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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, 1995
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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, 1995.
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I--Financial Information
Tennessee Gas Pipeline Company and Consolidated Subsidiaries--
Statements of Income.................................................. 2
Statements of Cash Flows.............................................. 3
Balance Sheets........................................................ 4
Statements of Changes in Shareowner's Equity.......................... 6
Notes to Financial Statements......................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
Part II--Other Information
Item 1. Legal Proceedings............................................... 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................................ 16
</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,
--------------
1995 1994
------ ------
<S> <C> <C>
Revenues:
Net sales and operating revenues--
Natural gas pipelines.................................. $ 505 $ 693
Automotive parts....................................... 589 431
Packaging.............................................. 636 491
Shipbuilding........................................... 421 403
Farm and construction equipment........................ -- 241
Other.................................................. (1) (2)
------ ------
2,150 2,257
Other income--
Interest income--
Affiliated companies................................. 84 49
Other................................................ 8 6
Gain on sale of businesses and assets, net............. 14 2
Other income, net...................................... 25 12
------ ------
2,281 2,326
------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown below).... 1,242 1,247
Operating expenses....................................... 371 540
Selling, general and administrative...................... 175 171
Finance charges of Tennessee's finance subsidiaries...... -- 4
Depreciation, depletion and amortization................. 102 99
------ ------
1,890 2,061
------ ------
Income Before Interest Expense, Income Taxes and Minority
Interest.................................................. 391 265
------ ------
Interest Expense (net of interest capitalized):
Affiliated companies..................................... 28 22
Other.................................................... 37 44
------ ------
65 66
------ ------
Income Before Income Taxes and Minority Interest........... 326 199
Income Tax Expense......................................... 133 77
------ ------
Income Before Minority Interest............................ 193 122
Minority Interest.......................................... 8 --
------ ------
Income From Continuing Operations.......................... 185 122
Income From Discontinued Operations, Net of Income Tax..... -- 6
------ ------
Income Before Cumulative Effect of Change in Accounting
Principle................................................. 185 128
Cumulative Effect of Change in Accounting Principle, Net of
Income Tax................................................ -- (13)
------ ------
Net Income................................................. $ 185 $ 115
====== ======
</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)
THREE MONTHS
ENDED MARCH
31,
-----------
1995 1994
---- -----
<S> <C> <C>
Operating Activities:
Income from continuing operations........................... $185 $ 122
Adjustments to reconcile income from continuing operations
to net cash provided (used) by continuing operations--
Depreciation, depletion and amortization.................. 102 99
Deferred income taxes..................................... 14 (15)
Gain on sale of businesses and assets, net................ (14) (2)
Changes in components of working capital--
(Increase) decrease in receivables...................... (103) (55)
(Increase) decrease in inventories...................... (155) (72)
(Increase) decrease in prepayments and other current
assets................................................. (5) 39
Increase (decrease) in payables......................... (225) (43)
Increase (decrease) in taxes accrued.................... 96 85
Increase (decrease) in interest accrued................. (3) 15
Increase (decrease) in restructuring liability.......... -- (3)
Increase (decrease) in natural gas pipeline revenue
reservation............................................ (177) 36
Increase (decrease) in other current liabilities........ 3 45
(Increase) decrease in long-term notes and receivables.... -- 2
Take-or-pay (refunds to customers) recoupments, net....... 14 (12)
Other..................................................... 57 (8)
---- -----
Cash provided (used) by continuing operations........... (211) 233
Cash provided (used) by discontinued operations......... 61 (19)
---- -----
Net Cash Provided (Used) by Operating Activities.............. (150) 214
---- -----
Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations.................................... 703 (5)
Net proceeds from sale of businesses and assets............. 34 55
Expenditures for plant, property and equipment--
Continuing operations..................................... (117) (78)
Discontinued operations................................... (4) (16)
Acquisitions of businesses.................................. (3) --
(Increase) decrease in Tenneco Inc. receivables............. (126) 5
(Increase) decrease in notes receivable from other
affiliates................................................. (271) (150)
Investments and other....................................... 12 (2)
---- -----
Net Cash Provided (Used) by Investing Activities.............. 228 (191)
---- -----
Financing Activities:
Capital distribution to affiliate........................... (28) --
Retirement of long-term debt................................ (15) (23)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt............................... (17) 26
---- -----
Net Cash Provided (Used) by Financing Activities.............. (60) 3
---- -----
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments............................................. 5 --
---- -----
Increase (Decrease) in Cash and Temporary Cash Investments.... 23 26
Cash and Temporary Cash Investments, January 1................ 459 220
---- -----
Cash and Temporary Cash Investments, March 31 (Note).......... $482 $ 246
==== =====
Cash Paid During the Period for Interest...................... $ 66 $ 54
Cash Paid During the Period for Income Taxes (net of refunds). $ 23 $ 22
</TABLE>
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NOTE: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
(The accompanying notes to financial statements are an integral part of these
statements of cash flows.)
3
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
MARCH 31, DECEMBER 31, MARCH 31,
ASSETS 1995 1994 1994
------ --------- ------------ ---------
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments......... $ 482 $ 459 $ 246
Receivables--
Customer notes and accounts (net)......... 465 644 1,063
Affiliated companies...................... 391 297 533
Gas transportation and exchange........... 221 214 303
Other..................................... 208 164 97
Notes receivable from Tenneco Inc........... 3,327 3,201 740
Inventories................................. 931 909 1,022
Deferred income taxes....................... 69 43 32
Prepayments and other....................... 262 301 284
------- ------- -------
6,356 6,232 4,320
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies.......... 441 523 420
Other investments, at cost.................. 41 49 59
Long-term receivables--
Notes and other (net)..................... 145 157 202
Affiliated companies...................... 271 -- 1,920
Investment in subsidiaries in excess of fair
value of net assets at date of acquisition,
less amortization.......................... 309 329 271
Deferred income taxes....................... 55 49 40
Other....................................... 1,248 733 853
------- ------- -------
2,510 1,840 3,765
------- ------- -------
Plant, Property and Equipment, at cost........ 10,210 11,009 10,451
Less--Reserves for depreciation, depletion
and amortization........................... 5,428 5,851 5,686
------- ------- -------
4,782 5,158 4,765
------- ------- -------
$13,648 $13,230 $12,850
======= ======= =======
</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)
MARCH 31, DECEMBER 31, MARCH 31,
LIABILITIES AND SHAREOWNER'S EQUITY 1995 1994 1994
----------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
Current Liabilities:
Short-term debt (including current maturities on
long-term debt)................................ $ 295 $ 298 $ 148
Payables--
Trade......................................... 779 1,029 1,012
Affiliated companies.......................... 119 244 178
Gas transportation and exchange............... 160 159 207
Taxes accrued................................... 283 49 275
Interest accrued................................ 56 37 64
Restructuring liability......................... -- -- 92
Natural gas pipeline revenue reservation........ 5 190 323
Other........................................... 1,005 787 802
------- ------- -------
2,702 2,793 3,101
------- ------- -------
Long-term Debt.................................... 782 793 1,068
------- ------- -------
Deferred Income Taxes............................. 1,237 1,408 1,216
------- ------- -------
Postretirement Benefits........................... 601 380 441
------- ------- -------
Deferred Credits and Other Liabilities............ 546 422 517
------- ------- -------
Commitments and Contingencies
Minority Interest................................. 479 475 20
------- ------- -------
Shareowner's Equity:
Common stock, par value $5 per share,
authorized, issued and outstanding 200 shares.. -- -- --
Premium on common stock and other capital
surplus........................................ 3,466 3,494 3,494
Cumulative translation adjustments.............. 11 (174) (271)
Retained earnings............................... 3,824 3,639 3,264
------- ------- -------
7,301 6,959 6,487
------- ------- -------
$13,648 $13,230 $12,850
======= ======= =======
</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 SHAREOWNER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS EXCEPT SHARE
AMOUNTS)
THREE MONTHS ENDED MARCH
31,
----------------------------
1995 1994
------------- -------------
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 ............................. 3,494 3,494
Capital distribution to affiliate............ (28) --
------ ------
Balance March 31............................... 3,466 3,494
------ ------
Cumulative Translation Adjustments:
Balance January 1.............................. (174) (297)
Translation of foreign currency statements... 58 26
Sale of investment in chemicals foreign
subsidiary.................................. 127 --
------ ------
Balance March 31............................... 11 (271)
------ ------
Retained Earnings:
Balance January 1.............................. 3,639 3,149
Net income................................... 185 115
------ ------
Balance March 31............................... 3,824 3,264
------ ------
Total...................................... $7,301 $6,487
====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
statements of changes in shareowner'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, 1995, and the results
of operations; changes in shareowner's equity; and cash flows for the periods
indicated.
In June 1994, Tenneco Inc. and its subsidiaries ("Tenneco") completed an
initial public offering ("IPO") of approximately 29% of the common stock of
Case Corporation ("Case"), the holder of Tenneco's Farm and construction
equipment segment. In November 1994, a secondary offering of Case's common
stock reduced Tenneco's ownership to approximately 44%. Prior to the IPO,
Tenneco reorganized this segment resulting in Tennessee selling all of its Farm
and construction equipment net assets to Case Corporation for consideration of
Case Corporation common stock and cash. From January through June 1994,
Tennessee's Farm and construction equipment segment was fully consolidated;
subsequent to June 1994, it was reflected in Tennessee's financial statements
using the cost method of accounting. Tennessee's remaining investment in Case
is not significant to its consolidated financial position.
Prior year's financial statements have been reclassified where appropriate to
conform to 1995 presentations.
(2) Pursuant to Order 636 issued by the Federal Energy Regulatory Commission
("FERC") on April 8, 1992, the Company implemented revisions to its tariff
which put into effect on September 1, 1993, the restructuring of its
transportation, storage and sales services. Pursuant to the provisions of Order
636 allowing for the recovery of transition costs related to the restructuring,
the Company has made filings to recover gas production costs related to its
Bastian Bay facilities, the remaining balance of purchased gas ("PGA") costs,
stranded transportation ("TBO") costs and gas supply realignment ("GSR") costs
resulting from remaining gas purchase obligations.
The Company's filings to recover production costs related to its Bastian Bay
facilities have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of the
Company to file for the recovery of losses upon disposition of these assets.
The Company has filed for appellate review of the FERC actions and is confident
that the Bastian Bay costs will ultimately be recovered as transition costs
directly related to Order 636, and no FERC order has questioned the ultimate
recoverability of these costs.
The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted effective September 1, 1993, and made subject to
refund pending FERC review: 1) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period, 2) recovery of TBO costs,
which the Company is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually and 3) GSR cost
recovery of 90% of such costs over a period of up to thirty-six months from
firm transportation customers and recovery of 10% of such costs from
interruptible transportation customers.
Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which
provides for the recovery of PGA costs of approximately $100 million and the
recovery of costs associated with the transfer of storage gas inventory to new
storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. On November 15,
1994, the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. The Company implemented
the terms of the PGA Stipulation and expects to make refunds in May 1995. The
Company has recorded a liability which it believes is adequate to cover the PGA
refunds.
7
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company is recovering TBO costs formerly incurred to perform its sales
functions, subject to refund, pending review of data submitted by the Company
through technical conference proceedings. On November 18, 1994, the FERC
issued an order on the Company's initial TBO surcharge filing to recover TBO
costs for the twelve-month period beginning September 1, 1993. The order
required the Company to remove certain costs from this surcharge, subject to
FERC's review at a second technical conference and FERC's consideration of a
request for rehearing. On November 30, 1994, the Company filed for a surcharge
to recover approximately $25 million of TBO costs in compliance with the FERC's
order, and in a separate filing, the Company filed to recover its projected
annual TBO costs of approximately $21 million for the twelve-month period
beginning September 1, 1994, through a new TBO surcharge. The FERC accepted the
Company's filing to recover its projected TBO costs, subject to refund, pending
review through technical conference proceedings.
With regard to the Company's GSR costs, the Company, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by the
Company of synthetic gas produced from the Great Plains Coal Gasification plant
("Great Plains"). On October 18, 1994, the FERC consolidated the four
proceedings and set them for hearing before an administrative law judge who is
to issue his initial decision by December 31, 1995. The FERC has committed to a
final order by December 31, 1996. The FERC order stated that the costs related
to the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. The hearing
will be limited to the issue of whether the settlement agreements are prudent.
Also related to the Company's GSR costs, on October 14, 1993, the Company
was sued in the State District Court of Ector County, Texas, by ICA Energy,
Inc. ("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA
and TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. On two subsequent
occasions, TransTexas gave the Company notice that it was adding new production
and/or acreage "to the contract." An amendment to the pleadings seeks $1.5
billion from the Company for alleged damages caused by the Company's refusal to
purchase gas produced from the TransTexas leases covering the new production
and lands. Neither ICA nor TransTexas were original parties to that contract.
However, they contend that any stranger acquiring a fractional interest in the
original committed reserves thereby obtains a right to add to the contract
unlimited volumes of gas production from locations in South Texas. The Company
filed a motion for summary judgment, asserting that the Texas statutes of
frauds precluded the plaintiffs from adding new production or acreage to the
contract. On May 4, 1995, the trial court granted the Company's motion for
summary judgment. The time for appeal of the trial court's ruling had not
commenced as of May 15, 1995.
The Company is engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company recorded in the first
quarter liabilities which it believes are adequate to cover the resolution of
these matters.
As of March 31, 1995, the Company has deferred GSR costs yet to be recovered
from its customers of approximately $518 million, net of $232 million
previously collected from its customers subject to refund. Proceedings have
commenced to review the recovery of these GSR costs; however, the FERC has also
generally encouraged pipelines to settle such issues through negotiations with
customers. Although Order 636 contemplates complete recovery by pipelines of
qualified transition costs, the Company is engaged in settlement discussions
with its customers concerning the amount of recoverable GSR costs in response
to FERC and customer statements acknowledging the desirability of such
settlements.
8
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact the resolution of these issues will
have on its consolidated financial position or results of operations.
The FERC issued final orders approving the Company's Stipulation and
Agreement partially resolving its 1991 rate case. Pursuant to these final FERC
orders, rates for the period February 1, 1992, through August 31, 1993, were
approved, and the Company paid refunds for this period in June 1994. Also
pursuant to these orders, rates for the period after September 1, 1993, were
approved and the Company paid refunds for the period September 1, 1993, to
October 31, 1994, in February 1995. The Company had recorded a liability which
was adequate to cover the refund obligations.
The approved Stipulation and Agreement discussed above also established
procedures for resolving the recovery of certain environmental expenditures.
These environmental costs are currently being collected in the Company's rates
subject to further review and possible refund. The Company intends to pursue
full recovery of the costs at issue. The Company is also currently pursuing the
possibility of a global settlement with its customers that would not only
address recovery of the environmental costs currently being recovered in its
rates, but would also establish a mechanism for recovering a substantial
portion of the environmental costs discussed in Note 4, that will be expended
in the future. The total amount of and timing for any recovery pursuant to such
a global settlement will depend upon the results of the Company's negotiations
with its customers and will be subject to FERC approval.
On December 30, 1994, the Company filed a general rate increase in Docket No.
RP95-112 which reflected an increase in the Company's revenue requirement of
$118 million, including recovery of certain environmental costs as discussed in
Note 4. On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. Subject to the outcome of
certain issues identified in the FERC order, the increased rates will become
effective on July 1, 1995, subject to refund.
The January 25, 1995, order also required the convening of a technical
conference, which was held in March 1995, to address various concerns raised by
the FERC and the Company's customers over, among other issues, the Company's
ability to provide its shippers with timely and accurate operating and billing
information, and the associated systems costs. At that technical conference, a
series of follow-up technical conferences were scheduled to address these
issues. The ultimate resolution of these issues may result in adjustments to
customer billings.
(3) Reference is made to Note 2 for information concerning gas supply
litigation. Tennessee Gas Pipeline Company and its subsidiaries are parties to
numerous other 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) Since 1988, the Company has been engaged in an internal project to
identify and deal with the presence of 1) polychlorinated biphenyls ("PCBs")
and 2) other substances of concern, including substances on the U.S.
Environmental Protection Agency ("EPA") List of Hazardous Substances ("HS
List") at compressor stations and other facilities operated by both its
interstate and intrastate natural gas pipeline systems. While conducting this
project, the Company has been in frequent contact with federal and state
regulatory agencies, both through informal negotiation and formal entry of
consent orders, in order to assure that its efforts meet regulatory
requirements.
9
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Tennessee has established a reserve for the Company's environmental expenses,
which includes: 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,
1995, Tennessee has charged approximately $98 million against the environmental
reserve. Of the remaining reserve, $30 million has been recorded on the balance
sheet under "Payables-Trade" and $135 million under "Deferred Credits and Other
Liabilities."
Due to the current uncertainty regarding the further activity necessary for
the Company to address the substances on the HS List and other substances of
concern, including the requirements for site characterization, the actual
presence of such substances at the sites, and the final, site-specific cleanup
decisions to be made with respect to cleanup levels and remediation
technologies, the Company cannot at this time project what additional costs, if
any, may result from such activity. 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 adequate.
Tennessee believes that a substantial portion of these costs, which will be
expended over the next five to ten years, will be recovered from customers of
its natural gas pipelines. The Company is currently recovering environmental
expenses annually in its rates. Reference is made to Note 2 for more
information regarding recovery of environmental costs. A significant portion of
these expenses remains subject to review and refund in the Company's 1991 rate
case. The Company is also currently pursuing the possibility of a global
settlement with its customers that would not only address recovery of the
environmental costs currently being recovered in its rates, but would also
establish a mechanism for recovering a substantial portion of the environmental
costs that will be expended in the future. The total amount of and timing for
any recovery pursuant to such a global settlement will depend upon the results
of the Company's negotiations with its customers and will be subject to FERC
approval. As of March 31, 1995, $125 million was remaining to be recovered from
customers.
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. The Company has pending litigation in a
Louisiana state court against its insurance carriers during this period,
seeking recovery of costs 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 cleanup 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. Tennessee has completed settlements with and
received payment from several of the defendant carriers and believes that the
likelihood of recovery of a portion of its remediation costs and claims 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.
10
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Recoveries could reduce the amount ultimately recoverable from customers.
The Company has identified other sites in its various operating divisions
where environmental remediation expenses 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
probable.
(5) In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 which establishes new accounting
standards for the impairment of long-lived assets and for long-lived assets to
be disposed of. The statement is effective for fiscal years beginning after
December 15, 1995. The impact of the adoption of the new standards has not been
quantified.
(6) In March 1995, the Company completed an IPO of 100 percent of its
Albright & Wilson chemicals segment, resulting in net proceeds of approximately
$700 million. The loss on the sale, which was recorded in December 1994 as
"discontinued operations," was $166 million, net of income tax expense of $117
million.
(The above notes are an integral part of the foregoing financial statements.)
11
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TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS RESULTS
REVENUES
Revenues for the first quarter of 1995 were $2.15 billion, down from $2.26
billion in the first quarter of 1994. Natural gas pipelines revenues were down
$188 million or 27 percent primarily in the nonregulated sector, which
experienced lower demand and prices stemming from the warm winter weather.
Automotive parts revenues increased $158 million or 37 percent, of which $86
million resulted from the Heinrich Gillet GmbH & Company ("Gillet") acquisition
in November 1994. Packaging revenues increased $145 million or 30 percent from
improved price realizations and volumes in both the paperboard and specialty
packaging segments. Shipbuilding revenues increased $18 million or four percent
due to increased activity on the SEALIFT conversion contract. Tennessee's first
quarter 1995 revenues exclude revenues from Case Corporation ("Case"), its farm
and construction equipment segment, due to the change to the cost method of
accounting for Case in July 1994. (See Note 1 in the "Notes to Financial
Statements" for additional information.)
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("OPERATING
INCOME")
Operating income for the first quarter of 1995 was $391 million, up $126
million or 48 percent, compared with $265 million for the first quarter of 1994
mainly resulting from improved pricing and volumes in the packaging sector.
NATURAL GAS PIPELINES
Natural gas pipelines reported first quarter operating income of $80 million
compared with $105 million in the 1994 first quarter. Revenues for the first
quarter of 1995 decreased to $505 million compared with $693 million in the
first quarter of 1994 primarily due to the decline in spot prices and lower
volumes in the nonregulated segment. Operating income decreased as a result of
depressed natural gas demand and prices in the nonregulated business and the
discounting of capacity associated with a terminated contract in the regulated
business. The natural gas pipeline industry is experiencing increasing
competition in virtually every aspect of operations, which is the result of
actions by the FERC to strengthen market forces throughout the industry. In a
number of key markets, Tennessee's interstate pipelines face competitive
pressure from other major pipeline systems, enabling local distribution
companies and end users to choose a supplier or switch suppliers based on the
short-term price of the gas and the cost of transportation. Tennessee's
pipelines have frequently been required to discount their transportation rates
to maintain market share. Additionally, the majority of the Company's
transportation contracts will be expiring over the next five years. The
renegotiation of these contracts may be impacted by such competitive factors.
In April 1995, Tennessee announced its intent to sell its 50% interest in
Kern River Gas Transmission Company ("Kern River") provided an agreement can be
reached with a buyer on terms acceptable to Tennessee. Kern River owns a 904-
mile natural gas pipeline system extending from southwestern Wyoming to
Bakersfield, California.
AUTOMOTIVE PARTS
Automotive parts reported first quarter operating income of $53 million
compared with $51 million in the first quarter of 1994. Revenues for the first
quarter of 1995 increased to $589 million compared with $431 million in last
year's first quarter, primarily as a result of the acquisition of Gillet, which
added $86 million
12
<PAGE>
in revenues. Profit margins declined in the first quarter of 1995 due to the
integration of Walker Europe with Gillet, the largest supplier of exhaust
systems for auto manufacturers in Europe. Aftermarket sales rose worldwide,
primarily due to the broadened geographic introduction and model coverage of
the Sensa-Trac ride control product line. Sensa-Trac was introduced in North
America, Australia and France last year and is being introduced in the rest of
Europe this year. Original equipment sales increased worldwide with much of
this increase supplied by the Gillet acquisition and the improving European
economy.
PACKAGING
First quarter operating income for packaging was $116 million, up $96 million
compared with $20 million generated in the first quarter of 1994. The 1995
first quarter operating income included a $14 million gain from the sale of a
mill in Sylva, North Carolina. Revenues for the first three months of 1995 were
$636 million compared with $491 million in the same period last year, up 30
percent primarily due to improved price realizations and volumes in both
paperboard and specialty packaging.
The paperboard packaging business, which includes containerboard and folding
boxboard operations, reported operating income of $107 million in the first
quarter, compared with $9 million a year ago, up $98 million primarily due to
higher commodity prices. Wastepaper costs increased by $19 million as costs of
a major component of wastepaper, old corrugated containers, escalated to more
than $200 per ton in March 1995 from $44 per ton a year ago.
Productivity of containerboard mills rose 3.3 percent over the year-ago
period and primary mills set a record with average production exceeding 6,000
tons per day for three consecutive months. Reduced machine downtime and scrap
contributed to these productivity gains.
Specialty packaging reported operating income of $9 million in the first
quarter of 1995 down slightly from last year. Aluminum and plastics packaging
operating income increased 11 percent in the first quarter as demand for these
products continues to grow. The molded fiber business reported lower operating
income in the first quarter of 1995 compared with the same period last year due
to higher raw material costs. The cost of recycled fiber rose 80 percent
compared with last year's first quarter.
SHIPBUILDING
Shipbuilding reported first quarter operating income of $44 million compared
with $48 million in the 1994 first quarter. Revenues increased $18 million to
$421 million in the first three months of 1995 compared with $403 million in
the same period last year due to a higher level of activity on the SEALIFT
conversion contract. Operating income declined due to the completion of the
contract to refuel and overhaul the aircraft carrier USS ENTERPRISE, which was
completed in September 1994, and higher initial costs on the SEALIFT conversion
contract.
The backlog at the end of the first quarter of 1995 was approximately $5.3
billion and included construction contracts for three LOS ANGELES class
submarines and three NIMITZ class aircraft carriers, a conversion contract for
two fast SEALIFT ships and two "Double Eagle" product tankers.
OTHER
Tennessee's other operations reported operating income of $98 million in the
first quarter of 1995 compared with $47 million for the first quarter of 1994.
Operating income improved in the first quarter of 1995 primarily due to higher
interest income from affiliated companies and higher levels of notes receivable
and temporary cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense decreased from $66 million in the 1994 first quarter to $65
million in the first quarter of 1995. The decline was primarily attributable to
lower debt levels that resulted from scheduled long-term debt retirements and
lower interest expense for a pipeline rate refund. Interest capitalized
increased from $1 million in the 1994 first quarter to $2 million in the first
quarter of 1995.
13
<PAGE>
INCOME TAXES
Income tax expense for the first quarter of 1995 was $133 million versus $77
million reported for the 1994 first quarter. This increase was primarily due to
higher pre-tax income in 1995.
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.
DISCONTINUED OPERATIONS
Income from discontinued operations in the first quarter of 1994 of $6
million (net of income tax expense of $1 million) was attributable to the
chemicals and brakes businesses, which have been sold.
In March 1995, Tenneco completed an IPO of 100 percent of its Albright &
Wilson chemicals segment, resulting in net proceeds of approximately $700
million. The loss on the sale, which was recorded in December 1994 as
"discontinued operations", was $166 million, net of income tax expense of $117
million.
NET INCOME
Net income for the first quarter of 1995 was $185 million compared with net
income of $115 million in the 1994 first quarter.
Included in the first quarter 1994 net income of $115 million was income from
continuing operations of $122 million, income from discontinued operations of
$6 million and a charge of $13 million related to the cumulative effect of the
change in accounting principle.
CAPITAL EXPENDITURES
Expenditures for plant, property and equipment from continuing operations for
the first three months of 1995 were $117 million compared with $78 million for
the first three months of 1994. Expenditures increased for natural gas
pipelines ($25 million), automotive parts ($3 million), shipbuilding ($8
million) and packaging ($3 million).
OTHER MATTERS
In March 1995, the Financial Accounting Standards Board issued FAS No. 121
which establishes new accounting standards for the impairment of long-lived
assets and for long-lived assets to be disposed of. The statement is effective
for fiscal years beginning after December 15, 1995. The impact of the adoption
of the new standards has not been quantified.
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.
The Company has executed a consent order with the United States Environmental
Protection Agency ("EPA") governing the remediation of its compressor stations
in Regions IV, V and VI. With respect to the 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 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. The Company believes that the ultimate resolution of
this matter will not have a material adverse effect on the financial condition
or results of operations of the Company and its consolidated subsidiaries.
(2) Other Proceedings.
On October 14, 1993, the Company was sued in the State District Court of
Ector County, Texas, by ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas"). In that suit, ICA and TransTexas contended that the Company had
an obligation to purchase gas production which TransTexas thereafter attempted
to add unilaterally to the reserves originally dedicated to a 1979 gas
contract. On two subsequent occasions, TransTexas gave the Company notice that
it was adding new production and/or acreage "to the contract." An amendment to
the pleadings seeks $1.5 billion from the Company for alleged damages caused by
the Company's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. Neither ICA nor TransTexas were original
parties to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment. The time for appeal of the trial
court's ruling had not commenced as of May 15, 1995.
(3) Potential Superfund Liability.
At March 31, 1995, the Company has been designated as a potentially
responsible party in 66 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain sites, the Company is fully indemnified by
third parties. With respect to certain other sites, the Company has sought to
resolve its liability through payments to the other potentially responsible
parties. For the remaining sites, the Company has estimated its share of the
remediation costs to between $12 million and $71 million or 0.4% to 2.2% of the
total remediation costs for those sites and has provided reserves that it
believes are adequate for such costs. Because the clean-up costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required, the Company'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 the Company could be required to pay in excess of its pro rata
share of remediation costs. The Company's understanding of the financial
strength of other potentially responsible parties has been considered, where
appropriate, in the Company's determination of its estimated liability.
15
<PAGE>
The Company 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 consolidated financial position or results of operations.
For additional information concerning environmental matters, see Note 4 in
the "Notes to Financial Statements" of Tennessee Gas Pipeline Company and
Consolidated Subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27--Financial Data Schedule
(b) Reports on Form 8-K. Tennessee Gas Pipeline Company did not file any
Current Reports on Form 8-K during the quarter ended March 31, 1995.
16
<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: May 15, 1995
17
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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