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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-4101
TENNESSEE GAS PIPELINE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 74-1056569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
EL PASO ENERGY BUILDING
1001 LOUISIANA
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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6% Debentures due 2011................................... New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO
THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF
SUCH STOCK, AS OF THE SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF
FILING......................................................................None
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common Stock, par
value $5 per share, 208 shares outstanding as of March 7, 1997.
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
I(1)(a) AND (b) TO FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TENNESSEE GAS PIPELINE COMPANY
TABLE OF CONTENTS
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CAPTION PAGE
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Glossary.............................................................. ii
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... *
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... *
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 43
PART III
Item 10. Directors and Executive Officers of the Registrant.......... *
Item 11. Executive Compensation...................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. *
Item 13. Certain Relationships and Related Transactions.............. *
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
Signatures.................................................. 45
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* No response to this item is included herein for the reason that no response is
required pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-K are defined below:
<TABLE>
<CAPTION>
DEFINITION
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<S> <C>
ALJ............................... Administrative Law Judge
Bcf(/d)........................... Billion cubic feet (per day)
Company........................... TGP and those subsidiaries owned directly or indirectly by TGP
subsequent to the Distributions and the Merger
Court of Appeals.................. United States Court of Appeals for the District of Columbia Circuit
Dakota............................ Dakota Gasification Company
East Tennessee.................... East Tennessee Natural Gas Company, a wholly owned subsidiary of
TGP
EPA............................... United States Environmental Protection Agency
EPG............................... El Paso Natural Gas Company
EPTPC............................. El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an indirect
subsidiary of EPG
FERC.............................. the Federal Energy Regulatory Commission
GSR............................... Gas supply realignment
ICA............................... ICA Energy, Inc.
Iroquois.......................... Iroquois Gas Transmission System, L.P.
IRS............................... Internal Revenue Service
Kern River........................ Kern River Gas Transmission Company
Midwestern........................ Midwestern Gas Transmission Company, a wholly owned indirect
subsidiary of TGP
MMcf(/d).......................... Million cubic feet (per day)
MMdth(/d)......................... Million decatherms (per day)
MW(s)............................. Megawatt(s)
Old Tenneco....................... Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior to the
Distribution and Merger
PASA.............................. Pipeline Authority of South Australia
PCB(s)............................ Polychlorinated biphenyl(s)
PRP(s)............................ Potentially Responsible Party(ies)
SEC............................... Securities and Exchange Commission
Series A Preferred Stock.......... 8 1/4% Cumulative Junior Preferred Stock, Series A, of EPTPC
SFAS.............................. Statement of Financial Accounting Standards
Tenneco Ventures.................. Tenneco Ventures Corporation and Tenneco Gas Production
Corporation, collectively
TGP............................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of EPTPC
TransTexas........................ TransTexas Gas Corporation
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
TGP, a Delaware corporation, is a wholly owned subsidiary of EPTPC. The
major businesses of the Company consist of the interstate transportation of
natural gas, which generally is subject to regulation by FERC, as well as
certain other non-regulated business operations, such as gas marketing,
intrastate pipeline operations, international pipelines and power generation
operations and domestic power generation operations. Prior to the Distributions
and Merger described below, the Company also was engaged in the manufacture and
sale of automotive exhaust system parts and ride control products; the
manufacture and sale of packaging materials, cartons, containers and specialty
packaging products for consumer and commercial markets; and the construction and
repair of ships.
ACQUISITION BY EPG
On December 12, 1996, an indirect subsidiary of EPG merged into Old Tenneco
(the "Merger"), resulting in Old Tenneco (including TGP) becoming an indirect
subsidiary of EPG. The Merger was effected in accordance with the Amended and
Restated Agreement and Plan of Merger dated as of June 19, 1996 (the "Merger
Agreement"). In the Merger, Old Tenneco changed its name to EPTPC. Prior to the
Merger, Old Tenneco and its subsidiaries (including TGP) effected various
intercompany transfers and distributions which restructured, divided and
separated their businesses, assets and liabilities so that all the assets,
liabilities and operations related to their automotive parts, packaging and
administrative services businesses (collectively, the "Industrial Business") and
their shipbuilding business (the "Shipbuilding Business") were spun-off to Old
Tenneco's then existing common stockholders (the "Distributions"). The entity
consisting of the Industrial Business was subsequently renamed Tenneco Inc.
("New Tenneco") and the entity consisting of the Shipbuilding Business was
subsequently renamed Newport News Shipbuilding Inc. ("Newport News"). Following
the Distributions, the remaining operations of the Company consisted primarily
of those operations related to the transmission and marketing of natural gas and
the discontinued operations of Old Tenneco. In preparation for the Merger and
Distributions, Old Tenneco initiated a realignment of the Company's indebtedness
(the "Debt Realignment"). As part of the Debt Realignment, Old Tenneco initiated
tender offers for certain issues of debt of Old Tenneco and certain of its
subsidiaries (including TGP) and certain other debt issues which were exchanged
into New Tenneco debt, defeased or otherwise retired. Upon completion of the
Debt Realignment transactions, the Company is only responsible for its remaining
debt which was not tendered, defeased or otherwise retired. As a result of the
Merger, EPG owns 100 percent of the common stock of EPTPC, representing at the
effective time of the Merger approximately 75 percent of the equity value of
EPTPC; the balance of the equity value of EPTPC is held by the holders of its
Series A Preferred Stock which was issued in a registered public offering in
November 1996 and remains outstanding. For a further discussion, see Note 1 of
Item 8, Financial Statements and Supplementary Data.
REGULATED OPERATIONS
The regulated operations of the Company include the interstate pipeline
systems of TGP, Midwestern and East Tennessee, as well as certain joint
ventures, which are primarily engaged in the transportation and storage of
natural gas for producers, marketers, end-users and other gas transmission and
distribution companies. TGP's multiple-line system begins in the gas-producing
regions of Texas and Louisiana, including the continental shelf of the Gulf of
Mexico, and extends into the northeastern section of the U.S., including the New
York City and Boston metropolitan areas. Midwestern's pipeline system extends
from Portland, Tennessee, to Chicago, and principally serves the Chicago
metropolitan area. East Tennessee's pipeline system serves the states of
Tennessee, Virginia and Georgia and connects with TGP's pipeline system in
Springfield and Lobelville, Tennessee. Net revenues from the interstate gas
sales and transportation operations of the Company accounted for approximately
32 percent, 40 percent and 39 percent of total revenues of the Company for 1996,
1995, and 1994, respectively.
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The interstate gas transmission systems of the Company include
approximately 16,300 miles of pipeline, gathering lines and sales laterals (with
14,800 miles operated by TGP, 400 miles operated by Midwestern and 1,100 miles
operated by East Tennessee), together with related facilities that include 90
compressor stations with an aggregate of approximately 1.5 million horsepower.
The Company also has interests in or contractual rights to six underground and
above-ground gas storage facilities to permit increased deliveries of gas during
peak demand periods. The total design delivery capacity of the Company's
interstate systems as of December 31, 1996, was approximately 4,900 MMcf/d,
giving effect for deliveries into Midwestern and East Tennessee, and
approximately 5,800 MMcf/d at peak demand, giving effect for gas withdrawn from
storage.
The following table sets forth the volumes of gas sold and transported by
the interstate pipeline systems of the Company for the periods shown.
<TABLE>
<CAPTION>
MMDTH
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Sales*.............................................. 77 95 131
Transportation*..................................... 2,348 2,139 2,184
----- ----- -----
Total..................................... 2,425 2,234 2,315
===== ===== =====
</TABLE>
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* Sales and transportation volumes include all natural gas sold or transported
by the Company's interstate pipeline systems (including the proportionate
share of transportation volumes of the joint ventures in which the Company had
interests) and have not been adjusted to reflect the sale of (i) a 50 percent
interest in Kern River in December 1995, and (ii) a 13.2 percent general
partnership interest in Iroquois in June 1996. Kern River owns a 904-mile
pipeline system extending from Wyoming to California. Iroquois owns a 370-mile
pipeline extending from the Canadian border at Waddington, New York, to Long
Island, New York. Of the total transportation volumes shown, Kern River
transported approximately 136 MMdth and 130 MMdth during 1995 and 1994,
respectively. Iroquois transported approximately 20 MMdth, 45 MMdth, and 32
MMdth during 1996, 1995 and 1994, respectively.
Regulatory Environment
The Company's interstate system is subject to the jurisdiction of FERC in
accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978.
In the mid-1980s, FERC began a series of actions which ultimately had the
effect of substantially removing interstate pipelines from the gas purchase and
resale business and confining their role to transportation of gas owned by
others. In Order No. 436, issued in 1985, FERC began this transition by
requiring interstate pipelines to provide non-discriminatory access to their
facilities for all transporters of natural gas. This requirement enabled
consumers to purchase their own gas and have it transported on the interstate
pipeline system, rather than purchase gas from the pipelines. The transition was
completed with Order No. 636, issued in 1992, in which FERC required all
interstate pipelines to "unbundle" their sales and transportation services so
that the transportation services they provided to third parties would be
"comparable" to the transportation services accorded to gas owned by the
pipelines. FERC's stated purpose was to ensure that the pipelines' monopoly over
the transportation of natural gas did not distort the gas producer sales market,
which had by then been essentially deregulated.
One of the obstacles to this transition was the existence of long-term gas
purchase contracts between pipelines and producers which required the pipelines
to take or pay for a significant percentage of the gas which the producer was
capable of delivering. While FERC did not deal with this issue initially, it
eventually adopted rate recovery procedures which facilitated negotiations
between pipelines and producers to address take-or-pay issues. In Order No. 636,
FERC provided that pipelines could recover 100 percent of the costs prudently
incurred to terminate their gas purchase obligations. In July 1996, the Court of
Appeals issued its decision upholding, in large part, Order No. 636, and
remanded to FERC several issues for further explanation, including further
explanation of FERC's decision to allow pipelines to recover 100 percent of GSR
costs and FERC's requirement that pipelines allocate 10 percent of GSR costs to
interruptible transportation customers. In February 1997, FERC reaffirmed its
decision to allow pipelines to recover
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100 percent of GSR costs. In addition, FERC modified the requirement that
pipelines allocate 10 percent of GSR costs to interruptible customers to permit
pipelines to propose an allocation of any percentage of such costs to their
interruptible customers. For a further discussion of GSR issues related to TGP,
see Item 3, Legal Proceedings, and Note 5 of Item 8, Financial Statements and
Supplementary Data.
In December 1994, TGP filed for a general rate increase (the "1995 Rate
Case"). In January 1995, 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. On July 1, 1995, TGP began collecting rates, subject
to refund, reflecting an $87 million increase in TGP's annual revenue
requirement. A Stipulation and Agreement (the "Stipulation") was filed with an
ALJ in this proceeding in April 1996. The Stipulation resolves the rates that
are the subject of the 1995 Rate Case, including a structural rate design change
that results in a larger proportion of TGP's transportation revenues being
dependent upon throughput. Under the Stipulation, TGP is required to refund,
upon final approval of the Stipulation, the difference between the revenues
collected under the July 1, 1995 motion rates and the revenues that would have
been collected pursuant to the rates underlying the Stipulation. In October
1996, FERC approved the Stipulation with certain modifications and
clarifications which are not material. In January 1997, FERC issued an order
denying requests for rehearing of the October 1996 order. One party to the rate
proceeding, a competitor of TGP, filed with the Court of Appeals in February
1997, a Petition for Review of the FERC orders approving the Stipulation.
For a discussion of recent FERC proceedings relating to the recovery by TGP
of certain environmental costs as a component of the rates charged by its
interstate pipeline operations, see Note 5 of Item 8, Financial Statements and
Supplementary Data.
Markets and Competition
The Company's interstate pipeline operations face varying degrees of
competition from alternative energy sources, such as electricity, coal, and oil.
The potential consequences of the proposed restructuring of the electric power
industry are currently unclear. It may benefit the natural gas industry by
creating more demand for gas turbine generated electric power, or it may hamper
demand by allowing more effective use of surplus electric capacity through
increased wheeling as a result of open access. At this time, the Company is not
projecting a significant increase in gas demand as a result of such
restructuring.
Customers of the interstate pipeline operations of the Company include
natural gas producers, marketers and end-users, as well as other gas
transmission and distribution companies. Substantially all of the revenues of
these operations are generated under long-term gas transmission contracts.
Contracts representing approximately 70 percent of the Company's firm
transportation capacity will be expiring over the next four years, principally
in the year 2000. Although the Company cannot predict how much capacity will be
resubscribed, a majority of the expiring contracts cover service to Northeastern
U.S. markets, where there is currently little excess capacity. Several projects,
however, have been proposed to deliver incremental volumes to this area. While
the Company intends to pursue the renegotiation, extension and/or replacement of
these contracts, there can be no assurance as to whether the Company will be
able to extend or replace these contracts (or a substantial portion thereof) or
that the terms of any renegotiated contracts will be as favorable to the Company
as the existing contracts. Accordingly, the Company presently is unable to
ascertain whether or not the expiration and renegotiation, extension and/or
replacement of these transportation contracts will have a materially adverse
effect on the Company's financial position or results of operations.
In a number of key markets, the Company faces 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 gas and the cost of transportation. Competition between pipelines is
particularly intense in the Company's supply area, Louisiana and Texas. In some
instances, the Company has had to discount its transportation rates in order to
maintain market share. The renegotiation of the Company's expiring contracts may
be impacted by the foregoing competitive factors.
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NON-REGULATED OPERATIONS
Field and Merchant Services
Certain subsidiaries of TGP are engaged in the businesses of marketing
natural gas and owning and operating approximately 1,300 miles of gathering and
intrastate pipelines that serve the Texas Gulf Coast and West Texas markets.
The interstate marketing operations buy, sell and contract for the
transportation of up to 1.2 Bcf/d of natural gas from approximately 300
suppliers, through 40 pipelines to about 500 customers, marketers and end-users.
The Company offers a portfolio of products and services that are intended to
help distributors, end-users and producers manage their gas sales and purchasing
processes. The Company also owns and manages gas gathering systems and natural
gas processing plants in Pennsylvania, Texas, Louisiana and Tennessee.
Additionally, the Company owns and operates, either directly or through joint
ventures, approximately 1,300 miles of intrastate pipelines and gathering lines
in the Texas Gulf Coast and West Texas markets. In addition to offering
transportation capacity, these intrastate pipeline and gathering operations
manage buying, selling and transportation services of up to 1.4 Bcf/d of natural
gas for approximately 135 suppliers and 140 customers and shippers. The
intrastate pipeline operations also provide swing storage services and access to
major intrastate and interstate pipelines in Texas.
The following table sets forth the volumes of gas sold and transported by
the Company's marketing and intrastate pipeline subsidiaries for the periods
indicated:
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<CAPTION>
MMDTH
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1996 1995 1994
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<S> <C> <C> <C>
Sales.................................................... 680 642 739
Transportation........................................... 281 230 274
--- --- -----
Total.......................................... 961 872 1,013
=== === =====
</TABLE>
In February 1994, the Company sold a 20 percent interest in its marketing
and intrastate pipeline subsidiary to Ruhrgas Aktiengesellschaft, Germany's
largest natural gas company. In anticipation of the Merger, the Company
repurchased this 20 percent interest in September 1996.
International and Other Energy-Related Business
The Company has recently undertaken various activities to extend its
traditional activities in North American pipelines to international pipeline,
power and energy-related projects, with a current focus on activities in Latin
America, Southeast Asia, Australia and Europe. Set forth below are brief
descriptions of the projects that are operational or are in various stages of
development.
Australia Project. In 1995, a subsidiary of the Company was selected to
construct, own and operate a 470-mile natural gas pipeline in Queensland,
Australia. Construction of the pipeline was completed in December 1996 at a
total cost of $170 million. Additionally, in June 1995 the Company acquired the
natural gas pipeline assets of PASA, which includes a 488-mile pipeline, for
$225 million. In December 1996, the Company received approximately $400 million
through debt financing and the subsequent sale of 70 percent of its ownership
interest in these projects.
Indonesia Project. The Company has a 50 percent ownership interest in a
producing gas field (having reserves of approximately 500 Bcf) and a 47.5
percent ownership interest in a 135 MW power generating plant under construction
in South Sulawesi, Indonesia. The $225 million project has been financed with
approximately $179 million in debt. The electricity from the power generating
plant will be sold to the national electric utility pursuant to a long-term
contract. The Company has obtained political risk insurance for its equity
investment.
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<PAGE> 8
Hungary Project. In September 1996, a subsidiary of the Company was
selected to acquire a 50 percent controlling interest in an operating 70 MW
power plant located in Dunaujvaros, Hungary. The electricity generated at this
plant is consumed by Dunaferr, the largest steel mill in Hungary. Excess power
is sold pursuant to long-term contracts to the Hungarian national electric
utility. Subject to satisfaction of certain conditions, the acquisition is
scheduled to be finalized in the first quarter of 1997. The assets will be
acquired for approximately $25 million, and no financing will be involved. The
Company is seeking political risk insurance from the Overseas Private Investment
Corporation for its equity investment. The acquisition agreement requires the
Company to study and, if deemed economically feasible, to expand the electric
generating plant. The feasibility study is underway.
Other Projects. The Company has a 17.5 percent interest in a 240 MW power
plant in Springfield, Massachusetts, and a 50 percent interest in two additional
cogeneration projects in Florida which have a combined capacity of 220 MWs.
Other
As a result of the Merger, the Company holds certain limited assets and is
responsible for certain liabilities, which the Company estimates to be
approximately $600 million, of existing and discontinued operations and
businesses.
Tenneco Credit Corporation (now renamed El Paso Energy Credit Corporation),
an indirect subsidiary of the Company, purchases interest-bearing and
noninterest-bearing trade receivables from the Company's operating subsidiaries.
Through June 1994, it also purchased retail receivables generated primarily by
retail sales of products by Case Corporation. As part of the intercompany
transfers preceding the Merger and Distributions, these Case Corporation retail
receivables and all of the interest and obligations associated with receivables
relating to the Industrial Business were transferred to New Tenneco.
ENVIRONMENTAL
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at ongoing and
former operating sites. As of December 31, 1996, the Company had a reserve of
approximately $187 million for the following environmental contingencies which
the Company anticipates incurring through 2002: (i) expected remediation costs
and associated onsite, offsite and groundwater technical studies of
approximately
$134 million; and (ii) other costs of approximately $53 million. For a further
discussion of specific environmental matters, see Item 3, Legal Proceedings, and
Note 5 of Item 8, Financial Statements and Supplementary Data.
In addition, the Company estimates that it will make capital expenditures
for environmental matters of approximately $5 million in 1997 and that capital
expenditures for environmental matters will range from approximately $40 million
to $80 million in the aggregate for the years 1998 through 2007. These
expenditures primarily relate to compliance with air regulations and control of
water discharges.
EMPLOYEES
The Company had approximately 2,800 full-time employees on December 31,
1996. Subsequent to the Merger, the Company implemented a program to streamline
operations and reduce operating costs. Since December 31, 1996, the Company has
reduced its workforce by 340 employees. The Company has no collective bargaining
arrangements.
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ITEM 2. PROPERTIES
A description of the Company's properties is included in Item 1, Business,
and is incorporated by reference herein.
The Company is of the opinion that it has generally satisfactory title to
the properties owned and used in its businesses, subject to the liens for
current taxes, liens incident to minor encumbrances, and easements and
restrictions that do not materially detract from the value of such property or
the interests therein or the use of such properties in its businesses. In
addition, the Company's physical properties are adequate and suitable for the
conduct of its business in the future.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, TGP was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District Court for
the District of Columbia. The plaintiff filed this action under the False Claims
Act against most interstate pipelines and others alleging that the defendants
mismeasured natural gas produced from federal and Indian lands, which deprived
the United States of royalties otherwise due it. Among other things, the
plaintiff seeks to recover unspecified treble damages on behalf of the United
States. The plaintiff is also seeking to recover his finder's fee and attorneys'
fees. All defendants, most of whom are pursuing a combined defense, have filed
responsive motions. The plaintiff responded to those motions in January 1997.
Oral arguments are set in March 1997. TGP believes that there are valid
jurisdictional and procedural defenses to the plaintiff's complaint; however,
even if the plaintiff is ultimately entitled to pursue his claims, TGP believes
that it has substantive defenses, including that TGP's measurement practices are
consistent with industry practice and all applicable standards, regulations,
contracts, and tariffs and that TGP should not be liable in any event. Based on
information available at this time, TGP does not believe that the ultimate
resolution of this matter will have a materially adverse effect on the Company's
financial position or results of operations.
On August 1, 1995, the Texas Supreme Court affirmed a ruling of the Texas
Court of Appeals favorable to TGP involving a gas purchase contract and
indicated that it would remand the case to the trial court. On April 18, 1996,
however, the Texas Supreme Court withdrew its initial opinion and issued an
opinion reversing the Court of Appeals opinion. In June 1996, TGP filed a motion
for rehearing with the Texas Supreme Court which was denied in August 1996. In
December 1996, TGP entered into settlement agreements with each of the parties
to this gas purchase contract. As a result of these settlements, the gas
purchase contract is now terminated. TGP paid a total of $74 million to
terminate this contract. In addition, all related litigation was terminated.
During the course of this action, TGP either paid, or provided for the payment
of, amounts it believes were appropriate to cover the resolution of its contract
reformation litigation, including providing a bond in the amount of $206
million. On September 30, 1996, TGP paid approximately $193 million to the
producers and the producers agreed to release all but approximately $2 million
of the bonded amount. On November 1, 1996, a final order was issued which
assessed only $456,000 of the $2 million to TGP and TGP was released from the
remaining bond amount. TGP has filed with FERC to recover these payments from
its customers.
On October 14, 1993, TGP was sued in the State District Court of Ector
County, Texas, by ICA and TransTexas. In that suit, ICA and TransTexas contended
that TGP had an obligation to purchase gas production which TransTexas
unilaterally attempted to add to the reserves originally dedicated to a 1979 gas
contract. An amendment to the pleading sought $1.5 billion from TGP for alleged
damages caused by TGP's refusal to purchase gas produced from the TransTexas
leases covering the new production and lands. In June 1996, TGP reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate their contract rights, released TGP from liability under the
contract, and indemnified TGP against future claims, including royalty owner
claims. TGP has filed with FERC to recover from its customers amounts previously
paid to TransTexas above the market price as well as the $125 million settlement
payment. In connection with that litigation, certain royalty interest owners
filed a claim against TGP alleging that they are sellers entitled to tender gas
to TGP under the settled contract. This claim fell under the indemnification
provisions of TGP's settlement with ICA and TransTexas, requiring ICA and
TransTexas to
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<PAGE> 10
defend and indemnify TGP. This royalty owner litigation was settled in December
1996 at no cost to TGP. The royalty owners' claims against TGP have been
dismissed.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the Pennsylvania and
New York environmental agencies to specify the remediation requirements at the
Pennsylvania and New York stations. Remediation activities in Pennsylvania are
essentially complete; in addition, pursuant to the Consent Order dated August 1,
1995, between TGP and the Pennsylvania Department of Environmental Protection,
TGP funded an environmentally beneficial project for $450,000 in April 1996 and
paid a $500,000 civil penalty in September 1996. Remediation and
characterization work at the compressor stations under its consent order with
the EPA and the jurisdiction of the New York Department of Environmental
Conservation is ongoing. Management believes that the ultimate resolution of
these matters will not have a materially adverse effect on the Company's
financial position or results of operations.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky stations from the agency, and continues to
work to resolve the remaining issues. Management believes that the resolution of
this issue will not have a materially adverse effect on the Company's financial
position or results of operations.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4, "Submission of Matters to a Vote of Security Holders," has been
omitted from this report pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.
7
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of TGP's common stock, par value $5 per share (the "Common Stock") is
owned by EPTPC and, accordingly, there is no public trading market for such
securities.
Dividends as may be determined by the Board of Directors of TGP may be
declared and paid on the Common Stock from time to time out of any funds legally
available therefor.
ITEM 6. SELECTED FINANCIAL DATA
Item 6, Selected Financial Data, has been omitted from this report pursuant
to the reduced disclosure format permitted by General Instruction I to Form
10-K.
8
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERGER TRANSACTION
On December 12, 1996, Old Tenneco (the parent corporation of TGP) and an
indirect subsidiary of EPG completed the Merger and Old Tenneco, (including TGP)
became an indirect subsidiary of EPG. The Merger was effected in accordance with
the Merger Agreement. In the Merger, Old Tenneco changed its name to EPTPC.
Prior to the Merger, Old Tenneco and its subsidiaries (including TGP) effected
various intercompany transfers and distributions which restructured, divided and
separated their businesses, assets and liabilities so that all the assets,
liabilities and operations related to the Industrial Business and the
Shipbuilding Business were spun-off to Old Tenneco's then existing common
stockholders in the Distributions. The entity consisting of the Industrial
Business was subsequently renamed Tenneco Inc. (referred to herein as "New
Tenneco") and the entity consisting of the Shipbuilding Business was
subsequently renamed Newport News. Following the Distributions, the remaining
operations of the Company consisted primarily of those operations related to the
transmission and marketing of natural gas and the discontinued operations of Old
Tenneco. In preparation for the Merger and Distributions, Old Tenneco initiated
the Debt Realignment. As part of the Debt Realignment, Old Tenneco initiated
tender offers for certain issues of debt of Old Tenneco and certain of its
subsidiaries and certain other debt issues which were exchanged into New Tenneco
debt, defeased or otherwise retired. Upon completion of the Debt Realignment
transactions, the Company is only responsible for its remaining debt which was
not tendered, defeased or otherwise retired. As a result of the Merger, EPG owns
100 percent of the common stock of EPTPC, representing at the effective time of
the Merger approximately 75 percent of the equity value of EPTPC. The balance of
the equity value of EPTPC is held by the holders of its Series A Preferred Stock
which was issued in a registered public offering in November 1996 and remains
outstanding. For a further discussion, see Note 1 of Item 8, Financial
Statements and Supplementary Data.
RESULTS OF OPERATIONS
Results of operations comparisons have been conformed to the
reclassification of the Combined Statements of Income.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenues
The Company's operating revenues in 1996 increased by 38 percent over the
operating revenues in 1995. Revenues from the energy-related operations of the
Company that are subject to regulation by FERC (generally referred to herein as
its "regulated" operations) increased to $861 million, or 13 percent. Of the
increase, $55 million was primarily due to benefits derived from a new rate
structure implemented on July 1, 1995 and $34 million was due to regulatory
adjustments that had no operating income impact. Revenues from the
energy-related operations of the Company that are not generally subject to
regulation by FERC (generally referred to herein as its "non-regulated"
operations) increased 60 percent to $1.8 billion, primarily due to higher
natural gas prices and volumes. Additionally, the acquisition of the assets of
PASA in June 1995 and new processing and gathering projects increased revenues
by $44 million. Revenues in 1996 from other operations were $29 million compared
with $59 million in the prior year due to lower interest revenue from the
continuing liquidation of Case Corporation receivables.
Operating Income
Operating income from regulated operations increased to $250 million or 40
percent in 1996 due to benefits derived from the new rate structure and
increased transportation volumes. Additionally, approximately $42 million of
environmental costs were reflected in 1995 and offset by insurance recoveries as
a result of the environmental settlement. These insurance recoveries were
included in other income as discussed
9
<PAGE> 13
below. Offsetting this increase were transition costs recognized in 1996 related
to the Merger and higher operating costs.
Non-regulated operating losses were $6 million in 1996 compared with income
of $3 million in 1995. 1996 increases included higher volumes and prices from
Tenneco Ventures' oil and gas production of $11 million and the acquisition of
PASA in June 1995 which contributed $10 million. Tenneco Ventures and 70 percent
of the Company's interest in the Australian pipelines were sold in December 1996
subsequent to the Merger. These increases were offset primarily by lower margins
from marketing activities.
Operating losses from other operations of the Company increased to $61
million or 26 percent in 1996 primarily due to lower interest revenue from the
continuing liquidation of Case Corporation receivables. In anticipation of the
Merger, Old Tenneco sold all of the Case Corporation retail receivables to New
Tenneco for an amount equal to their book value. Accordingly, income from these
receivables will not be recognized in future periods.
Other (Income) and Expense
Other income decreased to $50 million or 19 percent in 1996. The decrease
resulted from a $30 million gain recognized in 1995 from the sale of Kern River,
the absence of earnings due to the sale of Kern River which contributed $33
million in 1995, and insurance recoveries which offset environmental costs as
discussed above. Offsetting these items were $15 million in legal settlements
and lower interest expense of $24 million due to decreased levels of debt.
Additionally, 1995 included a $30 million reserve for estimated regulatory and
legal settlement costs and a $25 million reserve for the liquidation of surplus
real estate holdings.
Prior to the Merger, Old Tenneco's historical practice has been to incur
indebtedness for its consolidated group at the parent company level or at a
limited number of subsidiaries, rather than at an operating company level, and
to centrally manage various cash functions. Consequently, the corporate debt of
Old Tenneco and its related interest expense have been allocated to Old
Tenneco's automotive, packaging and shipbuilding businesses ("Old Tenneco's
former non-energy operations") based upon the portion of Old Tenneco's
investment in Old Tenneco's former non-energy operations which was deemed to be
debt, generally based upon the ratio of Old Tenneco's former non-energy
operations' net assets to Old Tenneco's consolidated net assets plus debt.
Interest expense was allocated at a rate equivalent to the weighted average cost
of all corporate debt, which was 12.4 percent, 11.4 percent and 11.0 percent for
1996, 1995 and 1994, respectively. Total pre-tax interest expense allocated to
Old Tenneco's former non-energy operations in 1996, 1995 and 1994 was $45
million, $60 million and $61 million, respectively. Old Tenneco's former
non-energy operations have also been allocated tax benefits approximating 35
percent of the allocated pre-tax interest expense. Although interest expense and
the related tax effects have been allocated to Old Tenneco's former non-energy
operations for financial reporting on a historical basis, Old Tenneco's former
non-energy operations have not been billed for these amounts. The changes in
allocated corporate debt and the after-tax allocated interest expense have been
included as a component of the combined equity of the Company. Although
management believes that the historical allocation of corporate debt and
interest is reasonable, it is not necessarily indicative of the debt and
interest expense of the Company subsequent to the Merger, or the debt that it
may incur in the future.
Income Tax Expense
Income tax expense for 1996 was $78 million compared with $31 million in
1995. The effective tax rate for 1996 was 33 percent compared with 16 percent in
the prior year. The low effective tax rate in 1995 was primarily due to the
benefit realization of unrecognized deferred tax assets, primarily certain
capital loss carryforwards. For an additional discussion of income taxes, see
Note 7 of Item 8, Financial Statements and Supplementary Data.
Extraordinary Loss
In preparation for the Merger and Distributions, Old Tenneco initiated a
realignment of its indebtedness. Upon completion of the debt realignment
transactions, the Company is only responsible for its remaining debt
10
<PAGE> 14
which was not tendered, defeased or otherwise retired (approximately $120
million of such debt remained outstanding immediately after the Merger). The
Company recognized an after-tax
extraordinary charge of $108 million related to the debt realignment immediately
prior to the Merger.
COMMITMENTS AND CONTINGENCIES
For a discussion of the Company's commitments and contingencies, see Note 5
of Item 8, Financial Statements and Supplementary Data.
11
<PAGE> 15
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "anticipate" and similar expressions
identify forward-looking statements.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
HIGHLY COMPETITIVE INDUSTRY
The ability to maintain or increase current transmission, gathering,
processing, and sales volumes, or to remarket unsubscribed capacity, can be
subject to the impact of future weather conditions, including those that
favor other alternative energy sources; price competition; drilling
activity and supply availability; and service competition. Future
profitability also may be affected by the Company's ability to compete with
the services offered by other energy enterprises which may be larger, offer
more services, and possess greater resources. The ability of TGP to
negotiate new contracts and to renegotiate existing contracts (70 percent
of which are expiring over the next five years, principally in the year
2000) could be adversely affected by the proposed construction of
additional pipeline capacity in the Northeast U.S., reduced demand due to
higher gas prices, the availability of alternative energy sources, and
other factors that are not within its control. For a further discussion see
Item 1, Business -- Regulated Operations -- Markets and Competition.
IMPACT OF NATURAL GAS AND NATURAL GAS LIQUIDS PRICES
The value of natural gas transmission services is based on an all-in
cost, including the cost of the natural gas. Therefore, the Company's
ability to compete with other transporters is impacted by natural gas
prices in the supply basins connected to its pipeline systems compared to
prices in other gas producing regions, especially Canada. Additionally,
revenues generated by the Company from its gathering and processing
contracts are dependent upon volumes and rates, both of which can be
affected by the prices of natural gas and natural gas liquids. Fluctuations
in energy prices are caused by a number of factors, including regional,
domestic and international demand, availability and adequacy of
transportation facilities, energy legislation, federal or state taxes, if
any, on the sale or transportation of natural gas and natural gas liquids
and the price and abundance of supplies of alternative energy sources.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course and conduct of its business, some of the
Company's non-regulated subsidiaries are engaged in the gathering,
processing and marketing of natural gas and other energy commodities and
utilize futures and option contracts traded on the New York Mercantile
Exchange and Over-The-Counter options and price and basis swaps with other
gas merchants and financial institutions. The Company could incur financial
losses in future periods as a result of volatility in the market values of
the underlying commodities.
ACQUISITIONS AND INVESTMENTS
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of acquisitions and
joint ventures within and outside the U.S. may be subject to
12
<PAGE> 16
the effects of, and changes in, U.S. and foreign trade and monetary
policies, laws and regulations, political and economic developments,
inflation rates, and the effects of taxes and operating conditions.
Activities in areas outside the U.S. also are subject to the risks inherent
in foreign operations, including loss of revenue, property and equipment as
a result of hazards such as expropriation, nationalization, war,
insurrection and other political risks, and the effects of currency
fluctuations and exchange controls. Such legal and regulatory delays and
other unforeseeable obstacles may be beyond the Company's control or
ability to manage.
PENDING REGULATORY PROCEEDINGS
TGP has entered into comprehensive settlements with its customers
that, if approved by FERC, would resolve many of the transportation rate,
gas supply realignment and other transition issues in which it is involved.
Whether FERC will approve such settlements in the form filed or whether
these regulatory proceedings will be otherwise resolved in a manner
satisfactory to the Company cannot be predicted with certainty, and the
business of the Company could be adversely affected thereby. For a
description of certain regulatory proceedings involving the Company, see
Item 1, Business -- Regulated Operations -- Regulatory Environment.
POTENTIAL ENVIRONMENTAL LIABILITIES
The Company may incur significant costs and liabilities in order to
comply with existing environmental laws and regulations. It is also
possible that other developments, such as increasingly strict environmental
laws, regulations and enforcement policies thereunder, and claims for
damages to property, employees, other persons and the environment resulting
from current or discontinued operations, could result in substantial costs
and liabilities in the future. For additional information concerning the
Company's environmental matters, see Note 5 of Item 8, Financial Statements
and Supplementary Data.
OPERATING HAZARDS AND UNINSURED RISKS
While the Company maintains insurance against certain of the risks
normally associated with the transportation, gathering and processing of
natural gas, including explosions, pollution and fires, the occurrence of a
significant event that is not fully insured against could have a material
adverse effect on the Company.
POTENTIAL LIABILITIES RELATED TO THE MERGER
The amount of the actual and contingent liabilities of Old Tenneco,
which remained the liabilities of the Company after the Merger, could vary
materially from the amount estimated by the Company, which was based upon
assumptions which may prove to be inaccurate. If New Tenneco or Newport
News were unable or unwilling to pay their respective liabilities, a court
could require the Company, under certain legal theories which may or may
not be applicable to the situation, to assume responsibility for such
obligations, which could have a material adverse effect on the Company.
UNCERTAINTY SURROUNDING INTEGRATION OF OPERATIONS
EPG is engaged in a comprehensive review of the business and
operations of EPTPC and its subsidiaries and has begun to integrate such
operations to increase operating and administrative efficiency through
consolidation and reengineering of facilities, workforce reductions and
coordination of purchasing, sales and marketing activities. Management
anticipates that the complementary interstate and intrastate pipeline
operations and energy marketing activities of the combined company should
provide increased operating flexibility and access to additional customers
and markets, although the amount and timing of the realization of such
benefits will depend upon the Company's ability to integrate successfully
the businesses and operations of the companies and the time period over
which such integration is effected.
13
<PAGE> 17
POTENTIAL FEDERAL INCOME TAX LIABILITIES
In connection with the Merger and Distributions, the IRS issued a
private letter ruling to Old Tenneco, in which the IRS ruled that for U.S.
federal income tax purposes: (i) the Distributions would be tax-free to Old
Tenneco and, except to the extent cash was received in lieu of fractional
shares, to its then existing stockholders; (ii) the Merger would constitute
a tax-free reorganization; and (iii) that certain other transactions
effected in connection with the Merger and Distributions would be tax-free.
If the Distributions were not to qualify as tax-free distributions, then a
corporate level federal income tax would be assessed to the consolidated
group of which Old Tenneco was previously the common parent. This corporate
level federal income tax would be payable by EPTPC. Under certain limited
circumstances, however, New Tenneco and Newport News have agreed to
indemnify EPTPC for a defined portion of such tax liabilities.
REFINANCING AND INTEREST RATE EXPOSURE RISKS
The business and operating results of the Company can be adversely
affected by factors such as the availability or cost of capital, changes in
interest rates, changes in the tax rates due to new tax laws, market
perceptions of the natural gas industry or the Company, or security
ratings.
POTENTIAL FOR CHANGES IN ACCOUNTING STANDARDS
Authoritative generally accepted accounting principle or policy
changes from such standard setting bodies as the Financial Accounting
Standards Board, FERC, and the SEC may affect the Company's results of
operations or financial position.
14
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TENNESSEE GAS PIPELINE COMPANY
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
-- PRE-ACQUISITION
COMBINED --
<S> <C> <C> <C>
Operating revenues:
Gas sales................................................. $1,788 $1,122 $1,695
Gas transportation........................................ 767 690 611
Other..................................................... 180 163 115
------ ------ ------
2,735 1,975 2,421
------ ------ ------
Operating expenses:
Cost of gas sold.......................................... 1,579 954 1,472
Operating expenses........................................ 455 414 380
General and administrative................................ 239 199 143
Finance charges........................................... 62 79 75
Depreciation, depletion and amortization.................. 217 196 102
------ ------ ------
2,552 1,842 2,172
------ ------ ------
Operating income............................................ 183 133 249
------ ------ ------
Other (income) and expense:
Interest income........................................... (32) (30) (21)
Interest expense, net of interest allocated to
affiliates............................................. 41 65 97
Equity in net income of affiliated companies.............. (30) (65) (51)
Gain on sale of assets, net............................... (3) (11) (1)
Gain on the sale by a subsidiary of its stock............. -- -- (23)
Other income, net......................................... (26) (21) (22)
------ ------ ------
(50) (62) (21)
------ ------ ------
Income before income taxes.................................. 233 195 270
Income tax expense.......................................... 78 31 89
------ ------ ------
Income before extraordinary loss............................ 155 164 181
Extraordinary loss, net of income tax....................... (108) -- --
------ ------ ------
Net income.................................................. $ 47 $ 164 $ 181
====== ====== ======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
15
<PAGE> 19
TENNESSEE GAS PIPELINE COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995
---------------- ----------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 14 $ 305
Notes receivable, net..................................... 9 208
Accounts receivable --
Customer accounts, net.................................. 233 300
Affiliated companies.................................... 175 243
Gas transportation and exchange......................... 218 64
Income taxes............................................ 213 --
Other................................................... 285 419
Inventories............................................... 42 36
Deferred income tax benefit............................... 67 5
Prepayments and other..................................... 46 71
------- -------
Total current assets............................... 1,302 1,651
------- -------
Plant, property and equipment, net.......................... 3,945 2,841
Investment in affiliated companies.......................... 322 280
Long-term notes and other receivables, net.................. 23 324
Notes receivable from affiliate............................. 568 --
Other....................................................... 139 606
------- -------
4,997 4,051
------- -------
Total assets....................................... $6,299 $5,702
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings (including current maturities on
long-term debt)......................................... $ 15 $ 275
Accounts payable --
Trade................................................... 422 353
Affiliated companies.................................... -- 108
Gas transportation and exchange......................... 156 28
Taxes accrued............................................. 38 430
Interest accrued.......................................... 14 42
Rate refund payable....................................... 167 48
Other..................................................... 297 401
------- -------
Total current liabilities.......................... 1,109 1,685
------- -------
Note payable to affiliate................................... 170 --
------- -------
Long-term debt, less current maturities..................... 1,005 702
------- -------
Deferred income taxes, less current portion................. 774 347
------- -------
Postretirement benefits, less current portion............... 309 260
------- -------
Deferred credits and other liabilities...................... 307 446
------- -------
Total liabilities.................................. 3,674 3,440
------- -------
Minority interest........................................... -- 19
------- -------
Commitments and contingencies (See Note 5.)
Equity:
Combined equity........................................... -- 2,243
Stockholder's equity:
Common stock, par value $5 per share; authorized 300
shares; issued 208 shares............................. -- --
Additional paid-in capital.............................. 2,625 --
Retained earnings....................................... -- --
------- -------
Total equity....................................... 2,625 2,243
------- -------
Total liabilities and equity....................... $6,299 $5,702
======= =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
16
<PAGE> 20
TENNESSEE GAS PIPELINE COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ----- -------
-- PRE-ACQUISITION
COMBINED --
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 47 $ 164 $ 181
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Extraordinary loss, net of tax............................ 108 -- --
Depreciation, depletion and amortization.................. 217 196 102
Equity in net income of affiliated companies, net of
dividends.............................................. 13 (12) (3)
Deferred income taxes..................................... (2) 47 34
Net gain on sale of assets................................ (3) (11) (24)
Cash paid for interest allocated to affiliates, net of
tax.................................................... (29) (39) (40)
Changes in components of working capital --
(Increase) decrease in receivables..................... (97) 246 23
(Increase) decrease in inventories..................... (11) -- --
(Increase) decrease in prepayments and other current
assets............................................... 15 8 35
Increase (decrease) in payables........................ (3) (135) (278)
Increase (decrease) in taxes accrued................... (8) 30 (204)
Increase (decrease) in interest accrued................ (35) (52) (39)
Increase (decrease) in rate refund payable............. 32 (156) (91)
Increase (decrease) in other current liabilities....... (29) (94) (60)
(Increase) decrease in long-term notes and other
receivables (net)...................................... 455 332 228
Take-or-pay recoupments, net.............................. 3 36 26
Other..................................................... (436) (83) (52)
------- ----- -------
Net cash provided by (used in) operating
activities...................................... 237 477 (162)
------- ----- -------
Cash flows from investing activities:
Net proceeds from sale of assets.......................... 465 17 68
Expenditures for plant, property and equipment............ (323) (337) (345)
Acquisitions of businesses................................ (41) (241) --
Increase in notes receivable with affiliate............... (568) -- --
Net change in other affiliated advances................... (175) -- --
Investments and other..................................... (8) 24 48
------- ----- -------
Net cash used in investing activities............. (650) (537) (229)
------- ----- -------
Cash flows from financing activities:
Redemption of equity securities by a subsidiary........... -- -- (160)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt................... 10 19 (92)
Increase in note payable to affiliate..................... 170 -- --
Issuance of other long-term debt.......................... 310 -- --
Retirement of long-term debt.............................. (1,560) (478) (358)
Net (increase) decrease in capitalized notes and advances
with affiliate......................................... 423 (239) (2,504)
Net cash contributions from affiliates.................... 769 954 3,434
------- ----- -------
Net cash provided by financing activities......... 122 256 320
------- ----- -------
Increase (decrease) in cash and temporary cash
investments............................................... (291) 196 (71)
Cash and temporary cash investments, at beginning of
period.................................................... 305 109 180
------- ----- -------
Cash and temporary cash investments, at end of period....... $ 14 $ 305 $ 109
======= ===== =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
17
<PAGE> 21
TENNESSEE GAS PIPELINE COMPANY
STATEMENTS OF CHANGES IN CONSOLIDATED
STOCKHOLDER'S EQUITY AND COMBINED EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED COMBINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY EQUITY
------ ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1994 Pre-Acquisition Combined... -- $ -- $ -- $ -- $ 920 $ 920
Net income............................... 181 181
Cash paid for interest allocated to
affiliates, net of tax................ (40) (40)
Change in corporate debt allocated to
affiliates............................ (23) (23)
Net change in notes and advances with Old
Tenneco............................... (2,504) (2,504)
Cash contributions from (distributions
to) affiliates, net................... 3,434 3,434
Noncash contributions from (distributions
to) affiliates, net................... (332) (332)
--- ------ ------ ------ ------- -------
December 31, 1994 Pre-Acquisition
Combined................................. -- -- -- -- 1,636 1,636
Net income............................... 164 164
Cash paid for interest allocated to
affiliates, net of tax................ (39) (39)
Change in corporate debt allocated to
affiliates............................ (47) (47)
Net change in notes and advances with Old
Tenneco............................... (239) (239)
Cash contributions from (distributions
to) affiliates, net................... 954 954
Noncash contributions from (distributions
to) affiliates, net................... (186) (186)
--- ------ ------ ------ ------- -------
December 31, 1995 Pre-Acquisition
Combined................................. -- -- -- -- 2,243 2,243
Net income............................... 47 47
Cash paid for interest allocated to
affiliates, net of tax................ (29) (29)
Change in corporate debt allocated to
affiliates............................ (502) (502)
Net change in notes and advances with Old
Tenneco............................... (145) (145)
Cash contributions from (distributions
to) affiliates, net................... 769 769
Noncash contributions from (distributions
to) affiliates, net................... 690 690
--- ------ ------ ------ ------- -------
December 11, 1996 Pre-Acquisition
Combined................................. -- -- -- -- 3,073 3,073
Merger transaction....................... 208 -- 3,073 -- (3,073) --
Acquisition adjustment to record assets
and liabilities at fair value......... 452 452
Push down of long-term debt to be
refinanced at TGP..................... (900) (900)
--- ------ ------ ------ ------- -------
December 31, 1996 Post-Acquisition
Consolidated............................. 208 $ -- $2,625 $ -- $ -- $ 2,625
=== ====== ====== ====== ======= =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
18
<PAGE> 22
TENNESSEE GAS PIPELINE COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. MERGER AND DISTRIBUTIONS
On December 12, 1996, TGP became an indirect subsidiary of EPG as a result
of the Merger between Old Tenneco and an indirect subsidiary of EPG. In the
Merger, Old Tenneco changed its name to EPTPC. Prior to the Merger, Old Tenneco
and its subsidiaries, including TGP, effected various intercompany transfers and
distributions which restructured, divided and separated their businesses, assets
and liabilities so that all the assets, liabilities and operations related to
the Industrial Business and the Shipbuilding Business were spun-off to Old
Tenneco's then existing common stockholders in the Distributions. The entity
consisting of the Industrial Business was subsequently renamed Tenneco Inc.
(referred to herein as "New Tenneco") and the entity consisting of the
Shipbuilding Business was renamed Newport News. Following the Distributions, the
remaining operations consisted primarily of those operations related to the
transmission and marketing of natural gas and the discontinued operations of Old
Tenneco. As a result of the Merger, EPG indirectly owns 100 percent of the
common stock of EPTPC, representing at the effective time of the Merger
approximately 75 percent of the equity value of EPTPC; the balance of the equity
value of EPTPC is held by the holders of its Series A Preferred Stock, which was
issued in a registered public offering in November 1996 and remains outstanding.
As used in these financial statements, unless the context otherwise
requires, the "Company" refers to (i) for periods as of and subsequent to the
Merger, TGP and consolidated subsidiaries and (ii) for periods prior to the
Merger, the combined historical businesses and operations owned directly or
indirectly by TGP (the "Energy Businesses of TGP"), principally the energy
businesses and certain discontinued operations of Old Tenneco. See also "Basis
of Presentation" discussion below.
In preparation for the Merger and Distributions, Old Tenneco initiated the
Debt Realignment. As part of the Debt Realignment, Old Tenneco initiated tender
offers for certain issues of debt of Old Tenneco and certain of its
subsidiaries, including TGP, and certain other debt issues were exchanged into
New Tenneco debt, defeased or otherwise retired. Upon completion of the debt
realignment transactions, the Company is only responsible for its remaining debt
which was not tendered, defeased or otherwise retired. The Company recognized an
after-tax extraordinary charge of $108 million related to the Debt Realignment
immediately prior to the Merger.
At December 31, 1996, EPTPC had approximately $1.6 billion of borrowings
under the Credit Facility' dated as of November 4, 1996. In addition EPTPC had
$300 million ($296 million net book value) of Series A Preferred Stock
outstanding and $134 million aggregate principal amount of debt which was not
redeemed or retired as a part of the Debt Realignment. Borrowings under the
Credit Facility are guaranteed by EPG. The primary assets of EPTPC consist of
its investment in TGP, which holds the majority of its operations, and
management anticipates that the funds necessary to service the debt and other
securities of EPTPC will be provided by EPG or the operations and asset sale or
financing transactions of TGP.
On October 30, 1996, the IRS issued a private letter ruling to Old Tenneco,
in which the IRS ruled that for U.S. federal income tax purposes: (i) the
Distributions would be tax-free to Old Tenneco and, except to the extent cash
was received in lieu of fractional shares, to its then existing stockholders;
(ii) the Merger would constitute a tax-free reorganization; and (iii) that
certain other transactions effected in connection with the Merger and
Distributions would be tax-free. If the Distributions were not to qualify as
tax-free distributions, then a corporate level federal income tax would be
assessed to the consolidated group of which Old Tenneco was previously the
common parent. This corporate level federal income tax would be payable by
EPTPC. Under certain limited circumstances, however, New Tenneco and Newport
News have agreed to indemnify EPTPC for a defined portion of such tax
liabilities.
The consideration provided in the Merger was approximately $4 billion,
including retained debt and EPG equity consideration valued at $913 million.
19
<PAGE> 23
Accounting for Acquisition by EPG
The acquisition of EPTPC, including TGP, by EPG pursuant to the Merger has
been accounted for using the purchase method of accounting and included the
application of "pushdown" accounting to the Company's financial statements
effective as of December 31, 1996. Accordingly, an allocation of the purchase
price has been assigned to the assets and liabilities acquired based upon the
estimated fair value of those assets and liabilities as of the acquisition date.
A substantial portion of the excess purchase price, approximately $1.6 billion,
has been allocated to the property, plant and equipment of the Company's
interstate pipeline systems. Such allocation is based on the Company's internal
evaluation of such assets. An independent appraisal of the fair value of the
property acquired is in process and is expected to be completed by mid-1997.
Should the independent appraisal not support such allocation, the excess of
total purchase price over fair value of net assets acquired will be reflected as
goodwill. In addition, the Company may make adjustments during 1997 to other
components of the preliminary purchase price allocation relating to regulatory,
tax, environmental or other issues based upon any changes in the Company's
preliminary assumptions or analysis. The final results of the independent
appraisal and the ultimate disposition of the purchase price allocation should
not materially impact future operating results. Current FERC policy does not
permit the Company to recover through its rates amounts allocated in purchase
accounting to its regulated operations in excess of original cost. In addition,
$900 million of long-term debt has been "pushed down" to TGP because it is EPG's
intent to finance $900 million of its acquisition cost by issuing $900 million
of TGP long-term debt.
The consolidated balance sheet of TGP and subsidiaries as of December 31,
1996, contained herein reflects the purchase price recorded by EPG and is
referred to herein as "Post-Acquisition". The combined financial statements of
the Company for periods prior to December 31, 1996, are referred to as
"Pre-Acquisition". As a result of the change in the basis of accounting from
historical cost to reflect EPG's purchase cost, the financial statements for
Pre-Acquisition periods are not comparable to those of Post-Acquisition periods.
See also "Basis of Presentation" discussion below.
Pro Forma Information
The following unaudited pro forma information illustrates the effect of the
Merger and related transactions as if they had occurred at the beginning of
1995, after giving effect to certain pro forma adjustments including the
realignment of the Company's indebtedness, the removal of the results of the
Company's exploration and production business, and other adjustments based on
the purchase price allocation related to the acquisition, together with
estimates of the related income tax effects.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $2,620 $1,874
Income before extraordinary loss............................ 143 131
</TABLE>
The summarized pro forma information has been prepared for comparative
purposes only. It is not necessarily indicative of the actual operating results
that would have occurred had the Merger and related transactions been
consummated at the beginning of 1995, or the results that may be attained in the
future.
Basis of Presentation
Although the separation of the Industrial Business and Shipbuilding
Business from Old Tenneco prior to the Merger was structured as a "spin-off" of
New Tenneco and Newport News for legal, tax and other reasons, New Tenneco
succeeded to certain important aspects of the Old Tenneco business, organization
and affairs, namely: (i) New Tenneco was renamed "Tenneco Inc." subsequent to
the consummation of the Merger; (ii) New Tenneco is headquartered at Old
Tenneco's former headquarters in Greenwich, Connecticut; (iii) New Tenneco's
Board of Directors consists of those persons previously constituting the Old
Tenneco Board of Directors prior to the Merger; (iv) New Tenneco's executive
management consists substantially of
20
<PAGE> 24
the Old Tenneco executive management prior to the Merger; and (v) the businesses
conducted by New Tenneco consist largely of the Industrial Business, which
represented over half of the assets, revenues and operating income of the
businesses, operations and companies constituting Old Tenneco and its
subsidiaries prior to the Merger and Distributions. In New Tenneco's Annual
Report on Form 10-K for the year ended December 31, 1996, New Tenneco has
reflected in its financial statements the historical results of operations and
financial position of the Company and the Shipbuilding Business as discontinued
operations.
Consequently, the Company has restated its historical financial statements
for periods prior to December 31, 1996, to reflect the combined financial
position, results of operations and cash flows of the Energy Businesses of TGP.
Additionally, certain reclassifications have been made to the prior year
financial statements to conform to current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Control and Consolidation
All of the outstanding common stock of TGP is owned by EPTPC. Subsequent to
the Merger, all of the outstanding common stock of EPTPC is indirectly owned by
EPG.
Investments in 20 percent to 50 percent owned companies where the Company
has the ability to exert significant influence over operating and financial
policies are accounted for by the equity method. Reference is made to Note 11,
"Investment in Affiliated Companies," for information concerning significant
equity method investments.
All significant transactions and balances among combined and consolidated
businesses have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
Accounting for Regulated Operations
The Company's businesses that are subject to the regulations and accounting
requirements of FERC continue to meet the accounting requirements of SFAS No.
71, Accounting for the Effects of Certain Types of Regulation, which accounting
methods may differ from those used by non-regulated entities. Transactions that
have been recorded differently as a result of regulatory accounting requirements
include transition costs to be recovered under volumetric surcharges, certain
benefits and other costs and taxes included in or expected to be included in
future rates, including costs to refinance debt. When the accounting method
followed is prescribed by or allowed by the regulatory authority for rate-making
purposes, such accounting conforms to the generally accepted accounting
principle of matching costs against the revenues to which they apply.
Changes in the regulatory and economic environment may, at some point in
the future, create circumstances in which the application of regulatory
accounting principles will no longer be appropriate. If these accounting
principles should no longer be applied, an amount would be charged to earnings
as an extraordinary item. At December 31, 1996, this amount, after consideration
of purchase accounting adjustments, was estimated to be approximately $59
million, net of income taxes. Any potential charge would be non-cash and would
have no direct effect on the regulated companies' ability to seek recovery of
the underlying deferred costs in their future rate proceedings or on their
ability to include such costs in the rates set thereby.
21
<PAGE> 25
Cash and Temporary Cash Investments
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts and Notes
The Company has established a provision for losses on accounts and notes
receivable, as well as gas imbalances due from shippers and operators, which may
become uncollectible. Collectibility is reviewed regularly, and the allowance
for bad debts is adjusted as necessary primarily under the specific
identification method. The balances of this provision at December 31, 1996 and
1995, were $45 million and $49 million, respectively.
Gas Imbalances
The Company values gas imbalances due to or due from shippers and operators
at the appropriate index price. The gas imbalances are either cashed-out monthly
or made up in-kind.
Inventory
Inventories, consisting of materials and supplies and gas in storage, are
valued at the lower of cost, determined using the average cost method, or
market, as adjusted at December 31, 1996, for purchase accounting considerations
as discussed in Note 1, "Merger and Distributions."
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, adjusted at December 31,
1996, to reflect the allocation of the excess purchase price as discussed in
Note 1, "Merger and Distributions." Included in the Company's property, plant,
and equipment is construction work in progress of approximately $110 million and
$223 million at December 31, 1996, and 1995, respectively. An allowance for both
debt and equity funds used during construction is included in the cost of the
Company's property, plant, and equipment.
Depreciation of the Company's regulated transmission facilities are
provided primarily using the composite method over the estimated useful lives of
the depreciable facilities. The rates for depreciation range from approximately
2 percent to 5 percent.
Depreciation of the Company's nonregulated properties is provided using the
straight line or composite method which, in the opinion of management, is
adequate to allocate the cost of properties over their estimated useful lives.
Costs of regulated properties that are not operating units, as defined by
FERC, which are retired, sold, or abandoned are charged or credited, net of
salvage, to accumulated depreciation and amortization. Gains or losses on sales
of operating units are credited or charged to income.
The Company evaluates impairment of its property, plant, and equipment in
accordance with SFAS No. 121.
Goodwill
Goodwill resulting from acquisitions was being amortized over 20 to 40
years using the straight-line method. Such amortization amounted to $1.6 million
in 1996 and $1.8 million for 1995 and 1994, respectively. Accumulated
amortization of goodwill was $5.4 million at December 31, 1995. The pre-Merger
balance of unamortized goodwill was eliminated as part of the purchase
accounting adjustments discussed in Note 1, "Merger and Distributions."
22
<PAGE> 26
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered including prior experience in remediation of contaminated
sites, other companies' clean-up experience and data released by the EPA or
other organizations. These estimated liabilities are subject to revision in
future periods based on actual costs or new circumstances. These liabilities are
included in the accompanying balance sheets at their undiscounted amounts, as
adjusted through purchase accounting at December 31, 1996. Reference is made to
Note 1, "Merger and Distributions." Recoveries are evaluated separately from the
liability and, when recovery is assured, are recorded and reported separately
from the associated liability in the consolidated and combined financial
statements as a regulatory asset.
Other Income
Gains or losses on the sale by a subsidiary of its stock are included in
the accompanying combined statements of income when recognized.
Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
interest rates and the price of certain energy and power commodities. These
financial instruments include interest rate swaps, price swap agreements,
futures, and options.
Price risk management activities consist of transactions entered into by
the Company to hedge the impact of market fluctuations on assets, liabilities,
production or other contractual commitments. Changes in the market value of
these transactions are deferred until the gains or losses on the hedged item are
recognized. See Note 4 for further discussion of the Company's price risk
management activities.
Income Taxes
The Company accounts for income taxes whereby it recognizes deferred tax
assets and liabilities for the future tax consequences of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the consolidated and combined financial statements. Deferred tax assets are
reduced by a valuation allowance when, based upon management's estimates, it is
more likely than not that a portion of the deferred tax assets will not be
realized in a future period. The estimates utilized in the recognition of
deferred tax assets are subject to revision in future periods based on new facts
or circumstances.
Old Tenneco, together with certain of its subsidiaries which were owned 80
percent or more
(including TGP) and subsidiaries in the Industrial Business (now held by New
Tenneco) and the Shipbuilding Business (now held by Newport News), had entered
into an agreement to file a consolidated U.S. federal income tax return. Such
agreement provided, among other things, that (i) each company in a taxable
income position would be currently charged with an amount equivalent to its
federal income tax computed on a separate return basis, and (ii) each company in
a tax loss position would be reimbursed currently to the extent its deductions,
including general business credits, were utilized in the consolidated return.
Management believes that income tax amounts reflected in the combined financial
statements of the Company prior to the Merger under the provisions of the tax
sharing arrangement would not be materially different from the income taxes
which would have been provided had the Company filed a separate consolidated tax
return. Under the tax sharing agreement, Old Tenneco paid all federal taxes
directly and billed or refunded, as applicable, its subsidiaries for the
applicable portion of the total tax payments. This tax sharing agreement remains
in effect among EPTPC and certain of its subsidiaries which are owned 80 percent
23
<PAGE> 27
or more, including TGP. EPTPC will continue to file a separate consolidated U.S.
federal income tax return subsequent to the Merger.
Recent Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, which establishes new accounting standards for the
impairment of long-lived assets and for long-lived assets to be disposed of. The
Company adopted the new standard in the first quarter of 1996 with no material
effect on the Company's financial position or results of operations.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The statement is generally effective for transactions occurring after December
31, 1996, but in December 1996, the Financial Accounting Standards Board issued
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, which defers the implementation of certain provisions of SFAS
No. 125 until January 1998. The new pronouncements are not expected to have a
material impact on the Company's financial position or results of operations.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which establishes new accounting and reporting standards for the recognition and
disclosure of environmental remediation liabilities. The provisions of the
statement are effective for fiscal years beginning after December 15, 1996. This
pronouncement is not expected to have a material impact on the Company's
financial position or results of operations.
In March 1997, SFAS No. 128, Earnings Per Share, and SFAS No. 129,
Disclosures of Information about Capital Structure, were issued. The Company is
currently evaluating the impact of these pronouncements.
3. LONG-TERM DEBT AND OTHER FINANCING
In contemplation of the Merger and Distributions, Old Tenneco initiated the
Debt Realignment to restructure, realign, and divide the Company's indebtedness.
As part of this Debt Realignment, Old Tenneco completed certain cash tender
offers for approximately $1.5 billion aggregate principal amount of its
outstanding notes and debentures, including debt of the Company. In addition,
approximately $1.9 billion aggregate principal amount of Old Tenneco notes and
debentures were exchanged into notes and debentures of New Tenneco. Certain
other components of the Company's historical short-term and long-term debt were
defeased, redeemed or otherwise retired in the Debt Realignment. The cash
funding requirements of the Debt Realignment were financed with internally
generated cash, new borrowings under the Credit Facility, cash contributions
from New Tenneco and Newport News and proceeds from the issuance of the Series A
Preferred Stock. All the remaining debt of the Company, including debt which was
not tendered or retired in the Debt Realignment, has been retained by the
Company subsequent to the Merger. Restrictive covenants on the Company's
outstanding debt at December 31, 1996 were eliminated as a part of the Debt
Realignment transactions.
The Company recognized an after-tax extraordinary charge of $108 million
(net of $58 million income tax benefit) related to the Debt Realignment
immediately prior to the Merger.
Subsequent to the Merger, the Company's debt consists of the notes and
debentures which were not tendered or retired pursuant to the Debt Realignment.
The long-term and short-term debt amounts at December 31, 1995, in the
accompanying balance sheet represent the historical indebtedness of the Company,
the majority of which was subject to the Debt Realignment, and includes a
reduction for the amount of corporate debt allocated to the Industrial Business
and the Shipbuilding Business. See Note 15 for information concerning debt
allocated to the Industrial Business and the Shipbuilding Business. The
long-term debt amounts at December 31, 1996 have been adjusted to fair market
value in the application of purchase accounting, as discussed in Note 1,
"Mergers and Distributions."
24
<PAGE> 28
Long-term debt outstanding at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
(IN MILLIONS)
TGP --
Debentures due 2011, effective interest rate 15.1% in
1996 and 1995 (net of $11 million in 1996 and $216
million in 1995 of unamortized discount)............. 73 184
Notes, average effective interest rate 9.7% in 1995
(including $5 million in 1995 of unamortized
discount)............................................ -- 570
El Paso Energy Credit Corporation --
Senior notes due 1997 through 2001, average effective
interest rate 9.9% in 1996 and 9.7% in 1995
(including $3 million in 1996 of unamortized premium
and $1 million in 1995 of unamortized discount)...... 30 549
Medium-term notes, average effective interest rate 9.0%
in 1995.............................................. -- 38
Subordinated notes due 1998, average effective interest
rate 9.9% in 1996 and in 1995........................ 7 92
Other Subsidiaries --
Notes due 1997 through 2014, average effective interest
rate 7.6% in 1996 and 8.6% in 1995 (including $14
million in 1995 of unamortized discount)............. 10 11
"Pushdown" of acquisition debt............................ 900 --
------- ------
1,020 1,444
Less -- current maturities............................. 15 406
------- ------
Total long-term debt................................... $1,005 $1,038
======= ======
</TABLE>
- ---------------
Note: The average effective interest rates disclosed above could change in the
future based on changes in market rates on variable-rate debt and the
application of purchase accounting adjustments.
"Push Down" of Acquisition Debt
In March 1997, TGP issued $900 million of fixed rate debt with interest
rates ranging from 7 percent to 7 5/8 percent and maturities ranging from 20 to
40 years, the proceeds of which will be used to pay down the Credit Facility
borrowings assumed in the Merger. Due to this refinancing, $900 million of the
EPTPC debt assumed in the acquisition has been "pushed down" and reflected as
long-term debt of the Company at December 31, 1996.
The following are aggregate maturities of long-term debt for the next 5
years and in total thereafter:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1997.................................... $ 15
1998.................................... 7
1999.................................... --
2000.................................... --
2001.................................... 18
Thereafter.............................. 980
------
Total long-term debt,
including current
maturities.................. $1,020
======
</TABLE>
25
<PAGE> 29
Long-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1995
----
PRE-ACQUISITION
COMBINED
<S> <C>
(IN MILLIONS)
Total Long-term debt........................................ $1,038
Less: Long-term debt allocated to the Industrial Business
and the Shipbuilding Business............................. (336)
------
Total long-term debt, net of allocation to the
Industrial Business and the Shipbuilding
Business........................................ $ 702
======
</TABLE>
- ---------------
Note: Reference is made to Note 15 for information concerning corporate debt
allocated to the Industrial Business and the Shipbuilding Business.
Short-Term Corporate Debt
The Company has historically used lines of credit and overnight borrowings
to finance its short-term capital requirement. Information regarding short-term
debt for the year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
1995
---------------
PRE-ACQUISITION
COMBINED
---------------
<S> <C>
(IN MILLIONS)
Outstanding borrowings at end of year... $ 35
Weighted average interest rate on
outstanding borrowings at end of
year.................................. 8.5%
</TABLE>
- ---------------
Note: Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.
As of December 31, 1996, the Company had no arranged committed credit
facilities.
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1995
---------------
PRE-ACQUISITION
COMBINED
---------------
<S> <C>
(IN MILLIONS)
Current maturities on long-term debt.... $ 406
Credit agreements....................... 35
-----
Total short-term debt (including
current maturities on long-term
debt).............................. 441
Less: Short-term corporate debt
allocated to the Industrial
Business and the Shipbuilding
Business........................... (166)
-----
Total short-term debt, net of
allocation to the Industrial
Business and the Shipbuilding
Business.......................... $ 275
=====
</TABLE>
- ---------------
Note: Reference is made to Note 15 for information concerning corporate debt
allocated to the Industrial Business and the Shipbuilding Business.
4. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the requirements of SFAS No. 107.
The estimated fair value amounts have been determined by the Company using
available market information and valuation methodologies.
26
<PAGE> 30
As of December 31, 1996, and 1995, the carrying amounts of certain
financial instruments employed by the Company, including cash, temporary cash
investments, short-term borrowings and investments, and trade receivables and
payables are representative of fair value because of the short-term maturity of
these instruments. The fair value of the long-term debt has been estimated based
on quoted market prices for the same or similar issues. The fair value of all
derivative financial instruments is the estimated amount at which management
believes they could be liquidated over a reasonable period of time, based on
quoted market prices, current market conditions, or other estimates obtained
from third-party dealers.
At December 31, 1996, the Company's aggregate customer and long-term
receivables balance was concentrated within the energy industry. Consequently,
the Company's credit risk could be effected by changes in the condition of the
energy industry. At December 31, 1995, the Company's aggregate customer and
long-term receivable balance was concentrated by industry as follows: energy
industry 22 percent; automotive parts industry 9 percent; packaging industry 8
percent; and farm and construction equipment industries 52 percent; all other
amounts were not significant. Receivables in the automotive parts, packaging and
farm and construction equipment industries resulted from Tenneco Credit
Corporation's
(now renamed El Paso Energy Credit Corporation) financing receivables of current
and former operating divisions of Old Tenneco. See Note 15 for a further
discussion.
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
------------------ ------------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
------------------ ------------------
(IN MILLIONS) CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
-------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Long-term debt (including current maturities)......... $(1,020) $(1,020) $(1,444) $(1,727)
Instruments With Off-Balance-Sheet Risk:
Derivative
Interest rate swaps:
In a net payable position........................ -- -- -- (18)
Natural gas swaps, futures and options............. -- (3) -- 3
Non-derivative
Financial guarantees............................... -- (3) -- (14)
</TABLE>
- ---------------
Note: The carrying amount and estimated fair value of long-term debt for 1995 is
before allocation of corporate debt to the Industrial Business and the
Shipbuilding Business. Reference is made to Note 15 for information
concerning corporate debt allocated to the Industrial Business and the
Shipbuilding Business.
Instruments With Off-Balance-Sheet Risk
Derivative
Interest Rate Swaps -- The fair value of interest rate swaps was based on
the cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps in
a gain position. At December 31, 1996 all outstanding interest rate swaps had
fully matured. At December 31, 1995, the Company was a party to swaps with a
notional value of $750 million, all of which were in a net payable position.
Notional amounts associated with these swaps do not represent future cash
payment requirements. These contractual amounts are only used as a base to
measure amounts to be exchanged at specified settlement dates. The
counterparties to these interest rate swaps were major international financial
institutions. The risk associated with counterparty default on interest rate
swaps were measured as the cost of replacing, at the prevailing market rates,
those contracts in a gain position.
27
<PAGE> 31
Price Risk Management -- The Company uses exchange-traded futures and
option contracts and over-the-counter option and swap contracts to reduce its
exposure to fluctuations in the prices of natural gas. The fair value of these
contracts is based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. As of December 31,
1996 and 1995, these contracts, maturing through 2000 and 1997, respectively,
had an absolute notional contract quantity of 237 Bcf and 321 Bcf, respectively.
Since the contracts described above are designated as hedges whose fair values
correlate to price movements of natural gas, any gains or losses on the
contracts resulting from market changes will be offset by losses or gains on the
hedged transactions. The Company has off-balance sheet risk of credit loss in
the event of non-performance by counterparties to all over-the-counter
contracts. However, the Company does not anticipate non-performance by the
counterparties.
Non-derivative
Guarantees -- At December 31, 1996 and 1995, the Company had guaranteed
payment and performance of approximately $3 million and $14 million,
respectively, primarily with respect to letters of credit and other guarantees
supporting various financing and operating activities.
5. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In 1992, FERC issued Order No. 636 which restructured the natural gas
industry by requiring mandatory "unbundling" of pipeline sales and
transportation services. Numerous parties appealed to the Court of Appeals,
challenging the legality of Order No. 636 generally, as well as the legality of
specific provisions of Order No. 636. In July 1996, the Court of Appeals issued
its decision upholding, in large part, Order No. 636, and remanded to FERC
several issues for further explanation, including further explanation of FERC's
decision to allow pipelines to recover 100 percent of their GSR costs and FERC's
requirement that pipelines allocate 10 percent of GSR costs to interruptible
transportation customers. In February 1997, FERC reaffirmed its decision to
allow pipelines to recover 100 percent of GSR costs. In addition, FERC modified
the requirement that pipelines allocate 10 percent of GSR costs to interruptible
customers to permit pipelines to propose an allocation of any percentage of such
costs to their interruptible customers.
TGP implemented revisions to its tariff, which restructured its
transportation, storage and sales services to convert TGP from primarily a
merchant to primarily a transporter of gas as required by Order No. 636. As a
result of this restructuring, TGP's gas sales declined while certain obligations
to producers under long-term gas supply contracts continued, causing TGP to
incur significant restructuring transition costs. Pursuant to the provisions of
Order No. 636 allowing for the recovery of transition costs related to the
restructuring, TGP has made filings to recover the following transition costs:
(i) costs related to its Bastian Bay facilities; (ii) the "stranded" costs of
TGP's continuing contractual obligations to pay for capacity on other pipeline
systems ("TBO costs"); (iii) GSR costs resulting from TGP's remaining gas
purchase obligations
(collectively referred to as "Transition Costs"); and (iv) the remaining
unrecovered balance of purchased gas ("PGA") costs. The filings implementing
TGP's recovery mechanisms for these transition costs were accepted by FERC
effective September 1, 1993, subject to refund and pending FERC review and
approval for eligibility and prudence.
TGP's filings to recover costs related to its Bastian Bay facilities have
been rejected by FERC based on the continued use of the gas production from the
field; however, FERC recognized the ability of TGP to file for the recovery of
any losses upon disposition of these assets. TGP has filed for appellate review
of FERC actions and is confident that the Bastian Bay costs will ultimately be
recovered; FERC has not contested the ultimate recoverability of these costs.
TGP is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. FERC issued an order requiring
TGP to refund certain of these costs and refunds were made in May 1996. TGP is
appealing this decision and believes such appeal will likely be successful.
28
<PAGE> 32
A phased proceeding was scheduled at FERC with respect to the recovery of
TGP's GSR costs. Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery. Phase II of the
proceeding on the prudency of the costs to be recovered and on certain contract
specific eligibility issues has not yet been scheduled. Although the Order No.
636 transition cost recovery mechanism provides for complete recovery by
pipelines of eligible and prudently incurred transition costs, certain customers
have challenged the prudence and eligibility of TGP's GSR costs and settlement
discussions have been entered into with TGP's customers concerning the amount of
such costs in response to FERC's public statements encouraging such settlements.
On February 28, 1997, TGP filed with FERC a proposed settlement of all
issues related to the recovery by TGP of its Transition Costs and related
proceedings (the "GSR Stipulation and Agreement"), as discussed above. Upon
final approval by FERC, this settlement will become effective retroactive to
January 1, 1997. The settlement is based upon a preliminary GSR understanding,
which called for sharing of transition costs, that EPG reached with TGP's
customers in October 1996 in anticipation of the Merger. The GSR Stipulation and
Agreement allows for TGP to recover up to $770 million in Transition Costs,
including interest, of which approximately $531 million has previously been
recovered, subject to refund, pending resolution of the Transition Costs issues.
Assuming FERC approves the GSR Stipulation and Agreement, TGP will be entitled
to recover additional Transition Costs, up to the remaining $239 million,
through a two-year demand transportation surcharge and an interruptible
transportation surcharge. The terms of the GSR Stipulation and Agreement provide
for a rate case moratorium through November 2000 (subject to certain limited
exceptions) and provide a rate cap, indexed to inflation, through October 31,
2005, for certain of TGP's customers. The purchase accounting adjustments
reflected in the Company's consolidated financial statements assume approval of
the settlement with respect to TGP's Transition Costs in accordance with the
terms of the GSR Stipulation and Agreement.
Although parties to TGP's Transition Cost proceedings do not have to
declare their support or opposition to the GSR Stipulation and Agreement until
mid-March, management believes that all of TGP's customers will support or not
oppose the GSR Stipulation and Agreement.
Following negotiations with its customers, TGP filed in July 1994 with 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 TGP'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. In April 1995, FERC orders approving the PGA Stipulation
and resolving all outstanding issues became final. TGP implemented the terms of
the PGA Stipulation and made refunds in May 1995. The refunds had no material
effect on the Company's reported net income. The orders approving the PGA
Stipulation have been appealed to the Court of Appeals by certain customers. TGP
believes the FERC orders approving the PGA Stipulation will be upheld on appeal.
In order to resolve litigation concerning purchases made by TGP of
synthetic gas produced from the Great Plains coal gasification plant, TGP, along
with three other pipelines, executed four separate settlement agreements with
Dakota and the U.S. Department of Energy initiated four separate proceedings at
FERC seeking approval to implement the settlement agreements. Among other
things, the settlement required TGP to pay Dakota over a limited period a
premium over the spot price for Dakota's production and resolves the litigation
with Dakota. As of December 31, 1996, TGP had paid $87 million of this premium
obligation and has accrued its estimated remaining premium obligation through
December 2003 of $55 million. FERC previously ruled 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. In October 1994,
FERC consolidated the four proceedings and set them for hearing before an ALJ.
The hearing, which concluded in July 1995, was limited to the issue of whether
the settlement agreements are prudent. The ALJ concluded, in his initial
decision issued in December 1995, that the settlement was not prudent. In
December 1996, FERC unanimously reversed that decision and upheld the
settlements among the pipelines, the U.S. Department of Energy and Dakota. No
parties filed for rehearing of the FERC decision. TGP notified Dakota in
December 1996 that it accepted the settlement.
29
<PAGE> 33
In December 1994, TGP filed the 1995 Rate Case. In January 1995, 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. On
July 1, 1995, TGP began collecting rates, subject to refund, reflecting an $87
million increase in TGP's annual revenue requirement. A Stipulation was filed
with an ALJ in this proceeding in April 1996. This Stipulation resolves the
rates that are the subject of the 1995 Rate Case, including a structural rate
design change that results in a larger proportion of TGP's transportation
revenues being dependent upon throughput. Under the Stipulation, TGP is required
to refund, upon final approval of the Stipulation, the difference between the
revenues collected under the July 1, 1995 motion rates and the revenues that
would have been collected pursuant to the rates underlying the Stipulation. In
October 1996, FERC approved the Stipulation with certain modifications and
clarifications which are not material. In January 1997, FERC issued an order
denying request for rehearing of the October 1996 order. Refunds will be made in
March 1997. The Company has established a provision for these refunds, and the
balance of this provision at December 31, 1996 was $167 million. One party to
the rate proceeding, a competitor of TGP, filed with the Court of Appeals a
Petition for Review of the FERC orders approving the Stipulation.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
materially adverse effect on the Company's financial position or results of
operations.
Environmental Matters
As of December 31, 1996, the Company had a reserve of approximately $187
million to cover environmental assessments and remediation activities as
discussed below. The reserve for such issues at December 31, 1996, has been
adjusted to reflect the purchase price allocation discussed in Note 1, "Merger
and Distributions."
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, in order to assure that its
efforts meet regulatory requirements.
Due to the current uncertainty regarding the further activity necessary for
TGP to address the presence of PCBs, substances on the EPA List of Hazardous
Substances and other substances of concern on its sites, including the
requirements for additional site characterization, the actual amount 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 accurately project what additional costs, if any, may arise
from future characterization and remediation activities. While there are still
many uncertainties relating to the ultimate costs which may be incurred, based
upon the Company's evaluation and experience to date, the Company believes that
the recorded estimate for the reserve is adequate.
Following negotiations with its customers, TGP in May 1995 filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs. In November 1995, FERC issued an order approving the
Environmental Stipulation. Although one shipper filed for rehearing, FERC denied
rehearing of its order in February 1996. This shipper filed a Petition for
Review in April 1996 in the Court of Appeals; TGP believes the FERC order
approving the Environmental Stipulation will be upheld on appeal. The
Environmental Stipulation, which was effective July 1, 1995, had no material
effect on the Company's financial position or results of operations. As of
December 31, 1996, the balance of the regulatory asset was $49 million.
TGP has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. TGP believes that additional recoveries from the remaining
carriers in the pending litigation against such carriers are reasonably
possible. In addition, TGP has settled its pending litigation against and
received payment from the manufacturer of the PCB-containing lubricant
previously used in the starting air systems in a portion of TGP's pipeline. TGP
has
30
<PAGE> 34
reduced the amount it is seeking to recover under the Environmental Stipulation
by the amount it has received in these proceedings.
The Company and certain of its subsidiaries have been designated, have
received notice that they could be designated, or have been asked for
information to determine whether they could be designated as a PRP with respect
to 25 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for payment of
the Company's allocable share of remediation costs. 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 federal Superfund
statute is joint and several, meaning that the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs has been considered, where
appropriate, in its determination of its estimated liability as described
herein. The Company presently believes that the costs associated with the
current status of such entities as PRPs at the Superfund sites referenced above
will not have a materially adverse effect on the financial position or results
of operations of the Company.
In addition, the Company has identified a number of formerly owned or
leased sites, and certain other sites associated with its discontinued
operations, where environmental remediation may be acquired. The Company
presently believes that the costs to remediate these sites will not have a
materially adverse effect on its financial position or results of operations.
The Company has identified other sites where environmental remediation 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. The Company believes that the provisions
recorded for environmental exposures are adequate based on current estimates.
Capital Commitments
At December 31, 1996, the Company had capital or investment commitments of
$36 million which are expected to be funded through cash provided by operations
and/or incremental borrowings. The Company's other planned capital and
investment projects are discretionary in nature, with no substantial capital
commitments made in advance of the actual expenditures.
Purchase Obligations
In connection with the financing commitments of certain joint ventures, the
Company has entered into unconditional purchase obligations for products and
services of $121 million ($94 million on a present value basis) at December 31,
1996. The Company's annual obligations under these agreements are $22 million
for the years 1997 and 1998, $21 million for the years 1999 and 2000, and $11
million for the year 2001. Payments under such obligations, including additional
purchases in excess of contractual obligations, were $25 million, $26 million
and $34 million for the years 1996, 1995 and 1994, respectively. In addition, in
connection with the Great Plains coal gasification project, TGP continues to
have an obligation to purchase 30 percent of a capped volume of the plant output
through July 2009. TGP has executed a settlement of this contract as a part of
its GSR negotiations discussed in "Rates and Regulatory Matters" above and has
established a provision for the estimated costs in excess of market prices which
management believes is adequate.
Legal Proceedings
See Item 3, Legal Proceedings, which is incorporated herein by reference.
31
<PAGE> 35
6. ACQUISITIONS AND DISPOSITIONS
Acquisitions
During 1995, the Company acquired the natural gas pipeline assets of PASA
which includes a 488-mile pipeline, for approximately $225 million. Also during
1995, the Company acquired a 50 percent interest in two gas-fired cogeneration
plants from ARK Energy, a privately-owned power generation company, for
approximately $65 million.
In May 1996, the Company acquired a 50 percent ownership interest in a
producing gas field (approximately 500 Bcf) and a 47.5 percent ownership
interest in a 135 MW power generating plant under construction in South
Sulawesi, Indonesia.
In September 1996, the Company reacquired for $41 million the 20 percent
interest in the Company's marketing and intrastate pipeline subsidiary.
Each of the acquisitions discussed above was accounted for as a purchase.
Net income would not have been significantly different from amounts reported if
the acquisition had occurred at the beginning of each respective year.
Disposition of Assets
In 1994, the Company's marketing and intrastate pipeline subsidiary issued
50 shares of its common stock, diluting Old Tenneco's ownership in this
subsidiary to 80 percent and resulting in a gain of $23 million. No taxes were
provided on the gain because management expected that the recorded investment
would be recovered in a tax-free manner.
In December 1995, the Company sold its 50 percent interest in Kern River
for a pre-tax gain of $30 million. Kern River owns a 904-mile pipeline extending
from Wyoming to California. Also in 1995, the Company sold certain other
facilities and assets for a combined pre-tax loss of $19 million.
During 1996, the Company sold its 13.2 percent interest in Iroquois, its 50
percent interest in Dauphin Island Gathering System and certain other assets,
resulting in a net pre-tax gain of $3 million.
In December 1996, subsequent to the Merger, the Company sold 70 percent of
its interests in two natural gas pipeline systems in Australia to CNGI Australia
Pty. Limited, a wholly-owned indirect subsidiary of Consolidated Natural Gas
Company, and four Australian investors for approximately $400 million, inclusive
of related debt financing involving these projects, and completed the sale of
its oil and gas exploration, production and financing unit, formerly known as
Tenneco Ventures, in a $105 million transaction. There was no gain or loss
recognized on these transactions due to the Merger and the application of
pushdown accounting to TGP. The net proceeds from these transactions were
utilized to retire outstanding borrowings under the Credit Facility subsequent
to year end.
32
<PAGE> 36
7. INCOME TAXES
Following is a comparative analysis of the components of pre-acquisition
combined income tax expense (benefit) for the years 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
------------- ---- ---- ----
PRE-ACQUISITION
COMBINED
<S> <C> <C> <C>
Current --
Federal .................................................. $ 26 $(13) $59
State and local........................................... 54 (3) (4)
---- ---- ---
80 (16) 55
---- ---- ---
Deferred --
Federal .................................................. 18 35 22
State and local........................................... (20) 12 12
---- ---- ---
(2) 47 34
---- ---- ---
Income tax expense.......................................... $ 78 $ 31 $89
==== ==== ===
</TABLE>
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate
(35 percent for all years presented) to the income tax expense reflected in the
pre-acquisition combined statements of income for the years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
------------- ---- ---- ----
PRE-ACQUISITION
COMBINED
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income
tax rate.................................................. $ 82 $ 68 $95
Increases (reductions) in income tax expense resulting from:
State and local taxes on income, net of U.S. federal
income tax benefit..................................... 22 6 5
Permanent differences on sales of assets.................. 5 12 (7)
Realization of unrecognized deferred tax assets........... (21) (49) --
Net reversal of tax reserves.............................. (4) -- --
Other..................................................... (6) (6) (4)
---- ---- ---
Income tax expense.......................................... $ 78 $ 31 $89
==== ==== ===
</TABLE>
Current U.S. income tax expense for the years ended December 31, 1996, 1995
and 1994, includes a reduction in current tax amounts of $16 million, $21
million and $22 million, respectively, related to the allocation of corporate
interest expense to the Industrial Business and the Shipbuilding Business.
Reference is made to Note 15 for information concerning corporate debt and
interest allocated to the Industrial Business and the Shipbuilding Business from
the Company.
33
<PAGE> 37
The components of the Company's net deferred tax liability at December 31,
1996 and 1995, were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995
------------- ---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Deferred tax assets --
U.S. capital loss carryforwards...................... $ -- $ 88
Postretirement benefits other than pensions.......... 124 104
Regulatory Issues.................................... 235 141
Environmental reserve................................ 71 75
Other................................................ 202 76
Valuation allowance.................................. -- (65)
------- -----
Net deferred tax asset............................... 632 419
------- -----
Deferred tax liabilities --
Tax over book depreciation........................... 1,001 440
Regulatory Issues.................................... 158 208
Debt related items................................... 6 43
Book versus tax gains and losses on asset
disposals......................................... 39 34
Other................................................ 135 36
------- -----
Total deferred tax liability......................... 1,339 761
------- -----
Net deferred tax liability............................. $ 707 $ 342
======= =====
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $65 million at December 31, 1995, which were not
recognized in the combined statements of income when generated. These benefits
resulted primarily from U.S. capital loss carryforwards which were available to
offset future capital gains. During 1996, these capital loss carryforwards were
utilized to offset taxes on capital gain transactions of the Company and certain
Old Tenneco affiliates. The table above reflects the deferred tax effects of the
purchase price allocation at December 31, 1996, as discussed in Note 1, "Merger
and Distributions."
8. EMPLOYEE BENEFITS
Postretirement Benefits
As part of the Distributions and Merger, the Company assumed responsibility
for certain benefits for former employees of Old Tenneco and the postretirement
health care plans for the Company's employees were significantly changed. The
Company will be responsible for benefits for both former employees and former
employees of operations previously disposed of by Old Tenneco. Employees who
retire before July 1, 1997 will receive the same benefits as former employees.
While employees who retire on or after July 1, 1997 will continue to receive
$10,000 of postretirement life insurance, they will not receive any employer
subsidized postretirement health care benefits. All of these benefits may be
subject to deductibles, co-payment provisions and other limitations. The Company
has reserved the right to change these benefits.
The majority of the Company's postretirement benefit plans are not funded.
In June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of TGP. The contributions are collected from customers
in FERC approved rates. As of December 31, 1996, cumulative contributions were
$16 million. Plan assets consist principally of fixed income securities.
34
<PAGE> 38
The funded status of the postretirement benefit plans reconciles with
amounts recognized on the consolidated and combined balance sheets at December
31, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.............................................. $ 339 $ 320
Fully eligible active plan participants............... 13 5
Other active plan participants........................ 1 2
------- -----
Total accumulated postretirement benefit obligation..... 353 327
Plan assets at fair value............................... 4 3
------- -----
Accumulated postretirement benefit obligation in excess
of plan assets........................................ (349) (324)
Claims paid during the fourth quarter................... -- 14
Unrecognized reduction of prior service obligations
resulting from plan amendments........................ -- (68)
Unrecognized net loss resulting from plan experience and
changes in actuarial assumptions...................... (1) 74
------- -----
Accrued postretirement benefit cost at December 31...... $(350) $(304)
======= =====
</TABLE>
- ---------------
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates, which are subject to revision in future
periods given new facts or circumstances, as described below, and reflects
adjustments recorded in purchase accounting at December 31, 1996. For the
1996 period the plan liabilities were estimated as of December 31, 1996
and for the 1995 period the plan liabilities were estimated at September
30, 1995 and rolled forward to December 31, 1995.
In December 1992, FERC issued a statement of policy which allows
jurisdictional pipelines to recognize allowances for prudently incurred costs of
postretirement benefits other than pensions on an accrual basis consistent with
the accounting principles set forth in SFAS No. 106. The Company believes that
all costs of providing postretirement benefits to its employees are necessary
and prudent operating expenses and that such costs are recoverable in rates.
Accordingly, postretirement benefit costs related to FERC regulated operations
have been deferred as a regulatory asset. At December 31, 1996 the balance of
this regulatory asset was $28 million and is being recovered through rates.
The net periodic postretirement benefit cost for the years 1996, 1995 and
1994 consists of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS) PRE-ACQUISITION COMBINED
<S> <C> <C> <C>
Service cost for benefits earned during the year............ $ 1 $ 1 $ 1
Interest cost on accumulated postretirement benefit
obligation................................................ 25 26 17
Net amortization of unrecognized amounts.................... (12) (13) (6)
---- ---- ----
Net periodic postretirement benefit cost.................... $ 14 $ 14 $ 12
==== ==== ====
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1996, 1995 and 1994 accumulated postretirement benefit
obligation was 6 percent, 7 percent and 8 percent, respectively, declining to 5
percent in 1997 and remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1996, 1995 and 1994 accumulated postretirement
benefit obligations by approximately $5 million, $14 million and $14 million,
respectively, and would increase the aggregate of the service cost and interest
cost
35
<PAGE> 39
components of the net postretirement benefit cost for 1996, 1995 and 1994 by
approximately $1 million, $1 million and $3 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1996, 1995 and 1994 accumulated postretirement benefit
obligations were 7.75 percent, 7.75 percent and 8.25 percent, respectively.
Pension Plans
In conjunction with the Distributions in December 1996, benefit accruals
for Company employees in the Old Tenneco Retirement Plan (the "TRP") were frozen
as of the last day of December 1996 and all benefits were fully vested. New
Tenneco became the sole sponsor of the TRP such that TGP is not responsible for
any benefits accrued before the last day of December 1996. TGP employees became
participants in the new EPG Cash Balance Pension Plan ("CBP Select") as of
January 1, 1997 with no account balances credited for prior service.
The Company's employees who were age 55 with at least 10 years of service
as of December 31, 1996 are eligible for special benefits under the 1997 Early
Retirement Incentive Program (the "ERIP") under the CBP Select. As a result of
the Merger, certain eligible employees who elected to retire under the ERIP will
receive an enhanced credit under the CBP Select which will be one year of pay
for most employees. TGP has accrued for these enhanced benefits as of December
31, 1996.
9. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
(IN MILLIONS) ---------------- ---------------
<S> <C> <C>
Materials and supplies.................................. $ 19 $ 24
Gas in storage.......................................... 23 12
------- ------
Total......................................... $ 42 $ 36
======= ======
</TABLE>
10. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
(IN MILLIONS) ---------------- ---------------
<S> <C> <C>
Property, plant, and equipment, at cost................. $2,371 $6,272
Less -- accumulated depreciation and depletion.......... -- 3,431
------- ------
2,371 2,841
Additional acquisition cost assigned to utility plant,
net of accumulated amortization....................... 1,574 --
------- ------
Total property, plant and equipment, net...... $3,945 $2,841
======= ======
</TABLE>
Current FERC policy does not permit the Company to recover amounts in
excess of original cost allocated in purchase accounting to its regulated
operations through rates.
11. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The principal equity method investments were
the Company's investments in international pipelines, interstate pipelines,
power generation plants, gathering systems and natural gas storage facilities.
These investments were subject to certain purchase accounting adjustments at
December 31, 1996, as discussed in Note 1, "Merger and Distributions."
36
<PAGE> 40
At December 31, 1996 and 1995, the Company's consolidated stockholder's
equity and combined equity, respectively, included equity in undistributed
earnings from equity method investments of $12 million and $25 million,
respectively. Dividends and distributions received from affiliates accounted for
on the equity method were $43 million, $53 million and $48 million during 1996,
1995 and 1994, respectively.
At December 31, 1996, the Company's investment in affiliates balance
exceeded the underlying net assets of its investments by $69 million. The excess
is being amortized into income by decreasing equity in net income of affiliated
companies using the straight-line method over the estimated economic useful
life.
Summarized financial information of the Company's proportionate share of 50
percent or less owned companies accounted for by the equity method of accounting
as of December 31, 1996, 1995 and 1994, and for the years then ended is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ----- -----
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
(IN MILLIONS) ---------------- ----------------
<S> <C> <C> <C>
Current assets.................................... $ 46 $ 60 $ 47
Non-current assets................................ 545 543 901
Short-term debt................................... 18 122 19
Other current liabilities......................... 37 24 61
Long-term debt.................................... 244 152 494
Other non-current liabilities..................... 39 25 16
Equity in net assets.............................. 253 280 358
Revenues and other income......................... 98 184 183
Costs and expenses................................ 68 119 132
Net income........................................ 30 65 51
</TABLE>
- ---------------
NOTE: Balance sheet amounts related to Kern River are not included in the table
above as of
December 31, 1996 and 1995, due to the Company's sale of its investment
in Kern River in December 1995. Reference is made to Note 6 for information
concerning the sale of Kern River.
12. NATURE OF OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company is engaged in the transportation, gathering, processing and
marketing of natural gas. For the year ended December 31, 1996, the Company's
operating revenues were predominately derived from the transportation and
marketing of natural gas. The Company's principal end markets for the
transportation of natural gas are the Northeast and Midwest United States. Prior
to the Merger, Tenneco Credit Corporation (now renamed El Paso Energy Credit
Corporation), a Company subsidiary, was engaged in financing, on a nonrecourse
basis, receivables of other operating divisions of Old Tenneco. El Paso Energy
Credit Corporation continues to sell certain energy receivables in the ordinary
course of its business subsequent to the Merger.
The Company did not have gross revenues from any customer equal to, or in
excess of, 10 percent of combined operating revenues for the years ended
December 31, 1996, 1995, and 1994.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
(IN MILLIONS) PRE-ACQUISITION COMBINED
<S> <C> <C> <C>
Interest................................................... $179 $ 254 $ 264
Income taxes............................................... 247 136 (137)
</TABLE>
37
<PAGE> 41
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
PRE-ACQUISITION COMBINED
---------------------------------------------
QUARTER OPERATING OPERATING NET
(IN MILLIONS) REVENUES INCOME INCOME (LOSS)
------------- --------- --------- -------------
<S> <C> <C> <C>
1996 1st.............................................. $ 754 $ 63 $ 43
2nd............................................. 629 43 36
3rd............................................. 636 49 40
4th............................................. 716 28 (72)
------ ---- -----
$2,735 $183 $ 47
====== ==== =====
1995 1st.............................................. $ 529 $ 54 $ 42
2nd............................................. 447 30 16
3rd............................................. 439 47 15
4th............................................. 560 2 91
------ ---- -----
$1,975 $133 $ 164
====== ==== =====
</TABLE>
Note: See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes 1, 3, 6 and 7 of the notes to
consolidated and combined financial statements for significant issues
affecting comparability of quarterly results.
15. TRANSACTIONS WITH AFFILIATES
Combined Equity
The "Combined Equity" caption in the accompanying combined financial
statements represents Old Tenneco's cumulative investment in the combined
businesses of the Company prior to the Merger. Changes in the "Combined Equity"
caption represent the net income (loss) of the Company, cash paid for interest
allocated to affiliates, net of tax, changes in corporate debt allocated to
affiliates, net change in notes and advances with Old Tenneco, and net cash and
noncash contributions from (distributions to) affiliates. Reference is made to
the statements of changes in consolidated stockholder's equity and combined
equity for an analysis of activity in the "Pre-Acquisition Combined Equity"
caption for each of the three years in the period ended December 31, 1996.
General and Administrative Expenses
Included in the total general and administrative expenses for 1996, 1995
and 1994, is $17 million, $16 million, and $13 million, respectively, which
represents the Company's share of Old Tenneco's corporate general and
administrative costs for legal, financial, communication and other
administrative services. Old Tenneco's corporate general and administrative
expenses have been allocated based on the estimated level of effort devoted to
Old Tenneco's various operations and relative size based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable and that
total general and administrative expenses reflected in the accompanying
pre-acquisition combined statements of income are reasonable when compared with
the total general and administrative costs the Company would have incurred on a
stand-alone basis.
Corporate Debt and Interest Allocations
The Company's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries rather than at the operating company level, and to centrally manage
various cash functions. Consequently, corporate debt of TGP and its related
interest expense have been allocated to TGP's automotive, packaging, and
shipbuilding businesses ("TGP's non-energy operations") based upon the portion
of TGP's investment in TGP's non-energy operations that is deemed to be debt,
generally based upon the ratio of TGP's non-energy operations' net assets to
TGP's consolidated net assets plus debt. Interest expense was allocated at a
rate equivalent to the
38
<PAGE> 42
weighted-average cost of all corporate debt, which was 12.4 percent, 11.4
percent and 11.0 percent for 1996, 1995 and 1994, respectively. Total pre-tax
interest expense allocated to TGP's non-energy operations in 1996, 1995 and 1994
was $45 million, $60 million and $61 million, respectively. TGP's non-energy
operations have also been allocated tax benefits totaling approximately 35
percent of the allocated pre-tax interest expense. Although interest expense,
and the related tax effects, have been allocated to TGP's non-energy operations
for financial reporting on a historical basis, TGP's non-energy operations have
not been billed for these amounts. The changes in allocated corporate debt and
the after-tax allocated interest expense have been included as a component of
the Company's combined equity. Although management believes that the historical
allocation of corporate debt and interest expense is reasonable, it may not
necessarily be indicative of the debt the Company may incur in the future.
Notes and Advances Receivable or Payable with Affiliates
"Cash contributions from (distributions to) affiliates" in the statements
of changes in consolidated stockholder's equity and combined equity consist of
net cash changes in notes and advances receivable or payable between the Company
and the Industrial Business and Shipbuilding Business which have been included
in combined equity. Historically, TGP has utilized notes and advances to
centrally manage cash funding requirements for its consolidated group.
At December 31, 1995 and 1994, the Company had a non-interest bearing note
payable on demand to Newport News totaling $965 million and $991 million,
respectively, which included as a component of the Company's combined equity.
The "Note payable to affiliate" balance at December 31, 1996 relates to an
interest-bearing demand loan made to the Company from EPG in December 1996
subsequent to the Merger. In addition, the "Notes receivable from affiliate"
balance at December 31, 1996 principally relates to the net proceeds from the
sale of certain assets, and related project financings, which were loaned to
EPTPC and utilized to retire borrowings under the Credit Facility.
Accounts Receivable and Accounts Payable -- Affiliated Companies
The December 31, 1995 "Accounts payable -- Affiliated companies" balance
primarily includes billings for general and administrative costs incurred by New
Tenneco and charged to the Company. The December 31, 1995 "Accounts and notes
receivable -- Affiliated companies" balance primarily relates to billings for
U.S. income taxes incurred by Old Tenneco and charged to the Industrial Business
and Shipbuilding Business. Affiliated accounts receivable and accounts payable
between the Company and the Industrial Business and Shipbuilding Business were
settled, capitalized or converted into ordinary trade accounts, as applicable,
as part of the Distributions.
The December 31, 1996 "Accounts receivable -- Affiliated companies" balance
principally relates to interest-bearing advances of cash flows from the
Company's operations to EPG.
Employee Benefits
Certain employees of the Company participated in Old Tenneco's employee
stock ownership and employee stock purchase plans. The Old Tenneco employee
stock ownership plan provided for the grant of Old Tenneco common stock options
and other stock awards at a price not greater than market value at the date of
grant. The Old Tenneco employee stock purchase plan allowed employees to
purchase Old Tenneco common stock at a 15 percent discount subject to certain
thresholds. Certain employees of the Industrial Business and Shipbuilding
Business also participated in Old Tenneco's employee stock ownership and
employee stock purchase plans. The cost of stock issued to these employees was
billed to the Industrial Business and Shipbuilding Business. In connection with
the Distributions, outstanding options on Old Tenneco common stock held by the
Company's employees were vested so that they became fully exercisable prior to
the Merger. If not exercised prior to the Merger, such options were cancelled
upon consummation of the Merger. Outstanding options on Old Tenneco common stock
held by the Industrial Business and
39
<PAGE> 43
Shipbuilding Business employees were converted into new options of New Tenneco
and Newport News, as applicable, so as to preserve the aggregate value of the
options held prior to the Distributions.
Employees of the Company also participated in certain Old Tenneco
postretirement and pension plans. Reference is made to Note 8, "Employee
Benefits", for a further discussion of the plans.
Sales of Receivables
At December 31, 1995, Tenneco Credit Corporation (now renamed El Paso
Energy Credit Corporation) had purchased $513 million of trade receivables from
Old Tenneco's Industrial Business. Tenneco Credit Corporation sold a portion of
these trade receivables to a third party in the ordinary course of business. In
addition, at December 31, 1995, Tenneco Credit Corporation had certain notes
receivable primarily related to retail sales of farm and construction equipment
by Case Corporation which it received in a prior transaction. As a part of the
intercompany transfers preceding the Merger and Distributions, Tenneco Credit
Corporation transferred these Case Corporation retail receivables and all of its
interest and obligations associated with receivables relating to the Industrial
Business held or factored at that time to New Tenneco.
40
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tennessee Gas Pipeline Company:
We have audited the accompanying post-acquisition balance sheet of
Tennessee Gas Pipeline Company ("TGP") and consolidated subsidiaries as of
December 31, 1996 and the pre-acquisition combined balance sheet of the Energy
Businesses of TGP, as predecessor operations to TGP and consolidated
subsidiaries (See Note 1), as of December 31, 1995, and the related
pre-acquisition combined statements of income, cash flows and changes in
consolidated stockholder's equity and combined equity for each of the three
years in the period ended December 31, 1996. These consolidated and combined
financial statements, and the schedule referred to below, are the responsibility
of TGP's management. Our responsibility is to express an opinion on these
consolidated and combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated and combined financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
and combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated and combined financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the post-acquisition
financial position of TGP and consolidated subsidiaries as of December 31, 1996
and the pre-acquisition combined financial position of the Energy Businesses of
TGP as of December 31, 1996 and 1995, and the results of their pre-acquisition
combined operations and cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated and combined financial statements taken as a whole. The
supplemental schedule listed in the index to Part IV, Item 14 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated and combined financial statements. The
supplemental schedule has been subjected to the auditing procedures applied in
the audits of the basic consolidated and combined financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic consolidated and combined
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 4, 1997
41
<PAGE> 45
SCHEDULE II
TENNESSEE GAS PIPELINE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts Deducted
from Assets to Which it Applies:
Year Ended December 31, 1996.......... $49 $15 $ 8 $27 $45
=== === === === ===
Year Ended December 31, 1995.......... $21 $26 $ 9 $ 7 $49
=== === === === ===
Year Ended December 31, 1994.......... $37 $ 2 $ 2 $20 $21
=== === === === ===
</TABLE>
42
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10, "Directors and Executive Officers of the Registrant," Item 11,
"Executive Compensation," Item 12, "Security Ownership of Certain Beneficial
Owners and Management," and Item 13, "Certain Relationships and Related
Transactions," have been omitted from this report pursuant to the reduced
disclosure format permitted by General Instruction I to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial statements.
The following consolidated and combined financial statements of the Company
are included in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined statements of income.......................... 15
Consolidated and combined balance sheets............... 16
Combined statements of cash flows...................... 17
Statements of changes in consolidated stockholder's
equity and combined equity............................ 18
Notes to consolidated and combined financial
statements............................................ 19
Report of independent public accountants............... 41
</TABLE>
2. Financial statement schedules and supplementary information required to
be submitted.
<TABLE>
<S> <C>
Schedule II -- Valuation and qualifying accounts....... 42
Schedules other than that listed above are omitted
because they are not applicable
3. Exhibit list............................................ 44
</TABLE>
(b) Reports on Form 8-K:
During the fourth quarter of the fiscal year ended December 31, 1996, TGP
filed with the Securities and Exchange Commission a Current Report on Form 8-K
dated December 26, 1996. In such report, TGP (i) described under Item 2 therein
the acquisition of its parent corporation, Tenneco Inc.
(now El Paso Tennessee Pipeline Co.), by El Paso Natural Gas Company and (ii)
the disposition by TGP of certain assets in connection with such acquisition and
(ii) under Item 7 therein, filed pro forma financial statements. This Current
Report on Form 8-K was amended by a Current Report on Form 8-K/A that was filed
on January 22, 1997.
43
<PAGE> 47
TENNESSEE GAS PIPELINE
EXHIBIT LIST
DECEMBER 31, 1996
Exhibits not incorporated by reference to a prior filing are designated by
an asterisk; all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation as amended and supplemented
as of January 31, 1995 (Exhibit 3(a) to the Form 10-K of
TGP for the fiscal year ended December 31, 1994, File No.
1-4101).
*3.2 -- Certificate of Ownership and Merger dated as of April 12,
1996; Certificate of Amendment of Certificate of
Incorporation dated October 8, 1996.
3.3 -- By-laws of EPTPC as amended on December 6, 1996 (Exhibit
3(b) to the Form 10-K of EPTPC for the fiscal year ended
December 31, 1992, File No. 1-9864).
4.1 -- Indenture dated as of March 4, 1997, between TGP and The
Chase Manhattan Bank (Exhibit 4.1 to the Form 10-K of
EPTPC, File No. 1-9864, filed March 14, 1997).
4.2 -- First Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.2 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
4.3 -- Second Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.3 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
4.4 -- Third Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.4 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
*12 -- Computation of Ratio of Earnings to Fixed Charges.
21 -- Omitted pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
*23 -- Consent of Independent Public Accountants.
*27 -- Financial Data Schedule.
</TABLE>
UNDERTAKING
The undersigned, Tennessee Gas Pipeline Company, hereby undertakes,
pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the
Securities and Exchange Commission upon request all constituent instruments
defining the rights of holders of long-term debt of Tennessee Gas Pipeline
Company and its consolidated subsidiaries not filed herewith for the reason that
the total amount of securities authorized under any of such instruments does not
exceed 10 percent of the total consolidated assets of Tennessee Gas Pipeline
Company and its consolidated subsidiaries.
44
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Tennessee Gas Pipeline Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on the
14th day of March 1997.
TENNESSEE GAS PIPELINE COMPANY
By: /s/ WILLIAM A. WISE
----------------------------------
William A. Wise
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Tennessee Gas
Pipeline Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM A. WISE Chairman of the Board and March 14, 1997
- ----------------------------------------------------- Director
William A. Wise
/s/ JOHN W. SOMERHALDER II President and Director March 14, 1997
- -----------------------------------------------------
John W. Somerhalder II
/s/ H. BRENT AUSTIN Senior Vice President and March 14, 1997
- ----------------------------------------------------- Director
H. Brent Austin
/s/ JEFFREY I. BEASON Vice President and Controller March 14, 1997
- -----------------------------------------------------
Jeffrey I. Beason
</TABLE>
45
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation as amended and supplemented
as of January 31, 1995 (Exhibit 3(a) to the Form 10-K of
TGP for the fiscal year ended December 31, 1994, File No.
1-4101).
*3.2 -- Certificate of Ownership and Merger dated as of April 12,
1996; Certificate of Amendment of Certificate of
Incorporation dated October 8, 1996.
3.3 -- By-laws of EPTPC as amended on December 6, 1996 (Exhibit
3(b) to the Form 10-K of EPTPC for the fiscal year ended
December 31, 1992, File No. 1-9864).
4.1 -- Indenture dated as of March 4, 1997, between TGP and The
Chase Manhattan Bank (Exhibit 4.1 to the Form 10-K of
EPTPC, File No. 1-9864, filed March 14, 1997).
4.2 -- First Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.2 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
4.3 -- Second Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.3 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
4.4 -- Third Supplemental Indenture dated as of March 13, 1997,
between TGP and The Chase Manhattan Bank to the Indenture
dated as of March 4, 1997, between TGP and The Chase
Manhattan Bank (Exhibit 4.4 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
*12 -- Computation of Ratio of Earnings to Fixed Charges.
21 -- Omitted pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
*23 -- Consent of Independent Public Accountants.
*27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF
OWNERSHIP AND MERGER MERGING
NEW TENN COMPANY
AND
NEW TENNESSEE GAS PIPELINE COMPANY
TENNESSEE GAS PIPELINE COMPANY, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That it is the owner of all the issued and outstanding stock of
NEW TENN COMPANY, a Delaware corporation, incorporated on December 12, 1984;
and NEW TENNESSEE GAS PIPELINE COMPANY, a Delaware corporation, incorporated on
May 10, 1989.
SECOND: That, in accordance with the provisions of Section 141(f) of
the General Corporation Law of the State of Delaware, the Board of Directors
of TENNESSEE GAS PIPELINE COMPANY, by written consent dated as of March 29,
1996, adopted the following resolutions to merge NEW TENN COMPANY and NEW
TENNESSEE GAS PIPELINE COMPANY into and with TENNESSEE GAS PIPELINE COMPANY:
RESOLVED, that the Company merge into itself and it hereby does
merge into itself its wholly-owned subsidiary New Tenn Company and
assume all of said corporation's liabilities and obligations; and it is
further
<PAGE> 2
RESOLVED, that the proper officers of the Company be, and they
hereby are, authorized, empowered and directed to execute, under the
corporate seal of the Company, a Certificate of Ownership and Merger
setting forth a copy of the resolutions to merge said New Tenn Company
into the Company, pursuant to which the Company will assume all of the
liabilities and obligations of the said New Tenn Company, and to cause
the same to be filed, in the manner provided by law, and to do all acts
and things whatsoever, whether within to without the State of Delaware,
which may be in anywise necessary or proper to effect said merger.
* * *
RESOLVED, that the Company merge into itself and it hereby does
merge into itself its wholly-owned subsidiary New Tennessee Gas
Pipeline Company and assume all of said corporation's liabilities and
obligations; and it is further
RESOLVED, that the proper officers of the Company be, and they
hereby are, authorized, empowered and directed to execute, under the
corporate seal of the Company, a Certificate of Ownership and Merger
setting forth a copy of the resolutions to merge said New Tennessee Gas
Pipeline Company into the Company, pursuant to which the Company will
assume all of the liabilities and obligations of the said New Tennessee
Gas Pipeline Company and to cause the same to be filed, in the manner
provided by law, and to do all acts and things whatsoever, whether
within or without the State of Delaware, which may be in anywise
necessary or proper to effect said merger.
2
<PAGE> 3
IN WITNESS WHEREOF, said TENNESSEE GAS PIPELINE COMPANY has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by
Robert G. Simpson, its Vice President, and James D. Gaughan, its Assistant
Secretary, as of April 12, 1996.
TENNESSEE GAS PIPELINE COMPANY
By: /s/ ROBERT G. SIMPSON
-----------------------------------
Robert G. Simpson
Vice President
ATTEST:
/s/ JAMES D. GAUGHAN
- -----------------------------------
James D. Gaughan,
Assistant Secretary
3
<PAGE> 4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TENNESSEE GAS PIPELINE COMPANY
Tennessee Gas Pipeline Company, a corporation duly organized and
existing under the General Corporation Law of the State of Delaware (the
"Company"), does hereby certify that:
1. The Certificate of Incorporation of the Company is hereby amended
by deleting Article FOURTH thereof and inserting the following in lieu thereof:
"FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is three hundred (300) and
the par value of each of such shares is Five Dollars ($5.00) amounting
in the aggregate to One Thousand Five Hundred Dollars ($1,500)."
2. That the foregoing amendment was duly adopted in accordance with
the provisions of Sections 242 and 228 (by the written consent of the sole
stockholder of the Company) of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Tennessee Gas Pipeline Company has caused this
Certificate to be executed by its duly authorized officer on this 8th day of
October, 1996.
TENNESSEE GAS PIPELINE COMPANY
By: /s/ ROBERT G. SIMPSON
----------------------------------
Robert G. Simpson
Vice President
<PAGE> 1
EXHIBIT 12
TENNESSEE GAS PIPELINE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income before extraordinary loss...................... $155 $164 $181 $164 $ 99
Add:
Interest............................................ 107 179 207 204 310
Portion of rentals representative of interest
factor........................................... 1 3 1 1 --
Income tax expense and other taxes on income........ 78 31 89 100 13
Amortization of interest capitalized applicable to
nonutility companies............................. 3 3 3 3 1
Interest capitalized applicable to utility
companies........................................ -- 2 2 1 1
Undistributed (earnings) losses of affiliated
companies in which less than a 50% voting
interest is owned................................ -- (9) (4) 3 (3)
---- ---- ---- ---- ----
Earnings as defined............................ $344 $373 $479 $476 $421
==== ==== ==== ==== ====
Interest.............................................. $107 $179 $207 $204 $310
Interest capitalized.................................. 8 2 2 1 2
Portion of rentals representative of interest
factor.............................................. 1 3 1 1 --
---- ---- ---- ---- ----
Fixed charges as defined....................... $116 $184 $210 $206 $312
==== ==== ==== ==== ====
Ratio of earnings to fixed charges.................... 2.97 2.03 2.28 2.31 1.35
==== ==== ==== ==== ====
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated March 4, 1997, included in the
Annual Report of Tennessee Gas Pipeline Company on Form 10-K for the year ended
December 31, 1996, into the following Registration Statement previously filed
with the Securities and Exchange Commission:
333-20199 S-3 $1,000,000,000 of Tennessee Gas Pipeline Company Debt
Securities (approximately $100,000,000 of Debt Securities
remain available for issuance under such registration)
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) 1996 10K.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 1,133
<ALLOWANCES> 0<F1>
<INVENTORY> 42
<CURRENT-ASSETS> 1,302
<PP&E> 3,945
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 6,299
<CURRENT-LIABILITIES> 1,109
<BONDS> 1,005
0
0
<COMMON> 0
<OTHER-SE> 2,625
<TOTAL-LIABILITY-AND-EQUITY> 6,299
<SALES> 2,735
<TOTAL-REVENUES> 2,735
<CGS> 0<F1>
<TOTAL-COSTS> 2,552
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 233
<INCOME-TAX> 78
<INCOME-CONTINUING> 155
<DISCONTINUED> 0
<EXTRAORDINARY> (108)
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>NOT SEPARATELY IDENTIFIED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR
ACCOMPANYING NOTES THERETO.
</FN>
</TABLE>
