<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 74-1056569
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $5 per share. Shares outstanding on August 10,
1999: 208
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
<TABLE>
<CAPTION>
DEFINITIONS
-----------
<S> <C>
ALJ......................... Administrative Law Judge
Company..................... Tennessee Gas Pipeline Company and its subsidiaries
Court of Appeals............ United States Court of Appeals for the District of Columbia
Circuit
EBIT........................ Earnings before interest expense and income taxes, excluding
affiliated interest income
EPA......................... United States Environmental Protection Agency
EPEC........................ El Paso Energy Corporation, the indirect parent of Tennessee
Gas Pipeline Company
EPTPC....................... El Paso Tennessee Pipeline Co., a direct subsidiary of El
Paso Energy Corporation and parent of Tennessee Gas Pipeline
Company
FERC........................ Federal Energy Regulatory Commission
GSR......................... Gas supply realignment
PCB(s)...................... Polychlorinated biphenyl(s)
PRP(s)...................... Potentially responsible party(ies)
TGP......................... Tennessee Gas Pipeline Company, a wholly owned subsidiary of
El Paso Tennessee Pipeline Co.
</TABLE>
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues.......................................... $175 $164 $362 $357
---- ---- ---- ----
Operating expenses
Operation and maintenance................................. 25 66 74 134
Depreciation, depletion, and amortization................. 34 33 68 67
Taxes, other than income taxes............................ 12 10 24 21
---- ---- ---- ----
71 109 166 222
---- ---- ---- ----
Operating income............................................ 104 55 196 135
---- ---- ---- ----
Other (income) and expense
Non-affiliated interest and debt expense.................. 31 24 64 50
Affiliated interest (income) expense, net................. (8) 17 (16) 35
Other -- net.............................................. (3) (7) (12) (11)
---- ---- ---- ----
20 34 36 74
---- ---- ---- ----
Income before income taxes and discontinued operations...... 84 21 160 61
Income tax expense.......................................... 26 6 52 20
---- ---- ---- ----
Income before discontinued operations....................... 58 15 108 41
Discontinued operations, net of income taxes................ -- 16 -- 36
---- ---- ---- ----
Net income.................................................. $ 58 $ 31 $108 $ 77
==== ==== ==== ====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
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TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 3 $ 5
Accounts and notes receivable, net........................ 142 137
Materials and supplies.................................... 16 15
Deferred income tax benefit............................... 39 38
Other..................................................... 24 33
------ ------
Total current assets.............................. 224 228
Property, plant, and equipment, net......................... 4,436 4,440
Other....................................................... 192 188
------ ------
Total assets...................................... $4,852 $4,856
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 214 $ 242
Short-term borrowings (including current maturities of
long-term debt)........................................ 112 191
Other..................................................... 230 257
------ ------
Total current liabilities......................... 556 690
------ ------
Long-term debt, less current maturities..................... 1,353 1,353
------ ------
Deferred income taxes....................................... 1,168 1,150
------ ------
Other....................................................... 282 278
------ ------
Commitments and contingencies (See Note 3)
Stockholder's equity
Common stock, par value $5 per share; authorized 300
shares; issued 208 shares.............................. -- --
Additional paid-in capital................................ 1,385 1,385
Retained earnings......................................... 108 --
------ ------
Total stockholder's equity........................ 1,493 1,385
------ ------
Total liabilities and stockholder's equity........ $4,852 $4,856
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
2
<PAGE> 5
TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
----------------
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 108 $ 77
Less income from discontinued operations, net of income
taxes.................................................. -- 36
----- -----
Income from continuing operations........................... 108 41
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 68 67
Deferred income taxes.................................. 16 (5)
Other.................................................. 1 (7)
Working capital changes................................... 2 156
Other..................................................... 3 (50)
----- -----
Cash provided by continuing operations................. 198 202
Cash used in discontinued operations................... -- (35)
----- -----
Net cash provided by operating activities......... 198 167
----- -----
Cash flows from investing activities
Capital expenditures...................................... (49) (22)
Investment in joint ventures and equity investees......... (7) (10)
Net change in advances to EPEC............................ (62) (215)
Other..................................................... (3) 7
Cash provided by investing activities of discontinued
operations............................................. -- 174
----- -----
Net cash used in investing activities............. (121) (66)
----- -----
Cash flows from financing activities
Net commercial paper borrowings........................... (79) --
Net proceeds from affiliated note......................... -- 153
Revolving credit repayments............................... -- (117)
Cash used in financing activities by discontinued
operations............................................. -- (153)
----- -----
Net cash used in financing activities............. (79) (117)
----- -----
Decrease in cash and temporary investments.................. (2) (16)
Less decrease in cash and temporary investments related to
discontinued operations................................ -- (14)
----- -----
Decrease in cash and temporary investments from continuing
operations............................................. (2) (2)
Cash and temporary investments
Beginning of period....................................... 5 11
----- -----
End of period............................................. $ 3 $ 9
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
3
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TENNESSEE GAS PIPELINE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1998 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at June 30, 1999, and for the quarters and six months ended
June 30, 1999, and 1998, are unaudited. The condensed balance sheet at December
31, 1998, is derived from audited financial statements at that date. These
financial statements do not include all disclosures required by generally
accepted accounting principles, but have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. In the opinion of
management, all material adjustments necessary to present fairly the results of
operations for such periods have been included. All such adjustments, except for
those relating to discontinued operations as described below, are of a normal
recurring nature. Results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year due to
the seasonal nature of the Company's businesses. Financial statements for the
previous periods include certain reclassifications which were made to conform to
the current presentation. Such reclassifications have no effect on reported net
income or stockholder's equity.
Tax-free Internal Reorganization (Discontinued Operations)
On December 31, 1998, EPEC completed a series of steps to effect a tax-free
internal reorganization. The Company has treated the assets and operations
distributed to EPEC or other subsidiaries of EPEC in the tax-free internal
reorganization as though they were discontinued operations as of December 31,
1998. Accordingly, the information for the quarter and six months ended June 30,
1998, in these financial statements has been restated as though the transactions
occurred on January 1, 1998. Revenues related to those items treated as
discontinued operations were $960 million and $2,222 million for the quarter and
six months ended June 30, 1998, respectively.
2. DEBT AND OTHER CREDIT FACILITIES
The average interest rate of short-term borrowings was 5.4% and 5.8% at
June 30, 1999, and December 31, 1998, respectively. The Company had short-term
borrowings, including current maturities of long-term debt, at June 30, 1999,
and December 31, 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $111 $190
Current maturities of long-term debt........................ 1 1
---- ----
$112 $191
==== ====
</TABLE>
In July 1999, EPEC issued $600 million aggregate principal amount of 6.625%
Senior Notes due 2001 and $100 million aggregate principal amount of floating
rate Senior Notes due 2001 with an interest rate equal to LIBOR plus .65%.
Proceeds of approximately $111 million were advanced to TGP and were used by the
Company to repay its outstanding commercial paper.
3. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. Among
other things, the NOPR proposes the following: (i) removing the price cap for
the short-term capacity market; (ii) establishing procedures to make pipeline
and shipper-owned capacity comparable; (iii) auctioning all available short-term
pipeline capacity on a daily basis with the pipeline unable
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<PAGE> 7
to set a reserve price above variable costs; (iv) changing policies or pipeline
penalties, nomination procedures and services; (v) increasing pipeline reporting
requirements; (vi) permitting the negotiation of terms and conditions of
service; and (vii) potentially modifying the procedures for certificating new
pipeline construction. Also in July 1998, FERC issued a Notice of Inquiry
("NOI") seeking comments on FERC's policy for pricing long-term capacity. The
Company provided comments on the NOPR and NOI in April 1999. It is not known
when FERC will act on the NOPR and NOI.
In February 1997, TGP filed a settlement with FERC of all issues related to
the recovery of its GSR and other transition costs and related proceedings (the
"GSR Stipulation and Agreement"). In April 1997, FERC approved the settlement.
Under the terms of the GSR Stipulation and Agreement, TGP is entitled to collect
up to $770 million from its customers, $693 million through a demand surcharge
and $77 million through an interruptible transportation surcharge. As of June
30, 1999, the demand portion had been collected and $44 million of the
interruptible transportation portion had been collected. 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 accordance with the terms of the GSR Stipulation and Agreement,
TGP filed a GSR Reconciliation Report with FERC in March 1999, and in June 1999,
FERC accepted the report as in compliance with the GSR Stipulation and
Agreement. TGP will refund $14 million to its firm customers in the third
quarter of 1999, which represents the amount collected in excess of the $693
million recoverable through the demand surcharge. TGP will also be required to
refund to firm customers amounts collected in excess of each firm customer's
share of the final transition costs based on the final GSR Reconciliation
Report, which will be filed in March 2001. Any future refund is not expected to
have a material adverse effect on the Company's financial position, results of
operations, or cash flows.
In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved 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. One
party, a competitor of TGP, filed a Petition for Review of the FERC orders with
the Court of Appeals. The Court of Appeals remanded the case to FERC to respond
to the competitor's argument that TGP's cost allocation methodology deterred the
development of market centers (centralized locations where buyers and sellers
can physically exchange gas). At FERC's request, comments were filed in January
1999. This matter is still pending before FERC.
All cost of service issues related to TGP's 1991 general rate proceeding
were resolved pursuant to a settlement agreement approved by FERC in an order
which now has become final. However, cost allocation and rate design issues
remained unresolved. In July 1996, following an ALJ's decision on these cost and
design issues, FERC ruled on certain issues but remanded to the ALJ the issue of
the proper allocation of TGP's New England lateral costs. In July 1997, FERC
issued an order denying rehearing of its July 1996 order. In February 1999,
petitions for review of the July 1996 and July 1997 FERC orders were denied by
the Court of Appeals. In the remand proceeding, the ALJ issued his decision on
the proper allocation of the New England lateral costs in December 1997. That
decision adopts a methodology that economically approximates the one currently
used by TGP. In October 1998, FERC issued an order affirming the ALJ's decision
and, in April 1999, FERC denied requests for rehearing of the October 1998
order. In April 1999, TGP filed with FERC revised rates to be effective May 1,
1999. In addition, TGP will refund approximately $1 million to certain of its
customers in the third quarter of 1999. Upon payment of the refunds, the
proceedings will be resolved.
In April 1999, FERC approved a settlement which resolved all outstanding
FERC proceedings relating to the cashout reports that TGP had filed for the
period September 1993 through August 1998. The settlement also established a new
cashout mechanism to account for customer imbalances. The new cashout mechanism
was implemented in the second quarter of 1999, retroactive to September 1998.
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 expire by November 2000. Although TGP cannot
predict how much capacity will be resubscribed, a majority of the
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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.
As an interstate pipeline, TGP is subject to FERC audits of its books and
records. As part of an industry-wide initiative, TGP's property retirements are
currently under review by the FERC audit staff.
As the aforementioned rate and regulatory matters are fully and
unconditionally resolved, the Company may either recognize an additional refund
obligation or a non-cash benefit to finalize previously estimated liabilities.
Management believes the ultimate resolution of these matters, which are in
various stages of finalization, will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
Legal Proceedings
In February 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPEC: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site, and seeks to recover that
amount plus interest. Other companies named as defendants include Atlantic
Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical
Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas
Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed
their answers and third-party complaints seeking contribution from twelve other
entities believed to be PRPs at Sikes. Although factual investigation relating
to Sikes is in very preliminary stages, the Company believes that the amount of
material, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or
Petro-Tex Chemical Corporation facilities was small, possibly de minimis.
However, the government plaintiffs have alleged that the defendants are each
jointly and severally liable for the entire remediation costs and have also
sought a declaration of liability for future response costs such as groundwater
monitoring. While the outcome of this matter cannot be predicted with certainty,
management does not expect this matter to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the EPA and the
relevant states regarding those remediation activities. TGP is also working with
the Pennsylvania and New York environmental agencies regarding remediation and
post-remediation activities at the Pennsylvania and New York stations.
Management believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.
In November 1988, the Kentucky environmental agency filed a complaint in a
Kentucky state court, Commonwealth of Kentucky, Natural Resources and
Environmental Protection Cabinet v. Tennessee Gas Pipeline Company, alleging
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 compressor stations from the agency, and
continues to work to resolve the remaining issues. The
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relevant Kentucky compressor stations are scheduled to be characterized and
remediated under the consent order with the EPA. Management believes that the
resolution of this issue will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
A number of subsidiaries of EPEC, both wholly and partially owned,
including the Company, have been named defendants in actions brought by Jack
Grynberg on behalf of the U.S. Government under the false claims act. Generally,
the complaints allege an industry-wide conspiracy to underreport the heating
value as well as the volumes of the natural gas produced from federal and Indian
lands, thereby depriving the U.S. Government of royalties. In April 1999, the
U.S. Government filed a notice that it would not intervene in these actions.
Grynberg has petitioned for consolidation of pre-trial matters with the
Multidistrict Litigation Panel, which will not consider this matter until
September 1999. The Company believes the complaint to be without merit.
Management believes that the ultimate resolution of this issue will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
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 June 30, 1999, the Company had reserves of
approximately $114 million for expected environmental costs.
In addition, the Company estimates that its subsidiaries will make capital
expenditures for environmental matters of approximately $6 million for the
remainder of 1999. These expenditures primarily relate to compliance with air
regulations and, to a lesser extent, control of water discharges. The Company
expects to incur expenditures of approximately $95 million in the aggregate for
the years 2000 through 2007.
Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, to assure that its efforts meet
regulatory requirements.
In May 1995, following negotiations with its customers, TGP filed with FERC
a Stipulation and Agreement (the "Environmental Stipulation") that establishes a
mechanism for recovering a substantial portion of the environmental costs
identified in the internal project. The Environmental Stipulation was effective
July 1, 1995. As of June 30, 1999, all amounts have been collected under the
Environmental Stipulation. Refunds may be required to the extent actual eligible
expenditures are less than estimated eligible expenditures used to determine
amounts to be collected under the Environmental Stipulation.
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 3 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for payment of
the Company's allocable share of remediation costs. Since the clean-up costs are
estimates and are subject to revision as more information becomes available
about the extent of remediation required, and because in some cases the Company
has asserted a defense to any liability, the Company's estimate of its share of
remediation costs could change. Moreover, liability under the federal Superfund
statute is joint and
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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
other entities as PRPs at the Superfund sites referenced above will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in the
discovery stage, and it is not yet possible to predict the outcome.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company may incur significant costs and liabilities in order to comply with
existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or other relevant 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 reserves are adequate.
For a further discussion of other environmental matters, see Legal
Proceedings above.
Other than the items discussed above, management is not aware of any other
commitments or contingent liabilities which would have a material adverse effect
on the Company's financial condition, results of operations, or cash flows.
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,378 $2,316
Less accumulated depreciation and depletion................. 271 216
------ ------
2,107 2,100
Additional acquisition cost assigned to utility plant, net
of accumulated amortization............................... 2,329 2,340
------ ------
Total property, plant, and equipment, net......... $4,436 $4,440
====== ======
</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.
5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This pronouncement
requires that an entity classify all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment,
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(ii) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (iii) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction. The accounting for the changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
standard was amended by Statement of Financial Accounting Standards No. 137
issued in June 1999. The amendment defers the effective date to fiscal years
beginning after June 15, 2000. The Company is currently evaluating the effects
of this pronouncement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
GENERAL
On December 31, 1998, EPEC completed a tax-free internal reorganization of
its assets and operations and those of its subsidiaries. After giving effect to
the reorganization, the Company's primary asset is an interstate pipeline system
known as the TGP System. See Note 1 for a further discussion of the tax-free
internal reorganization.
RESULTS OF CONTINUING OPERATIONS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- --------------
1999 1998 1999 1998
---- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................. $175 $ 164 $ 362 $ 357
Operating expenses................................. (71) (109) (166) (222)
Other -- net....................................... 3 7 12 11
---- ----- ----- -----
EBIT............................................. $107 $ 62 $ 208 $ 146
==== ===== ===== =====
</TABLE>
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Operating revenues for the quarter ended June 30, 1999, were $11 million
higher than for the same period of 1998 primarily due to the favorable
resolution of a regulatory issue in the quarter and the impact of a downward
revision in the amount of recoverable interest on GSR costs in 1998. The
increase was partially offset by a favorable customer settlement in the second
quarter of 1998.
Operating expenses for the quarter ended June 30, 1999, were $38 million
lower than for the same period of 1998. This decrease was primarily due to the
favorable resolution of an outstanding FERC proceeding. The decrease was also
attributable to lower operating expenses.
Other -- net for the quarter ended June 30, 1999, was $4 million lower than
for the same period of 1998. The decrease was primarily due to a gain on the
sale of assets in the second quarter of 1998 and lower earnings from equity
investments in 1999.
SIX MONTHS ENDED 1999 COMPARED TO SIX MONTHS ENDED 1998
Operating revenues for the six months ended June 30, 1999, were $5 million
higher than for the same period of 1998 primarily due to the favorable
resolution of regulatory issues and the impact of a downward revision in the
amount of recoverable interest on GSR costs in the second quarter of 1998. The
increase was partially offset by a favorable customer settlement in the second
quarter of 1998, and lower miscellaneous operating revenue.
Operating expenses for the six months ended June 30, 1999, were $56 million
lower than for the same period of 1998. The decrease was primarily due to the
favorable resolution of certain regulatory issues. The decrease was also
attributable to lower system fuel usage associated with operating efficiencies
achieved as a result of lower throughput levels and lower operating expenses.
Other -- net for the six months ended June 30, 1999, was $1 million higher
than for the same period of 1998. The increase was primarily due to the
favorable resolution of regulatory and contractual issues in the first quarter
of 1999, partially offset by a gain on the sale of assets in the second quarter
of 1998.
10
<PAGE> 13
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the second quarter and six
months ended June 30, 1999, was higher than for the same period of 1998
primarily due to an increase in long-term borrowings.
AFFILIATED INTEREST AND DEBT EXPENSE
Affiliated interest expense, net for the quarter and six months ended June
30, 1999, was lower than for the same period of 1998. The decrease was primarily
due to the reduction of affiliate debt and increased advances to EPEC.
OTHER
YEAR 2000
EPEC has established an executive steering committee and a project team to
coordinate the phases of its Year 2000 project to assure that the Company's key
automated systems, equipment, and related processes will remain functional
through the Year 2000. Those phases are: (i) awareness; (ii) assessment; (iii)
remediation; (iv) testing; (v) implementation of the necessary modifications and
(vi) contingency planning. The Company has participated in EPEC's Year 2000
project as described below.
In recognition of the importance of Year 2000 issues and their potential
impact on EPEC, the initial phase of the Year 2000 project involved the
establishment of a company-wide awareness program. The awareness program is
directed by the executive steering committee and project team and includes
participation of senior management in each core business area. The awareness
phase is substantially completed, although EPEC will continually update
awareness efforts for the duration of the Year 2000 project.
The Company's assessment phase consists of conducting a company-wide
inventory of its key automated systems and related processes, analyzing and
assigning levels of criticality to those systems and processes, identifying and
prioritizing resource requirements, developing validation strategies and testing
plans, and evaluating business partner relationships. The portion of the
assessment phase related to internally developed computer applications, hardware
and equipment, third-party-developed software, and embedded chips is
substantially complete. The assessment phase of the project, among other things,
involves efforts to obtain representations and assurances from third parties,
including third party vendors, that their hardware and equipment products,
embedded chip systems, and software products being used by or impacting the
Company are or will be modified to be Year 2000 compliant. Increasingly, the
responses from such third parties are generally encouraging. Nonetheless,
many of these responses lack the substantive detail to allow the Company to
make a meaningful evaluation of such third-parties' Year 2000 readiness.
Furthermore, in some circumstances, third parties are refusing to provide any
response beyond those contained in their publicly-disseminated information. As
a result, the overall evaluation of the Company's business partners' Year 2000
readiness remains inconclusive. Accordingly, the Company cannot predict the
potential consequences if these or other third parties or their products are
not Year 2000 compliant. The Company continues to evaluate the exposure
associated with such business partner relationships, and will use the
contingency planning process to attempt to mitigate the uncertainty concerning
third-party readiness.
The remediation phase involves converting, modifying, replacing or
eliminating key automated systems identified in the assessment phase. The
testing phase involves the validation of the identified key automated systems.
The Company is utilizing test tools and written test procedures to document and
validate, as necessary, its unit, system, integration and acceptance testing.
The implementation phase involves placing the converted or replaced key
automated systems into operation. Except as noted in the following paragraph,
the Company is substantially complete with its remediation, testing and
implementation phases for domestic systems.
One system that is important to the Company's efficient management of its
core-business process, but which was not substantially complete with respect to
Year 2000 issues as of June 30, 1999, is the nominations, scheduling and volume
accounting applications. In 1998, FERC mandated that all regulated pipelines
were to
11
<PAGE> 14
implement a dual communication system involving Gas Industry Standards Board
("GISB") approved Electronic Data Interchange ("EDI") file transfers and
standardized Internet web sites by June 2000, so shippers would have the option
of choosing the communication mode (EDI or the Internet web site) that best fits
their business needs. The Company had planned to implement a new system in
October 1999 that would allow for both modes of communication. In the second
quarter of 1999, the Company determined that a delay in the implementation of
the new system would be necessary to allow sufficient time to ensure that the
current nominations system is Year 2000 compliant. A request was filed with FERC
in June 1999, to delay compliance with certain GISB requirements. In July 1999,
FERC granted the Company an extension until April 2000. The Company expects to
substantially complete remediation, testing and implementation of necessary Year
2000 revisions to its existing nomination system during the third quarter of
1999.
The Company had previously identified the contingency planning phase as a
subset of the implementation phase, but has now established the process as its
own phase of the overall Year 2000 program. The contingency planning phase
consists of developing a risk profile of the Company's critical business
processes and then providing for actions the Company will pursue to keep such
processes operational in the event of Year 2000 disruptions. The focus of such
contingency planning is on prompt response to any Year 2000 events, and a plan
for subsequent resumption of normal operations. The plan is expected to assess
the risk of a significant failure to critical processes performed by the
Company, and to address the mitigation of those risks. The plan will also
consider any significant failures related to the most reasonably likely worst
case scenario, discussed below, as they may occur. In addition, the plan is
expected to factor in the severity and duration of the impact of a significant
failure. The Company has developed contingency plans for each business unit and
significant business process. By June 30, 1999, the Company had conducted
desk-top testing of its contingency plans and anticipates conducting drills and
mock outages over the next two calendar quarters, including some testing with
certain customers and other significant third parties. The Year 2000 contingency
plans will continue to be tested, modified and adjusted throughout the year as
additional information becomes available.
The goal of the Year 2000 project is to ensure that all of the critical
systems and processes which are under the Company's direct control remain
functional. Certain systems and processes may be interrelated with or dependent
upon systems outside the Company's control. However, systems within the
Company's control may also have unpredicted problems. Accordingly, there can be
no assurance that significant disruptions will be avoided. The Company's present
analysis of its most reasonably likely worst case scenario for Year 2000
disruptions includes sporadic Year 2000 failures in the telecommunications and
electricity industries, as well as interruptions from suppliers that might cause
disruptions in the Company's operations, thus causing temporary financial losses
and an inability to deliver products and services to customers. Virtually all of
the natural gas transported through the Company's interstate pipelines is owned
by third parties. Accordingly, failures of natural gas producers to be ready for
the Year 2000 could significantly disrupt the flow of product to the Company's
customers. In many cases, the producers have no direct contractual relationship
with the Company, and the Company relies on its customers to verify the Year
2000 readiness of the producers from whom they purchase natural gas. Since most
of the Company's revenues from the delivery of natural gas are based upon fees
paid by its customers for the reservation of capacity, and not based upon the
volume of actual deliveries, short-term disruptions in deliveries caused by
factors beyond the Company's control should not have a significant financial
impact on the Company, although it could cause operational problems for the
Company's customers. Longer-term disruptions, however, could materially impact
the Company's results of operations, financial condition, and cash flows.
While the total cost of the Company's Year 2000 project continues to be
evaluated, the Company estimates that the costs remaining to be incurred in 1999
and 2000 associated with assessing, remediating and testing internally developed
computer applications, hardware and equipment, embedded chip systems, and
third-party-developed software will be between $2 million and $3 million. Of
these estimated costs, the Company expects $1 million to be capitalized and the
remainder to be expensed. As of June 30, 1999, the Company has incurred expenses
of approximately $4 million and has capitalized costs of approximately $3
million. The Company has previously only traced incremental expenses related to
its Year 2000 project. This means that the costs of the Year 2000 project
related to salaried employees of the Company, including their direct salaries
and benefits, are not available, and have not been included in the estimated
costs of the
12
<PAGE> 15
project. Since the earlier phases of the project mostly involved work performed
by such salaried employees, the costs expended to date do not reflect the
percentage completion of the project. The Company anticipates that it will
expend a substantial amount of the remaining costs in the contingency planning
phase of the project, including the potential acquisition of back-up assets and
systems that may be deployed in the event primary systems fail to perform fully
according to expectations. It is possible the Company may need to reassess its
estimate of Year 2000 costs in the event the Company completes an acquisition
of, or makes a material investment in, substantial facilities or another
business entity.
Although the Company does not expect the costs of its Year 2000 project to
have a material adverse effect on its financial position, results of operations,
or cash flows, based on information available at this time the Company cannot
conclude that disruption caused by internal or external Year 2000 related
failures will not have such an effect. Specific factors which might affect the
success of the Company's Year 2000 efforts and the frequency or severity of a
Year 2000 disruption or the amount of expense include the failure of the Company
or its outside consultants to properly identify deficient systems, the failure
of the selected remedial action to adequately address the deficiencies, the
failure of the Company or its outside consultants to complete the remediation in
a timely manner (due to shortages of qualified labor or other factors), the
failure of other parties to joint ventures in which the Company is involved to
meet their obligations, both financial and operational, under the relevant joint
venture agreements to remediate assets used by the joint venture, unforeseen
expenses related to the remediation of existing systems or the transition to
replacement systems, the failure of third parties to become Year 2000 compliant
or to adequately notify the Company of potential noncompliance.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in the
Company's -- or an affiliate's -- equity or debt securities, this disclosure is
made for the SOLE PURPOSE of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from the actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to the Company's acquisitions, political
and economic risks associated with current and future operations in foreign
countries, conditions of the equity and other capital markets during the periods
covered by the forward-looking statements, and other risks, uncertainties and
factors, including the effect of the Year 2000 date change, discussed more
completely in the Company's other filings with the U.S. Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 1998.
13
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, in addition to
the interim consolidated financial statements, accompanying notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.
There have been no material changes in market risk faced by the Company
from those reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
14
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of TGP and its consolidated subsidiaries not
filed herewith for the reason that the total amount of securities
authorized under any of such instruments does not exceed 10 percent of the
total consolidated assets of TGP and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENNESSEE GAS PIPELINE COMPANY
Date: August 12, 1999 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: August 12, 1999 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 0<F1>
<INVENTORY> 16
<CURRENT-ASSETS> 224
<PP&E> 4,436
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 4,852
<CURRENT-LIABILITIES> 556
<BONDS> 1,353
0
0
<COMMON> 0
<OTHER-SE> 1,493
<TOTAL-LIABILITY-AND-EQUITY> 4,852
<SALES> 0
<TOTAL-REVENUES> 362
<CGS> 0
<TOTAL-COSTS> 166
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 160
<INCOME-TAX> 52
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
