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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4101
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TENNESSEE GAS PIPELINE COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 74-1056569
(State or Other Jurisdiction (I.R.S. Employer
of 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) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
----- -----------
<S> <C>
Common Stock, par value $5.00 per share,
as of August 12, 1998 208 shares
</TABLE>
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<TABLE>
<CAPTION>
DEFINITIONS
-----------
<S> <C>
ALJ......................... Administrative Law Judge
Company..................... Tennessee Gas Pipeline Company and its subsidiaries
Court of Appeals............ United States Court of Appeals for the District of Columbia
Circuit
EPA......................... United States Environmental Protection Agency
EPG......................... El Paso Natural Gas Company
EPMC........................ El Paso Management Company, a subsidiary of EPG and parent
of EPTPC which merged with EPG in August 1998
EPMSC....................... El Paso Marketing Services Company
EPTPC....................... El Paso Tennessee Pipeline Co. a subsidiary of El Paso
Natural Gas Company
FERC........................ The Federal Energy Regulatory Commission
GSR......................... Gas supply realignment
PCB(s)...................... Polychlorinated biphenyl(s)
PLN......................... Perusahaan Listrik Negra, the Indonesian government-owned
electric utility
PRP(s)...................... Potentially responsible party(ies)
SFAS........................ Statement of Financial Accounting Standards
TGP......................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
------------ -------- ------------ --------
CONSOLIDATED
CONSOLIDATED COMBINED AND COMBINED COMBINED
<S> <C> <C> <C> <C>
Operating revenues............................... $1,124 $ 788 $2,579 $2,383
------ ------ ------ ------
Operating expenses
Cost of gas and other products................. 925 606 2,135 1,991
Operation and maintenance...................... 97 82 203 176
Depreciation, depletion, and amortization...... 38 34 77 78
Taxes, other than income taxes................. 13 14 26 30
------ ------ ------ ------
1,073 736 2,441 2,275
------ ------ ------ ------
Operating income................................. 51 52 138 108
------ ------ ------ ------
Other (income) and expense
Interest and debt expense...................... 31 26 62 39
Other -- net................................... (25) (20) (38) (37)
------ ------ ------ ------
6 6 24 2
------ ------ ------ ------
Income before income taxes....................... 45 46 114 106
Income tax expense............................... 14 18 37 41
------ ------ ------ ------
Net income....................................... $ 31 $ 28 $ 77 $ 65
====== ====== ====== ======
Comprehensive income............................. $ 27 $ 27 $ 72 $ 64
====== ====== ====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
CONSOLIDATED COMBINED
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 18 $ 34
Accounts and notes receivable, net........................ 876 1,047
Inventories............................................... 19 41
Deferred income tax benefit............................... 106 100
Other..................................................... 432 275
------ ------
Total current assets.............................. 1,451 1,497
Property, plant, and equipment, net......................... 4,759 4,833
Other....................................................... 423 379
------ ------
Total assets...................................... $6,633 $6,709
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 684 $ 836
Short-term borrowings (including current maturities of
long-term debt)........................................ 308 425
Note payable to EPG....................................... 125 125
Other..................................................... 676 509
------ ------
Total current liabilities......................... 1,793 1,895
------ ------
Long-term debt, less current maturities..................... 976 976
------ ------
Deferred income taxes....................................... 1,153 1,150
------ ------
Other....................................................... 749 798
------ ------
Commitments and contingencies (See Note 4)
Minority interest........................................... 25 25
------ ------
Stockholder's equity
Common stock, par value $5 per share; authorized 300
shares; issued 208 shares.............................. -- --
Additional paid-in capital................................ 1,873 1,872
Retained earnings......................................... 76 --
Accumulated other comprehensive income.................... (12) (7)
------ ------
Total stockholder's equity........................ 1,937 1,865
------ ------
Total liabilities and stockholder's equity........ $6,633 $6,709
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------------- ---------
CONSOLIDATED
AND COMBINED COMBINED
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 77 $ 65
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion, and amortization.............. 77 78
Deferred income taxes.................................. 6 185
Other.................................................. (11) (2)
Working capital changes................................... 62 (56)
Other..................................................... (44) (32)
----- -----
Net cash provided by operating activities......... 167 238
----- -----
Cash flows from investing activities
Capital expenditures...................................... (30) (31)
Investment in joint ventures and equity investees......... (35) (42)
Net changes in advances to EPG............................ (15) (179)
Collection of note receivable from partnership............ -- 53
Other..................................................... 14 7
----- -----
Net cash used in investing activities............. (66) (192)
----- -----
Cash flows from financing activities
Revolving credit repayment................................ (117) --
Net proceeds from long-term debt issuance................. -- 883
Dividend to EPTPC......................................... -- (888)
Repayment of note payable to EPG.......................... -- (45)
----- -----
Net cash used in financing activities............. (117) (50)
----- -----
Decrease in cash and temporary investments.................. (16) (4)
Cash and temporary investments
Beginning of period............................... 34 19
----- -----
End of period..................................... $ 18 $ 15
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated and Combined Financial Statements.
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TENNESSEE GAS PIPELINE COMPANY
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. CHANGE IN REPORTING ENTITY
In March 1998, EPMC exchanged all the common stock of EPMSC for
approximately 934,000 shares of 6 1/4% Cumulative Junior Preferred Stock, Series
C ("Series C Preferred Stock") of EPTPC for a total value of $47 million. The
value paid represented the net book value of EPMSC at the exchange date. EPTPC,
in turn, contributed the common stock of EPMSC to TGP. This exchange and
contribution resulted in a change in reporting entity as defined in Accounting
Principles Board Opinion No. 20, Accounting Changes, requiring a restatement in
order to show financial information for the new reporting entity for all periods
presented. The condensed consolidated balance sheet at June 30, 1998, contained
herein reflects the exchange and contribution of EPMSC and is referred to as
"Consolidated." Periods prior to the exchange and contribution are referred to
as "Combined" and periods inclusive of the exchange are referred to as
"Consolidated and Combined." The combined and consolidated and combined
financial statements have been prepared as though the exchange and contribution
had occurred January 1, 1997, and the value of the contribution was $58 million,
the book value of the net assets of EPMSC at January 1, 1997. Earnings in each
respective period from January 1, 1997, to the exchange and contribution date
are reflected as an increase or decrease in the value of the contribution. Net
income, excluding the effects of the exchange and contribution of EPMSC for the
second quarter 1997 and for the six months ended June 30, 1997, would have been
$29 million and $77 million, respectively.
2. BASIS OF PRESENTATION
The 1997 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated and combined
financial statements at June 30, 1998 and December 31, 1997, and for the
quarters and six months ended June 30, 1998, and 1997, are unaudited. These
financial statements do not include all disclosures required by generally
accepted accounting principles. In the opinion of management, all material
adjustments necessary to present fairly the results of operations for such
periods have been included. All such adjustments are of a normal recurring
nature. Results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year due to the seasonal
nature of the Company's businesses.
Comprehensive Income
In accordance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Consolidated and
Combined Statements of Income. The only component of comprehensive income is the
cumulative translation adjustment which results from differences in the
translation of foreign currencies. This amount is reflected as accumulated other
comprehensive income in the Condensed Consolidated and Combined Balance Sheets.
3. SEGMENTS
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods.
The Regulated segment includes the interstate pipeline systems of TGP,
Midwestern Gas Transmission Company, and East Tennessee Natural Gas Company. The
segment transports natural gas to the northeast section of the United States
including the states of Tennessee, Virginia, and Georgia as well as New York
City, Chicago, and Boston metropolitan areas. The Non-Regulated segment provides
natural gas gathering, products extraction, dehydration, purification,
compression and intrastate transmission services. The
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Non-Regulated segment also markets and trades natural gas, power, and petroleum
products, and develops and operates energy infrastructure facilities worldwide.
The accounting policies of the individual segments are the same as those of the
Company, as a whole, as summarized in Note 2, Basis of Presentation.
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE QUARTER ENDED JUNE 30, 1998
----------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ----------- ----------- --------
CONSOLIDATED
<S> <C> <C> <C>
Revenues from external customers............... $ 168 $ 956 $1,124
Intersegment revenue........................... 11 -- 11
Operating income (loss)........................ 66 (15) 51
Segment assets................................. 5,158 1,193 6,351
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE QUARTER ENDED JUNE 30, 1997
----------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ----------- ----------- --------
COMBINED
<S> <C> <C> <C>
Revenues from external customers............... $ 181 $ 607 $ 788
Intersegment revenue........................... 8 -- 8
Operating income (loss)........................ 72 (20) 52
Segment assets................................. 4,771 1,192 5,963
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ------------ ------------ ---------
CONSOLIDATED AND COMBINED
<S> <C> <C> <C>
Revenues from external customers............... $ 371 $2,208 $2,579
Intersegment revenue........................... 19 -- 19
Operating income (loss)........................ 159 (21) 138
CONSOLIDATED
Segment assets................................. 5,158 1,193 6,351
</TABLE>
<TABLE>
<CAPTION>
SEGMENTS
AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------
NON-
REGULATED REGULATED TOTAL
(IN MILLIONS) ------------ ------------ ---------
COMBINED
<S> <C> <C> <C>
Revenues from external customers............... $ 385 $1,998 $2,383
Intersegment revenue........................... 19 -- 19
Operating income (loss)........................ 152 (44) 108
Segment assets................................. 4,771 1,192 5,963
</TABLE>
The reconciliations of operating income to income before income taxes are
presented below.
[CAPTION]
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------------
1998 1997 1998 1997
------------ ------- ------------ --------
<S> <C> <C> <C> <C>
CONSOLIDATED
(IN MILLIONS) CONSOLIDATED COMBINED AND COMBINED COMBINED
<S> <C> <C> <C> <C>
Operating income...................... $ 51 $ 52 $138 $108
Interest and debt expense............. (31) (26) (62) (39)
Other -- net.......................... 25 20 38 37
---- ---- ---- ----
Income before income taxes............ $ 45 $ 46 $114 $106
==== ==== ==== ====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Indonesian Economic Difficulties
The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at June 30, 1998, of
approximately $24 million. Current economic events in
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Indonesia have resulted in the devaluation of the Indonesian Rupiah and delays
or cancellations of certain infrastructure power projects in that country. The
Company has met with PLN and the Indonesian Minister of Finance to discuss the
terms of its power sales agreement in light of the current Indonesian economic
problems. At June 30, 1998, approximately $3.6 million remains as an outstanding
balance due to the Company. PLN has applied to the Minister of Finance for
approximately $150 million to help fund PLN's obligations. While the Company
cannot predict the ultimate outcome of Indonesia's financial difficulties or the
impact of such matters on the Company, it believes PLN, with the backing of the
Office of the Minister of Finance, will honor all obligations on the Sengkang
project in full. Furthermore, the Company believes its investment in the
Sengkang project is adequately protected by political risk insurance. The
Company believes the current economic difficulties in Indonesia will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery of its GSR and other transition costs and related proceedings (the
"GSR Stipulation and Agreement"). In April 1997, FERC approved the settlement
and TGP implemented the settlement on May 1, 1997. Under the terms of the GSR
Stipulation and Agreement, TGP is entitled to collect from customers up to $770
million, of which approximately $719 million has been collected as of June 30,
1998. TGP is entitled to recover additional transition costs, up to the
remaining $51 million, through a demand transportation surcharge and an
interruptible transportation surcharge. The demand transportation surcharge
portion is scheduled to be recovered over a period extending through December
1998. There is no time limit for collection of the interruptible transportation
surcharge portion. The terms of the GSR Stipulation and Agreement also provide
for a rate case moratorium through November 2000 (subject to certain limited
exceptions) and an escalating rate cap, indexed to inflation, through October
2005, for certain of TGP's customers.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. TGP
had provided a reserve for these rate refunds as revenues were collected. One
party, a competitor of TGP, filed with the Court of Appeals a Petition for
Review of the FERC orders. In July 1998, the Court of Appeals issued a decision
remanding the case to FERC to respond to the competitor's argument that TGP's
cost allocation methodology deterred the development of market centers.
In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding ALJ the issue of proper allocation of TGP's New England lateral
costs. In the July 1997 order on rehearing, FERC clarified, among other things,
that although the ultimate resolution as to the proper allocation of costs will
be applied retroactively to July 1, 1995, the cost of service settlement does
not allow TGP to recover from other customers amounts that TGP may ultimately be
required to refund. TGP, as well as several other customers, have filed with the
Court of Appeals a Petition for Review of the FERC orders on this issue. In
December 1997, the ALJ issued his decision on the proper allocation of the New
England lateral costs. The decision adopts a methodology that economically
approximates TGP's current methodology. The ALJ's decision is pending before
FERC.
TGP has filed cashout reports for the period September 1993 through August
1997. TGP's filings showed a cumulative loss of approximately $8 million that
would be rolled forward to the next cashout period pursuant to its tariff. FERC
has requested additional information and justification from TGP as to its
cashout methodology and reports. TGP's cashout methodology and reports are
currently pending before FERC.
Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is
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currently little excess capacity. Several projects, however, have been proposed
to deliver incremental volumes to these markets. Although TGP is actively
pursuing the renegotiation, extension and/or replacement of these contracts,
there can be no assurance as to whether TGP 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 TGP as the existing contracts.
Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
Environmental Matters
As of June 30, 1998, the Company had a reserve of approximately $237
million to cover environmental assessments and remediation activities discussed
below.
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, to assure that its efforts meet
regulatory requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. 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. The
Environmental Stipulation was effective July 1, 1995. As of June 30, 1998, a
balance of $13 million remains to be collected under this stipulation.
The Company and certain of its subsidiaries have been designated, have
received notice that they may be designated, or have been asked for information
to determine whether they could be designated, as a PRP with respect to 27 sites
under the Comprehensive Environmental Response, Compensation and Liability Act
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Company's allocable share of
remediation costs. Since the clean-up costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required, and because in some cases the Company has asserted a defense to any
liability, 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 sites referenced above will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
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. As
such information
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becomes available, or developments occur, related accrual amounts will be
adjusted accordingly. While there are still uncertainties relating to the
ultimate costs which may be incurred, based upon the Company's evaluation and
experience to date, the Company believes the recorded reserve is adequate.
Legal Proceedings
On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPG: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site, and seeks to recover that
amount plus interest. Other companies named as defendants include Atlantic
Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical
Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas
Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed
their answers and third-party complaints seeking contribution from twelve other
entities believed to be PRPs at Sikes. Although factual investigation relating
to Sikes is in very preliminary stages, the Company believes that the amount of
material, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or
Petro-Tex Chemical Corporation facilities was small, possibly de minimis.
However, the government plaintiffs have alleged that the defendants are each
jointly and severally liable for the entire remediation costs and have also
sought a declaration of liability for future response costs such as groundwater
monitoring. While the outcome of this matter cannot be predicted with certainty,
management does not expect this matter to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
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 relevant states
regarding those remediation activities. TGP is also 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 complete with the exception of some long-term groundwater
monitoring requirements. 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 material adverse
effect on the Company's financial position, results of operations, or cash
flows.
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. The relevant Kentucky compressor stations
are scheduled to be characterized and remediated under the consent order with
the EPA. Management believes that the resolution of this issue will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
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
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these matters to have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the five phases of its Year 2000 project to assure that the
Company's key automated systems and related processes will remain functional
through year 2000. Those phases include: (i) awareness, (ii) assessment, (iii)
remediation, (iv) testing, and (v) implementation of the necessary
modifications. The key automated systems of the Company consist of (a)
internally developed computer applications, (b) hardware and equipment, (c)
embedded chip systems, and (d) third-party-developed software.
The Company has conducted a corporate-wide awareness program, which is
substantially completed. Nonetheless, the Company will continually update
awareness efforts throughout the Year 2000 project.
The portion of the assessment phase related to internally developed
computer applications has been substantially completed. The recent upgrade of
various systems, particularly the financial systems, to a client/server platform
has reduced or eliminated concerns for such systems. The portion of the
assessment phase to determine the nature and impact of the year 2000 date change
for hardware and equipment, embedded chip systems, and third-party-developed
software is continuing. The assessment phase of the project, among other things,
involves efforts to obtain representations and assurances from third parties,
including third party vendors, that their hardware and equipment products,
embedded chip systems, and software products being used by or impacting the
Company are or will be modified to be Year 2000 compliant. To date, the
responses from such third parties are inconclusive. As a result, the Company
cannot predict the potential consequences if these or other third parties are
not Year 2000 compliant. The Company is currently evaluating the exposure
associated with such business partner relationships.
The Company expects that the remediation, testing and implementation phases
will be substantially completed by mid-1999.
While the total cost of the Company's Year 2000 project is still being
evaluated, the Company estimates that the costs to be incurred in 1998, 1999 and
2000 associated with assessing, testing, modifying or replacing internally
developed computer applications, hardware and equipment, embedded chip systems,
and third-party-developed software, is between $8 million and $18 million. Of
these estimated costs, the Company expects $2 million to $7 million to be
capitalized and the remainder to be expensed.
The Company's goal is to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems and processes may be interrelated with systems outside the
control of the Company, there can be no assurance that all implementations will
be successful. Accordingly, the Company is developing a contingency and business
resumption plan to respond to any failures as they may occur. The cost estimates
associated with the contingency plan effort are currently being developed.
Management does not expect the costs of the Company's Year 2000 project to have
a material adverse effect on the Company's financial position, results of
operations, or cash flows. Based on information available at this time, however,
the Company cannot conclude that any failure of the Company or third-party
entities to achieve Year 2000 compliance will not adversely effect the Company.
9
<PAGE> 12
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 1998, and December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- --------
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,530 $2,534
Less accumulated depreciation and depletion................. 184 125
------ ------
2,346 2,409
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,413 2,424
------ ------
Total property, plant, and equipment, net......... $4,759 $4,833
====== ======
</TABLE>
6. INVENTORIES
Inventories at June 30, 1998, and December 31, 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------ --------
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C>
Materials and supplies...................................... $16 $16
Gas in storage.............................................. 3 25
--- ---
$19 $41
=== ===
</TABLE>
Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
7. RECENT PRONOUNCEMENTS
Pensions and Other Postretirement Benefits Disclosures
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of obligations under
those plans. The standard is effective for fiscal years beginning after December
15, 1997. The Company is currently evaluating the effects of this pronouncement.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance for
accounting of such costs, and also defines internal-use computer software. It is
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the effects of this pronouncement.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. It is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
effects of this pronouncement.
10
<PAGE> 13
Accounting for Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for the changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The standard is effective for all fiscal quarters beginning after
June 15, 1999. The Company is currently evaluating the effects of this
pronouncement.
Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisors, Investment Companies, and Municipal Securities Issuers
In August 1998, the SEC issued the Interpretive Release: Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers, which will be effective
for the Company's future SEC filings. The release provides guidance for Year
2000 disclosure primarily focusing on Management's Discussion and Analysis of
Financial Condition and Results of Operations, and supersedes Staff Legal
Bulletin No. 5. The Company is currently evaluating the effect of the release on
its current disclosure, which is set forth under Note 4, Commitments and
Contingencies.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim condensed consolidated and combined financial statements
and accompanying notes presented in Item 1 of this Form 10-Q.
CHANGE IN REPORTING ENTITY
In March 1998, EPMC exchanged all the common stock of EPMSC for
approximately 934,000 shares of Series C Preferred Stock of EPTPC for a total
value of $47 million. EPTPC, in turn, contributed the common stock of EPMSC to
TGP. This contribution resulted in a change in reporting entity as defined in
Accounting Principles Board Opinion No. 20, Accounting Changes, requiring a
restatement in order to show financial information for the new reporting entity
for all periods presented. The management's discussion and analysis of financial
condition and results of operations below is based on restated information for
the new reporting entity. See Note 1 of Item 1, Financial Statements for further
discussion.
RESULTS OF OPERATIONS
GENERAL
The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. The adoption of SFAS No. 131 did not cause the Company's
aggregation of business activities into segments to change from previously
reported periods. Operating revenues and expenses by segment include
intersegment sales and expenses which are eliminated in consolidation. For a
further discussion of the individual segments, see Note 3 of Item 1, Financial
Statements.
SEGMENT RESULTS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ -------- ------------ --------
CONSOLIDATED
(IN MILLIONS) CONSOLIDATED COMBINED AND COMBINED COMBINED
<S> <C> <C> <C> <C>
OPERATING INCOME
Regulated...................... $ 66 $ 72 $159 $152
Non-Regulated.................. (15) (20) (21) (44)
---- ---- ---- ----
Total operating
income............. $ 51 $ 52 $138 $108
==== ==== ==== ====
</TABLE>
Operating income for the quarter and six months ended June 30, 1998, was $1
million lower and $30 million higher, respectively, than for the same period of
1997. Variances by segment are presented below.
REGULATED OPERATIONS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
------------ -------- ------------ --------
(IN MILLIONS) CONSOLIDATED CONSOLIDATED COMBINED
COMBINED AND COMBINED
<S> <C> <C> <C> <C>
Operating revenues................ $ 179 $ 189 $ 390 $ 404
Operating expenses................ (113) (117) (231) (252)
----- ----- ----- -----
Operating income........ $ 66 $ 72 $ 159 $ 152
===== ===== ===== =====
</TABLE>
12
<PAGE> 15
Second Quarter 1998 Compared to Second Quarter 1997
Operating revenues for the quarter ended June 30, 1998, were $10 million
lower than for the same period of 1997 primarily because of a downward revision
in the amount of recoverable interest on GSR costs and lower throughput
resulting from milder temperatures in the northeastern and midwestern markets.
Operating expenses for the quarter ended June 30, 1998, were $4 million
lower than for the same period of 1997 primarily due to lower system fuel usage
associated with the decrease in throughput.
Six Months Ended 1998 Compared to Six Months Ended 1997
Operating revenues for six months ended June 30, 1998, were $14 million
lower than for the same period of 1997 primarily because of lower throughput
resulting from warmer average temperatures in the northeastern and midwestern
markets and a downward revision in the amount of recoverable interest on GSR
costs.
Operating expenses for the six months ended June 30, 1998, were $21 million
lower than for the same period of 1997 primarily due to lower system fuel usage
associated with the decrease in throughput attributable to milder temperatures
in the northeast and midwest in the first four months of 1998. Lower labor and
related costs in the first quarter of 1998 also contributed to the decrease in
expenses.
NON-REGULATED OPERATIONS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
------------ -------- ------------ --------
CONSOLIDATED COMBINED
(IN MILLIONS) CONSOLIDATED COMBINED AND COMBINED
<S> <C> <C> <C> <C>
Gathering and treating margin............. $ 4 $ 2 $ 7 $ 4
Processing margin......................... -- -- 1 3
Natural gas and petroleum marketing
margin.................................. (8) (2) (2) (7)
Power margin.............................. 12 -- 19 --
---- ---- ---- ----
Total gross margin.............. 8 -- 25 --
Other revenues............................ 9 3 24 3
Operating expenses........................ (32) (23) (70) (47)
---- ---- ---- ----
Operating loss.................. $(15) $(20) $(21) $(44)
==== ==== ==== ====
</TABLE>
Second Quarter 1998 Compared to Second Quarter 1997
Total gross margin (revenue less cost of sales) for the quarter ended June
30, 1998, was $8 million higher than for the same period of 1997. The increase
in the power margin was primarily attributable to the net increase in the market
value of open power contracts due to price volatility (significant swings in
power prices upward or downward) in the last half of June. Power price
volatility is expected to continue during the third quarter of 1998. The
decrease in the natural gas margin was primarily attributable to the net losses
on open natural gas contracts. Low natural gas margins may continue to have a
negative impact on the Company's natural gas results.
Other revenues for the quarter ended June 30, 1998, were $6 million higher
than for the same period of 1997. The increase was due primarily to
consolidation for financial reporting purposes of the EMA Power project in July
1997.
Operating expenses for the quarter ended June 30, 1998, were $9 million
higher than for the same period of 1997 primarily due to the cost related to the
EMA Power project and higher international project development costs reflecting
an increase in project-related activities partially offset by lower costs due to
the marketing reorganization in 1997.
13
<PAGE> 16
Six Months Ended 1998 Compared to Six Months Ended 1997
Total gross margin (revenue less cost of sales) for the six months ended
June 30, 1998, was $25 million higher than for the same period of 1997. The
increase in the power margin was primarily attributable to the income
recognition from a long-term power contract closed during the first quarter and
the net increase in the market value of open power contracts due to price
volatility in the last half of June. Power price volatility is expected to
continue during the third quarter of 1998. The decrease in the natural gas
margin was primarily attributable to the net losses on open natural gas
contracts. Low natural gas margins may continue to have a negative impact on the
Company's natural gas results.
Other revenues for the six months ended June 30, 1998, were $21 million
higher than for the same period of 1997. The increase was due primarily to
consolidation for financial reporting purposes of the EMA Power project in July
1997.
Operating expenses for the six months ended June 30, 1998, were $23 million
higher than for the same period of 1997 primarily due to costs related to the
EMA Power project and higher international development costs reflecting an
increase in project-related activities partially offset by lower costs due to
the marketing reorganization.
OTHER INCOME AND EXPENSE
Second Quarter 1998 Compared to Second Quarter 1997
Other expenses for the quarter ended June 30, 1998, were flat compared to
the same period of 1997. Interest expense was higher due to an increase in
short-term borrowing offset by gains on the sale of assets, higher allowance of
funds used during construction, and additional earnings from equity investments.
The second quarter of 1997 also included earnings from notes receivable with
EPTPC which were settled at year end 1997.
Six Months Ended 1998 Compared to Six Months Ended 1997
Other expenses for the six months ended June 30, 1998, were $22 million
higher than for the same period of 1997. Interest expense was higher due to an
increase in long-term and short-term borrowings offset by increased earnings
from equity investments, gains on the sale of assets, and higher allowance of
funds used during construction. The six months ended 1997 also included earnings
from notes receivable with EPTPC which were settled at year end 1997.
INCOME TAX EXPENSE
Second Quarter 1998 Compared to Second Quarter 1997
The effective tax rate for the quarter ended June 30, 1998, was lower than
the rate for the same period of 1997 primarily due to lower state income taxes.
Six Months Ended 1998 Compared to Six Months Ended 1997
The effective tax rate for the six months ended June 30, 1998, was lower
than the rate for the same period of 1997 primarily due to lower state income
taxes.
14
<PAGE> 17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains 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 the 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 may
identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to acquisitions, including EPG's
acquisition of the Company, political and economic risks associated with current
and future operations in foreign countries, conditions of the equity and other
capital markets during the periods covered by the forward-looking statements,
and other risks, uncertainties and factors, including the effect of the year
2000 date change, discussed more completely in the Company's other filings with
the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, in addition to
the interim consolidated financial statements and accompanying notes presented
in Items 1 and 2 of this Form 10-Q.
There have been no material changes in market risks faced by the Company
from those reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
15
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned, TGP, 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 TGP 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 TGP and its consolidated subsidiaries.
b. Reports on Form 8-K
None
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENNESSEE GAS PIPELINE COMPANY
Date: August 14, 1998 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President
(Chief Financial Officer)
Date: August 14, 1998 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
statements of income and consolidated balance sheets.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 876
<ALLOWANCES> 0<F1>
<INVENTORY> 19
<CURRENT-ASSETS> 1,451
<PP&E> 4,759
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 6,633
<CURRENT-LIABILITIES> 1,793
<BONDS> 976
0
0
<COMMON> 0
<OTHER-SE> 1,937
<TOTAL-LIABILITY-AND-EQUITY> 6,633
<SALES> 0
<TOTAL-REVENUES> 2,579
<CGS> 0
<TOTAL-COSTS> 2,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 114
<INCOME-TAX> 37
<INCOME-CONTINUING> 77
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Not separately identified in the consolidated financial statements or
accompanying notes thereto.
</FN>
</TABLE>
