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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 MARCH 31, 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 March 31, 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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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............................................... 14
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>
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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 MARCH
31,
--------------
1994 1993
------ ------
<S> <C> <C>
Revenues:
Net sales and operating revenues--
Natural gas pipelines........................................ $ 693 $ 818
Farm and construction equipment.............................. 241 228
Automotive parts............................................. 446 403
Shipbuilding................................................. 403 452
Packaging.................................................... 491 504
Chemicals.................................................... 221 220
Other........................................................ (2) (2)
------ ------
2,493 2,623
Other income--
Interest income.............................................. 55 64
Other income, net............................................ 19 10
------ ------
2,567 2,697
------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown below)......... 1,447 1,442
Operating expenses............................................ 541 622
Selling, general and administrative........................... 195 185
Finance charges of Tennessee's finance subsidiaries........... 4 8
Depreciation, depletion and amortization...................... 109 106
------ ------
2,296 2,363
------ ------
Income Before Interest Expense and Income Taxes................ 271 334
Interest Expense (net of interest capitalized)................. 65 72
------ ------
Income Before Income Taxes..................................... 206 262
Income Tax Expense............................................. 78 114
------ ------
Income From Operations Before Cumulative Effect of Change in
Accounting Principle.......................................... 128 148
Cumulative Effect of Change in Accounting Principle, Net of
Income Tax.................................................... (13) --
------ ------
Net Income..................................................... $ 115 $ 148
====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
statements of income.)
2
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TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
THREE MONTHS
ENDED MARCH 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Income from operations before cumulative effect of change in
accounting principle....................................... $ 128 $ 148
Adjustments to reconcile income from operations before
cumulative effect of change in accounting principle to cash
provided (used) by continuing operations--
Depreciation, depletion and amortization.................. 109 106
Deferred income taxes..................................... (15) 1
Changes in components of working capital--
(Increase) decrease in receivables....................... (223) 271
(Increase) decrease in Tenneco Inc. receivables.......... 5 (48)
(Increase) decrease in inventories....................... (80) (46)
(Increase) decrease in prepayments and other current
assets.................................................. 43 48
Increase (decrease) in payables.......................... (53) (214)
Increase (decrease) in taxes accrued..................... 84 86
Increase (decrease) in interest accrued.................. 15 23
Increase (decrease) in restructuring liability........... (5) (11)
Increase (decrease) in natural gas pipeline revenue
reservation............................................. 36 45
Increase (decrease) in other current liabilities......... 48 (28)
(Increase) decrease in long-term notes and other
receivables.............................................. 2 7
Take-or-pay (refunds to customers) recoupments, net....... (12) (40)
Other..................................................... (14) (15)
------- -------
Cash provided (used) by continuing operations............. 68 333
Cash provided (used) by discontinued operations........... -- (11)
------- -------
Net Cash Provided (Used) by Operating Activities............. 68 322
------- -------
Cash Flows from Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations.................................... (5) (22)
Proceeds from sale of businesses and assets................. 55 1
Expenditures for plant, property and equipment.............. (94) (70)
Acquisitions of businesses.................................. -- (19)
Investments and other....................................... (1) (19)
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Net Cash Provided (Used) by Investing Activities............. (45) (129)
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Cash Flows from Financing Activities:
Retirement of long-term debt................................ (23) (32)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt............................... 26 (188)
------- -------
Net Cash Provided (Used) by Financing Activities............. 3 (220)
------- -------
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments............................................ -- 5
------- -------
Increase (Decrease) in Cash and Temporary Cash Investments... 26 (22)
Cash and Temporary Cash Investments, January 1............... 220 108
------- -------
Cash and Temporary Cash Investments, March 31 (Note)......... $ 246 $ 86
======= =======
Cash Paid During the Period for Interest..................... $ 54 $ 58
Cash Paid During the Period for Income Taxes (net of
refunds).................................................... $ 22 $ 105
</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
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TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
MARCH 31, DECEMBER 31, MARCH 31,
ASSETS 1994 1993 1993
------ --------- ------------ ---------
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments......... $ 246 $ 220 $ 86
Receivables--
Customer notes and accounts (net)......... 1,063 783 1,225
Affiliated companies...................... 533 716 346
Gas transportation and exchange........... 303 228 285
Other..................................... 97 88 138
Interest-bearing notes receivable from
Tenneco Inc................................ 442 447 871
Demand notes receivable from Tenneco Inc.... 298 298 298
Inventories................................. 1,022 932 1,081
Deferred income taxes....................... 32 26 99
Prepayments and other....................... 284 321 252
------- ------- -------
4,320 4,059 4,681
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies.......... 420 410 429
Other investments, at cost.................. 59 60 89
Long-term notes and other receivables (net). 202 221 211
Notes receivable from other affiliates...... 1,920 1,770 1,941
Investment in subsidiaries in excess of net
assets at date of acquisition, less
amortization............................... 271 273 202
Deferred income taxes....................... 40 38 --
Other....................................... 853 901 777
------- ------- -------
3,765 3,673 3,649
------- ------- -------
Plant, Property and Equipment, at cost........ 10,451 10,345 10,240
Less--Reserves for depreciation, depletion
and amortization........................... 5,686 5,573 5,509
------- ------- -------
4,765 4,772 4,731
------- ------- -------
$12,850 $12,504 $13,061
======= ======= =======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
4
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TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
MARCH 31, DECEMBER 31, MARCH 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993 1993
------------------------------------ --------- ------------ ---------
<S> <C> <C> <C>
Current Liabilities:
Short-term debt (including current
maturities on long-term debt).............. $ 148 $ 121 $ 153
Payables--
Trade..................................... 1,016 1,005 1,034
Affiliated companies...................... 174 263 152
Gas transportation and exchange........... 207 136 164
Taxes accrued............................... 275 218 314
Interest accrued............................ 64 43 93
Restructuring liability..................... 92 95 101
Natural gas pipeline revenue reservation.... 323 291 201
Other....................................... 802 815 833
------- ------- -------
3,101 2,987 3,045
------- ------- -------
Long-term Debt................................ 1,068 1,086 1,961
------- ------- -------
Deferred Income Taxes......................... 1,216 1,262 1,264
------- ------- -------
Deferred Credits and Other Liabilities........ 978 823 901
------- ------- -------
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.......... (271) (297) (232)
Retained earnings........................... 3,264 3,149 2,628
------- ------- -------
6,487 6,346 5,890
------- ------- -------
$12,850 $12,504 $13,061
======= ======= =======
</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)
THREE MONTHS ENDED MARCH
31,
----------------------------
1994 1993
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SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Common Stock:
Balance January 1 and March 31................ 200 $ -- 200 $ --
=== ------ === ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1 and March 31................ 3,494 3,494
------ ------
Cumulative Translation Adjustments:
Balance January 1............................. (297) (218)
Translation of foreign currency statements.. 26 (14)
------ ------
Balance March 31.............................. (271) (232)
------ ------
Retained Earnings:
Balance January 1............................. 3,149 2,480
Net income.................................. 115 148
------ ------
Balance March 31.............................. 3,264 2,628
------ ------
Total...................................... $6,487 $5,890
====== ======
</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 March 31, 1994, and the results
of operations; changes in stockholder's equity; and cash flows for the periods
indicated.
(2) On June 2, 1993, the Company filed a Stipulation and Agreement that
resolved several significant issues in Docket No. RP91-203 and established
procedures for resolving the remaining issues, including the recovery of
certain environmental expenditures. The Company is currently collecting the
environmental costs in its rates subject to further review in the rate case and
possible refund. The Company intends to pursue full recovery of these costs. On
October 29, 1993, the Federal Energy Regulatory Commission ("FERC") approved
the Company's Stipulation and Agreement. On April 5, 1994, the FERC issued an
Order on Rehearing which denied rehearing of the October 29, 1993, order. The
Company considers the April 5, 1994, order a final order and will disburse
refunds related to the period February 1, 1992, through August 31, 1993, within
60 days of that order. Refunds related to the Company's Stipulation and
Agreement for the period September 1, 1993, through present will be disbursed
by the Company upon receipt of a final FERC order in the Company's
restructuring proceedings. The Company has recorded a liability which is
adequate to cover these estimated refunds.
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"), directed a further sweeping restructuring of 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 up to thirty-six
months, 2) direct-bill customers for unrecovered gas costs over a twelve-month
period and 3) track and recover, through an annual surcharge, upstream
transportation costs from customers. 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 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
7
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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
March 31, 1994, the Company has deferred transition costs net of recoveries of
approximately $124 million which are recoverable from its customers. The
Company believes that other annual transition costs will not exceed $100
million in 1994, decreasing thereafter over the length of the contracts
involved.
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. Given the fact that 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.
(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 List of Hazardous
Substances ("HS List"). The Company conducted the project with frequent contact
with federal and state regulatory agencies, both through informal negotiations
and formal entry of consent orders, in order to assure that site
characterization efforts met regulatory requirements. As a result of its recent
negotiations with federal and state regulatory agencies, 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.
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 March 31, 1994, Tennessee has charged $67 million against
this environmental reserve. Of the remaining reserve, $41 million has been
recorded on the balance sheet under "Payables--Trade" and $152 million under
"Deferred Credits and Other Liabilities." 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.
8
<PAGE>
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 and reflected in "Operating expenses" in 1991. The
Company is currently recovering environmental expenses annually in its rates. A
significant portion of these expenses remains subject to review and refund in
the Company's pending rate case. As of March 31, 1994, the asset balance is
$159 million ($37 million in "Current Assets" and $122 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 five of the defendant carriers and believes that the
likelihood of recovery against the remaining defendant carriers is reasonably
possible. While it believes its legal position to be meritorious, Tennessee has
not adjusted its environmental reserve to reflect any insurance recoveries.
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) Effective January 1, 1994, Tennessee adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." This new accounting rule 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.
Tennessee recorded an after-tax charge of $13 million which was reported as a
cumulative effect of change in accounting principle.
(6) In February 1994, Tenneco Energy Resources Corporation announced the sale
of original issue stock to Ruhrgas AG, resulting in dilution of Tenneco
Corporation's ownership in that subsidiary from 100% to 80%. Proceeds from the
sale were $47 million. The agreement provides for finalization of the
transaction no later than February 1995, and the gain, if any, will not be
recognized until that time. At the same time, Tenneco Gas Inc. entered into an
agreement with the buyer to pursue joint opportunities in the European gas
industry.
(7) On April 26, 1994, it was announced that Tenneco Inc. and its
subsidiaries ("Tenneco") intend to offer 35% of the common stock of a newly
created corporation which will own its farm and construction equipment segment
("Case") through an initial public offering. After the offering, Tenneco would
retain 65% of the new corporation, which would operate under the name of Case
Corporation (the "new Case Corporation") as an indirect subsidiary of Tenneco
Inc. Additional details of the offering are: 1) Tennessee would transfer all of
its Case assets to the new Case Corporation and 2) the new Case Corporation
would be
9
<PAGE>
financed independently of Tennessee with $2.9 billion of credit lines available
to it and its finance subsidiaries to be syndicated by Chemical Bank. Proceeds
from the proposed offering would be used by Tenneco to repay short-term debt,
to pay taxes related to the transaction and for general corporate purposes.
Proceeds from the initial public offering are dependent upon the offering price
per share to be determined later. It is expected that the proposed offering
would not have a material effect on the 1994 earnings of Tenneco Inc. and
Consolidated Subsidiaries in the aggregate. Until Tennessee determines the
number of new Case Corporation shares that it will obtain, the number of those
shares to be offered for sale, and the share price, the ultimate impact on
Tennessee cannot be quantified.
(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
On April 22, 1994, Tennessee's parent, Tenneco Inc. formed a newly organized
corporation to acquire the farm and construction equipment segment ("Case") of
Tenneco. On April 26, 1994, a registration statement was filed with the
Securities and Exchange Commission whereby Tenneco will offer for sale to the
public 35% of the common stock of the new corporation through an initial public
offering. Upon the successful completion of the offering, Tenneco would
continue to own 65% of the new corporation, which would operate under the name
Case Corporation (the "new Case Corporation").
In connection with the offering, Tennessee will transfer all of its Case
assets to the new Case Corporation. The new Case Corporation will be financed
independently of Tennessee with $2.9 billion of credit lines available to the
new Case Corporation and its subsidiaries to be syndicated by Chemical Bank.
The proceeds from the proposed sale, which is dependent upon the offering price
per share to be determined later, will be used by Tenneco to repay short-term
debt, to pay taxes related to the transaction, and for general corporate
purposes.
It is expected that the proposed offering would not have a material effect on
the 1994 earnings of Tenneco Inc. and Consolidated Subsidiaries in the
aggregate. Until Tennessee determines the number of new Case Corporation shares
that it will obtain, the number of those shares to be offered for sale, and the
share price, the ultimate impact on Tennessee cannot be quantified.
THREE MONTHS RESULTS
REVENUES
Revenues for the first quarter of 1994 were $2.49 billion, down from $2.62
billion in the first quarter of 1993. Higher revenues for farm and construction
equipment (up $13 million or 6 percent), automotive parts (up $43 million or 11
percent) and chemicals (up slightly) were more than offset by lower revenues in
natural gas pipelines (down $125 million or 15 percent), shipbuilding (down $49
million or 11 percent) and packaging (down $13 million or 3 percent).
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES ("OPERATING INCOME")
Operating income for the first quarter of 1994 was $271 million, down $63
million or 19 percent, compared with $334 million for the first quarter of
1993.
Natural gas pipelines reported first quarter operating income of $105 million
compared with $121 million in the 1993 quarter. Revenues for the first quarter
of 1994 decreased to $693 million compared with $818 million in the first
quarter of 1993, mainly due to the year-over-year change to operating under the
Federal Energy Regulatory Commission ("FERC") Order No. 636 which commenced
September 1, 1993. Under the FERC Order No. 636, regulated pipeline revenues
will no longer include gas sales since this business will include primarily
transportation revenues, and will reflect a smoother quarterly earnings stream
with the switch to a non-seasonal rate structure. This new structure eliminates
the seasonal peaks in the winter and valleys in the summer. Operating income
decreased primarily due to the shift to the new non-seasonal rate structure,
partially offset by higher operating income resulting from the expansion into
non-regulated businesses.
11
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In February 1994, Tenneco Energy Resources Corporation ("TERC"), a gas
marketing and intrastate pipeline subsidiary, announced the sale of original
issue stock to Ruhrgas AG, resulting in dilution of Tenneco Corporation's
ownership in that subsidiary from 100% to 80%. Proceeds from the sale were $47
million. The agreement provides for finalization of the transaction no later
than February 1995, and the gain, if any, will not be recognized until that
time. At the same time, Tenneco Gas Inc. entered into an agreement with the
buyer to pursue joint opportunities in the European gas industry.
Farm and construction equipment posted a first quarter operating loss of $6
million, an improvement of $5 million over its operating loss of $11 million in
the first quarter last year. First quarter revenues of $241 million were up
from $228 million reported in the 1993 quarter as sales of farm and
construction equipment in the international business group improved during the
first quarter. Farm and construction equipment operating loss improved compared
to the first quarter 1993 as a result of the higher sales volumes and lower
discounts and improved pricing.
Automotive parts reported first quarter operating income of $48 million
compared with $45 million recorded in the same quarter a year ago. Revenues for
the quarter totaled $446 million compared with $403 million in last year's
first quarter, mainly due to higher North American original equipment sales in
both the Walker exhaust and Monroe ride control segments, reflecting higher new
car and truck production. Aftermarket sales of exhaust and ride control
products in North America also increased due to intensive product promotions in
anticipation of the peak selling season. Market share gains and improving
economic conditions led to higher European aftermarket sales for the exhaust
business. Operating income increased as result of the higher North American
original equipment sales and the benefit of quality program initiatives, which
more than offset higher distribution costs in the North American exhaust
aftermarket.
Shipbuilding reported first quarter operating income of $48 million compared
with $55 million in the 1993 first quarter. Revenues decreased $49 million to
$403 million in the first three months of 1994 compared with $452 million in
the same period a year ago. The sale in November 1993 of the Sperry Marine
business and reduced work on Navy contracts for aircraft carriers and
submarines accounted for most of the decline in revenues and operating income.
The backlog at the end of the first quarter of 1994 stood at $3.5 billion and
included construction contracts for five LOS ANGELES class submarines and two
NIMITZ class aircraft carriers, the refueling and overhaul contract on the
carrier USS ENTERPRISE and a conversion contract for two fast sealift ships.
First quarter operating income for packaging was $20 million, down from $37
million generated in the 1993 quarter. Revenues for the first three months were
$491 million compared with $504 million in the same period last year. The lower
operating income is primarily the result of severe winter weather in the
Midwest and Northeast, as well as the California earthquake which curtailed
plant operations, delayed customer shipments, increased energy and wood costs
and significantly constrained consumer spending for packaged goods. Lower
linerboard and specialty pricing also contributed to the operating income
decline as well as the 1993 divestiture of three international aluminum
packaging businesses.
Chemicals reported first quarter 1994 operating income of $9 million down
from $15 million in the same period last year. Revenues rose slightly to $221
million in the 1994 first quarter compared with $220 million in the 1993
period. During the 1994 quarter, chemicals recorded a $7 million charge to
increase the efficiency of the surfactants operations and to reduce costs at
the Whitehaven, U.K. site. With the exception of the surfactants business, each
of the chemicals business groups posted improvements in operating income.
Demand for phosphate products remained good in all major markets.
INTEREST EXPENSE
Interest expense decreased from $73 million in the 1993 quarter to $67
million in the first quarter of 1994. The decline was primarily attributable to
lower debt levels partially offset by higher interest expense
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for pending pipeline rate refunds. Interest capitalized increased from $1
million in the 1993 quarter to $2 million in 1994 due to higher capital
expenditures.
INCOME TAXES
Income tax expense for the first quarter of 1994 was $78 million versus $114
million reported for the first quarter of 1993. This decrease was primarily due
to lower pre-tax income in 1994 and lower levels of unbenefitted European
losses.
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 quarter 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 quarter of 1994 was $115 million compared with net
income of $148 million in the 1993 first quarter. Included in the 1994 net
income was income from operations before the cumulative effect of the change in
accounting principle of $128 million and the charge of $13 million (net of
income tax) relating to the cumulative effect of the change in accounting
principle.
OTHER MATTERS
In April 1994, Tennessee filed for FERC approval to transfer the assets of
East Tennessee Natural Gas Company and Midwestern Gas Transmission Company to
two separate limited partnerships. This provides Tennessee with the financial
flexibility to optimize the value of these assets in the future. Tennessee also
formally entered the 750-mile Argentina-to-Chile pipeline project as a 25
percent equity partner and agreed to oversee the design, construction and
operation of the transmission pipeline. Tennessee will be the pipeline's
technical operator upon completion of the $600 million pipeline project.
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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 reached a tentative oral
agreement under which the Company will make a specified payment in full
settlement of 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 finalization of this agreement, however, has been delayed
while the EPA and the Company assess the impact of the District of Columbia
Court of Appeals decision in 3M Company v. Browner, which, if upheld on appeal,
may limit the applicable statute of limitations. Meanwhile, the Company's
negotiations with EPA to finalize an agreement on the remediation of its
compressor stations in Regions IV, V, and VI are continuing on a separate
track. 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 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.
A subsidiary of the Company owns a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois"), which owns an interstate
natural gas pipeline from the Canadian border through the states of New York
and Connecticut to Long Island.
In early 1992, Iroquois was informed by U.S. Attorney's Offices for the
Northern, Southern, and Eastern Districts of New York that a civil
investigation had been initiated to determine whether Iroquois committed civil
environmental violations during construction of the pipeline. In February 1992,
26 alleged violations were identified to Iroquois in writing. In response,
Iroquois denied that such violations had occurred and asserted that all
concerns raised by governmental authorities during construction had been fully
addressed. Iroquois subsequently was informed that the alleged violations
included certain field reports prepared by a Federal/State Inter-Agency Task
Force which surveyed the right-of-way in connection with the right-of-way
restoration program. Iroquois responded to the appropriate U.S. Attorneys'
Offices that none of the matters referenced in field reports issued to date
represent violations of any law or governmental authorization. As of March 11,
1994, no formal civil demand in connection with this civil investigation has
been made on Iroquois by the federal government.
On December 3, 1993, Iroquois received notification from the Enforcement
Staff of the Federal Energy Regulatory Commission's Office of the General
Counsel ("Enforcement") that Enforcement has commenced a preliminary, non-
public investigation concerning Iroquois' construction of certain of its
pipeline facilities. That office has requested certain information regarding
such construction. In addition, on December 27, 1993,
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Iroquois received a similar request for information from the Army Corps of
Engineers requesting certain information regarding permit compliance in
connection with certain aspects of the pipeline's construction. Iroquois is
evaluating and responding to these requests for information. No proceedings
have been commenced against Iroquois in connection with these agency inquiries.
A criminal investigation has been initiated against Iroquois and its
environmental consultant by the U.S. Attorneys' Office for the Northern
District of New York in conjunction with the EPA and the Federal Bureau of
Investigation ("FBI"). According to a press release issued by the FBI in June
1992, areas under investigation include possible environmental violations, wire
fraud, mail fraud and providing false information or concealment of information
from Federal agencies in conjunction with construction of the pipeline. To
date, no criminal charges have been filed and the Assistant U.S. Attorney in
charge of the investigation has stated that he is not yet ready to meet with
Iroquois' attorneys to discuss the specifics of the matter.
As a general partner, the Company's subsidiary may be jointly and severally
liable with the other partners for the liabilities of Iroquois. The Company has
a contract to provide gas dispatching as well as post-construction field
operation and maintenance services for the operator of Iroquois, but the
Company is not the operator of Iroquois and is not an affiliate of the
operator. Moreover, the foregoing proceedings and investigations have not
affected pipeline operations. On May 4, 1994, the Company received a subpoena
from the U.S. Attorney requiring the production of Company documents relating
to the operation and maintenance of the Iroquois pipeline and its right-of-way.
The Company will provide documents responsive to the subpoena. Based upon
information available to Tennessee at May 11, 1994 concerning the above
investigations and proceedings involving Iroquois, Tennessee believes that
neither the Company nor any of its subsidiaries is the target of the
investigation described above and that the ultimate resolution of these matters
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 March 31, 1994, Tennessee has been designated as a potentially responsible
party in 72 "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 $12.6 million and $72.25 million or 0.4% to 2.5% 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.
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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: May 16, 1994
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