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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 MARCH 31, 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 May 12, 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>
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
----- -----
<S> <C> <C>
Operating revenues.......................................... $187 $193
---- ----
Operating expenses
Operation and maintenance................................. 49 68
Depreciation, depletion, and amortization................. 34 34
Taxes, other than income taxes............................ 12 11
---- ----
95 113
---- ----
Operating income............................................ 92 80
---- ----
Other (income) and expense
Non-affiliated interest and debt expense.................. 33 26
Affiliated interest (income) expense, net................. (8) 18
Other -- net.............................................. (9) (4)
---- ----
16 40
---- ----
Income before income taxes and discontinued operations...... 76 40
Income tax expense.......................................... 26 14
---- ----
Income before discontinued operations....................... 50 26
Discontinued operations, net of income tax.................. -- 20
---- ----
Net income.................................................. $ 50 $ 46
==== ====
</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)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and temporary investments............................ $ 5 $ 5
Accounts and notes receivable, net........................ 420 137
Materials and supplies.................................... 15 15
Other..................................................... 71 71
------ ------
Total current assets.............................. 511 228
Property, plant, and equipment, net......................... 4,425 4,440
Other....................................................... 194 188
------ ------
Total assets...................................... $5,130 $4,856
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 121 $ 242
Short-term borrowings (including current maturities of
long-term debt)........................................ 525 191
Other..................................................... 252 257
------ ------
Total current liabilities......................... 898 690
------ ------
Long-term debt, less current maturities..................... 1,353 1,353
------ ------
Deferred income taxes....................................... 1,166 1,150
------ ------
Other....................................................... 278 278
------ ------
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......................................... 50 --
------ ------
Total stockholder's equity........................ 1,435 1,385
------ ------
Total liabilities and stockholder's equity........ $5,130 $4,856
====== ======
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
2
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TENNESSEE GAS PIPELINE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
----------------
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 50 $ 46
Less income from discontinued operations, net of income
tax.................................................... -- 20
----- -----
Income from continuing operations........................... 50 26
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 34 34
Deferred income taxes.................................. 15 --
Other.................................................. (2) (3)
Working capital changes................................... 47 --
Other..................................................... (5) (19)
----- -----
Cash provided by continuing operations................. 139 38
Cash used in discontinued operations................... -- (17)
----- -----
Net cash provided by operating activities......... 139 21
----- -----
Cash flows from investing activities
Capital expenditures...................................... (17) (14)
Investment in joint ventures and equity investees......... (4) (6)
Net change in advances to EPEC............................ (453) (128)
Other..................................................... 1 7
Cash provided by investing activities of discontinued
operations............................................. -- 107
----- -----
Net cash used in investing activities............. (473) (34)
----- -----
Cash flows from financing activities
Net commercial paper borrowings........................... 334 --
Net proceeds from affiliated note......................... -- 105
Cash used in financing activities by discontinued
operations............................................. -- (105)
----- -----
Net cash provided by financing activities......... 334 --
----- -----
Decrease in cash and temporary investments.................. -- (13)
Less decrease in cash and temporary investments related to
discontinued operations................................ -- (15)
----- -----
Increase in cash and temporary investments from continuing
operations............................................. -- 2
Cash and temporary investments
Beginning of period....................................... 5 11
----- -----
End of period............................................. $ 5 $ 13
===== =====
</TABLE>
The accompanying Notes are an integral part of these
Condensed Consolidated Financial Statements.
3
<PAGE> 6
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 March 31, 1999, and for the quarters ended March 31,
1999, and 1998, are unaudited. The condensed balance sheet at December 31, 1998,
is derived from audited financial statements. These financial statements do not
include all disclosures required by generally accepted accounting principles. In
the opinion of management, all material adjustments necessary to present fairly
the results of operations for such periods have been included. All such
adjustments, 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 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 ended March 31, 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 $1,262 million for the quarter ended March 31, 1998.
2. FINANCING TRANSACTIONS
The average interest rate of short-term borrowings was 5.1% and 5.8% at
March 31, 1999, and December 31, 1998, respectively. The Company had short-term
borrowings, including current maturities of long-term debt, at March 31, 1999,
and December 31, 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Commercial paper............................................ $524 $190
Current maturities of long-term debt........................ 1 1
---- ----
$525 $191
==== ====
</TABLE>
In May 1999, EPEC issued $500 million aggregate principal amount of 6.75%
Senior Notes due 2009. Approximately $80 million of the proceeds were used to
repay a portion of TGP's 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 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
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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 March
31, 1999, the demand portion had been fully collected and $43 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 on March 31, 1999. Upon approval
of this report, TGP will refund approximately $14 million to its firm customers,
which represents the amount collected in excess of the $693 million recovered
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 on March 31, 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.
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 but clarifying that,
among other things, although the ultimate resolution as to the proper allocation
of costs would be applied retroactively to July 1, 1995, the cost of service
settlement does not allow TGP to recover from other customers any amounts that
TGP may ultimately be required to refund. 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.
TGP has filed cash out reports for the period September 1993 through August
1998. TGP's filings showed a cumulative loss through August of 1998 of $3
million. The reports, as well as the accounting for customer imbalances, were
previously challenged by TGP's customers. In April 1999, FERC approved a
settlement that resolved outstanding FERC proceedings relating to the filed
cashout reports, subject to rehearing. The settlement provides a new mechanism
for accounting for TGP's cash out program.
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 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
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<PAGE> 8
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 relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
In 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.
TGP has been named a defendant 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 does not intend to intervene in these
actions. The Company believes the complaint to be without merit.
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 March 31, 1999, the Company had reserves of
approximately $116 million for expected environmental costs.
In addition, the Company estimates that it will make capital expenditures
for environmental matters of approximately $6 million for the remainder of 1999.
Capital expenditures are expected to range from approximately $74 million to $99
million in the aggregate for the years 2000 through 2007. These expenditures
primarily relate to compliance with air regulations and, to a lesser extent,
control of water discharges.
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 its compressor stations
and other facilities. 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 March 31, 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 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
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<PAGE> 10
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 reserve is 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 March 31, 1999, and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost................ $2,363 $2,316
Less accumulated depreciation and depletion............ 272 216
------ ------
2,091 2,100
Additional acquisition cost assigned to utility plant,
net of accumulated amortization...................... 2,334 2,340
------ ------
Total property, plant, and equipment, net.... $4,425 $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, (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
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<PAGE> 11
designation. The standard is effective for all quarters in fiscal years
beginning after June 15, 1999. The Company is currently evaluating the effects
of this pronouncement.
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>
FIRST QUARTER
ENDED
MARCH 31,
---------------
1999 1998
---- -----
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $187 $ 193
Operating expenses.......................................... (95) (113)
Other -- net................................................ 9 4
---- -----
EBIT...................................................... $101 $ 84
==== =====
</TABLE>
Operating revenues for the quarter ended March 31, 1999, were $6 million
lower than for the same period of 1998 primarily due to lower GSR revenue in
1999, a favorable customer settlement in the first quarter of 1998, and lower
miscellaneous operating revenue. The decrease was partially offset by the
favorable resolution of a regulatory issue.
Operating expenses for the quarter ended March 31, 1999, were $18 million
lower than for the same period of 1998 primarily due to lower system fuel costs
associated with operating efficiencies related to lower throughput levels, the
favorable resolution of certain regulatory issues, and lower operating expenses.
Other -- net for the quarter ended March 31, 1999, was $5 million higher
than for the same period of 1998 primarily due to the favorable resolution of
regulatory and contractual issues and higher earnings from equity investments.
NON-AFFILIATED INTEREST AND DEBT EXPENSE
Non-affiliated interest and debt expense for the quarter ended March 31,
1999, was $7 million higher than for the same period of 1998 primarily due to an
increase in long-term borrowings.
AFFILIATED INTEREST (INCOME) EXPENSE, NET
Affiliated interest income, net for the quarter ended March 31, 1999, was
$8 million compared to affiliated interest expense, net of $18 million for the
same period in 1998 primarily due to the reduction of affiliated debt and
increased advances to EPEC.
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<PAGE> 12
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.
The Company is participating in EPEC's Year 2000 project. Accordingly, the
Company is taking steps to mitigate any adverse effects of the Year 2000 date
change on our customers and business operations including the assessment,
remediation, testing of our applications, hardware and software, and the
implementation of necessary changes. Nevertheless, our failure, or the failure
of third-parties with whom we deal, to achieve Year 2000 compliance may
adversely affect our business. For more information regarding the Year 2000
compliance project, see EPTPC's Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
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.
10
<PAGE> 13
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>
3.A -- Restated Certificate of Incorporation, dated May 11,
1999.
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
TGP filed a report under Item 2 on Form 8-K, dated January 14, 1999,
with respect to the tax-free internal reorganization.
11
<PAGE> 14
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: May 13, 1999 /s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 13, 1999 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.A -- Restated Certificate of Incorporation, dated May 11,
1999.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.A
RESTATED
CERTIFICATE OF INCORPORATION
OF
TENNESSEE GAS PIPELINE COMPANY
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
Tennessee Gas Pipeline Company, a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Tennessee Gas Pipeline Company (the
"Corporation"). The Corporation was originally incorporated under the name
Tennessee Gas Transmission Company. The original certificate of incorporation
was filed with the Secretary of State of the State of Delaware on June 9, 1947.
2. This Restated Certificate of Incorporation restates and further
amends the Certificate of Incorporation of the Corporation and has been adopted
and approved in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware. Stockholder approval of this Restated Certificate
of Incorporation was given by unanimous written consent of the stockholders of
the Corporation in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
3. The text of the Certificate of Incorporation, as heretofore amended,
is hereby amended and restated to read in its entirety as follows:
FIRST: The name of the corporation is Tennessee Gas Pipeline Company.
SECOND: The address of the Corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
New Castle County, Delaware 19801, and the name of its registered agent at the
above address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
<PAGE> 2
FOURTH: The total number of shares of stock the corporation shall have
authority to issue is three hundred (300) shares of common stock with a par
value of five dollars ($5.00) per share.
Shares of stock of this corporation whether with or without par value,
of any class or classes hereby or hereafter authorized, may be issued by this
corporation from time to time for such consideration permitted by law as may be
fixed from time to time by the Board of Directors.
FIFTH: Unless required by the By-laws, the election of the Board of
Directors need not be by written ballot.
SIXTH: The Board of Directors of this corporation is expressly
authorized to make, alter, or repeal the By-laws of the corporation, but the
stockholders may make additional by-laws and may alter or repeal any By-law
whether or not adopted by them.
SEVENTH: No director of the Corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, for any act or omission, except that a director may be
liable (i) for breach of the director's duty of loyalty to the corporation or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
General Corporation Law of the State of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors shall be eliminated or limited to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended. The elimination and limitation of liability provided
herein shall continue after a director has ceased to occupy such position as to
acts or omissions occurring during such director's term or terms of office. Any
amendment, repeal or modification of this Article Seventh shall not adversely
affect any right of protection of a director of the Corporation existing at the
time of such repeal or modification.
IN WITNESS WHEREOF, Tennessee Gas Pipeline Company has caused this
Restated Certificate of Incorporation to be signed by a duly authorized officer
this 11th day of May 1999.
Tennessee Gas Pipeline Company
By: /s/ Jeffrey I. Beason
-------------------------------------
Jeffrey I. Beason
Vice President and Controller
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 420
<ALLOWANCES> 0<F1>
<INVENTORY> 15
<CURRENT-ASSETS> 511
<PP&E> 4,425
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 5,130
<CURRENT-LIABILITIES> 898
<BONDS> 1,353
0
0
<COMMON> 0
<OTHER-SE> 1,435
<TOTAL-LIABILITY-AND-EQUITY> 5,130
<SALES> 0
<TOTAL-REVENUES> 187
<CGS> 0
<TOTAL-COSTS> 95
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 76
<INCOME-TAX> 26
<INCOME-CONTINUING> 50
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50
<EPS-PRIMARY> 0
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<FN>
<F1>Not separately identified in the Consolidated Financial Statements or
accompanying notes thereto.
</FN>
</TABLE>
