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UNITED STATES
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, 1997
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)
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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
7 1/2% Debentures due 2017............................... New York Stock Exchange
7% Debentures due 2027................................... New York Stock Exchange
7 5/8% Debentures due 2037............................... New York Stock Exchange
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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 16, 1998.
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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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......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Risk Factors -- Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995............................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 15
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 44
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......................................................... 44
Signatures.................................................. 46
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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:
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DEFINITION
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ALJ............................... Administrative Law Judge
BBtu(/d).......................... Billion British thermal units per day
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
EPECC............................. El Paso Energy Credit Corporation, known as Tenneco Credit
Corporation before the Merger
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)
NGL(s)............................ Natural gas liquids
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)
PLN............................... Perugahaan Listrilc Negara, the Indonesian government owned
electric utility
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
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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 natural gas transmission segment is comprised of three interstate
pipeline systems: the TGP system, the Midwestern system, and the East Tennessee
system, collectively referred to as the Interstate System. The Interstate System
totals approximately 16,300 miles of transmission pipeline.
The TGP system. The TGP system consists of approximately 14,800 miles of
pipeline with a design capacity of 5,490 MMcf/d. During 1997, TGP transported
natural gas volumes averaging 87 percent of its capacity. The TGP system serves
the northeast section of the U.S., including the New York City and Boston
metropolitan areas. The multiple-line system begins in the gas-producing regions
of Texas and Louisiana, including the Gulf of Mexico.
The Midwestern system. The Midwestern system consists of approximately 400
miles of pipeline with a design capacity of 680 MMcf/d. During 1997, Midwestern
transported natural gas volumes averaging approximately 65 percent of its
capacity. The Midwestern system extends from a connection with the TGP system at
Portland, Tennessee, to Chicago and principally serves the Chicago metropolitan
area.
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The East Tennessee system. The East Tennessee system consists of
approximately 1,100 miles of pipeline with a design capacity of 630 MMcf/d.
During 1997, East Tennessee transported natural gas volumes averaging
approximately 51 percent of its capacity. The East Tennessee system serves the
states of Tennessee, Virginia and Georgia and connects with the TGP system in
Springfield and Lobelville, Tennessee.
Other. The Company owns a 17.8 percent interest in the Portland Natural Gas
Transmission ("Portland") system which is developing a 292-mile interstate
natural gas pipeline with a projected capacity of 178 MMcf/d extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. Portland
received its FERC certificate in September 1997, and is now awaiting approval
from Canada's National Energy Board. Targeted completion is November 1998, at an
estimated total cost of $366 million.
From time to time the Company holds open seasons in an effort to capitalize
on pipeline expansion opportunities. Currently, TGP has announced the Eastern
Express Project 2000 which will provide gas transportation for the growing
markets in the northeast and mid-Atlantic regions of the United States. TGP has
also announced the Express 500 Expansion Project which is being designed to meet
the growing gas transportation demands in the Gulf of Mexico caused by the
significant increases in deepwater production. The projects are designed to
provide service to their markets beginning in the years 2000 and 1999,
respectively.
Regulatory Environment
The 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 initiated 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 provided to gas owned by themselves.
FERC's stated purpose was to ensure that the pipelines' monopoly over the
transportation of natural gas did not distort the competition in 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 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. Such procedures were
established in Order Nos. 500, 528 and 636, in the last of which 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.
In December 1994, TGP filed for a general rate increase with FERC and in
April 1996, it filed a 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. 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 that order. One party, a competitor of TGP, filed with the
Court of Appeals a Petition for Review of the FERC orders.
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For a further discussion of regulatory matters related to TGP, see Note 5
of Item 8, Financial Statements and Supplementary Data.
Markets and Competition
The Interstate System faces varying degrees of competition from alternative
energy sources, such as electricity, hydroelectric power, 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 change in gas demand as a result of such restructuring.
Customers of TGP include natural gas producers, marketers and end-users, as
well as other gas transmission and distribution companies, none of which
individually represents more than 10 percent of revenues on TGP's system.
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. TGP is actively pursuing the renegotiation,
extension and/or replacement of these contracts. Although TGP cannot predict how
much capacity will be resubscribed, a majority of the expiring contracts cover
service to northeastern markets, where there is currently little excess
capacity. Several projects, however, have been proposed to deliver incremental
volumes to these markets.
In a number of key markets, TGP 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 among pipelines is particularly intense in TGP's
supply areas, Louisiana and Texas. In some instances, TGP has had to discount
its transportation rates in order to maintain market share. The renegotiation of
TGP's expiring contracts may be impacted by the foregoing competitive factors.
NON-REGULATED OPERATIONS
Field and Merchant Services
Certain subsidiaries of EPTPC 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 merchant service business markets and trades natural gas, NGLs, power,
crude and refined products, and participates in the development and ownership of
domestic power generation projects. In the fourth quarter of 1997 and for the
year, the Company marketed physical and financial gas volumes of over 9,500
BBtu/d and 6,600 BBtu/d, respectively.
The Company provides a broad range of energy products and services,
including supply aggregation, as well as transportation management and
integrated price risk management. The Company maintains a diverse natural gas
supplier and customer base serving producers, utilities (including local
distribution companies and power plants), municipalities, and a variety of
industrial and commercial end users. In 1997, the Company served over 400
producers/suppliers and approximately 2,000 sales customers in 26 states with
transportation of gas supplies on 65 pipelines.
Demand for natural gas products and services has primarily resulted from
the effects of FERC Order No. 636, the commercialization of natural gas, and the
intense competition within the industry. Volatility in the physical and
financial gas markets has compounded the effects of these changes creating
greater service opportunities.
In the course of business, the Company trades and develops a market in
natural gas in both the physical and financial markets, and purchases or sells
swaps and options in the over-the-counter financial markets with major energy
merchants. The Company seeks to maintain a balanced portfolio of supply and
demand contracts
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and utilizes the New York Mercantile Exchange and over-the-counter financial
markets to manage price and basis risk which may affect those obligations. To
support these activities, the Company employs centralized corporate risk
management and trading strategies. For additional information regarding the use
of financial instruments, see Item 7A, Quantitative and Qualitative Disclosures
About Market Risk and Note 4 of Item 8, Financial Statements and Supplementary
Data.
The Company entered into a development agreement with Power Development
Company to jointly develop a natural gas-fired combined cycle electric
generation facility in Agawam, Massachusetts. The facility will have a normal
capacity of approximately 270 MWs. In December 1997, the entity that will own
and operate the plant completed non-recourse project financing which includes a
$50 million equity bridge loan and a 24-month $150 million construction loan. At
completion of construction, the Company will make its equity contribution of up
to $50 million, representing a 90 percent equity interest in the joint venture,
and the construction loan will convert to a 17-year $150 million term loan.
Construction of the facility began in December 1997 and it is scheduled to
commence operations in December 1999. The Company will be responsible for the
procurement and transportation of supplies of natural gas to fuel the project
and the marketing of the electric power that the plant produces. The Company is
also pursuing the development of domestic power generation facilities.
In its continued efforts to expand its power marketing and merchant
activities, the Company formed El Paso Power Services in February 1998. El Paso
Power Services will focus on helping electric utilities, non-utility and
merchant generators, fuel suppliers, and large industrial concerns achieve lower
costs in the transition to a competitive marketplace.
The merchant services business operates in a highly competitive environment
where its primary competitors include: (i) marketing affiliates of major oil and
gas producers; (ii) marketing affiliates of large local distribution companies;
(iii) marketing affiliates of other interstate and intrastate pipelines; and
(iv) independent energy marketers with varying scopes of operations and
financial resources. The Company competes on the basis of price, access to
production, imbalance management, and experience in the marketplace.
The Company's natural gas gathering and processing business provides
natural gas gathering, products extraction, dehydration, compression and
intrastate transmission services. The Company owns or has interest in
approximately 200 miles of gathering systems and approximately 1,300 miles of
intrastate transmission pipeline. In addition, the Company owns or has interest
in 7 natural gas processing facilities.
As of December 31, 1997, the gathering and transportation capacity was
1,300 MMcf/d which reflects the Company's net ownership, excluding entities
accounted for under the equity method, and is subject to increases or decreases
depending on operating pressures and point of delivery into or out of the
system. Average volume for the year ended December 31, 1997 was 440 BBtu/d.
As of December 31, 1997, the inlet capacity at the Company's net ownership
percentage in the processing facilities is approximately 200 MMcf/d. Average
inlet volume and average NGLs sales for the year ended December 31, 1997 are 101
BBtu/d and 167 Mgal/d, respectively.
The Company's natural gas gathering and processing business operates in a
highly competitive environment that includes independent gathering and
processing companies, intrastate pipeline companies, gas marketers, and oil and
gas producers. The Company competes for throughput primarily based on price,
efficiency of facilities, gathering system line pressures, availability of
facilities near drilling activity, service, and access to favorable downstream
markets.
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.
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International and Other Energy-Related Business
The Company has 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.
Acquisitions and greenfield development projects are subject to a higher
level of commercial and financial risk in foreign countries. Accordingly the
Company has adopted a risk mitigation plan to reduce the risk to more acceptable
and manageable levels. The Company's practice is to select experienced partners
with a history of success in commercial operations. Selected partners will
generally be chosen based on the complementary competencies which they offer to
the various joint ventures formed or to be formed. The Company designs and
implements a formal due diligence plan on every project it pursues and contracts
are negotiated to secure fuel source, manage operation and maintenance costs
and, when possible, index revenues to the U.S. dollar. The Company will obtain
political risk insurance when deemed appropriate, through the Overseas Private
Investment Corporation, the Multilateral Investment Guarantee Agency, or some
other private insurer.
Bolivia to Brazil Pipeline -- The Company is part of a consortium that is
constructing a 2,000 mile pipeline from Santa Cruz, Bolivia to Sao Paulo,
Brazil, with a southern lateral to Porto Alegre, Brazil. The Pipeline will
transport natural gas to the largest unserved market in the western hemisphere
(approximately 100 million people). The pipeline is expected to be in service by
the first quarter of 1999. The Company's interest in the project will be
approximately 10 percent.
EMA Power -- In June 1997, the Company purchased a 50 percent controlling
interest in an operating 70 MW power plant located in Danaujvaros, Hungary. The
electricity generated at the plant is consumed by Dunafer Kft., the largest
steel mill in Hungary. The acquisition agreement requires the Company to
evaluate and, if deemed economically feasible, to expand the electric generating
plant to 140 MW. The feasibility study is underway.
Australian Pipelines -- The Company owns a 30 percent interest in the
Moomba to Adelaide
transmission system, a 483-mile natural gas pipeline in southern Australia and
the Ballera to Wallumbilla transmission system, a 470-mile natural gas pipeline
in southwestern Queensland. Both pipelines were operational in 1997. The
Company's joint venture has been selected to construct the 270 mile expansion
project on the Dampier-to-Bunburry natural gas pipeline in western Australia.
The expansion project is expected to commence operations in the third quarter of
1999.
Sengkang Project -- The Company has a 50 percent interest in a producing
500 Bcf gas field and a 47.5 percent interest in a 135 MW power generating plant
in Sengkang, South Sulawesi, Indonesia. The electricity produced by the power
plant is sold to PLN, the national electric utility, pursuant to a long-term
power purchase agreement. The power plant began simple cycle commercial
operation in September 1997, making it one of the first independent power plants
to operate in Indonesia. Combined cycle completion is expected in the third
quarter of 1998. For a discussion on the devaluation of the Indonesian Rupiah,
see Note 5 of Item 8, Financial Statements and Supplementary Data.
Other Projects
The Company owns interests in three operating domestic power generation
plants consisting of 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 with a combined capacity of 220 MW of power
generation.
OTHER
As a result of the Merger, the Company holds certain limited assets and is
responsible for certain liabilities of existing and discontinued operations and
businesses. The liabilities were approximately
$600 million at the time of the Merger.
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EPECC, 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 current and
former operating sites. As of December 31, 1997, the Company had a reserve of
approximately $253 million for the following environmental contingencies which
the Company anticipates incurring through 2027: (i) expected remediation costs
and associated onsite, offsite and groundwater technical studies of
approximately $226 million; and (ii) other costs of approximately $26 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.
EMPLOYEES
The Company had approximately 1,700 full-time employees on December 31,
1997. The Company has no collective bargaining arrangements. Since December 31,
1996, the Company has reduced its workforce by approximately 1,100 employees as
a result of a program to streamline operations and reduce operating costs. No
significant changes in the workforce have occurred since December 31, 1997.
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
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 (CERCLA) cost recovery action, United States v.
Atlantic Richfield Co., et al, against fourteen companies including TGP, EPTPC,
EPEC Corp., EPEC Polymers, Inc. and the recently dissolved Petro-Tex Chemical
Corp., 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
Corp. arranged for disposal of hazardous substances at Sikes. TGP, EPTP, EPEC
Corp. 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. Although
factual investigation relating to Sikes is in very preliminary stages, the
Company believes that the amount of material disposed at Sikes from the Tenneco
Chemicals, Inc. or Petro-Tex Chemical Corp. facilities, if any, was small,
possibly de minimis. However, the government plaintiffs have alleged that the
defendants are each jointly and
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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 can not be predicted with
certainty, management does not expect this matter to have a material adverse
effect on the Company's financial position or result of operations.
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 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. 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 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 therefore. In March 1997, the Company declared and paid a $889 million
cash dividend to EPTPC and in December 1997, the Company declared and paid a
$1,083 million non-cash dividend to EPTPC which was used to offset a $1,083
million note receivable from EPTPC.
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 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 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 Consolidated and Combined Statements of Income.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996
---------------- ---------------
(IN MILLIONS) POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Transportation revenue................................... $728 $712
Other revenue............................................ 70 85
---- ----
Operating revenue.............................. 798 797
Operating expenses....................................... 494 544
---- ----
Operating income......................................... $304 $253
==== ====
</TABLE>
Operating revenue for the year ended December 31, 1997, were $1 million
higher than for the same period of 1996 primarily due to new system rates on TGP
which went into effect November 1, 1996. The increase was offset by the loss of
revenues associated with the sale of the Bastian Bay assets whose revenues are
included in the 1996 total.
Operating expenses for the year ended December 31, 1997, were $50 million
lower than for the same period of 1996, primarily due to lower labor and benefit
costs attributable to a reduction in staffing levels which occurred throughout
the latter half of 1996 and the first quarter of 1997, as well as lower legal
costs and
9
<PAGE> 13
operating and maintenance costs. The decrease in operating expenses was
partially offset by an increase in depreciation expense as a result of the
amortization of additional acquisition cost assigned to utility plant, as well
as new lower fuel retention rates starting in the second quarter of 1997.
Non-Regulated Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996
---------------- ---------------
(IN MILLIONS) POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C>
Gathering and treating margin............................ $ 12 $ 12
Processing margin........................................ 3 5
Marketing margin......................................... 28 13
Other.................................................... 18 136
---- ----
Total gross margin............................. 61 166
Operating expenses....................................... 102 237
---- ----
Operating loss........................................... $ 41 $ 71
==== ====
</TABLE>
Total gross margin and operating expenses were both lower for the year
ended December 31, 1997, than for the same period of 1996 primarily due to the
discontinuance of EPECC commercial activities and the sale of certain businesses
in the fourth quarter of 1996 whose revenues and expenses are included in the
1996 amounts. These sales included the Company's oil and gas exploration,
production and financing unit, formerly known as Tenneco Ventures, and 70
percent of the Company's interests in two natural gas pipeline systems in
Australia. Following the sale, the Australian natural gas pipelines operations
were accounted for by the equity method. The increase in marketing margin is
associated with generally higher volumes from the assignment of contracts in the
third quarter of 1997 and higher industry-wide gas marketing margins in the
third and fourth quarters of 1997. Partially offsetting this increase was lower
marketing margins in the second quarter associated with lower industry-wide gas
margins, as well as extreme market volatility which negatively impacted natural
gas marketing activities and trading positions during the first quarter. In
addition, partially offsetting the decline in total gross margin was the
consolidation during the third quarter of 1997 of the EMA Power project
described in Note 9.
OTHER (INCOME) AND EXPENSE
Other expense for the year ended December 31, 1997, was $49 million higher
than for the same period of 1996. The increase was due primarily to the
recognition of a gain on the sale of the Company's 50 percent general
partnership interest in Tenneco Mobile Bay Gathering Co., in February 1996, a
reduction in equity income from unconsolidated subsidiaries in 1997, a favorable
legal settlement in the second quarter of 1996, an increase in interest and debt
expense, and a decrease in interest income in 1997, offset by a loss on sale of
assets during the third quarter 1996.
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 for 1996 and 11.4 percent for
1995. Total pre-tax interest expense allocated to Old Tenneco's former
non-energy operations was $45 million in 1996 and $60 million in 1995. 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
10
<PAGE> 14
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 1997 was $88 million compared to $68 million for
1996. The effective tax rate was 35 percent and 30 percent for 1997 and 1996,
respectively. The effective tax rate for 1996 was lower than 1997 primarily
because of the reversal of a $21 million valuation allowance for deferred tax
assets. For additional discussion of income taxes, see Note 7 of Item 8,
Financial Statements and Supplementary Data.
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
RISK FACTORS -- 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 three years, principally in November
2000) could be adversely affected by the proposed construction by other
parties of additional pipeline capacity in the Northeast U.S., the
viability of the Company's expansion projects, 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 or if one of its counterparties fails to perform
under a contract. For additional information concerning the Company's
derivative financial instruments, see Item 7A, Quantitative and Qualitative
Disclosures About Market Risks and Note 4 of Item 8, Financial Statements
and Supplementary Data.
12
<PAGE> 16
ACQUISITIONS AND INVESTMENTS
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of such acquisitions
and joint ventures within and outside the U.S. may be subject to 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, wars, insurrection and
other political risks, and the effects of currency fluctuations and
exchange controls (such as the recent devaluation of the Indonesian
currency and other economic problems.) Such legal and regulatory events and
other unforeseeable obstacles may be beyond the Company's control or
ability to manage.
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 TGP, 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 could 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.
POTENTIAL FEDERAL INCOME TAX LIABILITIES
In connection with the Merger and Distributions, the IRS issued a
private letter ruling to Old Tenneco, in which it 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 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.
FINANCING 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 credit ratings.
13
<PAGE> 17
YEAR 2000
While the Company is taking steps, including the assessment,
remediation, testing and implementation of changes to applications,
hardware and software, to mitigate any adverse effects of the Year 2000
date change on its customers and business operations, the failure of
third-party entities to achieve Year 2000 compliance may adversely effect
the Company. For additional information of the Company's Year 2000
Strategy, see Note 5 of Item 8, Financial Statements and Supplementary
Data.
14
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities and interest and foreign
currency exchange rates. The Company's primary market risk exposure is changing
commodity prices. The Company's policy is to manage commodity price risk through
a variety of financial instruments, which are entered into for trading purposes
and include forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipts from)
counterparties based on the differential between a fixed and variable price for
the commodity, options, and other contractual arrangements.
The table below presents market value of commodity contracts and the
hypothetical loss of future earnings the Company would incur on such commodity
contracts should commodity prices fluctuate by 10 percent of their respective
market values as of December 31, 1997:
<TABLE>
<CAPTION>
GAIN (LOSS) FROM
10% CHANGE
MARKET VALUE IN
OF COMMODITY COMMODITY
COMMODITY TYPE CONTRACTS PRICES
-------------- ------------ ----------------
(IN MILLIONS)
<S> <C> <C>
Natural gas................................................. $ 26 $ (1)
Power....................................................... (2) 1
Petroleum products.......................................... (1) (1)
</TABLE>
The Company had no derivative financial instruments except for energy
commodity contracts disclosed above at December 31, 1997.
For a further discussion, see Note 4 of Item 8, Financial Statements and
Supplementary Data.
15
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TENNESSEE GAS PIPELINE COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------------- ------ ------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Operating revenue:
Natural gas and liquids................................... $2,799 $1,757 $1,116
Transportation............................................ 702 681 664
Gathering and processing.................................. 12 40 15
Other..................................................... 89 230 191
------ ------ ------
3,602 2,708 1,986
------ ------ ------
Operating expense:
Cost of gas and other products............................ 2,743 1,745 1,068
Operation and maintenance................................. 399 494 481
Finance charges........................................... -- 62 79
Depreciation, depletion and amortization.................. 143 164 170
Taxes, other than income taxes............................ 54 60 63
------ ------ ------
3,339 2,525 1,861
------ ------ ------
Operating income............................................ 263 183 125
------ ------ ------
Other (income) and expense:
Interest and other debt expense........................... 91 41 65
Gain on sale of assets, net............................... -- (3) (11)
Other, net................................................ (82) (78) (105)
------ ------ ------
9 (40) (51)
------ ------ ------
Income before income taxes.................................. 254 223 176
Income tax expense.......................................... 88 68 12
------ ------ ------
Income before extraordinary loss............................ 166 155 164
Extraordinary loss, net of income tax....................... -- (108) --
------ ------ ------
Net income.................................................. $ 166 $ 47 $ 164
====== ====== ======
</TABLE>
The accompanying Notes are an integral part of these Consolidated and Combined
Financial Statements.
16
<PAGE> 20
TENNESSEE GAS PIPELINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------ ------
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments....................... $ 19 $ 14
Accounts and notes receivable, net
Customer............................................... 635 460
Affiliated companies................................... 295 175
Other.................................................. 197 326
Inventories............................................... 26 42
Deferred income tax benefit............................... 100 67
Assets from commodity price risk management activities.... 96 --
Regulatory assets......................................... 116 202
Other..................................................... 61 16
------ ------
Total current assets.............................. 1,545 1,302
------ ------
Plant, property and equipment, net.......................... 4,822 3,945
Investment in affiliated companies.......................... 173 322
Other....................................................... 155 162
------ ------
Total assets...................................... $6,695 $5,731
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term borrowings (including current maturities on
long-term debt)........................................ $ 425 $ 15
Accounts payable
Trade.................................................. 682 578
Affiliated companies................................... 99 --
Other.................................................. 84 --
Note payable to EPG....................................... 125 170
Accrual for regulatory issues............................. -- 167
Liabilities from commodity price risk management
activities............................................. 73 --
Other..................................................... 440 349
------ ------
Total current liabilities......................... 1,928 1,279
------ ------
Long-term debt, less current maturities..................... 976 1,005
------ ------
Deferred income taxes....................................... 1,152 774
------ ------
Postretirement benefits..................................... 285 309
------ ------
Deferred credits and other liabilities...................... 510 307
------ ------
Minority interest........................................... 25 --
------ ------
Commitments and contingencies (See Note 5)
Stockholder's equity:
Common stock, par value $5 per share; authorized 300
shares; issued 208 shares.............................. -- --
Additional paid-in capital................................ 1,826 2,625
Retained earnings......................................... -- --
Cumulative translation adjustment......................... (7) --
Notes receivable from EPTPC............................... -- (568)
------ ------
Total stockholder's equity............................. 1,819 2,057
------ ------
Total liabilities and stockholder's equity............. $6,695 $5,731
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
17
<PAGE> 21
TENNESSEE GAS PIPELINE COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------------ ------- -----
POST- PRE-
ACQUISITION ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 166 $ 47 $ 164
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation, depletion and amortization.................. 143 217 196
Undistributed earnings in equity investments.............. (2) 13 (12)
Deferred income taxes (benefit)........................... 194 (2) 47
Net gain on sale of assets................................ -- (3) (11)
Extraordinary loss, net of tax............................ -- 108 --
Cash paid for interest allocated to affiliates, net of
tax.................................................... -- (29) (39)
Net take-or-pay recoveries................................ -- 3 36
Changes in components of working capital --
Accounts and notes receivable.......................... (190) (97) 246
Inventories............................................ 13 (11) --
Other current assets................................... (63) 15 8
Net commodity price risk management activities......... (23) -- --
Accounts payable....................................... 268 (3) (135)
Accrual for regulatory issues.......................... (146) 32 (156)
Other current liabilities.............................. (57) (72) (116)
Decrease in long-term notes and other receivables (net)... -- 455 332
Other..................................................... (44) (436) (83)
----- ------- -----
Net cash provided by operating activities......... 259 237 477
----- ------- -----
Cash flows from investing activities
Capital expenditures...................................... (126) (323) (337)
Investment in joint ventures and equity investees......... (46) (41) (241)
Net proceeds from sale of assets.......................... 6 465 17
Increase in notes receivable with affiliate............... -- (568) --
Net change in other affiliated advances................... (35) (175) --
Collection of note receivable from partnership............ 53 -- --
Investment in annuity..................................... (40) -- --
Other..................................................... 4 (8) 24
----- ------- -----
Net cash used in investing activities............. (184) (650) (537)
----- ------- -----
Cash flows from financing activities:
Net increase in short-term debt excluding current
maturities on long-term debt........................... -- 10 19
Increase (decrease) in note payable to affiliate.......... (45) 170 --
Issuance of other long-term debt.......................... 883 310 --
Retirement of long-term debt.............................. (15) (1,560) (478)
Dividend to EPTPC......................................... (889) -- --
Net (increase) decrease in capitalized notes and advances
with affiliate......................................... -- 423 (239)
Net cash contributions from affiliates.................... -- 769 954
Other..................................................... (4) -- --
----- ------- -----
Net cash used in (provided by) financing
activities...................................... (70) 122 256
----- ------- -----
Increase (decrease) in cash and temporary cash
investments............................................... 5 (291) 196
Cash and temporary cash investments, at beginning of
period.................................................... 14 305 109
----- ------- -----
Cash and temporary cash investments, at end of period....... $ 19 $ 14 $ 305
===== ======= =====
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
18
<PAGE> 22
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 CUMULATIVE NOTES
--------------- PAID-IN RETAINED TRANSLATION RECEIVABLE COMBINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT FROM EPTPC EQUITY EQUITY
------ ------ ---------- -------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 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 affiliates,
net................................ 954 954
Noncash distributions 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 affiliates,
net................................ 769 769
Noncash contributions from 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
Notes receivable from EPTPC........... (568) (568)
Push down of long-term debt to be
refinanced at TGP.................. (900) (900)
---- ------ ------ ------ ------ ------- ------- -------
December 31, 1996 Post-Acquisition
Consolidated.......................... 208 -- 2,625 -- -- (568) -- 2,057
Net income............................ 166 166
Increase in note receivable from
EPTPC.............................. (515) (515)
Cash dividend to EPTPC................ (841) (48) (889)
Dividend of note receivable from
parent............................. (965) (118) 1,083 --
Translation adjustment................ (7) (7)
Refinancing of push down long-term
debt............................... 900 900
Acquisition adjustment to record
assets and liabilities at fair
value.............................. 107 107
---- ------ ------ ------ ------ ------- ------- -------
December 31, 1997 Post-Acquisition
Consolidated.......................... 208 $ -- $1,826 $ -- $ (7) $ -- $ -- $ 1,819
==== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The accompanying Notes are an integral part of these
Consolidated and Combined Financial Statements.
19
<PAGE> 23
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. 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 was 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 its revolving credit and competitive advance facility (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 it 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 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.
20
<PAGE> 24
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 includes 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 was allocated to the
property, plant and equipment of the Company's interstate pipeline systems. An
independent appraisal of the fair value of the property acquired was completed
in 1997. In addition, the Company made adjustments during 1997 to other
components of the preliminary purchase price allocation relating to regulatory,
tax, environmental or other issues based upon changes in the Company's
preliminary assumptions or analysis. 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 was "pushed down" to TGP at December 31, 1996.
The Consolidated Balance Sheets of TGP and subsidiaries as of December 31,
1997, and 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 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
21
<PAGE> 25
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned and controlled subsidiaries of the Company after the elimination
of all significant intercompany accounts and transactions. Investments in
companies where the Company has the ability to exert significant influence over
operating and financial policies are accounted for using the equity method. The
financial statements for previous periods include certain reclassifications that
were made to conform to the current presentation. Such reclassifications have no
impact on reported net income or stockholders' equity, except for the
reclassifications of notes receivable from EPTPC which is discussed below.
Notes Receivable from EPTPC
During the third quarter of 1997, management determined that a dividend
from TGP to EPTPC would most likely be the source of funds to settle the notes
receivable with EPTPC. Accordingly, these notes receivable were reclassified as
a reduction of stockholder's equity. To conform to current presentation, the
1996 balance of these notes receivable were also reclassified to stockholder's
equity. These notes receivable were settled in December 1997 from funds EPTPC
received from TGP as a dividend.
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 that exist 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 have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, which may differ from
those accounting methods 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 a volumetric surcharge; 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 the Company's regulated
business fail to qualify under these accounting principles, an amount would be
charged to earnings as an extraordinary item in accordance with SFAS No. 101,
Regulated Enterprises -- Accounting for Discontinuation of Application of SFAS
No. 71. At December 31, 1997, this amount was estimated to be approximately $15
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 collect the rates set thereby.
22
<PAGE> 26
Cash and Temporary Investments
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts and Notes Receivable
The Company has established a provision for losses on accounts and notes
receivable, as well as for gas imbalances due from shippers and operators, which
may become uncollectible. Collectibility is reviewed regularly, and the
allowance is adjusted as necessary primarily under the specific identification
method. The balances of this provision at December 31, 1997 and 1996, were $12
million and $45 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 settled in cash or made
up in-kind.
Inventories
Inventories, consisting of materials and supplies and gas in storage, are
valued at the lower of cost or market with cost determined using the average
cost method.
Property, Plant, and Equipment
Included in the Company's property, plant, and equipment is construction
work in progress of approximately $148 million and $110 million at December 31,
1997, and 1996, respectively. An allowance for both debt and equity funds used
during construction of regulated projects 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
1 percent to 4 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.
Additional acquisition cost assigned to utility plant represents the excess
of allocated purchase costs over historical costs that resulted from the
December 1996 acquisition by EPG of EPTPC. These costs are being amortized on a
straight-line basis over the estimated useful life of the properties.
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, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
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 and include
estimates of associated legal costs. All available evidence is considered
including prior experience in remediation of contaminated sites, other
companies' clean-up
23
<PAGE> 27
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 balance sheets at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when recovery is assured, are recorded and reported separately from the
associated liability in the consolidated financial statements as a regulatory
asset.
Price Risk Management Activities
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities, interest rates, and foreign
currency exchange rates. In its commodity price risk management activities, the
Company engages in both trading and non-trading activities.
Activities for trading purposes consist of services provided to the energy
sector and are accounted for using the mark-to-market method of accounting. Such
trading activities are conducted through a variety of financial instruments,
including forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipts from)
counterparties based on the differential between a fixed and variable price for
the commodity, options, and other contractual arrangements.
Under mark-to-market accounting, financial instruments with third parties
are reflected at estimated market value, with resulting unrealized gains and
losses recorded in operating income in the Consolidated Statements of Income.
The net gains or losses recognized in the current period result primarily from
transactions originating within the period and the impact of price movements on
transactions originating in previous periods. The assets and liabilities
resulting from mark-to-market accounting are presented as assets from commodity
price risk management activities and liabilities from commodity price risk
management activities in the Consolidated Balance Sheets. Terms regarding cash
settlement of the contracts vary with respect to the actual timing of cash
receipts and payments. Receivables and payables resulting from these timing
differences are presented in accounts receivable, and accounts payable in the
Consolidated Balance Sheets. Cash inflows and outflows associated with these
price risk management activities are recognized in operating cash flow as the
settlements of transactions occur.
The market value of these financial instruments reflects management's best
estimate considering various factors including exchange and over-the-counter
quotations, time value and volatility factors underlying the commitments. The
values are adjusted to reflect the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under present
market conditions.
Derivative and other financial instruments are also utilized in connection
with non-trading activities. The Company enters into forwards, swaps, and other
contracts to hedge the impact of market fluctuations on assets, liabilities,
production, or other contractual commitments. Hedge accounting is applied only
if the derivative reduces the risk of the underlying hedge item, is designated
as a hedge at its inception, and is expected to result in financial impacts
which are inversely correlated to those of the item(s) being hedged. If
correlation ceases to exist, hedge accounting is terminated and mark-to-market
accounting is applied. Changes in market value of these transactions are
deferred until the gain or loss on the hedged item is recognized. If the hedged
item matures or is sold, the value of the derivative or other financial
instrument is recognized as a gain or loss in operating income in the
Consolidated Statements of Income. Cash inflows and outflows associated with
these price risk management activities are recognized in operating cash flow as
the settlements of transactions occur. See Note 4 for a further discussion of
the Company's price risk management activities.
Income Taxes
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
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
24
<PAGE> 28
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 or more, including TGP. EPTPC will continue to file a separate
consolidated U.S. federal income tax return subsequent to the Merger.
Capital Structure Reporting
The Company's capital structure is presented in accordance with the
Financial Accounting Standards Board SFAS No. 129, Disclosure of Information
about Capital Structure.
Recent Pronouncements
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
planning to adopt this statement in the first quarter of 1998.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This pronouncement
is effective for financial statements for periods beginning after December 15,
1997. The Company is planning to adopt this statement in the first quarter of
1998 and does not expect the number of reportable segments to change.
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 those plans. It
is effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the effect of this pronouncement.
25
<PAGE> 29
Other
In 1997, the Company adopted or applied the relevant provisions of SFAS No.
123, Accounting for Stock-Based Compensation SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, SFAS No. 128, Earnings per Share, SFAS No. 129, Disclosure of
Information about Capital Structure, the Securities and Exchange Commission's
Financial Reporting Release No. 48, Disclosure of Derivative and Other Financial
Instruments and Statement of Position No. 96-1, Environmental Remediation
Liabilities. The adoption or application of these pronouncements did not have a
material impact on the Company's financial position or results of operations.
3. FINANCING TRANSACTIONS
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 in 1996 (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 consisted 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 16 for information concerning debt
allocated to the Industrial Business and the Shipbuilding Business. The
long-term debt amounts at December 31, 1996 were adjusted to fair market value
in the application of purchase accounting, as discussed in Note 1, "Mergers and
Distributions."
26
<PAGE> 30
Long-term debt outstanding at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
(IN MILLIONS)
TGP
Debentures due 2011, average effective interest rate of
7.9% in 1997 and 15.1% in 1996....................... $ 75 $ 74
Debenture due 2017, average effective interest rate of
7.8% in 1997......................................... 295 --
Debenture due 2027, average effective interest rate of
7.2% in 1997......................................... 296 --
Debenture due 2037, average effective interest rate of
7.9% in 1997......................................... 293 --
El Paso Energy Credit Corporation
Senior notes due 1997 and 2001, average effective
interest rate of 6.0% in 1997 and 9.9% in 1996....... 15 30
Subordinated notes due 1998, average effective interest
rate of 6.5% in 1997 and 9.9% in 1996................ 7 7
Other Subsidiaries
Notes due 1997 through 2014, average effective interest
rate of 8.1% in 1997 and 7.6% in 1996................ 4 9
"Push down" of acquisition debt........................... -- 900
---- ------
985 1,020
Less current maturities................................ 9 15
---- ------
Total long-term debt................................... $976 $1,005
==== ======
</TABLE>
"Push Down" of Acquisition Debt
In March 1997, TGP issued net $883 million net of debt as described below
the proceeds of which were used to pay down the Credit Facility borrowings
assumed in the Merger. Due to this anticipated refinancing, $900 million of the
EPTPC debt assumed in the acquisition was "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>
1998.................................... $ 9
1999.................................... --
2000.................................... --
2001.................................... 15
2002.................................... --
Thereafter.............................. 961
----
Total long-term debt,
including current
maturities.................. $985
====
</TABLE>
In March 1997, TGP issued $300 million aggregate principal of 7 1/2%
debentures due 2017, $300 million aggregate principal of 7% debentures due 2027,
and $300 million aggregate principal of 7 5/8% debentures due 2037. Proceeds of
approximately $883 million, net of issuance costs, were used to repay a portion
of EPTPC's credit facility and for general corporate purposes. As a result of
such offering, TGP has approximately $100 million remaining under its February
1997 shelf registration.
In October 1997, EPG established a new $750 million 5-year revolving credit
and competitive advance facility and a new $750 million 364-day renewable
revolving credit and competitive advance facility (collectively, the "Revolving
Credit Facility"). TGP is also a party to the Revolving Credit Facility.
Initially, the interest rate will be a 32.5 basis point spread over LIBOR and
the spread will vary based on EPG's long-term debt credit rating. In connection
with the establishment of the Revolving Credit Facility, EPTPC's
27
<PAGE> 31
revolving credit facility was also terminated, and the outstanding balance of
$417 million was financed under the 5-year portion of the new Revolving Credit
Facility with TGP designated as the borrower.
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.
As of December 31, 1997, and 1996, the carrying amounts of certain
financial instruments held by the Company, including cash, cash equivalents,
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.
The following table reflects the carrying amount and estimated fair value
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
Long-term debt..................................... $985 $1,052 $1,020 $1,020
Other financial instruments:
Trading
Futures contracts............................... (3) (3) -- --
Option contracts................................ 3 3 -- --
Swap and forwards contracts..................... 23 23 -- --
</TABLE>
Trading Commodity Activities
The Company, through its merchant services business, offers integrated
price risk management services for trading purposes to the energy sector. These
services primarily relate to energy related commodities including natural gas,
power, NGLs, refined products and crude oil. The Company provides these services
through a variety of financial instruments including forward contracts involving
cash settlements or physical delivery of an energy commodity, swap contracts,
which require payments to (or receipt of payments from) counterparties based on
the differential between a fixed and variable price for the commodity, options
and other contractual arrangements. The Company recognized gross margin, of $28
million during 1997 arising from its trading activities.
The Company had no trading commodity activities during 1996 and no material
commodity hedging activities during 1996 or at December 31, 1996.
28
<PAGE> 32
The fair value of the financial instruments as of December 31, 1997, and
the average fair value of those instruments held during the year are set forth
below (amounts in millions):
<TABLE>
<CAPTION>
AVERAGE FAIR
VALUE FOR THE
YEAR ENDED
ASSETS LIABILITIES 12/31/97(A)
------ ----------- -------------
<S> <C> <C> <C>
Futures contracts.................................... $ 4 $ 7 $--
Option contracts..................................... 15 12 2
Swap and forward contracts........................... 77 54 18
</TABLE>
- ---------------
(a) computed using the net asset balance at each month end.
Notional Amounts and Terms
The notional amounts and terms of these financial instruments at December
31, 1997 are set forth below (natural gas and petroleum volumes in trillions of
British thermal unit equivalents, power volumes in millions of megawatt hours):
<TABLE>
<CAPTION>
FIXED PRICE FIXED PRICE MAXIMUM
PAYOR RECEIVER TERMS IN YEARS
----------- ----------- --------------
<S> <C> <C> <C>
Energy Commodities
Natural gas.................................. 4,079 3,584 20
Power........................................ 12 13 1
Petroleum products........................... 197 195 2
</TABLE>
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties. Accordingly, notional amounts are an
incomplete measure of the Company's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time based on the
Company's risk management needs and liquidity of the commodity market.
The volumetric weighted average maturity of the Company's entire portfolio
of price risk management activities as of December 31, 1997, was approximately
two years.
Market and Credit Risks
The Company serves a diverse customer group that includes independent power
producers, industrial companies, gas and electric utilities, oil and gas
producers, financial institutions and other energy marketers. This broad
customer mix generates a need for a variety of financial structures, products
and terms. This diversity requires the Company to manage, on a portfolio basis,
the resulting market risks inherent in these transactions subject to parameters
established by the Company's risk management committee. Market risks are
monitored by a risk control group operating separately from the units that
create or actively manage these risk exposures to ensure compliance with the
Company's stated risk management policies.
The Company measures and adjusts the risk in its portfolio in accordance
with mark-to-market and other risk management methodologies which utilize
forward price curves in the energy markets to estimate the size and probability
of future potential exposure.
29
<PAGE> 33
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties pursuant to the terms of their
contractual obligations. The counterparties associated with the Company's assets
from price risk management activities as of December 31, 1997 are summarized as
follows (amounts in millions):
<TABLE>
<CAPTION>
ASSETS FROM PRICE RISK MANAGEMENT ACTIVITIES
AS OF DECEMBER 31, 1997
------------------------------------------------
BELOW
INVESTMENT GRADE(A) INVESTMENT GRADE TOTAL
------------------- ---------------- -----
<S> <C> <C> <C>
Energy marketers............................. $21 $ 3 $24
Financial institutions....................... 20 20
Oil and gas producers........................ 14 4 18
Gas and electric utilities................... 16 2 18
Industrials.................................. 6 1 7
Other........................................ 8 1 9
--- --- ---
Total assets from price risk
management activities............ $85 $11 $96
=== === ===
</TABLE>
- ---------------
(a) "Investment Grade" is primarily determined using publicly available credit
ratings along with consideration of collateral, which encompass standby
letters of credit, parent company guarantees and property interest,
including oil and gas reserves. Included in Investment Grade are
counterparties with a minimum Standard & Poor's or Moody's rating of BBB-
or Baa3, respectively.
This concentration of counterparties may impact the Company's overall
exposure to credit risk, either positively or negatively, in that the
counterparties may be similarly affected by changes in economic, regulatory or
other conditions.
The Company maintains credit policies with regard to its counterparties to
minimize overall credit risk. These policies require an evaluation of potential
counterparties' financial condition (including credit rating), collateral
requirements under certain circumstances and the use of standardized agreements
which allow for the netting of positive and negative exposures associated with a
single counterparty.
Other Price Risk Management Activities
The Company had no derivative financial instruments except for energy
commodity contracts disclosed above at December 31, 1996 and 1997.
5. 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 December 31, 1997 of
approximately $19 million. Recent economic events in 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 economic problems. While the Company cannot predict
the ultimate outcome of Indonesia's financial difficulties or the impact of such
matters to the Company, it believes PLN, with the backing of the Office of the
Minister of Finance, will honor all current invoices on the Sengkang project in
full and therefore, the current economic difficulties in Indonesia will not have
a material adverse effect on the Company's financial position or results of
operations.
Rates and Regulatory Matters
In February 1997, TGP filed with FERC a settlement of all issues related to
the recovery by TGP 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
30
<PAGE> 34
of the GSR Stipulation and Agreement, TGP is entitled to collect from customers
up to $770 million, of which approximately $682 million has been collected as of
December 31, 1997. TGP is entitled to recover additional transition costs, up to
the remaining $88 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
April 1996, it filed a 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. 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 that order. Under the stipulation, TGP's refund obligation was
approximately $185 million, inclusive of interest, of which $161 million was
refunded to customers in March 1997 and June 1997 with the remaining $24 million
refund obligation offset against GSR recoveries in accordance with particular
customer elections. 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 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 has 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.
In October 1997, TGP filed its cashout report for the period September 1995
through August 1996. TGP previously filed cashout reports for the period
September 1993 through August 1995. TGP's October 1997 filing showed a
cumulative loss of $11 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 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 or results of
operations.
Environmental Matters
As of December 31, 1997, the Company had a reserve of approximately $253
million to cover environmental assessments and remediation activities discussed
below.
31
<PAGE> 35
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.
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 December 31, 1997, a
balance of $27 million remains to be collected under this agreement.
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 29 sites under 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. As of December
31, 1997, the Company has estimated its share of the remediation costs at these
sites to be between $52 million and $62 million and has provided reserves that
it believes are adequate for such costs. Because the clean-up costs are
estimates and are subject to revision as more information becomes available
about the extent of remediation required, 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 Superfund sites referenced above
will not have a material adverse effect on the Company's financial position or
results of operations.
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.
As such information 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
See Item 3, Legal Proceedings, which is incorporated herein by reference.
Year 2000
The Company has established an executive steering committee and a project
team to coordinate the assessment, remediation, testing and implementation of
the necessary modifications to its key computer applications (which consist of
internally developed computer applications, third party software, hardware and
embedded chip systems) to assure that such systems and related processes will
remain functional.
The assessment phase related to internally developed computer applications
has been completed and the costs estimate for making the necessary changes to
such systems, including implementation and testing efforts,
32
<PAGE> 36
is approximately $8 million to be spent in 1998 and 1999. These estimates were
based on various factors including availability of internal and external
resources and complexity of the software applications. The recent upgrade of
various systems, particularly the financial systems, to a Year 2000 compliant
client/server platform have greatly reduced or eliminated concerns in those
areas.
The assessment phase for the third party software and hardware impacts is
continuing, with completion of that phase and an estimate of costs necessary to
modify or replace those systems to be available in the second quarter of 1998.
Included in this phase of the project is the effort to obtain representations
and assurances from third party vendors that their software and hardware
products being used by the Company are or will be Year 2000 compliant.
Implementation and testing phases are expected to be completed by mid 1999.
It is the Company's goal to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems may be interrelated with systems outside the control of the
Company, there can be no assurance that all implementations will be successful.
Management does not expect the costs to modify its systems or to correct any
unsuccessful system implementations to have a material adverse impact on the
company's financial position or results of operations.
Capital Commitments
At December 31, 1997, the Company had capital or investment commitments of
$104 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, TGP
has entered into unconditional purchase obligations for products and services
totaling $99 million at December 31, 1997. TGP's annual obligations under these
agreements are $22 million for the year 1998, $21 million for the years 1999 and
2000, $11 million for the year 2001, $4 million for the year 2002, and $20
million thereafter. Payments under such obligations, including additional
purchases in excess of contractual obligations, were $26 million, $25 million
and $26 million for the years 1997, 1996 and 1995, respectively. Prior to August
1997, TGP had an obligation to purchase 30 percent of the output of the Great
Plains coal gasification project's original design capacity through July 2009.
TGP has executed a settlement of this contract as a part of its GSR
negotiations, recorded the related liability, and, in the third quarter of 1997,
purchased an annuity for $42 million to fund the expected remaining monthly
demand requirements of the contract which under the settlement continue through
January 2004.
Guarantees
At December 31, 1996, the Company had guaranteed payment and performance of
approximately $3 million, primarily with respect to letters of credit and other
guarantees supporting various financing and operating activities.
Management is not aware of other commitments or contingent liabilities
which would have a material adverse effect on the Company's financial condition
or results of operations.
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.
33
<PAGE> 37
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.
At the end of the second quarter of 1997, the Company acquired for $26
million a 50 percent legal interest and controlling voting interest in a company
that owns and operates a 70 MW power plant located in Dunaujvaros, Hungary.
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 acquisitions had occurred at the beginning of each respective year.
Disposition of Assets
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, TGP 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 the Company. The net proceeds from these transactions
were utilized to retire outstanding borrowings under the Credit Facility in
1997.
7. INCOME TAXES
Following are the analysis of the components of the post-acquisition income
tax expense for the year ended December 31, 1997 and comparative analyses of the
components of pre-acquisition combined income tax expense for the years 1996 and
1995.
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
------------- ------------ ------ ------
POST- PRE-ACQUISITION
ACQUISITION COMBINED
CONSOLIDATED
<S> <C> <C> <C>
Current
Federal ................................................ $ (71) $ 26 $(13)
State and local......................................... (35) 44 (22)
----- ---- ----
(106) 70 (35)
----- ---- ----
Deferred
Federal ................................................ 161 18 35
State and local......................................... 33 (20) 12
----- ---- ----
194 (2) 47
----- ---- ----
Income tax expense........................................ $ 88 $ 68 $ 12
===== ==== ====
</TABLE>
34
<PAGE> 38
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
Post-Acquisition Consolidated Statement of Income for the year 1997 and the
Pre-Acquisition Combined Statements of Income for the years 1996 and 1995:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
------------- ------------ ------ ------
POST- PRE-ACQUISITION
ACQUISITION COMBINED
CONSOLIDATED
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income
tax rate................................................ $ 89 $ 78 $ 61
Increases (reductions) in income tax expense resulting
from:
State and local taxes on income, net of U.S. federal
income tax benefit................................... (1) 16 (6)
Permanent differences on sales of assets................ -- 5 12
Realization of unrecognized deferred tax assets......... -- (21) (49)
Net reversal of tax reserves............................ -- (4) --
Other................................................... -- (6) (6)
---- ---- ----
Income tax expense........................................ $ 88 $ 68 $ 12
==== ==== ====
</TABLE>
Current U.S. income tax expense for the years ended December 31, 1996 and
1995, includes a reduction in current tax amounts of $16 million and $21
million, respectively, related to the allocation of corporate interest expense
to the Industrial Business and the Shipbuilding Business. Reference is made to
Note 16 for information concerning corporate debt and interest allocated to the
Industrial Business and the Shipbuilding Business from the Company.
The components of the Company's net deferred tax liability at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
------------- ------ ------
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
Deferred tax assets
U.S. net operating loss carryforwards..................... $ 82 $ --
Postretirement benefits other than pensions............... 122 124
Regulatory issues......................................... 69 235
Environmental reserve..................................... 99 71
Other..................................................... 222 202
------ ------
Total deferred tax asset.................................. 594 632
------ ------
Deferred tax liabilities
Tax over book depreciation................................ 1,461 1,001
Regulatory issues......................................... 70 158
Book versus tax gains and losses on asset disposals....... 3 39
Other..................................................... 116 141
------ ------
Total deferred tax liability.............................. 1,650 1,339
------ ------
Net deferred tax liability(1)............................... $1,056 $ 707
====== ======
</TABLE>
- ---------------
(1) As of December 31, 1997, $4 million of current deferred state income taxes
are included in other current liabilities on the balance sheet.
The cumulative undistributed earnings of certain foreign subsidiaries and
foreign corporate joint ventures were approximately $3 million as of December
31, 1997. Since the earnings have been or are intended to be indefinitely
reinvested in foreign operations, no provision has been made for any U.S. taxes
or foreign withholding taxes that may be applicable. If a distribution of such
earnings were to be made, the Company
35
<PAGE> 39
may be subject to both foreign withholding tax and U.S. income taxes, net of any
allowable foreign tax credits or deductions, however, an estimate of such taxes
is not practicable.
As of December 31, 1997, approximately $236 million of net operating losses
were available to offset future tax liabilities through the year 2012. Usage of
the carryover is subject to the limitations provided for under section 382 of
the IRS Code as well as the separate return limitation year rules of IRS
regulations.
EPG and EPTPC each file a separate consolidated federal income tax return
which includes the operations of their respective subsidiaries as they existed
at the time of the Merger. Deferred taxes corresponding to the allocation of the
purchase price to the assets and liabilities acquired, have been reflected in
the Consolidated Balance Sheets at December 31, 1996, and 1997.
8. EMPLOYEE BENEFITS
Postretirement Benefits, Other than Pension
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 the Company's former employees
and former employees of operations previously disposed of by Old Tenneco.
Employees who retired before July 1, 1997 received 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. Plan assets consist principally of fixed income
securities.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the Consolidated Balance Sheets at December 31, 1997 and
1996, as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
------------- ----- -----
POST-ACQUISITION
CONSOLIDATED
<S> <C> <C>
Accumulated postretirement benefit obligation............... $ 350 $ 353
Plan assets at fair value................................... 7 4
----- -----
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 343 349
Unrecognized net (gain) loss resulting from plan experience
and changes in actuarial assumptions...................... (17) 1
----- -----
Accrued postretirement benefit cost......................... $ 326 $ 350
===== =====
</TABLE>
As of December 31, 1997 and 1996, the current portion of the postretirement
benefits was $41 million and $41 million, respectively.
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, 1997 the balance of
this regulatory asset was $26 million and is being recovered through rates.
36
<PAGE> 40
The net periodic postretirement benefit cost for the years 1997, 1996 and
1995 consists of the following components:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
------------- ---------------- ----- -----
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Service cost for benefits earned during the year.... $ -- $ 1 $ 1
Interest cost on accumulated postretirement benefit
obligation........................................ 26 25 26
Net amortization of unrecognized amounts............ (1) (12) (13)
---- ---- ----
Net periodic postretirement benefit cost............ $ 25 $ 14 $ 14
==== ==== ====
</TABLE>
Actuarial estimates for the Company's plans assumed a weighted average
annual rate of increase in the per capita costs of covered health care benefits
of 5 percent for 1998, and remaining at that level thereafter. Increasing the
assumed health care cost trend rate by one percentage-point in each year would
increase the 1997 accumulated postretirement benefit obligations by
approximately $3 million and would increase the aggregate of the service cost
and interest cost components of the net postretirement benefit cost for 1997 by
approximately $.2 million.
The discount rates (which are based on long-term market rates) used in
determining the 1997 and 1996 accumulated postretirement benefit obligations
were 7.00 percent and 7.75 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 the Company is not
responsible for any benefits accrued before the last day of December 1996. The
Company employees became participants in the new EPG Cash Balance Pension Plan
as of January 1, 1997 with no account balances credited for prior service.
During 1997, the Company offered special termination benefits to employees
who were at least 55 years old on December 31, 1996 and who were vested in the
TRP. The 220 employees accepting this offer received an enhanced cash balance
equivalent to and in lieu of severance benefits provided pursuant to the merger
agreement at a cost of $11 million. The Company had accrued for these benefits
in December 1996.
9. MINORITY INTEREST
At the end of the second quarter of 1997, the Company acquired for $25
million a 50 percent legal interest and controlling voting interest in a company
that owns and operates a 70 MW power plant located in Dunaujvaros, Hungary.
During the third quarter the Company began consolidating this investment.
Accordingly, the assets and liabilities of the acquired company are reflected in
the Consolidated Balance Sheets, while the equity not owned by the Company is
included in minority interest in the Consolidated Balance Sheets. Revenues and
expenses of the acquired company are reflected in the Consolidated Statements of
Income. Contractually, the Company is entitled to receive 100 percent of the
income of the acquired company, and the other equity owners are income
participants only to the extent they receive reduced electricity rates;
therefore, no minority interest is presented in the Consolidated Statements of
Income.
37
<PAGE> 41
10. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
POST-ACQUISITION
(IN MILLIONS) CONSOLIDATED
<S> <C> <C>
Materials and supplies...................................... $16 $19
Gas in storage.............................................. 10 23
--- ---
Total............................................. $26 $42
=== ===
</TABLE>
11. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
POST-ACQUISITION
(IN MILLIONS) CONSOLIDATED
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,518 $2,371
Less accumulated depreciation and depletion................. 120 --
------ ------
2,398 2,371
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,424 1,581
------ ------
Total property, plant and equipment, net.......... $4,822 $3,952
====== ======
</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.
12. 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."
At December 31, 1997 and 1996, the Company's consolidated stockholders'
equity included equity in undistributed earnings from equity method investments
of $2 million and $12 million, respectively. Dividends and distributions
received from affiliates accounted for on the equity method were $17 million,
$43 million and $53 million during 1997, 1996 and 1995, respectively.
38
<PAGE> 42
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, 1997, 1996 and 1995, and for the years then ended is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ----------------
POST-ACQUISITION PRE-ACQUISITION
(IN MILLIONS) CONSOLIDATED COMBINED
<S> <C> <C> <C>
Current assets.......................... $ 49 $ 46 $ 60
Non-current assets...................... 501 545 543
Short-term debt......................... 10 18 122
Other current liabilities............... 28 37 24
Long-term debt.......................... 317 244 152
Other non-current liabilities........... 51 39 25
Equity in net assets.................... 143 253 280
Revenues and other income............... 101 98 184
Costs and expenses...................... 81 68 119
Net income.............................. 20 30 65
</TABLE>
- ---------------
13. NATURE OF OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company is principally engaged in the transportation, gathering,
processing and marketing of natural gas. For the year ended December 31, 1997,
the Company's operating revenues were predominately derived from the
transportation and marketing of natural gas and other commodities. The Company's
principal end markets for the transportation of natural gas are the Northeast
and Midwest United States. Prior to the Merger, EPECC, 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 the combined operating revenues for the years ended
December 31, 1997, 1996, and 1995.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
(IN MILLIONS) ---------------- ------ ------
POST-ACQUISITION PRE-ACQUISITION
CONSOLIDATED COMBINED
<S> <C> <C> <C>
Interest............................................ $ 82 $ 179 $ 254
Income tax payments (refunds)....................... (72) 247 136
</TABLE>
39
<PAGE> 43
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING OPERATING NET
(IN MILLIONS) REVENUES INCOME INCOME (LOSS)
------------- --------- --------- -------------
POST-ACQUISITION CONSOLIDATED
---------------------------------------------
<S> <C> <C> <C>
1997 1st.............................................. $ 689 $ 76 $ 48
2nd............................................. 785 52 29
3rd............................................. 851 62 36
4th............................................. 1,277 73 53
------ ---- ----
$3,602 $263 $166
====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION COMBINED
---------------------------------------------
<S> <C> <C> <C>
1996 1st.............................................. $ 754 $ 63 $ 43
2nd............................................. 626 36 36
3rd............................................. 616 52 40
4th............................................. 712 32 (72)
------ ---- ----
$2,708 $183 $ 47
====== ==== ====
</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.
16. 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, contributions from (distributions to) Old Tenneco stockholders, and
net cash and noncash contributions from (distributions to) affiliates. Reference
is made to the statements of changes in consolidated stockholders' equity and
combined equity for an analysis of activity in the "Pre-Acquisition Combined
Equity" caption for each of the two years in the period ended December 31, 1996.
General and Administrative Expenses
Included in the total operation and maintenance expenses for 1996 and 1995,
is $17 million and $16 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 practice before the Merger was 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 the Company and its
related interest expense have been allocated to Old Tenneco's automotive,
packaging, and shipbuilding businesses ("Old Tenneco's non-energy operations")
based upon the portion of Old Tenneco's investment in Old Tenneco's non-energy
operations that is deemed to be debt, generally based upon the ratio of
40
<PAGE> 44
Old Tenneco's 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 and 11.4
percent for 1996 and 1995, respectively. Total pre-tax interest expense
allocated to Old Tenneco's non-energy operations in 1996 and 1995 was $45
million and $60 million, respectively. Old Tenneco'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 Old Tenneco's non-energy operations for
financial reporting on a historical basis, Old Tenneco'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
is not necessarily indicative of the debt currently borrowed by the Company or
the debt which the Company may incur in the future.
Notes and Advances Receivable or Payable with Affiliates
For the years 1996 and 1995 cash contributions from (distributions to)
affiliates in the Statements of Changes in Consolidated Stockholders' 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, Old Tenneco
has utilized notes and advances to centrally manage cash funding requirements
for its consolidated group.
The "Note payable to EPG" balance at December 31, 1997 and 1996 relates to
an interest-bearing demand loan first made to TGP from EPG in December 1996
subsequent to the Merger.
Accounts Receivable and Accounts Payable -- Affiliated Companies
Balances in accounts receivable and accounts payable -- affiliated
companies relate to activities in the normal course of business. Amounts consist
of cash advances and amounts associated with marketing contracts transferred to
the Company's marketing subsidiaries effective April 1997.
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 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.
41
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tennessee Gas Pipeline Company:
We have audited the consolidated and combined financial statements and the
financial statement schedule of Tennessee Gas Pipeline Company listed in Item
14(a) of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tennessee Gas
Pipeline Company as of December 31, 1997 and 1996, the consolidated results of
its operations and its cash flows for the year ended December 31, 1997, and the
combined results of its operations and its cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 12, 1998
42
<PAGE> 46
SCHEDULE II
TENNESSEE GAS PIPELINE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(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 PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts....... $49 $21 $-- $51(a) $19
1996
Allowance for doubtful accounts....... $49 $19 $ 8 $27 $49
1995
Allowance for doubtful accounts....... $21 $26 $ 9 $ 7 $49
</TABLE>
- ---------------
(a) Primarily accounts written off.
43
<PAGE> 47
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>
Consolidated and Combined Statements of Income......... 16
Consolidated Balance Sheets............................ 17
Consolidated and Combined Statements of Cash Flows..... 18
Statements of Changes in Consolidated Stockholder's
Equity and Combined Equity............................ 19
Notes to Consolidated and Combined Financial
Statements............................................ 20
Report of independent accountants...................... 42
2. Financial statement schedules and supplementary
information required to be submitted.
Schedule II -- Valuation and qualifying accounts....... 43
Schedules other than that listed above are omitted
because they are not applicable
3. Exhibit list............................................ 45
</TABLE>
(b) Reports on Form 8-K:
None
44
<PAGE> 48
TENNESSEE GAS PIPELINE COMPANY
EXHIBIT LIST
DECEMBER 31, 1997
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.A -- 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). Certificate of Ownership and Merger dated as of
April 12, 1996; Certificate of Amendment of Certificate
of Incorporation dated October 8, 1996 (Exhibit 3.2 to
TGP's Form 10-K filed March 14, 1997).
3.B -- By-laws of TGP 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.A -- 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.B -- 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,
filed March 14, 1997).
4.C -- 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 4.2 to the Form 10-K of EPTPC,
filed March 14, 1997).
4.D -- 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,
filed March 14, 1997).
21 -- Omitted pursuant to the reduced disclosure format
permitted by General Instruction I to Form 10-K.
*23 -- Consent of Independent 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.
45
<PAGE> 49
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
23rd day of March 1998.
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 23, 1998
- ----------------------------------------------------- Director
William A. Wise
/s/ JOHN W. SOMERHALDER II President and Director March 23, 1998
- -----------------------------------------------------
John W. Somerhalder II
/s/ H. BRENT AUSTIN Executive Vice President and March 23, 1998
- ----------------------------------------------------- Director
H. Brent Austin
/s/ JEFFREY I. BEASON Vice President and Controller March 23, 1998
- -----------------------------------------------------
Jeffrey I. Beason
</TABLE>
46
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.A -- 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). Certificate of Ownership and Merger dated as of
April 12, 1996; Certificate of Amendment of Certificate
of Incorporation dated October 8, 1996. (Exhibit 3.2 to
TGP's Form 10-K filed March 14, 1997).
3.B -- By-laws of TGP 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.A -- 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.B -- 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 4.2 to the Form 10-K of EPTPC,
File No. 1-9864, filed March 14, 1997).
4.C -- 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).
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 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Tennessee Gas Pipeline Company (the "Company") on Form S-3 (File No. 333-20199)
of our report dated March 12, 1998, on our audits of the consolidated and
combined financial statements and the financial statement schedule of the
Company as of December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 20, 1998
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 1,127
<ALLOWANCES> 0<F1>
<INVENTORY> 26
<CURRENT-ASSETS> 1,545
<PP&E> 4,822
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 6,695
<CURRENT-LIABILITIES> 1,928
<BONDS> 976
0
0
<COMMON> 0
<OTHER-SE> 1,819
<TOTAL-LIABILITY-AND-EQUITY> 6,695
<SALES> 0
<TOTAL-REVENUES> 3,602
<CGS> 0
<TOTAL-COSTS> 3,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 254
<INCOME-TAX> 88
<INCOME-CONTINUING> 166
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
