989
------- ------- -------
Long-term Debt.................................. 857 1,086 1,255
------- ------- -------
Deferred Income Taxes........................... 1,233 1,262 1,252
------- ------- -------
Deferred Credits and Other Liabilities.......... 794 823 885
------- ------- -------
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............ (155) (297) (267)
Retained earnings............................. 3,353 3,149 2,743
------- ------- -------
6,692 6,346 5,970
------- ------- -------
$12,434 $12,504 $12,351
======= ======= =======
</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)
SIX MONTHS ENDED JUNE 30,
----------------------------
1994 1993
------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Common Stock:
Balance January 1 and June 30.................. 200 $ -- 200 $ --
=== ------ === ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1 and June 30.................. 3,494 3,494
------ ------
Cumulative Translation Adjustments:
Balance January 1.............................. (297) (218)
Translation of foreign currency statements... 143 (54)
Hedges of net investment in foreign
subsidiaries (net of income taxes).......... (1) 5
------ ------
Balance June 30................................ (155) (267)
------ ------
Retained Earnings:
Balance January 1.............................. 3,149 2,480
Net income................................... 204 263
------ ------
Balance June 30................................ 3,353 2,743
------ ------
Total........................................ $6,692 $5,970
====== ======
</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 June 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) On April 5, 1994, the Federal Energy Regulatory Commission ("FERC")
issued a final order approving the Company's Stipulation and Agreement that
resolved many significant issues in Docket No. RP91-203 (the Company's current
rate case, which was filed in 1991) and established procedures for resolving
the remaining issues, including the recovery of certain environmental
expenditures discussed in Note (4) below. The Company is currently collecting
the environmental costs in its 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 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 now included in its rates, but
would also establish a mechanism for recovering a substantial portion of the
environmental costs discussed in Note (4) that will be expended in the future.
The total amount of and timing for any recovery pursuant to such 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
of a possible settlement, the Company is unable to predict its timing or its
impact on Tennessee's consolidated financial position or results of operations.
Pursuant to the final FERC order, on June 3, 1994, the Company paid refunds
for the period February 1, 1992, through August 31, 1993. 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.
On April 8, 1992, the FERC issued Order No. 636 which, together with
subsequently issued clarifying Order Nos. 636-A and 636-B (the "FERC
Restructuring Orders"), restructured the interstate gas pipeline industry. The
FERC Restructuring Orders required pipelines to: 1) "unbundle" their
transportation and storage services from their sales services, 2) increase
pipeline customers' flexibility to change receipt and delivery points under
transportation contracts and to allow release of capacity under those contracts
for use by others and 3) separate interstate pipeline gas sales organizations
from interstate pipeline transportation and storage business units. Under the
FERC Restructuring Orders, rates for pipeline transportation and storage
generally remain subject to traditional cost-of-service regulation but under a
rate design which is relatively insensitive to throughput and hence less
sensitive to seasonal variation. Sales of natural gas by interstate pipelines
occur pursuant to a blanket sales certificate under which price and other terms
of sale are set by market forces.
Commencing on September 1, 1993, the Company implemented its Order No. 636
tariff and the restructuring of its transportation, storage and sales services
and the implementation of various recovery mechanisms to begin recovery of
certain transition costs already paid or obligated to be paid in connection
with the FERC Restructuring Orders.
The Company's Order No. 636 compliance filings request authority to: 1)
recover, through a monthly surcharge, one-time gas supply realignment costs and
certain related costs incurred to date over a period of
7
<PAGE>
up to thirty-six months, 2) direct-bill customers for unrecovered purchased gas
costs over a twelve-month period and 3) track and recover from customers,
through an annual surcharge, upstream transportation costs which the Company is
obligated to pay under existing contracts. The filings were accepted effective
September 1, 1993, and made subject to refund pending review. Hearings have
been instituted to review the recovery of the gas supply realignment costs and
the direct billing of unrecovered purchased gas costs.
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 will seek appellate review of the FERC actions. The Company is
confident that the Bastian Bay costs will ultimately be recovered either as
transition costs directly related to Order No. 636 or through traditional rate
recovery methods, and no FERC order has questioned the ultimate recoverability
of these costs.
The total amount of transition costs that will be incurred by the Company
will depend upon: 1) developments in restructuring proceedings involving the
Company, its customers and other affected parties, 2) the resolution of pending
litigation and 3) the terms of multiple negotiations with individual suppliers.
Until these issues are resolved, the Company cannot finally determine the
ultimate amount of one-time transition costs or other annual costs it will
incur, nor the amounts which will be recovered from customers. The Company
believes that one-time transition costs will not exceed $700 million. As of
June 30, 1994, the Company has deferred transition costs net of recoveries of
approximately $135 million, which will be recovered from its customers. The
Company believes that other annual transition costs, including upstream
transportation costs, will not exceed $100 million in 1994, decreasing
thereafter over the length of the contracts involved.
In July 1994, the Company filed with the FERC a Stipulation and Agreement
(the "PGA Stipulation"), which will resolve, if approved, the recovery of
unrecovered purchased gas costs 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
unrecovered purchased gas costs, but establishes a cap on the charges that may
be imposed upon former sales customers.
The FERC Restructuring Orders will undergo judicial review, clarification and
formulation of cost recovery details as the restructuring process proceeds.
However, the Company believes that it is entitled to full recovery of all
transition costs it will incur. Inasmuch as the FERC Restructuring Orders
contemplate complete recovery by pipelines of qualified transition costs,
Tennessee believes that the Company's Order No. 636 restructuring (together
with the Order No. 636 restructuring of Tennessee's other interstate pipelines)
will not have a material adverse effect on Tennessee's consolidated financial
position or results of operations. The Company further believes that the PGA
Stipulation will not have a material effect on Tennessee's consolidated
financial position or results of operations.
(3) Tennessee Gas Pipeline Company and its subsidiaries are parties to
numerous legal proceedings arising from their operations. Tennessee Gas
Pipeline Company believes that the outcome of these 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.
8
<PAGE>
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 June 30, 1994, Tennessee has charged $70 million against
this environmental reserve. Of the remaining reserve, $41 million has been
recorded on the balance sheet under "Payables--Trade" and $149 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 through rates
charged to 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" and $200 million in "Investments and Other
Assets"). The 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 June 30, 1994, the asset balance is $151 million ($37 million
in "Current Assets" and $114 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 ligation remains pending. Tennessee has completed
settlements with and received payment from five 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.
9
<PAGE>
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 third 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) 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. Tennessee recognized a pre-tax gain of $51 million on its assets sold to
Case Corporation as a part of the reorganization preceding the IPO. Tennessee
received proceeds of $44 million and recognized a pre-tax loss of $73 million
on the sale of the portion of its Case Corporation common shares included in
the IPO. The combination of the reorganization and IPO resulted in a loss of
$41 million, including $19 million of income tax expense. Although Tennessee
recorded a loss on these transactions, Tenneco in the aggregate recorded a gain
of $1 million, net of $8 million of income tax expense.
(The above notes are an integral part of the foregoing financial statements.)
10
<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. Tennessee recognized a pre-tax gain of $51 million on its assets sold to
Case Corporation as a part of the reorganization preceding the IPO. Tennessee
received proceeds of $44 million and recognized a pre-tax loss of $73 million
on the sale of the portion of its Case Corporation common shares included in
the IPO. The combination of the reorganization and IPO resulted in a loss of
$41 million, including $19 million of income tax expense. Although Tennessee
recorded a loss on these transactions, Tenneco in the aggregate recorded a gain
of $1 million, net of $8 million of income tax expense.
THREE MONTH RESULTS
REVENUES
Revenues for the second quarter of 1994 were $2.63 billion, down slightly
from $2.64 billion in the second quarter of 1993. Lower revenues were reported
for natural gas pipelines, where revenues decreased $60 million or 9 percent,
and farm and construction equipment (down $24 million or 8%). Higher revenues
were reported for automotive parts (up $48 million or 10 percent), shipbuilding
(up $1 million), packaging (up $13 million or 3%), and chemicals (up $9 million
or 4%).
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES ("OPERATING INCOME")
Operating income for the second quarter of 1994 was $296 million, which was
the same as in the second quarter of 1993.
Natural gas pipelines reported operating income for the second quarter of
1994 of $89 million compared with $76 million in the 1993 second quarter.
Revenues for the second quarter of 1994 decreased to $605 million compared with
$665 million in the second 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 will 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. Operating
income increased primarily due to the shift to the new non-seasonal rate
structure.
Farm and construction equipment posted an operating loss for the second
quarter of 1994 of $1 million, down $3 million from operating income of $2
million in the second quarter last year. Second quarter revenues of $277
million were down from $301 million reported in the 1993 quarter due to lower
production volumes in Europe.
Automotive parts reported second quarter 1994 operating income of $72 million
compared with $65 million recorded in the same quarter a year ago. During the
1994 second quarter, automotive recorded a $5 million charge to reduce excess
capacity. Revenues for the second quarter of 1994 totaled $506 million compared
with $458 million in last year's second quarter, primarily due to higher North
American original equipment sales in the Walker exhaust segment, reflecting
higher new car and truck production. Aftermarket
11
<PAGE>
sales of ride control products in North America increased as a result of the
continuing success of Monroe's new Sensa-Trac shocks and struts. Improving
economic conditions in Europe led to a 14 percent increase in overall European
revenues. Operating income increased as a result of the higher revenues and the
benefit of quality program initiatives.
Shipbuilding reported second quarter operating income of $53 million, which
was the same as in the 1993 second quarter. Revenues increased slightly to $464
million in the second quarter of 1994 compared with $463 million in the same
period a year ago. Revenue increases from higher volumes on the SEALIFT
activity and carrier construction were offset by 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 second quarter of 1994 stood at $3.1 billion and
included construction contracts for five LOS ANGELES class submarines, two
NIMITZ class aircraft carriers, the refueling and overhaul contract on the
carrier USS ENTERPRISE and a conversion contract for two fast SEALIFT ships.
Second quarter 1994 operating income for packaging was $44 million, up from
$30 million generated in the 1993 second quarter. Revenues for the second
quarter of 1994 were $527 million compared with $514 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.
Chemicals reported second quarter 1994 operating income of $21 million up
slightly from $20 million in the same period last year. Revenues increased 4
percent to $251 million in the 1994 second quarter compared with $242 million
in the 1993 period. The improvements in revenues and operating income were led
by higher volumes in the United Kingdom phosphates group. Phosphate products
are used as additives in industrial cleansers, carbonated beverages and
detergent builders.
INTEREST EXPENSE
Interest expense decreased from $69 million in the 1993 second quarter to $68
million in the second quarter of 1994. The decline was primarily attributable
to lower debt levels that resulted from scheduled long-term debt retirements.
INCOME TAXES
Income tax expense for the second quarter of 1994 was $118 million compared
with $91 million reported in the 1993 second quarter. This increase was
primarily due to increased tax expense of $19 million attributable to the loss
on the Case reorganization and IPO 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 sells a broad
line of brake components and accessories. The transaction is expected to close
in the third quarter of 1994.
The loss from discontinued operations in the second quarter of 1994 includes
the $20 million loss (net of income tax benefit of $15 million) on the sale of
automotive's brakes business and a loss of $1 million (net of income tax
benefit of $4 million) from operations. This compares with income of $1 million
(net of income tax benefit of $2 million) in the 1993 second quarter from the
brakes operations.
EXTRAORDINARY LOSS
The second quarter 1993 extraordinary loss of $22 million was attributable to
the early redemption premium on long-term debt retired with the net proceeds
from the April 1993 underwritten public offering of 23.5 million shares of
Tenneco Inc. common stock.
12
<PAGE>
NET INCOME
Income from continuing operations for the second quarter of 1994 was $110
million compared with income from continuing operations of $136 million in the
1993 second quarter.
Loss from discontinued operations for the second quarter of 1994 was $21
million versus income of $1 million in the 1993 quarter. Extraordinary loss for
the second quarter of 1993 was $22 million. Net income for the second quarter
of 1994 was $89 million compared to net income of $115 million for the second
quarter of 1993.
SIX MONTH RESULTS
REVENUES
Net sales and operating revenues for the first six months of 1994 were $5.11
billion, down from $5.26 billion reported in 1993. Higher revenues for
automotive parts (up $88 million or 10 percent) and chemicals (up $10 million
or 2 percent) were offset by lower revenues for natural gas pipelines (down
$185 million or 12 percent), farm and construction equipment (down $11 million
or 2 percent) and shipbuilding (down $48 million or 5 percent). Revenues for
packaging were unchanged.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES ("OPERATING INCOME")
Operating income for the first six months of 1994 was $570 million compared
with $632 million reported for the same period of 1993.
Natural gas pipelines reported operating income of $194 million for the first
half of 1994 compared with $197 million in the same period of 1993. Revenues
decreased to $1.30 billion compared to $1.48 billion in the first six months of
1993. Farm and construction equipment reported year-to-date 1994 operating
income of $55 million, up $64 million from the $9 million operating loss
reported for the first half of 1993. Year-to-date revenues were $518 million,
down from $529 million reported in the first half of 1993. These changes in the
above divisions' revenues and operating income were due principally to the
factors discussed under "Three Month Results" above.
Automotive parts reported first half 1994 operating income of $123 million
compared with $112 million recorded in the same period a year ago. Year-to-date
revenues for 1994 totaled $938 million as compared with last year's reported
amount of $850 million. Higher revenues were reported for both exhaust and ride
control products in North American original equipment markets, buoyed by
increased new car and light truck production. Overall revenues were also up in
Europe due to the improving market conditions which contributed to higher
operating income. The improvement in first half 1994 operating income also
resulted from the higher original equipment market revenues, 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 first half 1994 operating income of $101 million
compared with $108 million in the same period in 1993. Revenues were $867
million for the first six months of 1994 compared with $915 million in the
first half of 1993. Revenue and operating income decreases 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 $64 million in the first six months of 1994
versus $67 million in the same period of the prior year. Revenues were $1.02
billion in both periods. Higher revenues and operating income due to
strengthening containerboard pricing in the second quarter of 1994 were 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.
13
<PAGE>
First half 1994 operating income for chemicals was $30 million, down from $35
million in the same period in 1993. Revenues in the first six months of 1994
were $472 million versus $462 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.
INTEREST EXPENSE
Interest expense decreased from $142 million in the first half of 1993 to
$135 million in the first half of 1994 while interest capitalized increased
from $1 million to $2 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 half of 1994 was $197 million versus $205
million in the same period of 1993. Income tax expense decreased in 1994
primarily due to lower pre-tax income and lower levels of unbenefitted foreign
losses, partially offset by increased tax expense of $19 million attributable
to the loss on the Case reorganization and IPO.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the first half 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 $1 million (net of income tax benefit of $2 million)
for the first six months of 1993 reflects the loss from the brakes operations.
EXTRAORDINARY LOSS
The extraordinary loss for the first half of 1993 was attributable to the
second quarter early redemption premiums on long-term debt as discussed under
"Three Month Results" above.
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 first half of 1994 Statement of Income includes an after-tax
charge of $13 million for the cumulative effect of the accounting change.
NET INCOME
Net income for the first half of 1994 was $204 million compared with net
income of $263 million in the 1993 first half. The 1994 first half net income
includes income from continuing operations of $240 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 half 1993 net income includes income from continuing
operations of $286 million, loss from discontinued operations of $1 million and
the extraordinary loss of $22 million.
CAPITAL EXPENDITURES
Expenditures for plant, property and equipment from continuing operations for
the first six months of 1994 were $208 million compared to $161 million for the
first six months of 1993. Increased expenditures for packaging ($25 million),
natural gas pipelines ($21 million), chemicals ($10 million) and farm and
construction equipment ($2 million) were partially offset by declines for
automotive ($6 million) and shipbuilding ($5 million).
14
<PAGE>
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
addressed 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 will pay $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 the 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, the 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
the Company 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) Potential Superfund Liability.
At June 30, 1994, Tennessee has been designated as a potentially responsible
party in 74 "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 $73 million or 0.4% to 2.3% of the total
remediation costs for those sites and has provided reserves that it believes
are adequate for such costs. Because the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, 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.
15
<PAGE>
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: August 12, 1994
16
