-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CK8cmW+3C3iJejJ5opBAhTNSWJpbe+j3Sy6JJzEhR7ZQW0nitlPPtOIjOOVVMH5M H/j6Sn3pr04K1Y5eRqQdFQ== 0000950129-99-003621.txt : 19990813 0000950129-99-003621.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950129-99-003621 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNESSEE GAS PIPELINE CO CENTRAL INDEX KEY: 0000097142 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 741056569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04101 FILM NUMBER: 99686117 BUSINESS ADDRESS: STREET 1: 1001 LOUISIANA STREET 2: EL PASO ENERGY BLDG CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137572131 MAIL ADDRESS: STREET 1: 1001 LOUISIANA STREET 2: EL PASO ENERGY BLDG CITY: HOUSTON STATE: TX ZIP: 77002 FORMER COMPANY: FORMER CONFORMED NAME: TENNECO INC DATE OF NAME CHANGE: 19871227 FORMER COMPANY: FORMER CONFORMED NAME: TENNESSEE GAS TRANSMISSION CO DATE OF NAME CHANGE: 19680411 10-Q 1 TENNESSEE GAS PIPELINE COMPANY - DATED 06/30/99 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) 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)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 GLOSSARY The following abbreviations, acronyms, or defined terms used in this Form 10-Q are defined below:
DEFINITIONS ----------- 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.
i 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TENNESSEE GAS PIPELINE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS) (UNAUDITED)
QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- 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 ==== ==== ==== ====
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. 1 4 TENNESSEE GAS PIPELINE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) 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 ====== ======
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. 2 5 TENNESSEE GAS PIPELINE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------- 1999 1998 ----- ----- 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 ===== =====
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. 3 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 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:
1999 1998 ----- ----- (IN MILLIONS) Commercial paper............................................ $111 $190 Current maturities of long-term debt........................ 1 1 ---- ---- $112 $191 ==== ====
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 4 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 5 8 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 6 9 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 7 10 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:
1999 1998 ------ ------ (IN MILLIONS) 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 ====== ======
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, 8 11 (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. 9 12 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
QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- -------------- 1999 1998 1999 1998 ---- ----- ----- ----- (IN MILLIONS) Operating revenues................................. $175 $ 164 $ 362 $ 357 Operating expenses................................. (71) (109) (166) (222) Other -- net....................................... 3 7 12 11 ---- ----- ----- ----- EBIT............................................. $107 $ 62 $ 208 $ 146 ==== ===== ===== =====
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 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 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 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 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 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.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 -- Financial Data Schedule.
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 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 19 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 -- Financial Data Schedule.
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS. 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3 0 142 0 16 224 4,436 0 4,852 556 1,353 0 0 0 1,493 4,852 0 362 0 166 0 0 48 160 52 108 0 0 0 108 0 0 Not separately identified in the Consolidated Financial Statements or accompanying notes thereto.
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