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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4101
TENNESSEE GAS PIPELINE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-1056569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TENNECO BUILDING, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
9 1/4% Notes due 1996; 9% Notes due 1997;
6% Debentures due 2011................................. New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO
THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF
SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.
None
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $5
per share, 200 shares outstanding as of February 21, 1996.
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
J(1)(A) AND (B) TO THE FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A
REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS........................................................ 1
Tennessee Gas Pipeline Company...................................... 1
Contributions of Major Businesses................................... 1
Tenneco Automotive.................................................. 2
Tenneco Energy...................................................... 4
Tenneco Packaging................................................... 9
Newport News Shipbuilding........................................... 11
Business Strategy................................................... 12
Environmental Matters............................................... 12
ITEM 2. PROPERTIES..................................................... 13
ITEM 3. LEGAL PROCEEDINGS.............................................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDER MATTERS................................................. 15
ITEM 6. SELECTED FINANCIAL DATA........................................ 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 25
Index to Financial Statements of Tennessee Gas Pipeline Company
and Consolidated Subsidiaries................................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. *
ITEM 11. EXECUTIVE COMPENSATION......................................... *
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. *
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 56
Financial Statements Included in Item 8............................. 56
Index to Financial Statements and Schedules Included in Item 14..... 56
Schedules Omitted as Not Required or Inapplicable................... 56
Reports on Form 8-K................................................. 62
Exhibits............................................................ 62
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* No response to this item is included herein for the reason that no response
is required pursuant to the reduced disclosure format permitted by General
Instruction J to Form 10-K.
i
PART I
TENNESSEE GAS PIPELINE COMPANY
ITEM 1. BUSINESS.
Tennessee Gas Pipeline Company, a Delaware corporation (the "Company"), is a
wholly-owned subsidiary of Tenneco Inc. As used herein, "Tennessee" refers to
the Company and its consolidated subsidiaries.
The major businesses of Tennessee are the manufacture and sale of automotive
exhaust system parts and ride control products; natural gas transportation and
marketing; manufacture and sale of packaging materials, cartons, containers and
specialty packaging products for consumer and commercial markets; and
construction and repair of ships.
In March 1995, Tenneco Inc. sold, in a public flotation primarily in the
United Kingdom, all of the capital stock of Albright & Wilson plc, which is
engaged in the chemical business. See Note 3 to the Financial Statements of
Tennessee Gas Pipeline Company and Consolidated Subsidiaries for additional
information concerning the sale of this subsidiary.
At December 31, 1995, Tennessee had approximately 59,000 employees.
CONTRIBUTIONS OF MAJOR BUSINESSES
Information concerning Tennessee's principal industry segments and geographic
areas is set forth in Note 11 to the Financial Statements of Tennessee Gas
Pipeline Company and Consolidated Subsidiaries. The following tables summarize
(i) net sales and operating revenues from continuing operations, (ii) income
from continuing operations before interest expense, income taxes and minority
interest and (iii) capital expenditures for continuing operations of the major
business groups of Tennessee for the periods indicated.
NET SALES AND OPERATING REVENUES FROM CONTINUING OPERATIONS
1995 1994 1993
----------- ----------- -----------
(DOLLAR AMOUNTS IN MILLIONS)
Automotive............................... $2,427 27% $1,850 21% $1,628 17%
Energy................................... 1,916 22 2,378 28 2,862 30
Packaging................................ 2,750 31 2,184 25 2,042 22
Shipbuilding............................. 1,756 20 1,753 20 1,861 20
Farm and construction equipment*......... -- -- 518 6 1,014 11
Other.................................... -- -- -- -- 1 --
Intergroup sales......................... (9) -- (7) -- (8) --
------ --- ------ --- ------ ---
Total.................................. $8,840 100% $8,676 100% $9,400 100%
====== === ====== === ====== ===
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES AND
MINORITY INTEREST
1995 1994 1993
------ ------ ------
(MILLIONS)
Automotive............................................... $ 235 $ 205 $ 198
Energy................................................... 333 415 411
Packaging................................................ 457 209 139
Shipbuilding............................................. 160 200 225
Farm and construction equipment*......................... -- (1) 49
Other.................................................... 319 193 219
------ ------ ------
Total.................................................. $1,504 $1,221 $1,241
====== ====== ======
1
CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS
1995 1994 1993
-------- -------- --------
(DOLLAR AMOUNTS IN
MILLIONS)
Automotive........................................ $204 22% $106 16% $ 89 21%
Energy............................................ 334 36 331 51 170 39
Packaging......................................... 316 34 166 26 124 29
Shipbuilding...................................... 77 8 29 5 36 8
Farm and construction equipment*.................. -- -- 4 -- 11 3
Other............................................. 4 -- 14 2 1 --
---- --- ---- --- ---- ---
Total........................................... $935 100% $650 100% $431 100%
==== === ==== === ==== ===
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* In June 1994, Tennessee reorganized its farm and construction equipment
segment prior to the Case Corporation initial public offering. The
reorganization resulted in Tennessee receiving Case Corporation common stock
and cash in exchange for the net assets of its farm and construction
equipment segment. Since that time, Tennessee's investment in Case
Corporation common stock has been reflected using the cost method of
accounting. See Notes 1 and 3 in the "Notes to Financial Statements" for
additional information on Tennessee's investment in Case Corporation common
stock.
The interest expense, income taxes and minority interest from continuing
operations that are not allocated to the major businesses were as follows:
1995 1994 1993
---- ---- ----
(MILLIONS)
Interest Expense (net of interest capitalized)............... $287 $265 $278
Income Tax Expense........................................... 448 290 329
Minority Interest............................................ 33 1 --
TENNECO AUTOMOTIVE
The principal business operations of Tenneco Automotive and its affiliates
are Walker Manufacturing Company and Monroe Auto Equipment Company.
Walker Manufacturing Company and its affiliates ("Walker") manufacture a
variety of automotive exhaust systems and emission control products. In the
United States, Walker operates nine manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities,
and also has two research and development facilities. In addition, Walker
operates 25 manufacturing facilities located in Australia, Canada, the United
Kingdom, Mexico, Denmark, Germany, France, Spain, Portugal and Sweden, and also
has one engineering and technical center in Germany.
Walker's products are sold to automotive manufacturers for use as original
equipment and to wholesalers and retailers for sale as replacement equipment.
Sales to the original equipment market are directly dependent on new car sales,
and sales to the replacement market are related to the service life of original
equipment and to the level of maintenance by individual owners of their
automobiles. The service life of exhaust systems has increased in recent years,
resulting in a longer time period for the exhaust replacement rate.
2
The following table sets forth information relating to Walker's sales:
PERCENTAGE OF
SALES
----------------
1995 1994 1993
---- ---- ----
United States Sales
Automotive replacement equipment (primarily exhaust
system parts).......................................... 46% 48% 52%
Automotive original equipment........................... 54 52 48
--- --- ---
100% 100% 100%
=== === ===
Foreign Sales
Automotive replacement equipment........................ 42% 74% 78%
Automotive original equipment........................... 58 26 22
--- --- ---
100% 100% 100%
=== === ===
Total Sales by Geographic Area
United States........................................... 42% 65% 67%
European Union.......................................... 45 27 26
Canada.................................................. 7 -- --
Other areas............................................. 6 8 7
--- --- ---
100% 100% 100%
=== === ===
In November 1994, Walker acquired ownership of Heinrich Gillet GmbH & Co. KG
and its affiliates ("Gillet"), a manufacturer of exhaust systems headquartered
at Edenkoben, Germany. The combination of Gillet, Europe's largest original
equipment exhaust supplier, and Walker's European division, which is Europe's
largest replacement market supplier, increased Walker's European sales in 1995
by approximately 150%.
Monroe Auto Equipment Company and its affiliates ("Monroe") are engaged
principally in the design, manufacture and distribution of ride control
products. Monroe ride control products consist of hydraulic shock absorbers,
air adjustable shock absorbers, spring assisted shock absorbers, gas charged
shock absorbers, struts, replacement cartridges and electronically adjustable
suspension systems. Monroe manufactures and markets replacement shock absorbers
for virtually all domestic and most foreign makes of automobiles. In addition,
Monroe manufactures and markets shock absorbers and struts for use as original
equipment on passenger cars and trucks, as well as for other uses. Monroe has
seven manufacturing facilities in the United States and ten foreign
manufacturing operations in Australia, Belgium, Canada, Mexico, the United
Kingdom, Spain and New Zealand. (The manufacturing operations in Brazil are not
owned by subsidiaries of the Company.)
The following table sets forth information relating to Monroe's sales:
PERCENTAGE OF
SALES
----------------
1995 1994 1993
---- ---- ----
United States Sales
Automotive replacement equipment...................... 70% 72% 72%
Automotive original equipment......................... 30 28 28
--- --- ---
100% 100% 100%
=== === ===
Foreign Sales
Automotive replacement equipment...................... 64% 66% 65%
Automotive original equipment......................... 36 34 35
--- --- ---
100% 100% 100%
=== === ===
Total Sales by Geographic Area
United States......................................... 52% 55% 58%
European Union........................................ 39 36 33
Canada................................................ 3 -- --
Other areas........................................... 6 9 9
--- --- ---
100% 100% 100%
=== === ===
In 1995, Tenneco Automotive acquired a 51% interest in a joint venture that
has two ride control manufacturing facilities in India and a 51% interest in a
joint venture that has one ride control manufacturing facility in China. It is
anticipated that the joint venture in India will also manufacture exhaust
systems.
3
Tenneco Automotive owns and licenses the rights under a number of domestic
and foreign patents and trademarks relating to its products and businesses. It
manufactures and distributes its products primarily under the names "Walker"
and "Monroe," which are well recognized in the marketplace.
Tenneco Automotive is actively pursuing opportunities to expand its business
by entering additional geographic areas, including countries in Eastern Europe,
Asia and South America. It is anticipated that this expansion will occur
through a variety of means, including joint ventures and acquisitions.
The operations of Tenneco Automotive face intense competition from other
manufacturers of automotive equipment.
TENNECO ENERGY
Tennessee is engaged in the interstate and intrastate transportation and
marketing of natural gas, with operations conducted by Tenneco Energy Inc. and
other related subsidiaries of the Company (collectively, "Tenneco Energy").
Tenneco Energy is also engaged in related businesses that are not generally
subject to regulation by the Federal Energy Regulatory Commission ("FERC")
which Tenneco Energy believes have the potential to generate higher returns
than its regulated businesses. The principal activities of these business units
include the development of and participation in international natural gas
pipelines, primarily in Australia, and in international and domestic gas-fired
power generation projects, and the development of natural gas production and
production financing programs for producers, primarily in the United States.
INTERSTATE PIPELINE OPERATIONS
Tenneco Energy's interstate pipeline operations include the pipeline systems
of the Company, Midwestern Gas Transmission Company ("Midwestern") and East
Tennessee Natural Gas Company ("East Tennessee"), which are primarily engaged
in the transportation and storage of natural gas for producers, marketers, end-
users, and other gas transmission and distribution companies.
The Company's multiple-line system begins in gas-producing regions of Texas
and Louisiana, including the continental shelf of the Gulf of Mexico, and
extends into the northeastern section of the United States, including the New
York City and Boston metropolitan areas. Midwestern's pipeline system extends
from Portland, Tennessee, to Chicago, and principally serves the Chicago
metropolitan area. East Tennessee's pipeline system serves the states of
Tennessee, Virginia and Georgia.
At December 31, 1995, Tenneco Energy's interstate gas transmission systems
included approximately 16,300 miles of pipeline, gathering lines and sales
laterals, together with related facilities that include 90 compressor stations
with an aggregate of approximately 1.5 million horsepower. These systems also
include underground and above-ground gas storage facilities to permit increased
deliveries of gas during peak demand periods. The total design delivery
capacity of Tenneco Energy's interstate systems at December 31, 1995, was
approximately 4,800 million cubic feet ("MMCF") of gas per day, and
approximately 5,600 MMCF on peak demand days, which includes gas withdrawn from
storage.
Tenneco Energy also has a 13.2% interest in Iroquois Gas Transmission System,
L.P. ("Iroquois"). The 370-mile Iroquois pipeline extends from the Canadian
border at Waddington, New York, to Long Island, New York, and is designed to
deliver (directly or through interconnecting pipelines such as Tennessee Gas
Pipeline Company) 818 MMCF of gas per day to local distribution companies and
electric generation facilities in six states. For more information on Iroquois,
see Item 3, "Legal Proceedings."
In December 1995, Tenneco Energy sold its 50% interest in Kern River Gas
Transmission Company ("Kern River"). This sale was a part of Tennessee's
ongoing plan to redeploy assets into its primary growth businesses, which
include the nonregulated natural gas operations. Kern River owns a 904-mile
pipeline system extending from Wyoming to California.
4
Gas Sales and Transportation Volumes
The following table sets forth the volumes of gas, stated in billions of
British thermal units ("BBtu"), sold and transported by Tenneco Energy's
interstate pipeline systems for the periods shown.
1995 1994 1993
--------- --------- ---------
Sales*......................................... 95,397 131,097 213,210
Transportation*................................ 2,139,169 2,183,944 2,118,936
--------- --------- ---------
Total........................................ 2,234,566 2,315,041 2,332,146
========= ========= =========
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* These sales and transportation volumes include all natural gas sold or
transported by Tenneco Energy's interstate pipeline companies. The table
includes Tenneco Energy's proportionate share of transportation volumes of
the joint ventures in which it had interests during 1995; of the total
transportation volumes shown, 183,281 BBtu was attributable to these joint
venture interests in 1995, 167,961 BBtu in 1994 and 169,871 BBtu in 1993.
Intercompany deliveries of natural gas have not been eliminated from the
table.
Federal Regulation
Tenneco Energy's interstate natural gas pipeline companies are "natural gas
companies" as defined in the Natural Gas Act of 1938, as amended (the "Natural
Gas Act"). As such, these companies are subject to the jurisdiction of the
FERC. Tenneco Energy's interstate pipeline operations are operated pursuant to
certificates of public convenience and necessity issued under the Natural Gas
Act and pursuant to the Natural Gas Policy Act of 1978. The FERC regulates the
interstate transportation and certain sales of natural gas, including, among
other things, rates and charges allowed natural gas companies, extensions and
abandonments of facilities and service, rates of depreciation and amortization
and the accounting system utilized by the companies.
Prior to the FERC's industry restructuring initiatives in the 1980's, Tenneco
Energy's interstate pipeline companies operated primarily as merchants,
purchasing natural gas under long-term contracts and reselling the gas to
customers, also under long-term contracts. Pursuant to Order 636 issued by the
FERC, the Company implemented revisions to its tariff, effective on September
1, 1993, which restructured its transportation, storage and sales services to
convert the Company from primarily a merchant to primarily a transporter of
gas. As a result of this restructuring, the Company's gas sales declined while
certain obligations to producers under long-term gas supply contracts
continued, causing the Company to incur significant restructuring transition
costs. Pursuant to the provisions of Order 636 allowing for the recovery of
transition costs related to the restructuring, the Company has made filings to
recover gas supply realignment ("GSR") costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the "stranded"
cost of the Company's continuing contractual obligation to pay for capacity on
other pipeline systems ("TBO costs").
The Company's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas production
from the field; however, the FERC recognized the ability of the Company to file
for the recovery of losses upon disposition of these assets. The Company has
filed for appellate review of the FERC actions and is confident that the
Bastian Bay costs will ultimately be recovered as transition costs under Order
636; the FERC has not contested the ultimate recoverability of these costs.
The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery is subject to refund pending FERC review and approval for eligibility:
1) direct-billing of unrecovered PGA costs to its former sales customers over a
twelve-month period; 2) recovery of TBO costs, which the Company is obligated
to pay under existing contracts, through a surcharge from firm transportation
customers, adjusted annually; and 3) GSR cost recovery of 90% of such costs
over a period of up to 36 months from firm transportation customers and
recovery of 10% of such costs from interruptible transportation customers over
a period of up to 60 months.
5
Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which
provides for the recovery of PGA costs of approximately $100 million and the
recovery of costs associated with the transfer of storage gas inventory to new
storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. On November 15,
1994, the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. The Company implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on Tennessee's reported net income. The orders approving the
PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. The Company believes the FERC orders approving the PGA
Stipulation will be upheld on appeal.
The Company is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function, pending FERC review of data
submitted by the Company. The FERC subsequently issued an order requiring the
Company to refund certain costs from this surcharge. The Company is appealing
this decision and believes such appeal will likely be successful.
With regard to the Company's GSR costs, the Company, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by the
Company of synthetic gas produced from the Great Plains Coal Gasification plant
("Great Plains"). The FERC previously ruled that the costs related to the Great
Plains project are eligible for recovery through GSR and other special recovery
mechanisms and that the costs are eligible for recovery for the duration of the
term of the original gas purchase agreements. On October 18, 1994, the FERC
consolidated the four proceedings and set them for hearing before an
administrative law judge ("ALJ"). The hearing, which concluded in July 1995,
was limited to the issue of whether the settlement agreements are prudent. The
ALJ concluded, in his initial decision issued in December 1995, that the
settlement was imprudent. The Company has filed exceptions to this initial
decision and believes that this decision will not impair the Company's recovery
of the costs resulting from this contract. The FERC has committed to issuing a
final order by December 31, 1996.
Also related to the Company's GSR costs, on October 14, 1993, the Company was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment; the plaintiffs have filed a notice
of appeal. Thereafter, ICA and TransTexas filed a motion for summary judgment
on a separate issue involving the term "committed reserves" and whether the
Company has a contractual obligation to purchase gas produced from a lease not
described in the gas contract. On November 8, 1995, the trial court granted
ICA's and TransTexas' motion in part. That order, which would be finalized upon
conclusion of the trial, also held that ICA's and TransTexas' rights are
subject to certain limitations of the Texas Business and Commerce Code. In
addition to these defenses, which are to be resolved at trial, the Company has
other defenses which it has asserted and intends to pursue. The Company has
filed a Motion to Clarify the November 8, 1995 order together with a new motion
for partial summary judgment concerning the committed reserve issue. The
November 8, 1995 ruling does not affect the trial court's previous May 4, 1995
order granting summary judgment to the Company.
6
The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution of
these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling of
the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
As of December 31, 1995, the Company has deferred GSR costs yet to be
recovered from its customers of approximately $462 million, net of $316 million
previously recovered from its customers, subject to refund. A proceeding before
a FERC ALJ is scheduled to commence in early 1996 to determine whether the
Company's GSR costs are eligible for cost recovery. The FERC has generally
encouraged pipelines to settle such issues through negotiations with customers.
Although Order 636 provides for complete recovery by pipelines of eligible and
prudently incurred transition costs, certain customers have challenged the
prudence and eligibility of the Company's GSR costs and the Company has engaged
in settlement discussions with its customers concerning the amount of such
costs in response to the FERC and customer statements acknowledging the
desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
On December 30, 1994, the Company filed for a general rate increase (the
"1995 Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended
its effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, the
Company began collecting rates, subject to refund, reflecting an $87 million
increase in the Company's annual revenue requirement. Settlement discussions
with the FERC staff and customers regarding 1995 Rate Case issues, including
structural rate design and increased revenue requirements, are ongoing and the
Company is reserving revenues it believes adequate to cover any refunds that
may be required upon final settlement of this proceeding. A hearing is
scheduled to commence in March 1996.
Competition
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, Tenneco Energy's
interstate pipelines face competitive pressure from other major pipeline
systems, enabling local distribution companies and end users to choose a
supplier or switch suppliers based on the short term price of gas and the cost
of transportation. Competition between pipelines is particularly intense in
Midwestern's Chicago and Northern Indiana markets, in East Tennessee's Roanoke,
Chattanooga and Atlanta markets, and in the Company's supply area, Louisiana
and Texas. In some instances, Tenneco Energy's pipelines have been required to
discount their transportation rates in order to maintain their market share.
Additionally, transportation contracts representing approximately 70% of firm
transportation capacity will be expiring over the next five years, principally
in the year 2000. The renegotiation of these contracts may be impacted by these
competitive factors.
Gas Supply
With full implementation of Order 636, the Company's firm sales obligations
requiring maintenance of long-term gas purchase contracts have declined from
over a 1.4 billion dekatherm maximum daily delivery obligation to less than a
200 million dekatherm maximum daily delivery obligation. As discussed above
under
7
the caption "Federal Regulation," the Company has substantially reduced its
natural gas purchase portfolio in line with these requirements through
termination and assignment to third parties. Although the Company's
requirements for purchased gas are substantially less than prior to its
implementation of Order 636, Tenneco Energy is pursuing the attachment of gas
supplies to the Company's pipeline system for transportation by others. Current
gas supply activities include development of offshore and onshore pipeline
gathering projects and utilization of production financing programs to spur
exploration and development drilling in areas adjacent to the Company's system.
Major gathering systems in the Gulf of Mexico were completed during the fourth
quarter of 1994.
GAS MARKETING AND INTRASTATE PIPELINES
Tenneco Energy Resources Corporation, an 80% owned subsidiary of Tennessee,
and its subsidiaries (collectively, "Tenneco Resources") are engaged in the
businesses of marketing natural gas and owning and operating approximately
1,300 miles of pipelines that serve the Texas Gulf Coast and West Texas
markets. Its businesses include the buying, selling, storage and transportation
of natural gas and price risk management services, including the offering of
fixed, floating and other natural gas pricing for short or long terms using
natural gas futures contracts or other financial instruments. These businesses
serve third parties, including producers, marketers, end-users, distribution
companies and gas transmission companies. During 1995 Tenneco Resources
transported, processed or sold approximately 2.3 billion cubic feet of natural
gas for its customers. Tenneco Resources also owns and manages gas gathering
systems and natural gas liquids plants in Pennsylvania, Texas, Louisiana and
the outer continental shelf of the Gulf of Mexico.
The following table sets forth the volumes of gas, stated in BBtu, sold and
transported by subsidiaries of Tenneco Resources for the periods indicated:
1995 1994 1993
------- --------- -------
Sales.............................................. 642,096 739,432 741,800
Transportation..................................... 229,415 273,587 235,940
------- --------- -------
Total............................................ 871,511 1,013,019 977,740
======= ========= =======
In February 1994, a 20% interest in Tenneco Resources was sold to Ruhrgas AG,
Germany's largest natural gas company.
INTERNATIONAL
Tenneco Gas International Inc. and other subsidiaries of Tennessee
(collectively, "TGI") was organized to extend the Company's traditional
activities in North American pipelines to international pipeline, power, and
energy-related projects, with a current focus on activities in South America,
Southeast Asia, Australia and Europe. TGI was selected to construct, own and
operate a 470 mile natural gas pipeline in Queensland, Australia; construction
of the pipeline commenced in late 1995 with completion expected in early 1997.
In June 1995, Tennessee acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488 mile pipeline, for
approximately $225 million. The purchase resulted from the privatization of
Australia's natural gas industry. TGI also has interests in two consortiums
pursuing the development of two natural gas pipeline projects in South America,
from Argentina to Chile and from Bolivia to Brazil, including related gas-fired
electric generation plants.
In December 1995, TGI was selected by the Beijing Natural Gas Transportation
Company ("BGTC") to serve as technical advisor for the construction of China's
first major onshore natural gas pipeline. BGTC, a joint venture between the
Chinese National Petroleum Corporation and the city of Beijing, will build a
600 mile line linking the Jingbian gas field in central China's Ordos Basin
with Beijing. Construction is scheduled to commence in March 1996, with an in-
service date scheduled for October 1997.
8
POWER GENERATION
Tenneco Power Generation Company ("Tenneco Power") has a 17.5% interest in a
power plant in Springfield, Massachusetts and a 50% interest in a cogeneration
project in Florida.
In December 1995, Tenneco Power entered into an agreement with Energy Equity
Corp., Ltd., an Australian company, to purchase 50% of two of its subsidiaries
subject to satisfaction of certain conditions. The new joint venture will
construct a 135 megawatt gas fired power plant.
TENNECO VENTURES
Tenneco Gas Production Corporation ("Tenneco Production") and Tenneco
Ventures Corporation ("Tenneco Ventures"), subsidiaries of Tennessee, together
with institutional investors and partners, invest in oil and gas properties and
finance independent producers engaged in exploration and development projects.
Tenneco Ventures and Tenneco Production hold various ownership interests in oil
and gas fields located primarily in the Gulf of Mexico, Texas and Louisiana.
The reserves in those fields are estimated to be in excess of approximately 150
billion cubic feet of natural gas. Tenneco Ventures is also involved in TGI's
international projects through exploration and development of gas reserves in
Indonesia, Poland and Bolivia.
TENNECO PACKAGING
Tenneco Packaging Inc. and other related Tennessee subsidiaries
(collectively, "Tenneco Packaging") manufacture and sell containerboard,
paperboard, corrugated shipping containers, folding cartons, plastic food
storage and trash bags, stretch film, disposable plastic and aluminum
containers, molded fiber products and other related products. Its shipping
container products are used in the packaging of food, paper products, metal
products, rubber and plastics, automotive products and point of purchase
displays. Its folding cartons are used in the packaging of soap and detergent,
food products and a wide range of other consumer goods. Uses for its molded
fiber products include produce and egg packaging, food service items and
institutional and consumer disposable dinnerware, as well as a wide range of
other consumer and industrial goods. Its disposable plastic and aluminum
containers are sold to the food service, food processing and related
industries. Plastic food storage and trash bags, foam dinnerware and related
products are sold through a variety of retail outlets. In addition to products
bearing the name "Tenneco Packaging", Tenneco Packaging manufactures and
distributes products under the names "EZ FOIL(R)," "Revere Foil Containers,"
"Dahlonega Packaging," "Agri-Pak," "PRESSWARE(R) International," "HEFTY(R),"
"HEFTY ONE ZIP(R)," "BAGGIES(R)" and "KORDITE(R)".
The following table sets forth information with respect to Tenneco
Packaging's sales during the past three years:
PERCENTAGE OF
SALES
----------------
1995 1994 1993
---- ---- ----
Sales by Product Type
Corrugated shipping containers and containerboard products. 58% 56% 53%
Disposable plastic and aluminum products................... 22 20 22
Molded fiber products...................................... 7 9 9
Folding cartons and recycled paperboard mill products...... 7 9 10
Paper stock and other...................................... 6 6 6
--- --- ---
100% 100% 100%
=== === ===
Total Sales by Geographic Area
United States.............................................. 90% 90% 88%
European Union............................................. 5 5 7
Canada..................................................... 1 2 2
Other areas................................................ 4 3 3
--- --- ---
100% 100% 100%
=== === ===
9
At December 31, 1995, Tenneco Packaging operated 69 container plants, seven
folding carton plants and 12 corrugated containerboard and paperboard machines
at six mills. Two of the mills (located in Georgia and Wisconsin), including
substantially all of the equipment associated with both mills, are leased from
third parties. Tenneco Packaging also has eight molded fiber products plants,
one pressed paperboard plant, three lumber plants, one pole mill, three paper
stock plants, and 25 disposable plastic and aluminum container plants. Tenneco
Packaging's plants are located primarily in the United States. Its foreign
plants are located in Great Britain, Spain, Canada, Switzerland and Germany. In
the United States, Tenneco Packaging has a 50% ownership interest in a molded
fiber distribution company and in a hardwood chip mill. In addition, Tenneco
Packaging has a 50% interest in a folding carton plant in Dongguan, China, and
a 50% interest in a folding carton plant in Bucharest, Romania.
In November 1995, Tenneco Inc. acquired the assets of Mobil Corporation's
plastics division for $1.3 billion. As part of the acquisition transaction,
Tenneco Inc. made a capital contribution to Tennessee of the acquired net
assets of the plastics business. The business manufactures HEFTY(R) trash bags
and BAGGIES(R) food storage bags for the consumer market. It also manufactures
polystyrene foam foodservice containers, plates and meat trays; clear take-out
containers from thermoformed polystyrene packaging; and polyethylene film
products including liners, produce and retail bags, and medical and industrial
disposable packaging. The division employs 4,100 people at 11 manufacturing
plants and 16 distribution centers in the United States and Canada.
Additionally, during 1995 Tenneco Packaging made eight other acquisitions in
the packaging segment. The total purchase price for these acquisitions was $104
million. Tenneco Inc. acquired an additional packaging operation for $58
million and made a capital contribution to Tennessee of the acquired net assets
of this business.
Tenneco Packaging owns and licenses the rights under a number of domestic and
foreign patents and trademarks relating to its products and businesses. The
patents, trademarks and other intellectual property owned by Tenneco Packaging
are important in the manufacturing and distribution of its products.
Generally, Tenneco Packaging faces intense competition from numerous
competitors and alternative products in each of its geographic and product
markets.
The principal raw materials used by Tenneco Packaging in its mill operations
are virgin pulp and reclaimed paper stock and, in its specialty products
operations, aluminum and plastics. Tenneco Packaging obtains virgin pulp and
reclaimed paper stock from independent logging contractors, from timberlands
owned or controlled by it, from operation of its reclaimed paper stock
collecting and processing plants and from other sources. Tenneco Packaging
obtains aluminum rolling stock and plastic feed stock from various suppliers.
At December 31, 1995, Tenneco Packaging owned 187,000 acres of timberland in
Alabama, Michigan, Mississippi and Tennessee and leased, managed or had cutting
rights on an additional 808,000 acres of timberland in those states (excluding
Michigan) and in Florida, Wisconsin and Georgia. During the years 1995, 1994
and 1993 approximately 31%, 20% and 22%, respectively, of the virgin fiber and
timber used by Tenneco Packaging in its operations was obtained from
timberlands controlled by it.
10
NEWPORT NEWS SHIPBUILDING
Newport News Shipbuilding and Dry Dock Company ("Newport News"), a Tennessee
subsidiary located in Newport News, Virginia, is the largest privately owned
shipbuilding company in the United States. Its primary business is constructing
and overhauling nuclear-powered aircraft carriers for the United States Navy.
Newport News also overhauls and repairs U.S. Navy and commercial vessels and
refuels nuclear-powered ships. Newport News returned to the commercial
shipbuilding market with the October 1994 award of product tanker contracts
from a foreign owner for two ships. Options for two additional ships were
exercised in June 1995. Additionally, Newport News was awarded a contract to
construct five additional "Double Eagle" tankers which will be used in U.S.
domestic trade. In February 1996, the owners secured financing guarantees from
the Maritime Administration. Newport News is also pursuing international sales
of its fast frigate design and is currently being considered under
congressional budgets for additional submarine work. Newport News' shipbuilding
facilities are located on the James River on approximately 475 acres of
property which it owns.
At December 31, 1995, the aggregate amount of Newport News' backlog of work
was approximately $4.6 billion (substantially all of which is U.S. Navy-
related), a decrease from the previous backlog of $5.6 billion as of December
31, 1994. Although cuts in naval shipbuilding have continued to put pressure on
the Newport News backlog, Newport News was successful in adding $1 billion in
new work during 1995. Major additions to the backlog included the overhaul
contract for the nuclear-powered aircraft carrier USS Eisenhower, two Double
Eagle product tankers and engineering design work for aircraft carriers and
submarines. At December 31, 1995, Newport News anticipated that it would
complete approximately $1.5 billion of the current backlog by December 31,
1996, and an additional $1.0 billion in 1997. The December 31, 1995, backlog of
Newport News included contracts for the construction of two Nimitz-class
aircraft carriers, scheduled for delivery in 1998 and 2002, and two Los
Angeles-class attack submarines to be delivered in 1996. The backlog also
included contracts for the construction of the four product tankers, the
conversion of two Sealift ships, and the Eisenhower overhaul. The present
backlog extends into 2002. For information concerning the impact of the
conversion work on Newport News' margins, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Newport News has various other contracts for U.S. Navy design work and for
industrial products. As is typical for similar Government contracts, all of
Newport News' contracts with the U.S. Navy are unilaterally terminable by the
U.S. Navy at its convenience with compensation for work completed and costs
incurred.
To increase its competitiveness worldwide and in response to the anticipated
decline in U.S. Navy budgets, Newport News has reduced its workforce by
approximately 11,000 or 37% between December 31, 1990 and December 31, 1995.
Newport News is aggressively pursuing new business opportunities and
attempting to expand its business base in light of the declining U.S. Navy
backlog; however, Newport News faces intense worldwide competition in its
efforts to enter new markets. During 1995, Newport News entered into contracts
to construct two additional product tankers. In addition it has a 40% interest
in a venture that will design, construct, own and operate a shipyard in Abu
Dhabi, United Arab Emirates. Construction of the shipyard is expected to be
completed in 1998. While the percentage of Newport News' total business for
commercial work is expected to increase, the U.S. Navy will continue to be its
primary customer. Newport News is pursuing new submarine design and
construction work, major U.S. Navy overhaul and repair work, new commercial
construction contracts, and foreign military sales. For additional information,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
11
BUSINESS STRATEGY
Since September 1991, Tenneco Inc., Tennessee's parent company, has focused
on various initiatives and taken steps designed to strengthen its financial
results and improve its financial flexibility and create greater returns to its
stockholders. Asset evaluation and redeployment have been and will continue to
be important parts of this strategy. Tenneco Inc. continues to study
opportunities for the strategic repositioning and restructuring of its
operations (including through acquisitions, dispositions, divestitures, spin-
offs and joint venture participation, wholly and partially, of various
businesses). Tenneco Inc. has expressed an intention to act on a broad range of
options--spin-offs, sales, public offerings, mergers, joint ventures and
acquisitions--until it is satisfied that its strategic mix and corporate
structure maximize stockholder value. These actions may include one, two or all
of Tennessee's businesses.
ENVIRONMENTAL MATTERS
The Company estimates that its subsidiaries will make capital expenditures
for environmental matters of approximately $60 million in 1996 and that capital
expenditures for environmental matters will range from approximately $161
million to $201 million in the aggregate for the years 1997 through 2007.
For information regarding environmental matters see Item 3, "Legal
Proceedings--Environmental Proceedings" and "--Potential Superfund Liability,"
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Environmental Matters," and Note 12, "Commitments and
Contingencies" in the "Notes to Financial Statements." See also Note 1,
"Control and Summary of Accounting Policies--Environmental Liabilities," in the
"Notes to Financial Statements."
12
ITEM 2. PROPERTIES.
Reference is made to Item 1 for a description of Tennessee's properties.
Tennessee believes that substantially all of its plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs and as supplemented by planned construction are
expected to remain adequate for the near future.
The Company is of the opinion that its subsidiaries have generally
satisfactory title to the properties owned and used in their respective
businesses, subject to liens for current taxes and easements, restrictions and
other liens which do not materially detract from the value of such property or
the interests therein or the use of such properties in their businesses.
ITEM 3. LEGAL PROCEEDINGS.
(1) Environmental Proceedings.
The Company is a party in proceedings involving federal and state authorities
regarding the past use by the Company of a lubricant containing polychlorinated
biphenyls ("PCBs") in its starting air systems. The Company has executed a
consent order with the EPA governing the remediation of certain of its
compressor stations and is working with the Pennsylvania and New York
environmental agencies to specify the remediation requirements at the
Pennsylvania and the New York stations. Tennessee believes that the ultimate
resolution of this matter will not have a material adverse effect on the
financial condition or results of operations of the Company and its
consolidated subsidiaries.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court,
Docket No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency
alleges that the Company discharged pollutants into the waters of the state
without a permit and seeks an injunction against future discharges and a civil
penalty. Counsel for Tennessee are unable to express an opinion as to its
ultimate outcome. Tennessee believes that the resolution of this issue will not
have a material adverse effect on its consolidated financial position or
results of operations.
A subsidiary of the Company owns a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois"), which owns an interstate
natural gas pipeline from the Canadian border through the states of New York
and Connecticut to Long Island. The operator of the pipeline is Iroquois
Pipeline Operating Company (the "Operator"), a subsidiary of TransCanada
Pipelines, Ltd., an affiliate of TransCanada Iroquois, Ltd., which is also a
partner in Iroquois. The Company has a contract to provide gas dispatching as
well as post-construction field operation and maintenance services for the
Operator of Iroquois, but the Company is not the Operator and is not an
affiliate of the Operator.
Iroquois has been informed of investigations and allegations regarding
alleged environmental violations which occurred during the construction of the
pipeline. Communications have been received from U.S. Attorneys' Offices, the
Enforcement Staff of the FERC's Office of the General Counsel, the Army Corps
of Engineers, the Public Service Commission of the State of New York, the EPA
and the Federal Bureau of Investigation. Proceedings have not been commenced
against Iroquois in connection with these inquiries. However, communications
have indicated possible allegation of civil and criminal violations. Iroquois
has held discussions with certain of the agencies to explore the possibility of
a negotiated resolution of the issues. In the absence of a negotiated
resolution, Iroquois believes that indictments will be sought and, in them,
substantial fines and other sanctions may be requested.
As a general partner, the Company's subsidiary may be jointly and severally
liable with the other partners for the liabilities of Iroquois. The foregoing
proceedings and investigations have not affected pipeline operations. Based
upon information available to the Company, the Company believes that neither it
nor any of its subsidiaries is a target of the criminal investigation described
above. Further, while a global resolution of these inquiries could have a
material adverse effect on the financial condition of Iroquois, Tennessee
believes that the ultimate resolution of these matters will not have a material
adverse effect on the financial condition or results of operations of the
Company and its consolidated subsidiaries.
13
On August 2, 1993, the Department of Justice filed suit against Tenneco
Packaging Inc. ("Tenneco Packaging") in the Federal District Court for the
Northern District of Indiana, alleging that wastewater from Tenneco Packaging's
molded fiber products plant in Griffith, Indiana, interfered with or damaged
the Town of Griffith's municipal sewage pumping station on two occasions in
1991 and 1993, resulting in discharges by the Town of Griffith of untreated
wastewater into a river. Tenneco Packaging and the Department of Justice have
agreed in principle to settle the suit. A consent decree is being negotiated by
Tenneco Packaging and the Department of Justice. Tennessee believes that the
resolution of this matter will not have a material adverse effect on the
financial condition or results of operations of the Company and its
consolidated subsidiaries.
(2) Potential Superfund Liability.
At December 31, 1995, Tennessee has been designated as a potentially
responsible party in 55 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain sites, Tennessee is fully indemnified by
third parties. With respect to certain other sites, Tennessee has sought to
resolve its liability through payments to the other potentially responsible
parties. For the remaining sites, Tennessee has estimated its share of the
remediation costs to be between $11 million and $69 million or 0.5% to 2.5% of
the total remediation costs for those sites and has provided reserves that it
believes are adequate for such costs. Because the clean-up costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required, Tennessee's estimate of its share of
remediation costs could change. Moreover, liability under the Comprehensive
Environmental Response, Compensation and Liability Act is joint and several,
meaning that Tennessee could be required to pay in excess of its pro rata share
of remediation costs. Tennessee's understanding of the financial strength of
other potentially responsible parties has been considered, where appropriate,
in Tennessee's determination of its estimated liability. Tennessee believes
that the costs associated with its current status as a potentially responsible
party in the Superfund sites described above will not be material to its
consolidated financial position or results of operations.
For additional information concerning environmental matters, see the caption
"Environmental Matters" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the caption "Environmental
Matters" under Note 12, in the "Notes to Financial Statements."
(3) Other Proceedings.
On October 14, 1993, the Company was sued in the State District Court of
Ector County, Texas, by ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas"). In that suit, ICA and TransTexas contended that the Company had
an obligation to purchase gas production which TransTexas thereafter attempted
to add unilaterally to the reserves originally dedicated to a 1979 gas
contract. An amendment to the pleading seeks $1.5 billion from the Company for
alleged damages caused by the Company's refusal to purchase gas produced from
the TransTexas leases covering the new production and lands. Neither ICA nor
TransTexas were original parties to that contract. However, they contend that
any stranger acquiring a fractional interest in the original committed reserves
thereby obtains a right to add to the contract unlimited volumes of gas
production from locations in South Texas. The Company filed a motion for
summary judgment, asserting that the Texas statutes of frauds precluded the
plaintiffs from adding new production or acreage to the contract. On May 4,
1995, the trial court granted the Company's motion for summary judgment; the
plaintiffs have filed a notice of appeal. Thereafter, ICA and TransTexas filed
a motion for summary judgment on a separate issue involving the term "committed
reserves" and whether the Company has a contractual obligation to purchase gas
produced from a lease not described in the gas contract. On November 8, 1995,
the trial court granted ICA's and TransTexas' motion in part. That order, which
would be finalized upon conclusion of the trial, also held that ICA's and
TransTexas' rights are subject to certain limitations of the Texas Business and
Commerce Code. In addition to these defenses, which are to be resolved at
trial, the Company has other defenses which it has asserted and intends to
pursue. The Company has filed a Motion to Clarify the November 8, 1995 order
together with a new motion for partial summary judgment concerning the
committed reserve issue. The November 8, 1995 ruling does not affect the trial
court's previous May 4, 1995 order granting summary judgment to the Company.
14
The Company and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. The Company believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on Tennessee's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the capital stock of the Company is owned by Tenneco Inc. and,
therefore, there is no trading market for such securities.
Except as set forth below, such dividends as may be determined by the Board
of Directors may be declared and paid on the Common Stock from time to time out
of any funds legally available therefor.
Agreements under which certain indebtedness of the Company is outstanding
contain provisions restricting the Company's right to pay dividends and make
other distributions on its Common Stock. At December 31, 1995, under its most
restrictive dividend provision, the Company had approximately $3.7 billion of
retained earnings available for the payment of dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
Item 6, "Selected Financial Data", has been omitted from this report pursuant
to the reduced disclosure format permitted by General Instruction J to Form 10-
K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following review of Tennessee's financial condition and results of
operations should be read in conjunction with the financial statements and
related notes of Tennessee Gas Pipeline Company and Consolidated Subsidiaries
presented on pages 27 to 55.
YEARS 1995 AND 1994
1995 STRATEGIC ACTIONS
Tennessee's diversified businesses are organized and operated through several
industry segments, including "Tenneco Automotive," "Tenneco Energy," "Tenneco
Packaging," and "Newport News Shipbuilding."
During 1995, Tennessee continued implementing its strategy to redeploy
capital from non-core assets into less cyclical, higher-growth businesses. The
following asset dispositions were completed or announced during 1995:
. In March 1995, Tenneco Inc. completed the initial public offering of its
Albright & Wilson chemicals segment, resulting in net proceeds of
approximately $700 million. Tennessee's loss on the sale, which was
recorded in December 1994 as "discontinued operations", was $166 million,
including income tax expense of $117 million.
. Tenneco sold approximately 16.1 million shares of Case Corporation
("Case") common stock in a public offering in August 1995, reducing
Tenneco's ownership in Case from 44 percent to 21 percent. Of the 16.1
million shares sold, Tennessee owned approximately 646,000 shares.
Tennessee's net proceeds from the offering were $22 million, resulting in
a loss of $35 million, including $35 million of tax benefit. Although
Tennessee recorded a loss on this transaction, Tenneco in the aggregate
recorded a pre-tax gain of $101 million.
15
. In December 1995, Tenneco Energy sold its 50 percent interest in Kern
River Gas Transmission Company ("Kern River"), a joint venture that owns
a 904-mile pipeline extending from Wyoming to California. The sales price
was $206 million, resulting in a pre-tax gain of $30 million.
Tennessee acquired or announced intentions to acquire several new businesses
during 1995, including:
. Tenneco Inc. acquired the plastics business of Mobil Corporation
("Mobil") which is the largest North American producer of polyethylene
and polystyrene packaging on November 17, 1995 for $1.3 billion. Its
consumer products are marketed under the HEFTY(R), KORDITE(R) and
BAGGIES(R) brand names. The acquired plastics business is also a leader
in polystyrene foam packaging, thermoformed polystyrene packaging and
polyethylene film products for food service and industrial consumers. As
part of the acquisition transaction, Tenneco Inc. made a capital
contribution to Tennessee of the acquired net assets of the plastics
business. In addition to this acquisition, Tenneco Packaging acquired two
plastics packaging operations in the United Kingdom for $25 million
during 1995.
. Tenneco Packaging also completed six acquisitions in the paperboard
packaging business during 1995 for $79 million in cash and notes. Tenneco
Inc. acquired an additional paperboard packaging operation for $58
million and made a capital contribution to Tennessee of the acquired net
assets of this business.
. Tenneco Energy acquired the natural gas pipeline assets of the Pipeline
Authority of South Australia ("PASA"), which includes a 488-mile
pipeline, in June 1995 for approximately $225 million and a 50 percent
interest in a gas-fired cogeneration plant from ARK Energy for
approximately $25 million in cash.
. Tenneco Automotive acquired an exhaust company and a catalytic converter
company in 1995 for $40 million and entered into two ride control joint
ventures for $14 million. Tenneco Automotive also announced that it will
acquire two additional ride control companies for $36 million in 1996.
Tenneco Inc. has expressed an intention to act on a broad range of options--
spin-offs, sales, public offerings, mergers, joint ventures and acquisitions--
until it is satisfied that its strategic mix and corporate structure maximize
shareowner value. These actions may include one, two or all of Tennessee's
businesses.
RESULTS OF OPERATIONS
Tennessee's income from continuing operations in 1995 of $736 million
improved by 11 percent compared with $665 million in 1994. Improved results
from Tenneco Packaging and Tenneco Automotive and interest income from
affiliated companies were partially offset by declines in results at Tenneco
Energy and Newport News Shipbuilding, all of which are discussed below.
In 1994, Tennessee recorded a loss of $162 million on the discontinued
operations of its Albright & Wilson chemicals business and Tenneco Automotive's
brake operations. Also, 1994 results included a charge of $13 million for the
adoption of a new accounting principle. No similar costs were incurred in 1995.
Net income in 1995 was $736 million compared with net income of $490 million in
1994.
NET SALES AND OPERATING REVENUES
1995 1994
------ ------
(MILLIONS)
Automotive................................................ $2,427 $1,850
Energy.................................................... 1,916 2,378
Packaging................................................. 2,750 2,184
Shipbuilding.............................................. 1,756 1,753
Farm and construction equipment........................... -- 518
Other..................................................... (9) (7)
------ ------
$8,840 $8,676
====== ======
16
Revenues for farm and construction equipment (Case) are not included in
Tennessee's consolidated results in 1995. Tennessee consolidated the results of
Case through June 1994. Since the June 1994 reorganization and initial public
offering, Case is reflected in Tennessee's financial statements using the cost
method of accounting. Tennessee's ownership of Case stock at December 31, 1995
is not significant to its consolidated financial position. Excluding Case,
Tennessee's 1995 revenues increased $682 million and have benefited from strong
market conditions in the packaging industry along with revenues from
acquisitions made in late 1994 and 1995. These increases more than offset lower
natural gas sales at Tenneco Energy. The results of each segment are discussed
in detail below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
1995 1994
------ ------
(MILLIONS)
Automotive................................................. $ 235 $ 205
Energy..................................................... 333 415
Packaging.................................................. 457 209
Shipbuilding............................................... 160 200
Farm and construction equipment............................ -- (1)
Other...................................................... 319 193
------ ------
$1,504 $1,221
====== ======
Tennessee's 1995 operating income increased by $283 million compared with
1994. Tenneco Packaging benefited from favorable market conditions in the
packaging industry and Tenneco Automotive improved as European original
equipment and aftermarkets performed well. These increases were offset by lower
operating income at Tenneco Energy in both its regulated and nonregulated
businesses and at Newport News Shipbuilding due to lower margins on conversion
work, costs incurred to enter the highly competitive international commercial
shipbuilding markets and a charge for staff downsizing. The results of each
segment are discussed in detail below.
Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
. Pre-tax loss on sales of assets and businesses of $32 million in 1995
(primarily the sale of Case common stock, a mill in North Carolina and
Tenneco Energy's interest in Kern River) compared with losses of $38
million in 1994 (primarily from the Case initial and secondary public
offerings partially offset by a gain on the sale of a 20 percent interest
in Tenneco Energy Resources Corporation ("Tenneco Resources")).
. Reserves established in 1995 of $30 million for estimated regulatory and
legal settlement costs at Tenneco Energy, $30 million for restructuring
at Tenneco Packaging's molded fiber and aluminum foil packaging
operations and $24 million in charges at Newport News Shipbuilding
related to staff downsizing and costs related to entering the highly
competitive international commercial markets.
. A gain from a 1994 contract settlement between Tenneco Energy and
Columbia Gas Transmission Corporation ("Columbia Gas") of $11 million.
. Charges in 1994 of $22 million at Tenneco Automotive for a plant closing
in Ohio and consolidations in Europe associated with the acquisition of
Heinrich Gillet GmbH & Co. KG ("Gillet"), the German exhaust
manufacturer.
TENNECO AUTOMOTIVE
1995 1994
------ ------
(MILLIONS)
Revenues....................................................... $2,427 $1,850
Operating income............................................... $ 235 $ 205
17
Revenues for automotive parts increased $577 million to $2,427 million in
1995 from $1,850 million in 1994 because of increased sales in both the
aftermarket and original equipment market. European original equipment and
aftermarket revenues were up significantly in 1995 for both the exhaust and
ride control businesses. This increase is largely related to improved economic
conditions in many European countries where Gillet is the leading original
equipment manufacturer of exhaust components.
Automotive operating income for 1995 was $235 million, compared with $205
million in 1994. The 1994 operating income included a $17 million charge for
plant consolidations in Europe associated with the Gillet acquisition and a $5
million charge taken for closing a plant in Ohio. The addition of Gillet
contributed $16 million to operating income in 1995. Operating income for 1995
included a high level of costs related to new product launches. Tenneco
Automotive completed 68 product launches for 1996 model year vehicles in 1995,
more than twice the normal levels, which strained plant capabilities and
adversely affected 1995 earnings. In connection with the new product launches,
Tenneco Automotive incurred additional costs of $10 million in 1995 including
those related to a new process, hydroforming. Hydroforming is a liquid, high-
pressure process for bending and shaping metal parts not available with
traditional manufacturing technology. The positive impact of higher sales
volumes in the European aftermarket was essentially offset by the negative
impact of lower North American aftermarket sales. Industry-wide, the North
American aftermarket experienced its sharpest decline in more than a decade.
The unusually mild winter weather in 1995 in the Northeast and Midwest slowed
automotive parts replacement rates.
OUTLOOK
The consolidation of the exhaust operations of Walker Europe and Gillet which
was undertaken during 1995 is substantially complete and is expected to result
in improved earnings from the European original equipment business in 1996.
Also, Tenneco Automotive's international expansion, including joint ventures in
India and China, acquisitions in Spain and Australia and new international
plants such as the new ride control plant in Mexico, are expected to contribute
to future earnings. Tenneco Automotive anticipates higher original equipment
volumes as a result of the high level of new product launches undertaken in
1995 and interest by additional customers in hydroforming technology. Tenneco
also anticipates the North American aftermarket to improve to more normal
activity levels in 1996.
TENNECO ENERGY
1995 1994
------ ------
(MILLIONS)
Revenues....................................................... $1,916 $2,378
Operating income............................................... $ 333 $ 415
The regulated portion of Tenneco Energy's business experienced a decline in
revenues from $918 million in 1994 to $761 million in 1995. Lower regulated
merchant gas sales along with a small decrease in transportation revenues
caused the decline. Under Federal Energy Regulatory Commission ("FERC") Order
636, customers assume the responsibility for acquiring their gas supplies,
reducing sales by the pipeline. The contract settlement reached with Columbia
Gas in 1994 as part of its bankruptcy proceedings reduced its contract volume,
contributing to the transportation revenue decline in 1995.
Operating income in the regulated portion of Tenneco Energy's business was
down by $27 million in 1995 as compared with 1994. The 1995 results included
the $30 million pre-tax gain on the sale of Tennessee's interest in Kern River
and a $21 million reserve for estimated regulatory and legal settlement costs
while 1994 included the $11 million benefit from the Columbia Gas contract
settlement. Excluding these transactions, Tenneco Energy's regulated business
operating income decrease was primarily due to the
18
reduction of revenues related to the early termination of transportation
contracts and lower returns earned on regulated assets due to the operating
environment created by Order 636. This decrease was partially offset by the
benefit Tennessee realized through the implementation of a new rate structure
in July 1995.
Revenues in Tenneco Energy's nonregulated businesses were $1,155 million,
down $305 million compared with 1994. Average natural gas prices were lower in
1995 compared with 1994, contributing approximately $175 million to the revenue
decrease. Natural gas volumes declined also, contributing $148 million to the
revenue decrease. Warmer weather in early 1995 resulted in lower levels of
storage activity during the year, decreasing demand for natural gas and forcing
prices lower. These effects were offset somewhat by $18 million in revenues
earned by the PASA assets which were acquired by Tenneco Energy in June 1995.
The 1995 operating income for the nonregulated business decreased $55 million
compared with 1994. Operating income in 1994 included a $23 million gain from
the sale of a 20 percent interest in Tenneco Resources to Ruhrgas AG. The
remainder of the operating income decline was due to increased startup and
development costs on international programs, a $9 million reserve for estimated
legal settlement costs and lower margins and volumes due to lower demand in gas
marketing. Tenneco Energy operating results included $9 million in income from
operating the PASA assets during the last half of 1995.
OUTLOOK
During 1995, Tenneco Energy sold its interest in Kern River and purchased the
PASA assets in Australia. Tenneco Energy also began construction during 1995 of
a 470-mile pipeline in Queensland, Australia, has been chosen to participate in
constructing a pipeline from Bolivia to Brazil, is participating in feasibility
studies for the construction of a pipeline in Taiwan and was selected as a
technical advisor for the construction of China's first major onshore natural
gas pipeline. Tenneco Energy and its partners continue to pursue pre-
construction commitments from prospective natural gas shippers and obtaining
right-of-way concessions for the construction of the Argentina to Chile
pipeline. Also, Tenneco Energy has acquired a stake in GreyStar Corp., a
Houston-based offshore services company that serves production and pipeline
facilities in the Gulf of Mexico. These actions are intended to reduce Tenneco
Energy's reliance on regulated businesses, increasing the opportunity to earn
higher returns.
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, Tenneco Energy's
interstate pipelines face competitive pressure from other major pipeline
systems, enabling local distribution companies and end users to choose a
supplier or switch suppliers based on the short term price of gas and the cost
of transportation. Competition between pipelines is particularly intense in
Midwestern Gas Transmission's Chicago and Northern Indiana markets, in East
Tennessee Natural Gas' Roanoke, Chattanooga and Atlanta markets, and in
Tennessee Gas Pipeline Company's supply area, Louisiana and Texas. In some
instances, Tenneco Energy's pipelines have been required to discount their
transportation rates in order to maintain their market share. Additionally,
transportation contracts representing approximately 70 percent of firm
transportation capacity will be expiring over the next five years, principally
in the year 2000. The renegotiation of these contracts may be impacted by these
competitive factors.
TENNECO PACKAGING
1995 1994
------ ------
(MILLIONS)
Revenues....................................................... $2,750 $2,184
Operating income............................................... $ 457 $ 209
19
Tenneco Packaging's paperboard business experienced excellent results during
1995. Revenues were up $399 million to $1,928 million in 1995, primarily as a
result of strong pricing improvements. As a result of the move into higher
margin graphics and specialty corrugated segments, Tenneco Packaging realized
higher revenues on comparable volumes. In addition, strong industry demand for
linerboard and corrugated products served to substantially increase prices for
those products in 1995 and contributed to record revenues.
Operating income in the paperboard business improved by $287 million to $426
million in 1995. This improvement includes the 1995 pre-tax gain of $14
million on the sale of a mill in North Carolina. Effective mix management
allowed Tenneco Packaging to absorb rapidly rising raw material prices for
corrugated products while posting increased margins. Additionally, Tenneco
Packaging continued to post new productivity gains, especially in the
operation of its containerboard mills, resulting in record operating margins
in 1995.
Revenues in Tenneco Packaging's specialty packaging business increased by
$167 million to $822 million during 1995. Revenues of $106 million from the
recently acquired plastics business (November 1995) are included in the
results of the specialty packaging business. The remainder of the revenue
increase over 1994 results from price increases realized during the year.
The specialty packaging business earned $31 million in operating income in
1995, a $39 million decrease compared with 1994 results. Specialty packaging
recorded a restructuring charge of $30 million in 1995 for its molded fiber
and aluminum foil packaging operations and recognized income from the recently
acquired plastics business of $15 million. Excluding these two items, the
decline in operating income for specialty packaging resulted from raw material
cost increases that more than offset the positive effects of the pricing
increases initiated during the year. The major contributors to the raw
material cost increases were higher prices for polystyrene, aluminum and old
newspaper. However, these prices declined during the second half of the year
and are expected to remain at their current lower levels.
In its restructuring actions, specialty packaging expects to complete in
1996 a realignment of molded fiber assets, enter into joint venture agreements
to reduce egg packaging and fruit tray costs and close an aluminum rolling
mill, whose production will be outsourced.
OUTLOOK
The plastics business is expected to be a major contributor to earnings. Its
revenues, combined with specialty packaging's existing business, will comprise
approximately one-half of Tenneco Packaging's revenues in 1996. The plastics
business is expected to generate less cyclical earnings than the paperboard
segment has historically. Tenneco Packaging has also been working to reduce
the cyclicality of its paperboard business. Four of the paperboard
acquisitions completed in 1995 were in enhanced graphics and displays, a
business less sensitive to changes in linerboard pricing. These acquisitions,
along with the corrugated requirements of the recently acquired plastics
business, have increased Tenneco Packaging's level of integration, reducing
exposure to linerboard pricing volatility. Tenneco Packaging expects some
softening in the paperboard market in the first and second quarters of 1996
followed by an improvement in the second half of the year.
NEWPORT NEWS SHIPBUILDING
1995 1994
------ ------
(MILLIONS)
Revenues....................................................... $1,756 $1,753
Operating income............................................... $ 160 $ 200
Shipbuilding revenues for 1995 increased slightly compared with 1994 due to
greater levels of activity on the conversion program, offset by lower carrier
and submarine program revenues. Construction activity on the Los Angeles-class
submarines declined in 1995 as two of the remaining four vessels were
delivered
20
during the year. Carrier activity declined for the year as 1994 activity
included the overhaul of the Enterprise; the overhaul of the Eisenhower began
in the third quarter of 1995 and construction activity on the Ronald Reagan
replaced construction of the John C. Stennis which was delivered in the fourth
quarter of 1995.
Operating income for the Shipbuilding segment was down for the year due to
lower margins for conversion work and costs of approximately $24 million
incurred related to staff downsizing and Newport News' reentry into the highly
competitive international commercial markets.
OUTLOOK
Shipbuilding will continue to rely on the U.S. Navy for a significant amount
of its revenue; however, Shipbuilding is actively pursuing the large, global
commercial and military markets. Newport News has contracts to build four
"Double Eagle" product tankers. Additionally, Newport News was awarded a
contract to construct five additional "Double Eagle" tankers which will be used
in U.S. domestic trade. In February 1996, the owners secured financing
guarantees from the Maritime Administration. Shipbuilding is also pursuing
sales of its fast frigate to Middle East and Pacific Rim countries. U.S. Navy
work accounted for 95 percent of Shipbuilding revenues in 1995.
The shipyard's backlog was $4.6 billion at December 31, 1995 substantially
all of which is U.S. Navy-related. This compares with $5.6 billion at the end
of 1994. During 1995, Shipbuilding delivered one aircraft carrier (John C.
Stennis) and two submarines.
The yearend backlog included two Los Angeles-class submarines, two Nimitz-
class aircraft carriers (Harry S. Truman and Ronald Reagan), the two ship
Sealift conversion contract and contracts to construct four "Double Eagle"
product tankers. In addition, Newport News has ongoing engineering contracts as
the lead design yard for the Los Angeles-class and Seawolf-class submarines.
Subject to new orders, this backlog will decline as the remaining submarines
are delivered in 1996 and the aircraft carriers are delivered in 1998 and 2002.
OTHER
Tennessee's other operations reported operating income of $319 million for
1995. Other operating income is comprised primarily of affiliated interest
income. Also included is a pre-tax loss on the sale of Case stock for $70
million (after-tax loss of $35 million). During 1994, other operations reported
operating income of $193 million, including a pre-tax loss of $68 million from
the Case reorganization and initial and secondary public offerings.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Tennessee's interest expense in 1995 was $287 million compared with $265
million in 1994. Interest capitalized was $9 million in 1995 compared with $4
million in 1994 due to higher levels of capital spending in 1995.
MINORITY INTEREST
Minority interest of $33 million in 1995 primarily related to dividends on
preferred stock of a U.S. subsidiary which was issued in December 1994.
Minority interest for 1994 was $1 million.
INCOME TAXES
Income tax expense for 1995 was $448 million compared with $290 million in
1994. The increase in tax expense in 1995 was primarily from higher pre-tax
income in 1995 and lower levels of tax benefits compared with 1994. In 1994,
Tennessee recorded tax benefits from the realization of previously unrecognized
deferred tax assets resulting from consolidation of Tennessee's German
operations and the sale of businesses.
21
DISCONTINUED OPERATIONS
Loss from discontinued operations in 1994 of $162 million, net of income tax
expense of $118 million, resulted from the sale of Tennessee's chemicals and
brakes businesses. The loss of $191 million, net of $103 million income tax
expense, on the sale of these businesses included a $166 million loss, net of
income tax expense of $117 million, from the sale of the chemicals business,
and a $25 million loss from the sale of the brakes business, net of income tax
benefit of $14 million. Net income from the chemicals operations in 1994 was
$32 million, net of income tax expense of $19 million. Net loss in 1994 from
the brakes operations was $3 million, net of income tax benefit of $4 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, Tennessee adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. As a result of adopting this statement,
an after-tax charge of $13 million was recorded in 1994.
Tennessee will adopt FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first quarter
of 1996. FAS No. 121 establishes new accounting standards for measuring the
impairment of long-lived assets. Adoption of the new standard will not have a
material effect on Tennessee's consolidated financial position or results of
operations.
CAPITAL EXPENDITURES
Expenditures for plant, property and equipment from continuing operations for
1995 were $935 million compared with $650 million for 1994. Capital
expenditures increased at Packaging ($150 million), Automotive ($98 million),
Shipbuilding ($48 million), and Energy ($3 million). Capital expenditures
decreased $4 million at farm and construction equipment and $10 million at
Tenneco's other operations.
FERC MATTERS
The Company has deferred certain costs it has incurred associated with
renegotiating gas supply contracts ("GSR" costs) as a result of FERC Order 636.
As of December 31, 1995, the Company has deferred GSR costs yet to be recovered
from its customers of approximately $462 million, net of $316 million
previously recovered from its customers, subject to refund. A proceeding before
a FERC administrative law judge is scheduled to commence in early 1996 to
determine whether the Company's GSR costs are eligible for cost recovery. The
FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although Order 636 provides for complete recovery
by pipelines of eligible and prudently incurred transition costs, certain
customers have challenged the prudence and eligibility of the Company's GSR
costs and the Company has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC and customer
statements acknowledging the desirability of such settlements.
Also related to the Company's GSR costs, on October 14, 1993, the Company was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds
22
precluded the plaintiffs from adding new production or acreage to the contract.
On May 4, 1995, the trial court granted the Company's motion for summary
judgment; the plaintiffs have filed a notice of appeal. Thereafter, ICA and
TransTexas filed a motion for summary judgment on a separate issue involving
the term "committed reserves" and whether the Company has a contractual
obligation to purchase gas produced from a lease not described in the gas
contract. On November 8, 1995, the trial court granted ICA's and TransTexas'
motion in part. That order, which would be finalized upon conclusion of the
trial, also held that ICA's and TransTexas' rights are subject to certain
limitations of the Texas Business and Commerce Code. In addition to these
defenses, which are to be resolved at trial, the Company has other defenses
which it has asserted and intends to pursue. The Company has filed a Motion to
Clarify the November 8, 1995 order together with a new motion for partial
summary judgment concerning the committed reserve issue. The November 8, 1995
ruling does not affect the trial court's previous May 4, 1995 order granting
summary judgment to the Company.
The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution of
these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling of
the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
ENVIRONMENTAL MATTERS
The Company and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. All available evidence is considered, including
prior experience in remediation of contaminated sites, other companies' cleanup
experience and data released by the United States Environmental Protection
Agency ("EPA") or other organizations. These estimated liabilities are subject
to revision in future periods based on actual costs or new circumstances. These
liabilities are included in the balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are recorded and reported separately from the associated liability in
the financial statements.
The Company is a party in proceedings involving federal and state authorities
regarding the past use by the Company of a lubricant containing polychlorinated
biphenyls ("PCBs") in its starting air systems. The Company has executed a
consent order with the EPA governing the remediation of certain of its
compressor stations and is working with the Pennsylvania and New York
environmental agencies to specify the remediation requirements at the
Pennsylvania and the New York stations. Tennessee believes that the ultimate
resolution of this matter will not have a material adverse effect on the
financial condition or results of operations of the Company and its
consolidated subsidiaries.
23
A subsidiary of the Company owns a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois"), which owns an interstate
natural gas pipeline from the Canadian border through the states of New York
and Connecticut to Long Island. The operator of the pipeline is Iroquois
Pipeline Operating Company (the "Operator"), a subsidiary of TransCanada
Pipelines, Ltd., an affiliate of TransCanada Iroquois, Ltd. which is also a
partner in Iroquois. The Company has a contract to provide gas dispatching as
well as post-construction field operation and maintenance services for the
Operator of Iroquois, but the Company is not the Operator and is not an
affiliate of the Operator.
Iroquois has been informed of investigations and allegations regarding
alleged environmental violations which occurred during the construction of the
pipeline. Communications have been received from U.S. Attorneys' Offices, the
Enforcement Staff of the FERC's Office of the General Counsel, the Army Corps
of Engineers, the Public Service Commission of the State of New York, the EPA
and the Federal Bureau of Investigation. Proceedings have not been commenced
against Iroquois in connection with these inquiries. However, communications
have indicated possible allegation of civil and criminal violations. Iroquois
has held discussions with certain of the agencies to explore the possibility of
a negotiated resolution of the issues. In the absence of a negotiated
resolution, Iroquois believes that indictments will be sought and, in them,
substantial fines and other sanctions may be requested.
As a general partner, the Company's subsidiary may be jointly and severally
liable with the other partners for the liabilities of Iroquois. The foregoing
proceedings and investigations have not affected pipeline operations. Based
upon information available to the Company, the Company believes that neither it
nor any of its subsidiaries is a target of the criminal investigation described
above. Further, while a global resolution of these inquiries could have a
material adverse effect on the financial condition of Iroquois, Tennessee
believes that the ultimate resolution of these matters will not have a material
adverse effect on the financial condition or results of operations of the
Company and its consolidated subsidiaries.
At December 31, 1995, Tennessee has been designated as a potentially
responsible party in 55 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain sites, Tennessee is fully indemnified by
third parties. With respect to certain other sites, Tennessee has sought to
resolve its liability through payments to the other potentially responsible
parties. For the remaining sites, Tennessee has estimated its share of
remediation costs to be between $11 million and $69 million or 0.5% to 2.5% of
the total remediation costs for those sites and has provided reserves that it
believes are adequate for such costs. Because the cleanup costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required, Tennessee's estimate of its share of
remediation costs could change. Moreover, liability under the Comprehensive
Environmental Response, Compensation and Liability Act is joint and several,
meaning that Tennessee could be required to pay in excess of its pro rata share
of remediation costs. Tennessee's understanding of the financial strength of
other potentially responsible parties has been considered, where appropriate,
in Tennessee's determination of its estimated liability. Tennessee believes
that the costs associated with its current status as a potentially responsible
party in the Superfund sites described above will not be material to its
consolidated financial position or results of operations.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNESSEE GAS PIPELINE COMPANY
AND CONSOLIDATED SUBSIDIARIES
PAGE
----
Report of independent public accountants.................................. 26
Statements of income for each of the three years in the period ended
December 31, 1995........................................................ 27
Balance sheets--December 31, 1995 and 1994................................ 28
Statements of cash flows for each of the three years in the period ended
December 31, 1995........................................................ 29
Statements of changes in shareowner's equity for each of the three years
in the period ended December 31, 1995.................................... 30
Notes to financial statements............................................. 31
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tennessee Gas Pipeline Company:
We have audited the accompanying balance sheets of Tennessee Gas Pipeline
Company (a Delaware corporation and a wholly-owned subsidiary of Tenneco Inc.)
and Tennessee Gas Pipeline Company and consolidated subsidiaries as of December
31, 1995 and 1994, and the related statements of income, cash flows and changes
in shareowner's equity for each of the three years in the period ended December
31, 1995. These financial statements and the schedule referred to below are the
responsibility of Tennessee Gas Pipeline Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of Tennessee Gas Pipeline
Company and Tennessee Gas Pipeline Company and consolidated subsidiaries as of
December 31, 1995 and 1994, and the results of their operations, cash flows and
changes in shareowner's equity for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective January 1,
1994, Tennessee Gas Pipeline Company and its consolidated subsidiaries changed
their method of accounting for postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to Part IV, Item 14 relating to Tennessee Gas Pipeline Company and
consolidated subsidiaries is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Tennessee Gas Pipeline Company and consolidated subsidiaries taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 8, 1996
26
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(MILLIONS)
YEARS ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ------ ------
REVENUES
Net sales and operating revenues--
Automotive........................................... $2,427 $1,850 $1,628
Energy............................................... 1,916 2,378 2,862
Packaging............................................ 2,750 2,184 2,042
Shipbuilding......................................... 1,756 1,753 1,861
Farm and construction equipment...................... -- 518 1,014
Other................................................ (9) (7) (7)
------ ------ ------
8,840 8,676 9,400
Other income--
Interest income:
Affiliated companies............................... 360 251 215
Other.............................................. 49 38 26
Equity in net income of affiliated companies......... 66 59 43
Gain (loss) on sale of businesses and assets, net.... (32) (61) 112
Gain on the sale by a subsidiary of its stock........ -- 23 --
Other income, net.................................... 58 (30) (11)
------ ------ ------
9,341 8,956 9,785
------ ------ ------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown
below).............................................. 5,226 4,901 5,253
Operating expenses................................... 1,414 1,880 2,265
Selling, general and administrative.................. 751 640 626
Finance charges of Tennessee's finance subsidiaries.. -- 7 22
Depreciation, depletion and amortization............. 446 307 378
------ ------ ------
7,837 7,735 8,544
------ ------ ------
Income before interest expense, income taxes and
minority interest..................................... 1,504 1,221 1,241
------ ------ ------
Interest expense (net of interest capitalized):
Affiliated companies................................. 155 101 66
Other................................................ 132 164 212
------ ------ ------
287 265 278
------ ------ ------
Income before income taxes and minority interest....... 1,217 956 963
Income tax expense..................................... 448 290 329
------ ------ ------
Income before minority interest........................ 769 666 634
Minority interest...................................... 33 1 --
------ ------ ------
Income from continuing operations...................... 736 665 634
Income (loss) from discontinued operations, net of
income tax............................................ -- (162) 59
------ ------ ------
Income before extraordinary loss....................... 736 503 693
Extraordinary loss, net of income tax.................. -- -- (24)
------ ------ ------
Income before cumulative effect of change in accounting
principle............................................. 736 503 669
Cumulative effect of change in accounting principle,
net of income tax..................................... -- (13) --
------ ------ ------
Net income............................................. $ 736 $ 490 $ 669
====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements of income.
27
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(MILLIONS)
DECEMBER 31,
---------------
ASSETS 1995 1994
------ ------- -------
Current Assets:
Cash and temporary cash investments.......................... $ 193 $ 459
Receivables--
Customer notes and accounts (net)........................... 465 644
Affiliated companies........................................ 757 297
Gas transportation and exchange............................. 64 214
Other....................................................... 486 164
Notes receivable from Tenneco Inc............................ 3,354 3,201
Inventories.................................................. 1,174 909
Deferred income taxes........................................ 18 43
Prepayments and other........................................ 253 301
------- -------
6,764 6,232
------- -------
Investments and other assets:
Investment in affiliated companies........................... 286 523
Long-term notes and other receivables (net).................. 106 157
Investment in subsidiaries in excess of fair value of net as-
sets at date of acquisition, less amortization.............. 616 329
Deferred income taxes........................................ 52 49
Other........................................................ 1,656 782
------- -------
2,716 1,840
------- -------
Plant, property and equipment, at cost........................ 11,824 11,009
Less--Reserves for depreciation, depletion and amortization.. 5,611 5,851
------- -------
6,213 5,158
------- -------
$15,693 $13,230
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY
-----------------------------------
Current Liabilities:
Short-term debt (including current maturities on long-term
debt)....................................................... $ 346 $ 298
Payables--
Trade....................................................... 1,065 1,029
Affiliated companies........................................ 216 244
Gas transportation and exchange............................. 28 159
Taxes accrued................................................ 391 49
Interest accrued............................................. 27 37
Natural gas pipeline revenue reservation..................... 27 190
Other........................................................ 1,020 787
------- -------
3,120 2,793
------- -------
Long-term debt................................................ 550 793
------- -------
Deferred income taxes......................................... 989 1,408
------- -------
Postretirement benefits....................................... 609 380
------- -------
Deferred credits and other liabilities........................ 623 422
------- -------
Commitments and contingencies
Minority interest............................................. 492 475
------- -------
Shareowner's Equity:
Common stock, par value $5 per share, authorized, issued and
outstanding 200 shares...................................... -- --
Premium on common stock and other capital surplus............ 4,903 3,494
Cumulative translation adjustments........................... 32 (174)
Retained earnings............................................ 4,375 3,639
------- -------
9,310 6,959
------- -------
$15,693 $13,230
======= =======
The accompanying notes to financial statements are an integral part of these
balance sheets.
28
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(MILLIONS)
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------ -------
Operating Activities:
Income from continuing operations................. $ 736 $ 665 $ 634
Adjustments to reconcile income from continuing
operations to cash provided (used) by continuing
operations--
Depreciation, depletion and amortization........ 446 307 378
Equity in net (income) loss of affiliated
companies, net of dividends.................... (13) (11) 2
Deferred income taxes........................... 77 28 28
(Gain) loss on sale of businesses and assets,
net............................................ 32 38 (112)
Changes in components of working capital--
(Increase) decrease in receivables............. (249) 551 236
(Increase) decrease in inventories............. (237) (139) 44
(Increase) decrease in prepayments and other
current assets................................ (34) 10 23
Increase (decrease) in payables................ (58) 25 (167)
Increase (decrease) in taxes accrued........... 29 (151) (22)
Increase (decrease) in interest accrued........ (30) (17) (29)
Increase (decrease) in restructuring liability. -- (5) (85)
Increase (decrease) in natural gas pipeline
revenue reservation........................... (156) (91) 136
Increase (decrease) in other current
liabilities................................... (59) (9) (18)
(Increase) decrease in long-term notes and
receivables.................................... -- 1 3
Take-or-pay (refunds to customers) recoupments,
net............................................ 36 26 (34)
Other........................................... 104 (18) (55)
------ -------- --------
Cash provided (used) by continuing operations.. 624 1,210 962
Cash provided (used) by discontinued
operations.................................... (35) 36 23
------ -------- --------
Net Cash Provided (Used) by Operating Activities... 589 1,246 985
------ -------- --------
Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations........................... 689 (17) (54)
Net proceeds from sale of businesses and assets... 93 301 249
Expenditures for plant, property and equipment--
Continuing operations........................... (935) (650) (431)
Discontinued operations......................... (4) (67) (62)
Acquisitions of businesses........................ (428) (51) (33)
(Increase) decrease in Tenneco Inc. receivables... (153) (2,456) 472
(Increase) decrease in notes receivable from other
affiliates....................................... -- 1,770 151
Investments and other............................. (16) 91 (24)
------ -------- --------
Net Cash Provided (Used) by Investing Activities... (754) (1,079) 268
------ -------- --------
Financing Activities:
Capital contribution from (distribution to)
affiliates, net.................................. 116 -- --
Issuance of equity securities by a subsidiary..... -- 294 --
Issuance of long-term debt........................ 1 -- 3
Retirement of long-term debt...................... (256) (156) (977)
Net increase (decrease) in short-term debt
excluding current maturities on long-term debt... 30 (70) (163)
------ -------- --------
Net Cash Provided (Used) by Financing Activities... (109) 68 (1,137)
------ -------- --------
Effect of Foreign Exchange Rate Changes on Cash and
Temporary Cash Investments........................ 8 4 (4)
------ -------- --------
Increase (Decrease) in Cash and Temporary Cash
Investments....................................... (266) 239 112
Cash and Temporary Cash Investments, January 1..... 459 220 108
------ -------- --------
Cash and Temporary Cash Investments, December 31
(Note)............................................ $ 193 $ 459 $ 220
====== ======== ========
Cash Paid During the Year for Interest............. $ 327 $ 284 $ 330
Cash Paid During the Year for Income Taxes (net of
refunds).......................................... $ 444 $ 427 $ 334
- -------
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
29
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNER'S EQUITY
(MILLIONS EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Common Stock:
Balance January 1 and December
31............................. 200 $ -- 200 $ -- 200 $ --
=== ------ === ------ === ------
Premium on Common Stock and Other
Capital Surplus:
Balance January 1............... 3,494 3,494 3,494
Capital contribution from
(distribution to) affiliates,
net.......................... 1,409 -- --
------ ------ ------
Balance December 31............. 4,903 3,494 3,494
------ ------ ------
Cumulative Translation
Adjustments:
Balance January 1............... (174) (297) (218)
Translation of foreign
currency statements.......... 13 124 (83)
Sale of investment in foreign
subsidiaries................. 193 -- --
Hedges of net investment in
foreign subsidiaries (net of
income taxes)................ -- (1) 4
------ ------ ------
Balance December 31............. 32 (174) (297)
------ ------ ------
Retained Earnings:
Balance January 1............... 3,639 3,149 2,480
Net income.................... 736 490 669
------ ------ ------
Balance December 31............. 4,375 3,639 3,149
------ ------ ------
Total......................... $9,310 $6,959 $6,346
====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowner's equity.
30
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. CONTROL AND SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of Tennessee Gas Pipeline Company (the
"Company") is owned by Tenneco Inc. Tennessee Gas Pipeline Company and
consolidated subsidiaries ("Tennessee") are thus members of an operating group
under the control of Tenneco Inc. As such, Tennessee engages in transactions
characteristic of group administration and operation with other members of the
group. Tennessee's diversified businesses are organized and operated through
several industry segments, including "Tenneco Automotive," "Tenneco Energy,"
"Tenneco Packaging," and "Newport News Shipbuilding." Reference is made to Note
11, "Segment and Geographic Area Information," for additional information on
Tennessee's industry segments.
Consolidation and Presentation
The financial statements of Tennessee include all majority-owned
subsidiaries. Investments in 20% to 50% owned companies where Tennessee has the
ability to exert significant influence over operating and financial policies
are carried at cost plus equity in undistributed earnings since date of
acquisition (except for Tennessee's farm and construction equipment segment as
noted below) and cumulative translation adjustments. At December 31, 1995,
Tennessee's shareowner's equity included equity in undistributed earnings and
cumulative translation adjustments from equity method investments of $28
million and none, respectively; at December 31, 1994, the corresponding amounts
were $117 million and $(20) million, respectively. Dividends and distributions
received from affiliates accounted for on the equity method were $53 million,
$48 million and $45 million during 1995, 1994 and 1993, respectively. All
significant intercompany transactions have been eliminated.
In June 1994, Tenneco Inc. and its subsidiaries ("Tenneco") completed an
initial public offering ("IPO") of approximately 29% of the common stock of
Case Corporation ("Case"), the holder of Tenneco's farm and construction
equipment segment. In November 1994, a secondary offering of Case's common
stock reduced Tenneco's ownership to approximately 44%. A third offering in
August 1995 reduced Tenneco's ownership to approximately 21%. Prior to the IPO,
Tenneco reorganized this segment resulting in Tennessee selling all of its farm
and construction equipment net assets to Case Corporation for consideration of
Case Corporation common stock and cash. Subsequent to the June 1994
reorganization and IPO, Tennessee's farm and construction equipment segment is
reflected in Tennessee's financial statements using the cost method of
accounting. Tennessee's remaining investment in Case is not significant to its
consolidated financial position. For further information on this subject,
reference is made to Note 3, "Discontinued Operations, Disposition of Assets
and Extraordinary Loss."
Gains or losses on the sale by a subsidiary of its stock are included in the
Statements of Income.
Depreciation, Depletion and Amortization
Depreciation of Tennessee's properties is provided on a straight-line basis
in amounts which, in the opinion of management, are adequate to allocate the
cost of properties over their estimated useful lives.
The excess of investment in subsidiaries over fair value of net assets at
date of acquisition is being amortized over periods ranging from 15 years to 40
years. Such amortization relative to continuing operations amounted to $12
million, $9 million and $10 million for 1995, 1994 and 1993, respectively, and
is included in the income statement caption, "Other income, net."
Tennessee has capitalized certain other intangible assets, primarily
trademarks and patents, based on their estimated fair value at date of
acquisition. Amortization is provided on these intangible assets on a straight-
line basis over periods ranging from five to 40 years. The majority of other
intangible assets at December 31, 1995, resulted from the acquisition of the
plastics division of Mobil Corporation during 1995. See Note 2, "Acquisitions,"
for further information on the acquisition.
31
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Newport News Shipbuilding and Dry Dock Company ("Newport News"), a wholly-
owned subsidiary, reports profits on its long-term shipbuilding contracts on
the percentage-of-completion method of accounting, determined on the basis of
total costs incurred to date to estimated final total costs. Losses on
contracts are reported when first estimated. The performance of contracts
usually extends over several years, requiring periodic reviews and revisions of
estimated final contract prices and costs during the term of the contracts. The
effect of these revisions to estimates is included in income in the period the
revisions are made.
Tennessee's other divisions recognize revenue on the accrual method when
title passes to the customer or when the service is performed.
Risk Management Activities
Tennessee has utilized financial instruments for many years to mitigate its
exposure to various risks. Tennessee is currently a party to financial
instruments to hedge its exposure to changes in interest rates, foreign
currency exchange rates and natural gas prices. These financial instruments are
accounted for on the accrual basis with gains and losses being recognized based
on the type of contract and exposure being hedged. The amounts paid or received
under interest rate swap agreements are recognized as an adjustment to interest
expense. After-tax net gains or losses on foreign currency contracts designated
as hedges of Tennessee's net investments in foreign subsidiaries are recognized
in the balance sheet caption, "Cumulative translation adjustments." Net gains
and losses of foreign currency contracts designated as hedges of firm
commitments or other specific transactions are deferred and recognized when the
offsetting gains or losses are recognized on the hedged items. Net gains and
losses on energy commodity contracts are deferred and recognized when the
hedged transaction is consummated.
In the statements of cash flows, cash receipts or payments related to the
financial instruments discussed above are classified consistent with the cash
flows from the transactions being hedged.
Income Taxes
Tennessee Gas Pipeline Company and its parent, Tenneco Inc., together with
certain of their respective subsidiaries which are owned 80% or more, have
entered into an agreement to file a consolidated U.S. federal income tax
return. Such agreement provides, among other things, that (1) each company in a
taxable income position will be currently charged with an amount equivalent to
its federal income tax computed on a separate return basis and (2) each company
in a tax loss position will be currently reimbursed to the extent its
deductions, including general business credits, are utilized in the
consolidated return.
Tennessee utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. Deferred
tax assets are reduced by a valuation allowance when, based upon management's
estimates, it is more likely than not that a portion of the deferred tax assets
will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
Tennessee does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries is approximately $495 million at December 31, 1995. It is
not practicable to determine the amount of U.S. income taxes that would be
payable upon remittance of the assets that represent those earnings.
32
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Changes in Accounting Principles
Tennessee will adopt Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-lived
assets. The adoption of this new standard will not have a significant effect on
Tennessee's consolidated financial position or results of operations.
Effective January 1, 1994, Tennessee adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Tennessee recorded an after-tax charge of $13
million which was reported as a cumulative effect of change in accounting
principle.
Inventories
At December 31, 1995 and 1994, inventory by major classification was as
follows:
1995 1994
------ ------
(MILLIONS)
Finished goods.............................................. $ 395 $ 355
Work in process............................................. 101 82
Long-term contracts in progress, less progress billings..... 264 138
Raw materials............................................... 248 178
Materials and supplies...................................... 166 156
------ ------
$1,174 $ 909
====== ======
Inventories are stated at the lower of cost or market. A portion of
inventories are valued using the "last-in, first-out" method (38% and 27% at
December 31, 1995 and 1994, respectively). All other inventories are valued on
the "first-in, first-out" ("FIFO") or "average" methods. If the FIFO or average
method of inventory accounting had been used by Tennessee for all inventories,
inventories would have been $56 million, $54 million and $47 million higher at
December 31, 1995, 1994 and 1993, respectively.
Plant, Property and Equipment, at Cost
At December 31, 1995 and 1994, plant, property and equipment, at cost, by
major segment was as follows:
1995 1994
------- -------
(MILLIONS)
Automotive............................................... $ 1,382 $ 1,313
Energy................................................... 6,262 5,654
Packaging................................................ 2,617 1,661
Shipbuilding............................................. 1,552 1,494
Discontinued chemicals operations........................ -- 780
Other.................................................... 11 107
------- -------
$11,824 $11,009
======= =======
33
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Notes Receivable and Allowance for Doubtful Accounts and Notes
Short-term notes receivable of $89 million and $37 million were outstanding
at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, the
allowance for doubtful accounts and notes receivable was $50 million and $48
million, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of
the liability are based upon currently available facts, existing technology,
and presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered including prior experience in remediation of
contaminated sites, other companies' clean-up experience and data released by
the United States Environmental Protection Agency ("EPA") or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the balance sheet at their undiscounted amounts. Recoveries are
evaluated separately from the liability and, when recovery is assured, are
recorded and reported separately from the associated liability in the financial
statements.
For further information on this subject, reference is made to Note 12,
"Commitments and Contingencies--Environmental Matters."
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Cumulative translation adjustments."
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of Tennessee's assets, liabilities, revenues
and expenses. Reference is made to the "Revenue Recognition" and "Income Taxes"
sections of this footnote and Notes 6, 9, 10 and 12 for additional information
on significant estimates included in Tennessee's financial statements.
Reclassifications
Prior years' financial statements have been reclassified where appropriate to
conform to 1995 presentations.
2. ACQUISITIONS
In November 1995, Tenneco Inc. acquired the plastics division of Mobil
Corporation for $1.3 billion. The plastics business is the largest North
American producer of polyethylene and polystyrene consumer and food service
packaging and became part of Tennessee's packaging segment, Tenneco Packaging.
34
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The acquisition of the plastics business was accounted for as a purchase;
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based on preliminary estimates of their fair values.
Final purchase price allocations will be based on more complete evaluations and
may differ from the original allocation. The excess of the purchase price over
the fair value of the net assets acquired is included in the balance sheet
caption, "Investment in subsidiaries in excess of fair value of net assets at
date of acquisition, less amortization" and is being amortized on a straight-
line basis over 40 years. The purchase was initially financed by a combination
of Tenneco Inc. short-term debt and cash. As part of the acquisition
transaction, Tenneco Inc. made a capital contribution to Tennessee of the
acquired net assets of the plastics business.
The following unaudited pro forma information of Tennessee Gas Pipeline
Company and consolidated subsidiaries illustrates the effect of the plastics
business acquisition as if it had occurred at the beginning of 1994, after
giving effect to certain pro forma adjustments including amortization of the
excess purchase price, depreciation and other adjustments based on the
preliminary purchase price allocation related to the acquisition, together with
estimates of the related income tax effects.
(UNAUDITED)
YEARS ENDED DECEMBER 31
-----------------------
1995 1994
----------- -----------
(MILLIONS)
Net sales and operating revenues................. $ 9,836 $ 9,713
Income from continuing operations................ $ 782 $ 648
The summarized pro forma information has been prepared for comparative
purposes only. It is not intended to be indicative of the actual operating
results that would have occurred had the acquisition been consummated at the
beginning of 1994, or the results which may be attained in the future.
During 1995, Tennessee made various other acquisitions of assets and
investments. Tenneco Energy acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488-mile pipeline, for
approximately $225 million. Tenneco Energy also acquired a 50% interest in a
gas-fired cogeneration plant from ARK Energy, a privately-owned power
generation company, for approximately $25 million in cash. Tenneco Packaging
completed acquisitions of 8 packaging businesses for total consideration of
approximately $104 million in cash and notes. Tenneco Inc. acquired an
additional packaging operation for $58 million and made a capital contribution
to Tennessee of the acquired net assets of this business. In addition, Tenneco
Automotive completed four acquisitions for approximately $54 million.
Each of the acquisitions was accounted for as a purchase. If these assets and
investments had been acquired January 1, 1995, net income would not have been
significantly different from the reported amount.
In 1994, Tenneco Automotive acquired Heinrich Gillet GmbH & Co. KG for $44
million in cash and $69 million in assumed debt.
On December 29, 1994, Tenneco International Holding Corp. ("TIHC"), a
majority-owned subsidiary, acquired 100% of the issued and outstanding common
stock of Tenneco Canada Inc. from a Tenneco Inc. subsidiary in exchange for
TIHC common stock.
35
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS AND EXTRAORDINARY LOSS
Discontinued Operations
In March 1995, Tenneco completed an initial public offering of 100% of its
Albright & Wilson chemicals segment. The offering was underwritten in the
United Kingdom and was offered primarily in the United Kingdom. Also in 1994,
Tenneco sold its brakes operation. Net proceeds from the sales of the chemicals
and the brakes operations were approximately $700 million and $18 million,
respectively.
Net assets and results from discontinued operations included in Tennessee's
financial statements as of and for the years ended December 31, 1994 and 1993,
are as follows:
1994 1993
---------------- ----------------
CHEMICALS BRAKES CHEMICALS BRAKES
--------- ------ --------- ------
(MILLIONS)
Net assets at December 31............. $ 639 $ -- $558 $61
===== ==== ==== ====
Net sales and operating revenues...... $ 986 $ 57 $914 $48
===== ==== ==== ====
Income (loss) before income taxes..... $ 51 $ (7) $ 78 $ (7)
Income tax (expense) benefit.......... (19) 4 (15) 3
----- ---- ---- ----
Net income (loss)..................... 32 (3) 63 (4)
----- ---- ---- ----
Loss on disposition................... (49) (39) -- --
Income tax (expense) benefit from loss
on disposition....................... (117) 14 -- --
----- ---- ---- ----
Net loss on disposition............... (166) (25) -- --
----- ---- ---- ----
Net income (loss) from discontinued
operations......................... $(134) $(28) $ 63 $ (4)
===== ==== ==== ====
Disposition of Assets
Case Common Stock
In June 1994, Tenneco completed an IPO of approximately 29% of the common
stock of Case. In November 1994, a secondary offering of Case common stock
reduced Tenneco's ownership interest in Case to approximately 44%. Combined
proceeds to Tenneco from the two transactions was $694 million, net of
commissions and offering expenses. Prior to the IPO, Tenneco reorganized this
segment resulting in Tennessee selling all of its farm and construction
equipment net assets to Case Corporation for consideration of Case Corporation
common stock and cash. In connection with the reorganization, IPO and November
1994 secondary offering, Tennessee received net proceeds of $204 million and
recognized a loss of $33 million, including $35 million of income tax benefit.
Although Tennessee recorded a loss on these transactions, Tenneco in the
aggregate recorded a gain of $36 million, including a $7 million tax benefit.
In August 1995, Tenneco sold an additional 16.1 million shares of Case common
stock for net proceeds of approximately $540 million. The offering reduced
Tenneco's ownership in Case from 44% to 21%. Of the 16.1 million shares sold,
approximately 646,000 shares were owned by Tennessee. In connection with the
offering, Tennessee received net proceeds of $22 million and recognized a loss
of $35 million, including $35 million of income tax benefit. Although Tennessee
recorded a loss on this transaction, Tenneco in the aggregate recorded a pre-
tax gain of $101 million. Tennessee's remaining investment in Case is not
significant to its consolidated financial position.
Other
In December 1995, Tenneco Energy sold its 50% interest in Kern River Gas
Transmission Company ("Kern River") for a pre-tax gain of $30 million. Kern
River owns a 904-mile pipeline extending from Wyoming to California. Also in
1995, Tennessee sold certain other facilities and assets, principally at its
Tenneco Packaging and Tenneco Energy segments for a combined pre-tax net gain
of $8 million.
36
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1994, Tennessee disposed of several assets and investments including
a facility, machinery and equipment at Tenneco Packaging and facilities and
equipment at Case. Proceeds from these dispositions were $56 million resulting
in a pre-tax gain of $7 million. Also in 1994, Tenneco Energy Resources
Corporation, a subsidiary which operates nonregulated gas marketing and
intrastate pipeline businesses, issued 50 shares of its common stock, diluting
Tennessee's ownership in this subsidiary to 80%. Cash proceeds were $41
million resulting in a gain of $23 million. No taxes were provided on the gain
because management expects that the recorded investment will be recovered in a
tax-free manner.
During 1993, Tennessee disposed of a number of assets and investments
including its Newport News' Sperry Marine business; several Tenneco Packaging
operations; two wholly-owned Tenneco Energy companies, Viking Gas Transmission
Company and Dean Pipeline Company; and facilities and land of two foreign Case
operations. The proceeds from dispositions were $249 million and the pre-tax
gain was $112 million.
Extraordinary Loss
In April 1993, the Company's parent Tenneco Inc. issued 23.5 million shares
of common stock for approximately $1.1 billion, a portion of which was loaned
to the Company and used to retire approximately $688 million of long-term
debt. In November 1993, Tennessee retired DM250 million bonds. The redemption
premium related to the retirement of long-term debt resulting from these two
transactions ($24 million, net of income tax benefits of $12 million) was
recorded as an extraordinary loss.
4. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt outstanding at December 31, 1995 and 1994, is
set forth in the following table:
1995 1994
---- -----
(MILLIONS)
Tennessee Gas Pipeline Company--
Debentures due 2011, effective interest rate 15.1% in 1995 and
1994 (net of $216 million in 1995 and $219 million in 1994 of
unamortized discount)........................................... $184 $ 181
Notes due 1996 through 1997, average effective interest rate 9.7%
in 1995 and 10.1% in 1994 (net of $5 million in 1995 and $8
million in 1994 of unamortized discount)........................ 573 808
Other subsidiaries--
Notes due 1996 through 2014, average effective interest rate 8.5%
in 1995 and 8.6% in 1994 (net of $19 million in 1995 and $20
million in 1994 of unamortized discount)........................ 47 51
---- -----
804 1,040
---- -----
Less--Current maturities........................................... 254 247
---- -----
$550 $ 793
==== =====
At December 31, 1995 and 1994, approximately $2 million and $84 million,
respectively, of gross plant, property and equipment was pledged as collateral
to secure $2 million and $1 million, respectively, principal amounts of long-
term debt.
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1995, are $254 million, $330 million, $4
million, $2 million and $1 million for 1996, 1997, 1998, 1999 and 2000,
respectively.
37
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Debt
Information for the years ended December 31, 1995 and 1994, regarding credit
facilities, including borrowings under both committed and uncommitted credit
facilities and similar arrangements, follows:
(MILLIONS)
1995 1994
----- -----
Outstanding borrowings at end of year............................ $ 75 $ 42
Weighted average interest rate on outstanding borrowings at end
of year......................................................... 7.5% 9.8%
Approximate maximum month-end outstanding borrowings during year. $ 76 $ 167
Approximate average month-end outstanding borrowings during year. $ 62 $ 65
Weighted average interest rate on approximate average month-end
outstanding borrowings during year.............................. 10.2% 7.3%
Tennessee had other short-term borrowings of $17 million at December 31, 1995
and $9 million at December 31, 1994.
Financing Arrangements
Tennessee has arranged $122 million of committed credit facilities ($43
million of which expire in 1996) with various banks to provide short-term
financing at various rates. TIHC has an additional $50 million committed credit
facility with Tenneco Credit Corporation, a Tenneco Inc. subsidiary. At
December 31, 1995, TIHC had borrowed $25 million under this credit facility.
The credit facilities generally provide for commitment fees on the unused
portion of the total commitment and some credit facilities also provide for
facility fees on the total commitment.
Restrictions on the Payment of Dividends
At December 31, 1995, under the most restrictive dividend provisions
contained in indentures under which certain notes and debentures have been
issued, the Company has approximately $3.7 billion of retained earnings
available for the payment of dividends on common stock.
Certain of the Company's subsidiaries have provisions under financing
arrangements and statutory requirements which limit the amount of their
retained earnings available for dividends. The restriction of the ability to
pay dividends by such subsidiaries would not affect the amount of retained
earnings of the Company available for dividends on common stock.
38
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of Tennessee's financial instruments
by class at December 31, 1995 and 1994, were as follows:
1995 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)
ASSETS (LIABILITIES)
Asset and Liability Instruments
Cash and temporary cash investments...... $ 193 $ 193 $ 459 $ 459
Receivables (customer and long-term)..... 571 571 801 801
Accounts payable (trade)................. (1,065) (1,065) (1,029) (1,029)
Short-term debt (excluding current
maturities)............................. (92) (92) (51) (51)
Long-term debt (including current
maturities)............................. (804) (1,001) (1,040) (1,175)
Instruments With Off-Balance-Sheet Risk
Derivative
Interest rate swaps:
In a net receivable position......... -- -- -- --
In a net payable position............ -- (18) -- (10)
Foreign currency contracts............. (2) (3) 1 2
Natural gas swaps, futures and options. -- 3 -- (5)
Non-derivative
Financial guarantees................... -- (30) -- (50)
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was not determined to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, Tennessee's aggregate customer and
long-term receivable balance was concentrated by industry segment as follows:
Tenneco Automotive, 51% and 28%; Tenneco Energy, 12% and 11%; Tenneco
Packaging, 12% and 9%; Newport News Shipbuilding, 22% and 24%; all other
amounts were not significant.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates; the carrying
amount of floating-rate debt was assumed to approximate its fair value.
Instruments With Off-Balance-Sheet Risk
Derivative
Interest Rate Swaps--The fair value of interest rate swaps was based on the
cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps in
a gain position. At December 31, 1995 and 1994, Tennessee was a party to swaps
with a notional value of $750 million, which were in a net payable position at
the end of both years. Notional amounts associated with these swaps do not
represent future cash payment requirements. These contractual amounts are only
used as a base to measure amounts to be exchanged at specified settlement
dates.
39
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Consistent with its overall policy, Tennessee uses these instruments from
time to time only to hedge known, quantifiable risks arising from fluctuations
in interest rates. The counterparties to these interest rate swaps are major
international financial institutions. The risk associated with counterparty
default on interest rate swaps is measured as the cost of replacing, at the
prevailing market rates, those contracts in a gain position. In the event of
non-performance by the counterparties, the cost to replace outstanding interest
rate swaps at December 31, 1995 and 1994, would not have been material.
Foreign Currency Contracts--Tennessee periodically utilizes foreign currency
contracts to hedge certain translation effects of Tennessee's investment in net
assets in certain foreign subsidiaries. Pursuant to these arrangements,
Tennessee recognized aggregate after-tax translation gains (losses) of none,
$(1) million and $4 million for 1995, 1994 and 1993, respectively, which have
been included in the balance sheet caption, "Cumulative translation
adjustments."
In the normal course of business, Tennessee and its foreign subsidiaries also
routinely enter into various foreign currency forward purchase and sale
contracts to hedge the transaction effect of exchange rate movements on
receivables and payables denominated in foreign currencies. These foreign
currency contracts generally mature in one year or less.
In managing its foreign currency exposures, Tennessee identifies naturally
occurring offsetting positions and then hedges residual exposures. The
following table summarizes by major currency the contractual amounts of foreign
currency contracts utilized by Tennessee. These contracts include those entered
into with third parties, as well as other Tenneco affiliates.
NOTIONAL AMOUNT
-----------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
PURCHASE SELL PURCHASE SELL
---------- ------ -------- ------
(MILLIONS)
Foreign currency contracts (in US$):
Australian Dollars....................... $ 1 $ 202 $ 94 $ 26
British Pounds........................... 508 86 277 455
Canadian Dollars......................... 23 50 81 65
French Francs............................ 44 16 94 15
U.S. Dollars............................. 261 509 244 377
Other.................................... 127 104 274 123
------ ------ ------ ------
$ 964 $ 967 $1,064 $1,061
====== ====== ====== ======
Based on exchange rates at December 31, 1995 and 1994, the cost of replacing
these contracts in the event of non-performance by the counterparties would not
have been material.
Price Risk Management--Tennessee uses exchange-traded futures and option
contracts and over-the-counter option and swap contracts to reduce its exposure
to fluctuations in the prices of natural gas. The fair value of these contracts
is based upon the estimated consideration that would be received to terminate
those contracts in a gain position and the estimated cost that would be
incurred to terminate those contracts in a loss position. As of December 31,
1995 and 1994, these contracts, maturing through 1997 and 1996, respectively,
had an absolute notional contract quantity of 321 Bcf and 187 Bcf,
respectively. Since the contracts described above are designated as hedges
whose fair values correlate to price movements of natural gas, any gains or
losses on the contracts resulting from market changes will be offset by losses
or gains on the hedged transactions. Tennessee has off-balance sheet risk of
credit loss in the event of non-performance by counterparties to all over-the-
counter contracts. However, Tennessee does not anticipate non-performance by
the counterparties.
40
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Non-derivative
Guarantees--At December 31, 1995 and 1994, Tennessee had guaranteed payment
and performance of approximately $30 million and $50 million, respectively,
primarily with respect to letters of credit and other guarantees supporting
various financing and operating activities.
6. FEDERAL ENERGY REGULATORY COMMISSION ("FERC") REGULATORY MATTERS
Restructuring Proceedings
Pursuant to Order 636 issued by the FERC on April 8, 1992, the Company
implemented revisions to its tariff, effective on September 1, 1993, which
restructured its transportation, storage and sales services to convert the
Company from primarily a merchant to primarily a transporter of gas. As a
result of this restructuring, the Company's gas sales declined while certain
obligations to producers under long-term gas supply contracts continued,
causing the Company to incur significant restructuring transition costs.
Pursuant to the provisions of Order 636 allowing for the recovery of transition
costs related to the restructuring, the Company has made filings to recover gas
supply realignment ("GSR") costs resulting from remaining gas purchase
obligations, costs related to its Bastian Bay facilities, the remaining
unrecovered balance of purchased gas ("PGA") costs and the "stranded" cost of
the Company's continuing contractual obligation to pay for capacity on other
pipeline systems ("TBO costs").
The Company's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas production
from the field; however, the FERC recognized the ability of the Company to file
for the recovery of losses upon disposition of these assets. The Company has
filed for appellate review of the FERC actions and is confident that the
Bastian Bay costs will ultimately be recovered as transition costs under Order
636; the FERC has not contested the ultimate recoverability of these costs.
The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery is subject to refund pending FERC review and approval for eligibility:
1) direct-billing of unrecovered PGA costs to its former sales customers over a
twelve-month period; 2) recovery of TBO costs, which the Company is obligated
to pay under existing contracts, through a surcharge from firm transportation
customers, adjusted annually; and 3) GSR cost recovery of 90% of such costs
over a period of up to 36 months from firm transportation customers and
recovery of 10% of such costs from interruptible transportation customers over
a period of up to 60 months.
Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which
provides for the recovery of PGA costs of approximately $100 million and the
recovery of costs associated with the transfer of storage gas inventory to new
storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. On November 15,
1994, the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. The Company implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on Tennessee's reported net income. The orders approving the
PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. The Company believes the FERC orders approving the PGA
Stipulation will be upheld on appeal.
The Company is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function, pending FERC review of data
submitted by the Company. The FERC subsequently
41
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
issued an order requiring the Company to refund certain costs from this
surcharge. The Company is appealing this decision and believes such appeal will
likely be successful.
With regard to the Company's GSR costs, the Company, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by the
Company of synthetic gas produced from the Great Plains Coal Gasification plant
("Great Plains"). The FERC previously ruled that the costs related to the Great
Plains project are eligible for recovery through GSR and other special recovery
mechanisms and that the costs are eligible for recovery for the duration of the
term of the original gas purchase agreements. On October 18, 1994, the FERC
consolidated the four proceedings and set them for hearing before an
administrative law judge ("ALJ"). The hearing, which concluded in July 1995,
was limited to the issue of whether the settlement agreements are prudent. The
ALJ concluded, in his initial decision issued in December 1995, that the
settlement was imprudent. The Company has filed exceptions to this initial
decision and believes that this decision will not impair the Company's recovery
of the costs resulting from this contract. The FERC has committed to issuing a
final order by December 31, 1996.
Also related to the Company's GSR costs, on October 14, 1993, the Company was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment; the plaintiffs have filed a notice
of appeal. Thereafter, ICA and TransTexas filed a motion for summary judgment
on a separate issue involving the term "committed reserves" and whether the
Company has a contractual obligation to purchase gas produced from a lease not
described in the gas contract. On November 8, 1995, the trial court granted
ICA's and TransTexas' motion in part. That order, which would be finalized upon
conclusion of the trial, also held that ICA's and TransTexas' rights are
subject to certain limitations of the Texas Business and Commerce Code. In
addition to these defenses, which are to be resolved at trial, the Company has
other defenses which it has asserted and intends to pursue. The Company has
filed a Motion to Clarify the November 8, 1995 order together with a new motion
for partial summary judgment concerning the committed reserve issue. The
November 8, 1995 ruling does not affect the trial court's previous May 4, 1995
order granting summary judgment to the Company.
The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution of
these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling of
the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
42
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1995, the Company has deferred GSR costs yet to be
recovered from its customers of approximately $462 million, net of $316 million
previously recovered from its customers, subject to refund. A proceeding before
a FERC ALJ is scheduled to commence in early 1996 to determine whether the
Company's GSR costs are eligible for cost recovery. The FERC has generally
encouraged pipelines to settle such issues through negotiations with customers.
Although Order 636 provides for complete recovery by pipelines of eligible and
prudently incurred transition costs, certain customers have challenged the
prudence and eligibility of the Company's GSR costs and the Company has engaged
in settlement discussions with its customers concerning the amount of such
costs in response to the FERC and customer statements acknowledging the
desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
Rate Proceedings
On December 30, 1994, the Company filed for a general rate increase (the
"1995 Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended
its effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, the
Company began collecting rates, subject to refund, reflecting an $87 million
increase in the Company's annual revenue requirement. Settlement discussions
with the FERC staff and customers regarding 1995 Rate Case issues, including
structural rate design and increased revenue requirements, are ongoing and the
Company is reserving revenues it believes adequate to cover any refunds that
may be required upon final settlement of this proceeding. A hearing is
scheduled to commence in March 1996.
7. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
YEARS ENDED
DECEMBER 31
----------------
1995 1994 1993
------ ---- ----
(MILLIONS)
U.S. income before income taxes......................... $1,079 $828 $792
Foreign income before income taxes...................... 138 128 171
------ ---- ----
Income before income taxes.............................. $1,217 $956 $963
====== ==== ====
43
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Following is a comparative analysis of the components of consolidated income
tax expense applicable to continuing operations:
YEARS ENDED
DECEMBER 31
---------------
1995 1994 1993
---- ---- ----
(MILLIONS)
Current--
U.S.................................................... $256 $192 $224
State and local........................................ 50 32 46
Foreign................................................ 65 38 31
---- ---- ----
371 262 301
---- ---- ----
Deferred--
U.S.................................................... 64 46 43
State and local........................................ 12 10 11
Foreign................................................ 1 (28) (26)
---- ---- ----
77 28 28
---- ---- ----
Income tax expense....................................... $448 $290 $329
==== ==== ====
Following is a reconciliation of income taxes computed at the U.S. federal
income tax rate (35% for all years presented) to the income tax expense from
continuing operations reflected in the Statements of Income:
YEARS ENDED
DECEMBER 31
----------------
1995 1994 1993
---- ---- ----
(MILLIONS)
Tax expense computed at the U.S. federal income tax rate..... $426 $335 $337
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit....................................... 11 15 4
Permanent differences on sale of businesses................ 53 (44) (6)
State and local taxes on income, net of U.S. federal income
tax benefit............................................... 40 27 37
U.S. federal income tax rate change........................ -- -- 11
Realization of unrecognized deferred tax assets............ (93) (12) (37)
Other...................................................... 11 (31) (17)
---- ---- ----
Income tax expense........................................... $448 $290 $329
==== ==== ====
44
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of Tennessee's net deferred tax liability at December 31, 1995
and 1994, were as follows:
1995 1994
------ ------
(MILLIONS)
Deferred tax assets--
Tax loss carryforwards....................................... $ 163 $ 217
Postretirement benefits other than pensions.................. 176 90
GSR reserve.................................................. 141 --
Environmental reserve........................................ 76 83
Other........................................................ 117 163
Valuation allowance.......................................... (142) (235)
------ ------
Net deferred tax asset..................................... 531 318
------ ------
Deferred tax liabilities--
Tax over book depreciation................................... 785 781
Pension...................................................... 166 107
Asset related to GSR costs of operations regulated by the
FERC........................................................ 141 --
Long-term shipbuilding contracts............................. 62 54
Debt related items........................................... 43 44
Book versus tax gains and losses on asset disposals.......... 89 418
Other........................................................ 164 230
------ ------
Total deferred tax liability............................... 1,450 1,634
------ ------
Net deferred tax liability..................................... $ 919 $1,316
====== ======
As reflected by the valuation allowance in the table above, Tennessee had
potential tax benefits of $142 million and $235 million at December 31, 1995
and 1994, respectively, which were not recognized in the Statements of Income
when generated. These benefits resulted primarily from tax loss carryforwards
which are available to reduce future tax liabilities. During 1995, Tennessee
reduced its deferred tax asset valuation allowance due to the recognition of
tax loss carryforwards utilized to offset income taxes payable on asset and
investment dispositions.
At December 31, 1995, Tennessee had tax benefits of $80 million related to
U.S. capital loss carryforwards which expire in 1999 and $83 million from
foreign net operating loss carryforwards which will carry forward indefinitely.
8. MINORITY INTEREST
At December 31, 1995 and 1994, Tennessee reported minority interest in the
balance sheet of $492 million and $475 million, respectively. At December 31,
1995, $293 million of minority interest resulted from the December 1994 sale by
Tennessee of a 25% preferred stock interest in TIHC to a financial investor.
Additionally, $174 million and $156 million, respectively, of minority interest
at December 31, 1995 and 1994 resulted from the December 1994 issuance of TIHC
common stock to a Tenneco Inc. subsidiary in exchange for 100% of the issued
and outstanding common stock of Tenneco Canada Inc. TIHC is a separate legal
entity from the Company and holds certain assets including the capital stock of
Tenneco Canada Inc., Monroe Europe N.V., Monroe Australia Proprietary Limited,
Walker France S.A. and other subsidiaries included in the Tenneco Automotive
segment. TIHC also holds financial obligations of Tenneco Inc. or guaranteed by
Tenneco Inc. For financial reporting purposes, the assets, liabilities and
earnings of TIHC and its subsidiaries have continued to be consolidated in
Tennessee's financial statements, and the investor's preferred stock interest
has been recorded as "Minority interest" in the balance sheet.
45
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Dividends on the TIHC preferred stock are based on the issue price ($300
million) times a rate per annum equal to 1.12% over LIBOR and are payable
quarterly in arrears on the last business day of each quarter commencing on
March 31, 1995. For 1995, the weighted average rate paid on TIHC preferred
stock was 7.30%. Additionally, beginning in 1996, the holder of the 12,000,000
shares of preferred stock will be entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC. For financial reporting purposes, dividends paid by
TIHC to its financial investors have been recorded in Tennessee's income
statement as "Minority interest."
9. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
Tennessee has postretirement health care and life insurance plans which cover
substantially all of its domestic employees. For salaried employees, the plans
cover employees retiring from Tennessee on or after attaining age 55 who have
had at least 10 years service with Tennessee after attaining age 45. For hourly
employees, the postretirement benefit plans generally cover employees who
retire pursuant to one of Tennessee's hourly employee retirement plans. All of
these benefits may be subject to deductibles, copayment provisions and other
limitations, and Tennessee has reserved the right to change these benefits.
The majority of Tennessee's postretirement benefit plans are not funded. In
June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of the Tenneco Energy segment. The contributions are
collected from customers in FERC approved rates. As of December 31, 1995,
cumulative contributions were $10 million. Plan assets consist principally of
fixed income securities.
The funded status of the postretirement benefit plans reconciles with amounts
recognized on the balance sheet at December 31, 1995 and 1994, as follows
(Note):
1995 1994
----- -----
(MILLIONS)
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 504 $ 271
Fully eligible active plan participants........................ 47 45
Other active plan participants................................. 63 60
----- -----
Total accumulated postretirement benefit obligation.............. 614 376
Plan assets at fair value at September 30........................ 3 2
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (611) (374)
Claims paid during the fourth quarter............................ 20 8
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (99) (34)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 161 95
----- -----
Accrued postretirement benefit cost at December 31............... $(529) $(305)
===== =====
- --------
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
46
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the Case IPO in June 1994, active Case salaried employees
were transferred from the Tenneco Inc. plans to new Case salaried plans, and
Case hourly retirees were transferred from the Case hourly plans to the Tenneco
Inc. plans. Amendments to reduce the cost of providing future benefits for Case
hourly retirees were reflected at that time. In January 1995, the liability
related to Case retirees covered by Tenneco Inc. plans, $251 million at
December 31, 1994, was transferred, with an equal amount of cash, from Tenneco
Inc. to Tenneco Corporation, a wholly-owned subsidiary of the Company.
Prior to the June 1994 IPO, Tennessee sold all of its farm and construction
equipment net assets to Case Corporation. Therefore, all Case liabilities for
the new Case plans are excluded from the Tennessee disclosure information
beginning in 1994. Benefit costs for these plans have been included up to the
date of the sale (for six months of 1994). For additional information
concerning Tennessee's changing ownership in Case, reference is made to Note 1,
"Control and Summary of Accounting Policies" and Note 3, "Discontinued
Operations, Dispositions of Assets and Extraordinary Loss."
The net periodic postretirement benefit cost from continuing operations for
the years 1995, 1994 and 1993 consist of the following components:
1995 1994 1993
---- ---- ----
(MILLIONS)
Service cost for benefits earned during the year......... $ 6 $ 7 $ 9
Interest cost on accumulated postretirement benefit
obligation.............................................. 49 28 31
Net amortization of unrecognized amounts................. (13) (2) (2)
---- --- ---
Net periodic postretirement benefit cost................. $ 42 $33 $38
==== === ===
Tennessee recorded a pre-tax loss resulting from curtailments, settlements
and special termination benefits under these plans of $3 million in 1994
related primarily to restructuring at Case.
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point in
each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $36 million, $24 million and $19 million,
respectively, and would increase the aggregate of the service cost and interest
cost components of the net postretirement benefit cost for 1995, 1994 and 1993
by approximately $4 million, $3 million and $4 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
Tennessee adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Implementation of this new rule reduced 1994
net income by $13 million, net of income tax benefits of $7 million, which was
reported as the cumulative effect of a change in accounting principle.
47
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PENSION PLANS
Tennessee has retirement plans which cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Tennessee's funding policies are to
contribute to the plans amounts necessary to satisfy the funding requirements
of federal laws and regulations. Plan assets consist principally of listed
equity and fixed income securities.
The funded status of the plans reconciles with amounts recognized on the
balance sheet at December 31, 1995 and 1994, as follows:
PLANS IN
PLANS IN WHICH
WHICH ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED ALL PLANS
BENEFITS ASSETS (NOTE)
-------------- ------------ --------------
1995 1994 1995 1994 1995 1994
------ ------ ----- ----- ------ ------
(MILLIONS)
Actuarial present value of bene-
fits based on service to date
and present pay levels at Sep-
tember 30:
Vested benefit obligation....... $2,446 $1,729 $ 28 $ 18 $2,474 $1,747
Non-vested benefit obligation... 90 86 2 2 92 88
------ ------ ----- ----- ------ ------
Accumulated benefit obligation.. 2,536 1,815 30 20 2,566 1,835
Additional amounts related to
projected salary increases...... 206 222 2 2 208 224
------ ------ ----- ----- ------ ------
Total projected benefit obliga-
tion at September 30............ 2,742 2,037 32 22 2,774 2,059
Plan assets at fair value at Sep-
tember 30....................... 3,088 2,310 3 4 3,091 2,314
------ ------ ----- ----- ------ ------
Plan assets in excess of (less
than) total projected benefit
obligation at September 30...... 346 273 (29) (18) 317 255
Contributions during the fourth
quarter......................... 4 17 -- -- 4 17
Unrecognized net (gain) loss re-
sulting from plan experience and
changes in actuarial assumptions 166 96 1 1 167 97
Unrecognized prior service obli-
gations resulting from plan
amendments...................... 82 99 -- 1 82 100
Remaining unrecognized net obli-
gation (asset) at initial appli-
cation.......................... (132) (165) -- 1 (132) (164)
Adjustment recorded to recognize
minimum liability............... -- -- -- (1) -- (1)
------ ------ ----- ----- ------ ------
Prepaid (accrued) pension cost at
December 31..................... $ 466 $ 320 $ (28) $ (16) $ 438 $ 304
====== ====== ===== ===== ====== ======
- --------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
In December 1993, all liabilities and assets were transferred from the Case
Corporation Pension Plan for Hourly-Paid Employees ("Case Plan") to the
Tenneco Inc. Retirement Plan. These liabilities are currently overfunded and
in January 1995, plan assets and liabilities (totaling a $133 million net
asset) were transferred, in exchange for cash, from Tenneco Inc. to Tenneco
Corporation, a wholly-owned subsidiary of the Company. In June 1994, all
future accruals for the salaried and hourly active Case employees were
transferred from the Tenneco Inc. Retirement Plan to new Case plans. Prior to
the June 1994 IPO, Tennessee sold all of its farm and construction equipment
net assets to Case Corporation. Therefore, all domestic and foreign Case
liabilities and assets in the new Case plans are excluded from the Tennessee
disclosure information beginning in 1994. Pension cost (income) for these
plans has been included up to the date of the sale (for six months of 1994).
48
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net periodic pension costs (income) from continuing operations for the years
1995, 1994 and 1993 consist of the following components:
1995 1994 1993
----------- ------------ -----------
(MILLIONS)
Service cost--benefits earned
during the year................... $ 50 $ 59 $ 56
Interest accrued on prior year's
projected benefit obligation...... 205 131 134
Expected return on plan assets--
Actual (return) loss............. (536) 140 (315)
Unrecognized excess (deficiency)
of actual return over expected
return.......................... 261 (330) 126
---- ----- ----
(275) (190) (189)
Net amortization of unrecognized
amounts........................... (10) (9) (9)
----- ----- -----
Net periodic pension costs
(income).......................... $ (30) $ (9) $ (8)
===== ===== =====
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.5% and 7.7%, respectively. The rate of
increase in future compensation was 5.0% in 1995 and 5.1% in 1994 and 1993. The
weighted average expected long-term rate of return on plan assets was 10.0% in
1995 and 1994 and 9.8% in 1993.
11. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Tennessee is a diversified industrial conglomerate with multinational
operations. Tennessee's principal business segments are as follows:
Tenneco Automotive-- International manufacturer of exhaust system
parts and ride control products for automobiles,
which are sold in both the original equipment and
replacement markets.
Tenneco Energy-- Transporter and marketer of natural gas,
operating in both the regulated and nonregulated
environments. Additionally, holds interests in
international natural gas pipelines and domestic
power generation projects.
Tenneco Packaging-- Manufacturer of packaging materials, cartons,
containers and specialty packaging products for
consumer and commercial markets.
Newport News Primary business includes the design,
Shipbuilding-- construction and repair of U.S. Naval ships and
submarines, and commercial vessels.
In addition to the principal business segments above, Tennessee also holds an
investment in Case, a leading manufacturer of farm and construction equipment
with primary operations in the U.S. and European Union. Tenneco, in the
aggregate, holds a 21% ownership interest in Case at December 31, 1995. During
1995, Tennessee sold its Albright & Wilson chemicals segment, which was
involved in the production of phosphorous chemicals and surfactants, as well as
a range of specialty chemicals. For more discussion of Tennessee's farm and
construction equipment and chemicals segments, see Notes 1 and 3.
49
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize certain segment and geographic information of
Tennessee's businesses:
SEGMENT
----------------------------------------------------------------
FARM AND RECLASS.
AUTO- SHIP- CONSTRUCTION AND CONSOL-
(MILLIONS) MOTIVE ENERGY PACKAGING BUILDING EQUIPMENT(C) CHEMICALS OTHER ELIMINATION IDATED
---------- ------ ------ --------- -------- ------------ --------- ------ ----------- -------
AT DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED
Net sales and operating
revenues(a)............ $2,427 $1,916 $2,750 $1,756 $ -- $ -- $ -- $ (9) $ 8,840
====== ====== ====== ====== ==== ==== ====== ===== =======
Operating profit........ 243 286 467 172 -- -- 317 -- 1,485
Equity in net income of
affiliated companies... 1 63 -- -- -- -- 2 -- 66
General corporate
expenses............... (9) (16) (10) (12) -- -- -- -- (47)
------ ------ ------ ------ ---- ---- ------ ----- -------
Income before interest
expense, income taxes
and minority interest.. 235 333 457 160 -- -- 319 -- 1,504
====== ====== ====== ====== ==== ==== ====== ===== =======
Identifiable assets..... 1,864 4,098 3,862 1,467 -- -- 4,221 (105) 15,407
Investment in affiliated
companies.............. 3 239 4 9 29 -- 2 -- 286
------ ------ ------ ------ ---- ---- ------ ----- -------
Total assets......... 1,867 4,337 3,866 1,476 29 -- 4,223 (105) 15,693
====== ====== ====== ====== ==== ==== ====== ===== =======
Depreciation, depletion
and amortization....... 79 195 104 67 -- -- 1 -- 446
====== ====== ====== ====== ==== ==== ====== ===== =======
Capital expenditures
for continuing
operations............. 204 334 316 77 -- -- 4 -- 935
====== ====== ====== ====== ==== ==== ====== ===== =======
AT DECEMBER 31, 1994, AND FOR THE YEAR THEN ENDED
Net sales and operating
revenues(a)............ $1,850 $2,378 $2,184 $1,753 $518 $ -- $ -- $ (7) $ 8,676
====== ====== ====== ====== ==== ==== ====== ===== =======
Operating profit (loss). 214 379 217 213 (8) -- 193 -- 1,208
Equity in net income of
affiliated companies... -- 52 -- -- 7 -- -- -- 59
General corporate
expenses............... (9) (16) (8) (13) -- -- -- -- (46)
------ ------ ------ ------ ---- ---- ------ ----- -------
Income (loss) before
interest expense, in-
come taxes and minority
interest............... 205 415 209 200 (1) -- 193 -- 1,221
====== ====== ====== ====== ==== ==== ====== ===== =======
Identifiable assets..... 1,477 3,241 1,884 1,353 -- -- 4,056 (149) 11,862
Investment in affiliated
companies.............. 2 359 3 -- 56 -- -- -- 420
Identifiable assets
related to discontinued
operations............. -- -- -- -- -- 849 -- (4) 845
Investment in affiliated
companies related
to discontinued
operations............. -- -- -- -- -- 103 -- -- 103
------ ------ ------ ------ ---- ---- ------ ----- -------
Total assets......... 1,479 3,600 1,887 1,353 56 952 4,056 (153) 13,230
====== ====== ====== ====== ==== ==== ====== ===== =======
Depreciation, depletion
and amortization....... 45 100 82 70 7 -- 3 -- 307
====== ====== ====== ====== ==== ==== ====== ===== =======
Capital expenditures
for continuing
operations............. 106 331 166 29 4 -- 14 -- 650
====== ====== ====== ====== ==== ==== ====== ===== =======
See notes on page 52
50
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEGMENT
----------------------------------------------------------------
FARM AND RECLASS.
AUTO- SHIP- CONSTRUCTION AND CONSOL-
(MILLIONS) MOTIVE ENERGY PACKAGING BUILDING EQUIPMENT(C) CHEMICALS OTHER ELIMINATION IDATED
---------- ------ ------ --------- -------- ------------ --------- ------ ----------- -------
AT DECEMBER 31, 1993, AND FOR THE YEAR THEN ENDED
Net sales and operating
revenues(a)............ $1,628 $2,862 $2,042 $1,861 $1,014 $ -- $ 1 $ (8) $ 9,400
====== ====== ====== ====== ====== ==== ====== ==== =======
Operating profit ....... 206 376 146 238 56 -- 220 -- 1,242
Equity in net income
(loss) of affiliated
companies.............. -- 49 2 -- (7) -- (1) -- 43
General corporate
expenses............... (8) (14) (9) (13) -- -- -- -- (44)
------ ------ ------ ------ ------ ---- ------ ---- -------
Income before interest
expense, income taxes
and minority interest.. 198 411 139 225 49 -- 219 -- 1,241
====== ====== ====== ====== ====== ==== ====== ==== =======
Identifiable assets..... 1,044 2,953 1,712 1,277 911 -- 3,392 (77) 11,212
Investment in affiliated
companies.............. 4 307 6 -- (44) -- 75 -- 348
Identifiable assets
related to discontinued
operations............. 69 -- -- -- -- 815 -- (2) 882
Investment in affiliated
companies related
to discontinued
operations............. -- -- -- -- -- 62 -- -- 62
------ ------ ------ ------ ------ ---- ------ ---- -------
Total assets......... 1,117 3,260 1,718 1,277 867 877 3,467 (79) 12,504
====== ====== ====== ====== ====== ==== ====== ==== =======
Depreciation, depletion
and amortization....... 44 166 77 72 16 -- 3 -- 378
====== ====== ====== ====== ====== ==== ====== ==== =======
Capital expenditures for
continuing operations.. 89 170 124 36 11 -- 1 -- 431
====== ====== ====== ====== ====== ==== ====== ==== =======
GEOGRAPHIC AREA(C)(D)
--------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND CONSOL-
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION IDATED
---------- ------- ------ -------- ------- ----------- -------
AT DECEMBER 31, 1995, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers(a)........... $ 7,336 $149 $1,140 $215 $ -- $ 8,840
Transfers among geo-
graphic areas(b)....... 74 43 27 29 (173) --
------- ---- ------ ---- ----- -------
Total................. 7,410 192 1,167 244 (173) 8,840
======= ==== ====== ==== ===== =======
Operating profit......... 1,340 25 90 30 -- 1,485
Equity in net income of
affiliated companies.... 65 -- 1 -- -- 66
General corporate ex-
penses.................. (47) -- -- -- -- (47)
------- ---- ------ ---- ----- -------
Income before interest
expense, income taxes
and minority interest... 1,358 25 91 30 -- 1,504
======= ==== ====== ==== ===== =======
Identifiable assets...... 13,067 277 1,252 904 (93) 15,407
Investment in affiliated
companies............... 244 2 2 38 -- 286
------- ---- ------ ---- ----- -------
Total assets.......... 13,311 279 1,254 942 (93) 15,693
======= ==== ====== ==== ===== =======
See notes on following page.
51
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
GEOGRAPHIC AREA(C)(D)
--------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND CONSOL-
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION IDATED
---------- ------- ------ -------- ------- ----------- -------
AT DECEMBER 31, 1994, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers(a)............ $ 7,327 $16 $1,056 $277 $ -- $8,676
Transfers among geo-
graphic areas(b)........ 19 -- 58 37 (114) --
------- --- ------ ---- ---- ------
Total.................. 7,346 16 1,114 314 (114) 8,676
======= === ====== ==== ==== ======
Operating profit.......... 1,082 2 82 42 -- 1,208
Equity in net income
(loss) of affiliated com-
panies................... 59 -- 1 (1) -- 59
General corporate ex-
penses................... (46) -- -- -- -- (46)
------- --- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 1,095 2 83 41 -- 1,221
======= === ====== ==== ==== ======
Identifiable assets....... 10,151 155 1,339 327 (110) 11,862
Investment in affiliated
companies................ 417 -- -- 3 -- 420
Identifiable assets re-
lated to discontinued op-
erations................. 177 43 602 42 (19) 845
Investment in affiliated
companies related to
discontinued operations.. 26 -- 3 74 -- 103
------- --- ------ ---- ---- ------
Total assets........... 10,771 198 1,944 446 (129) 13,230
======= === ====== ==== ==== ======
AT DECEMBER 31, 1993, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers(a)............ $ 7,608 $11 $1,467 $314 $ -- $9,400
Transfers among geo-
graphic areas(b)........ 31 -- 61 27 (119) --
------- --- ------ ---- ---- ------
Total.................. 7,639 11 1,528 341 (119) 9,400
======= === ====== ==== ==== ======
Operating profit ......... 1,065 1 109 67 -- 1,242
Equity in net income
(loss) of affiliated com-
panies................... 48 -- (5) -- -- 43
General corporate ex-
penses................... (44) -- -- -- -- (44)
------- --- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 1,069 1 104 67 -- 1,241
======= === ====== ==== ==== ======
Identifiable assets....... 9,321 7 1,520 396 (32) 11,212
Investment in affiliated
companies................ 313 -- 27 8 -- 348
Identifiable assets re-
lated to discontinued op-
erations................. 219 64 565 43 (9) 882
Investment in affiliated
companies related to
discontinued operations.. 26 -- 5 31 -- 62
------- --- ------ ---- ---- ------
Total assets........... 9,879 71 2,117 478 (41) 12,504
======= === ====== ==== ==== ======
- --------
Notes: (a) Contracts with U.S. government agencies (primarily shipbuilding
contracts with the U.S. Navy) accounted for $1.7 billion, $1.7
billion and $1.8 billion for 1995, 1994 and 1993, respectively.
(b) Products are transferred between geographic areas on a basis intended
to reflect as nearly as possible the "market value" of the products.
(c) In July 1994, Tennessee's accounting for its farm and construction
equipment segment changed due to the June 1994 reorganization and
IPO. For additional information, see Notes 1 and 3.
(d) As reflected above, Tennessee's segments principally market their
products and services in the United States, with significant sales in
the European Union and other foreign countries.
52
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Tennessee is engaged in the sale of products for export from the United
States. Such sales are reflected in the table below:
(MILLIONS)
--------------
GEOGRAPHIC AREA PRINCIPAL PRODUCTS 1995 1994 1993
--------------- ------------------ ---- ---- ----
Canada.................. Paperboard products, molded and
pressed pulp goods, corrugated
boxes, aluminum and plastics,
natural gas ....................... $ 87 $ 75 $115
European Union.......... Molded and pressed pulp goods,
paperboard products, corrugated
boxes, aluminum and plastics,
navigation aids (1993 only), tanker
construction and repair work (1995
only).............................. 164 23 36
Other Foreign........... Ride control systems, molded and
pressed pulp goods, paperboard
products, corrugated boxes,
aluminum and plastics ............. 113 49 60
---- ---- ----
Total Export Sales........................................... $364 $147 $211
==== ==== ====
12. COMMITMENTS AND CONTINGENCIES
Capital Commitments
Tennessee estimates that expenditures aggregating approximately $1.2 billion
will be required after December 31, 1995, to complete facilities and projects
authorized at such date, and substantial commitments have been made in
connection therewith.
Purchase Obligations
In connection with the financing commitments of certain joint ventures,
Tennessee has entered into unconditional purchase obligations for products and
services of $145 million ($106 million on a present value basis) at December
31, 1995. Tennessee's annual obligations under these agreements are $22
million for the years 1996 through 2000. Payments under such obligations,
including additional purchases in excess of contractual obligations, were $26
million, $34 million and $31 million for the years 1995, 1994 and 1993,
respectively. In addition, in connection with the Great Plains coal
gasification project (Dakota Gasification Company), the Company has contracted
to purchase 30% of the output of the plant's original design capacity for a
remaining period of 14 years. The Company has executed a settlement of this
contract as a part of its gas supply realignment negotiations discussed in
Note 6.
Lease Commitments
Tennessee holds certain of its facilities and equipment under long-term
leases. The minimum rental commitments under non-cancelable operating leases
with lease terms in excess of one year are $145 million, $134 million, $132
million, $119 million and $123 million for the years 1996, 1997, 1998, 1999
and 2000, respectively, and $925 million for subsequent years. Of these
amounts, $81 million for 1996, $84 million for 1997, $93 million for 1998, $86
million for 1999, $92 million for 2000 and $689 million for subsequent years
are lease payment commitments to GECC, John Hancock and Metropolitan Life for
assets purchased from
53
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Georgia-Pacific in January 1991 and leased to Tenneco Packaging. Commitments
under capital leases were not significant to the accompanying financial
statements. Total rental expense for continuing operations for the years 1995,
1994 and 1993, was $178 million, $168 million and $173 million, respectively,
including minimum rentals under non-cancelable operating leases of $172
million, $168 million and $173 million for the corresponding periods.
Litigation
Reference is made to Note 6, "Federal Energy Regulatory Commission ("FERC")
Regulatory Matters," for information concerning gas supply litigation.
Tennessee Gas Pipeline Company and its subsidiaries are parties to numerous
other legal proceedings arising from their operations. Tennessee believes that
the outcome of these proceedings, individually and in the aggregate, will have
no material effect on the financial position or results of operations of
Tennessee Gas Pipeline Company and its consolidated subsidiaries.
Environmental Matters
Since 1988, the Company has been engaged in an internal project to identify
and deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. Environmental
Protection Agency List of Hazardous Substances ("HS List") at compressor
stations and other facilities operated by both its interstate and intrastate
natural gas pipeline systems. While conducting this project, the Company has
been in frequent contact with federal and state regulatory agencies, both
through informal negotiation and formal entry of consent orders, in order to
assure that its efforts meet regulatory requirements.
Tennessee has established a reserve for the Company's environmental expenses,
which includes: 1) expected remediation expense and associated onsite, offsite
and groundwater technical studies, 2) legal fees and 3) settlement of third
party and governmental litigation, including civil penalties. Through December
31, 1995, Tennessee has charged approximately $147 million against the
environmental reserve, excluding recoveries related to the Company's
environmental settlement as discussed below. Of the remaining reserve, $38
million has been recorded on the balance sheet under "Payables-trade" and $126
million under "Deferred credits and other liabilities."
Due to the current uncertainty regarding the further activity necessary for
the Company to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, the Company cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
the Company's evaluation and experience to date, Tennessee continues to believe
that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, the Company in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental Stipulation")
that addresses the recovery of environmental costs currently being recovered in
its rates and also establishes a mechanism for recovering a substantial portion
of the environmental costs that will be expended in the future. In November
1995, the FERC issued an order approving the Environmental Stipulation.
Although one shipper on its system has filed for rehearing, the Company
believes the Environmental Stipulation will be upheld. The effects of the
Environmental Stipulation, which is effective as of July 1, 1995, have been
recorded with no material effect on Tennessee's
54
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
financial position or results of operations. As of December 31, 1995, the
balance of the regulatory asset is $74 million.
Tennessee has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. Tennessee believes that the likelihood of recovery of a portion
of its remediation costs and claims against the remaining carriers in its
pending litigation is reasonably possible. In addition, the Company has settled
its pending litigation against and received payment from the manufacturer of
the PCB-containing lubricant. These recoveries have been considered in the
Company's recording of its environmental settlement with its customers.
Tennessee has identified other sites in its various operating divisions where
environmental remediation expense may be required should there be a change in
ownership, operations or applicable regulations. These possibilities cannot be
predicted or quantified at this time and accordingly, no provision has been
recorded. However, provisions have been made for all instances where it has
been determined that the incurrence of any material remedial expense is
reasonably possible. Tennessee believes that the provisions recorded for
environmental exposures are adequate based on current estimates.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME INCOME
BEFORE INTEREST (LOSS) FROM CUMULATIVE
NET SALES EXPENSE, DISCONTINUED EFFECT OF CHANGE
AND INCOME TAXES INCOME FROM OPERATIONS, IN ACCOUNTING
QUARTER OPERATING AND MINORITY CONTINUING NET OF PRINCIPLE, NET NET
(MILLIONS) REVENUES INTEREST OPERATIONS INCOME TAX OF INCOME TAX INCOME
---------- --------- --------------- ----------- ------------ ---------------- ------
1995.................... 1st $2,150 $ 391 $185 $ -- $ -- $185
2nd 2,183 442 206 -- -- 206
3rd 2,121 311 145 -- -- 145
4th 2,386 360 200 -- -- 200
------ ------ ---- ----- ---- ----
$8,840 $1,504 $736 $ -- $ -- $736
====== ====== ==== ===== ==== ====
1994.................... 1st $2,257 $ 265 $122 $ 6 $(13) $115
2nd 2,378 275 97 (8) -- 89
3rd 2,011 376 216 7 -- 223
4th 2,030 305 230 (167) -- 63
------ ------ ---- ----- ---- ----
$8,676 $1,221 $665 $(162) $(13) $490
====== ====== ==== ===== ==== ====
- --------
Notes: Reference is made to Notes 2 and 3 for discussion of items affecting
quarterly results.
(The preceding notes are an integral part of the foregoing financial
statements.)
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in accountants during 1995 or 1994, nor has there
been any disagreement on any matter of accounting principles or practices or
financial disclosure which in either case is required to be reported pursuant
to this Item 9.
PART III
Item 10, "Directors and Executive Officers of the Registrant," Item 11,
"Executive Compensation," Item 12, "Security Ownership of Certain Beneficial
Owners and Management," and Item 13, "Certain Relationships and Related
Transactions," have been omitted from this report pursuant to the reduced
disclosure format permitted by General Instruction J to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Tennessee Gas Pipeline Company and
Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and
Supplementary Data."
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 14
PAGE
----
Tennessee Gas Pipeline Company--
Statements of income for each of the three years ended December 31,
1995................................................................... 57
Statements of cash flows for each of the three years ended December 31,
1995................................................................... 58
Balance Sheets--December 31, 1995 and 1994.............................. 59
Notes to financial statements........................................... 60
Schedule of Tennessee Gas Pipeline Company and Consolidated Subsidiaries--
Schedule II--Valuation and qualifying accounts--three years ended
December 31, 1995...................................................... 61
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I--Condensed financial information of registrant
Schedule III--Real estate and accumulated depreciation
Schedule IV--Mortgage loans on real estate
Schedule V--Supplemental Information Concerning Property--
Casualty Insurance Operations
56
TENNESSEE GAS PIPELINE COMPANY
STATEMENTS OF INCOME
(MILLIONS)
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Net sales and operating revenues--
Automotive................................... $ 647 $ 621 $ 559
Energy....................................... 830 1,040 1,212
-------- -------- --------
1,477 1,661 1,771
Interest income--
Affiliated companies......................... 60 92 39
Other........................................ 18 16 9
Gain (loss) on sale of businesses and assets,
net........................................... (5) 4 11
Other income, net.............................. 75 18 42
-------- -------- --------
1,625 1,791 1,872
-------- -------- --------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown
below)........................................ 481 424 362
Operating expenses............................. 378 591 688
Selling, general and administrative............ 251 224 219
Depreciation and amortization.................. 167 97 170
Interest expense (net of interest
capitalized)--
Affiliated companies......................... 126 118 52
Other........................................ 134 158 198
-------- -------- --------
1,537 1,612 1,689
-------- -------- --------
Income From Continuing Operations Before Income
Tax Expense and Equity in Net Income From
Continuing Operations of Affiliated Companies... 88 179 183
-------- -------- --------
Income Tax Expense (Benefit):
Current........................................ 12 43 53
Deferred....................................... 50 (1) 8
-------- -------- --------
62 42 61
-------- -------- --------
Equity in Net Income From Continuing Operations
of Affiliated Companies......................... 710 528 512
-------- -------- --------
Income From Continuing Operations................ 736 665 634
Income (Loss) From Discontinued Operations, Net
of Income Tax................................... -- (162) 59
-------- -------- --------
Income Before Extraordinary Loss................. 736 503 693
Extraordinary Loss, Net of Income Tax............ -- -- (24)
-------- -------- --------
Income Before Cumulative Effect of Change in
Accounting Principle............................ 736 503 669
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax.................... -- (13) --
-------- -------- --------
Net Income....................................... $ 736 $ 490 $ 669
======== ======== ========
(The accompanying notes to financial statements are an integral part of these
statements of income.)
57
TENNESSEE GAS PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(MILLIONS)
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Operating Activities:
Income from continuing operations............... $ 736 $ 665 $ 634
Adjustments to reconcile income from continuing
operations to cash provided (used) by continuing
operations--
Depreciation and amortization................. 167 97 170
Deferred income taxes......................... 50 (1) 8
Equity in net income of affiliated companies,
net of dividends............................. (665) (528) (480)
(Gain) loss on sale of businesses and assets,
net.......................................... 5 (4) (11)
Changes in components of working capital--
(Increase) decrease in receivables........... 262 (4) 201
(Increase) decrease in inventories........... (11) (7) (6)
(Increase) decrease in prepayments and other
current assets.............................. (34) 20 14
Increase (decrease) in payables.............. (3) 4 (258)
Increase (decrease) in taxes accrued......... (32) (18) 37
Increase (decrease) in interest accrued...... (20) (7) (21)
Increase (decrease) in natural gas pipeline
revenue reservation......................... (161) (103) 141
Increase (decrease) in other current
liabilities................................. (64) (21) (60)
Take-or-pay (refunds to customers)
recoupments, net............................. 36 26 (34)
Other......................................... (3) (87) (58)
-------- -------- --------
Cash provided (used) by continuing
operations.................................. 263 32 277
Cash provided (used) by discontinued
operations.................................. -- (3) (5)
-------- -------- --------
Net Cash Provided (Used) by Operating Activities. 263 29 272
-------- -------- --------
Investing Activities:
Net proceeds (expenditures) related to the sale
of discontinued operations...................... (2) 5 --
Net proceeds from sale of investments and other
assets.......................................... 56 18 12
Expenditures for plant, property and equipment--
Continuing operations......................... (269) (254) (172)
Discontinued operations....................... -- (1) (2)
Acquisitions of businesses...................... (8) (4) (10)
Decrease in Tenneco Inc. receivables............ -- 203 716
Investments in affiliated companies and other... (291) 47 (161)
-------- -------- --------
Net Cash Provided (Used) by Investing Activities. (514) 14 383
-------- -------- --------
Financing Activities:
Capital contribution from (distribution to)
affiliates, net ............................... 112 -- --
Retirement of long-term debt.................... (242) -- (795)
Net increase (decrease) in short-term debt
excluding current maturities on long-term debt. (388) (123) (76)
Increase in notes payable to Tenneco Inc. ...... 440 181 --
Increase in note payable to Tenneco United
Kingdom Holdings Limited....................... 474 -- --
Net increase in advances from affiliated
companies...................................... (145) (101) 213
-------- -------- --------
Net Cash Provided (Used) by Financing Activities. 251 (43) (658)
-------- -------- --------
Increase (Decrease) in Cash and Temporary Cash
Investments..................................... -- -- (3)
Cash and Temporary Cash Investments, January 1... -- -- 3
-------- -------- --------
Cash and Temporary Cash Investments, December 31
(Note).......................................... $ -- $ -- $ --
======== ======== ========
Cash Paid During the Year for Interest........... $ 275 $ 276 $ 271
Cash Paid During the Year for Income Taxes (net
of refunds)..................................... $ 46 $ 50 $ 15
- --------
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
(The accompanying notes to financial statements are an integral part of these
statements of cash flows.)
58
TENNESSEE GAS PIPELINE COMPANY
BALANCE SHEETS
(MILLIONS)
DECEMBER 31,
---------------
ASSETS 1995 1994
------ ------- -------
Current Assets:
Receivables--
Customers (net)............................................. $ 32 $ 53
Affiliated companies........................................ 171 207
Gas transportation and exchange............................. 46 178
Other....................................................... 124 50
Inventories--
Raw material, work in process and finished products......... 59 46
Materials and supplies...................................... 18 18
Deferred income taxes........................................ -- 18
Prepaid pension.............................................. 62 55
Prepayments and other........................................ 55 54
------- -------
567 679
------- -------
Investments and Other Assets:
Investment in affiliated companies........................... 13,885 11,697
Other........................................................ 617 288
------- -------
14,502 11,985
------- -------
Plant, Property and Equipment, at cost:
Automotive................................................... 358 285
Energy....................................................... 5,142 5,027
------- -------
5,500 5,312
Less--Reserves for depreciation and amortization............. 3,281 3,207
------- -------
2,219 2,105
------- -------
$17,288 $14,769
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY
-----------------------------------
Current Liabilities:
Current maturities on long-term debt......................... $ 251 $ 242
Notes payable to Tenneco Inc. ............................... 621 181
Note payable to Tenneco United Kingdom Holdings Limited...... 474 --
Subordinated demand note payable to Tenneco Corporation...... 4,107 4,495
Payables--
Trade and other............................................. 139 178
Affiliated companies........................................ 108 17
Gas transportation and exchange............................. 12 118
Taxes accrued................................................ 26 54
Deferred income taxes........................................ 20 --
Interest accrued............................................. 26 35
Natural gas pipeline revenue reservation..................... 26 187
Other........................................................ 329 143
------- -------
6,139 5,650
------- -------
Long-term Debt................................................ 506 748
------- -------
Advances from Affiliated Companies............................ 583 755
------- -------
Deferred Income Taxes......................................... 363 357
------- -------
Deferred Credits and Other Liabilities........................ 387 300
------- -------
Commitments and Contingencies
Shareowner's Equity:
Common stock, par value $5 per share, authorized, issued and
outstanding 200 shares...................................... -- --
Premium on common stock and other capital surplus............ 4,903 3,494
Cumulative translation adjustments........................... 32 (174)
Retained earnings............................................ 4,375 3,639
------- -------
9,310 6,959
------- -------
$17,288 $14,769
======= =======
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
59
TENNESSEE GAS PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
The financial statements of Tennessee Gas Pipeline Company should be read in
conjunction with the financial statements of Tennessee Gas Pipeline Company and
Consolidated Subsidiaries presented in this document.
Accounting Policies
Majority-owned subsidiaries and companies in which at least a 20% voting
interest is owned are carried at cost plus equity in undistributed earnings
since date of acquisition and cumulative translation adjustments. At December
31, 1995, equity in undistributed earnings and cumulative translation
adjustments amounted to $1,987 million and $31 million, respectively; at
December 31, 1994, the corresponding amounts were $1,244 million and $(150)
million, respectively.
Dividends received from companies accounted for on an equity basis amounted
to $45 million, none and $32 million for 1995, 1994 and 1993, respectively.
Tennessee Gas Pipeline Company charged corporate overhead expenses to its
subsidiaries in the amount of $32 million, $31 million and $36 million for the
years 1995, 1994 and 1993, respectively.
Income Taxes
Tennessee Gas Pipeline Company and its parent, Tenneco Inc., together with
certain of their respective subsidiaries which are owned 80% or more, have
entered into an agreement to file a consolidated U.S. federal income tax
return. Such agreement provides, among other things, that (1) each company in a
taxable income position will be currently charged with an amount equivalent to
its federal income tax computed on a separate return basis and (2) each company
in a tax loss position will be currently reimbursed to the extent its
deductions, including general business credits, are utilized in the
consolidated return.
Tennessee Gas Pipeline Company's pre-tax earnings from continuing operations
(excluding equity in net income from continuing operations of affiliated
companies) for the years 1995, 1994 and 1993 are principally domestic. The
differences between the income tax expense, reflected in the Statements of
Income, of $62 million, $42 million and $61 million for the years 1995, 1994
and 1993 and the income tax expense, computed based on pre-tax income from
continuing operations at the U.S. federal income tax rates, of $279 million,
$247 million and $243 million, respectively, consisted principally of the tax
effect of equity in net income from continuing operations of affiliated
companies in each of the three years and permanent differences on the sale of
businesses in 1995 and 1994.
Long-Term Debt and Current Maturities
The aggregate maturities and sinking fund requirements applicable to the
long-term debt issues outstanding at December 31, 1995, are $251 million, $326
million, $1 million, none and none for 1996, 1997, 1998, 1999 and 2000,
respectively.
Financial Instruments
Tennessee Gas Pipeline Company has agreed to cause and enable Newport News
Shipbuilding and Dry Dock Company (a wholly-owned subsidiary) to perform its
covenants and agreements under certain major shipbuilding contracts.
Tennessee Gas Pipeline Company has guaranteed the performance of certain
affiliates pursuant to arrangements under which receivables are factored on a
nonrecourse basis with Tenneco Credit Corporation.
(The above notes are an integral part of the foregoing financial statements.)
60
SCHEDULE II
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (NOTE) OF YEAR
- ------------------------------------------------------------------------------
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $48 $29 $-- $27 $50
=== === === === ===
Year Ended December 31,
1994.................. $66 $16 $ 2 $36 $48
=== === === === ===
Year Ended December 31,
1993.................. $51 $39 $ 1 $25 $66
=== === === === ===
- --------
Note: For 1994, primarily the result of the reorganization and sale of Case.
For 1995, 1994 and 1993, includes uncollectible accounts written off, net
of recoveries on accounts previously written off.
61
REPORTS ON FORM 8-K
During the fourth quarter of the fiscal year ended December 31, 1995, the
Company did not file with the Securities and Exchange Commission any Current
Reports on Form 8-K.
EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by an
asterisk; all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
3(a) --Certificate of Incorporation as amended and supplemented as of
January 31, 1995 (Exhibit 3(a) to Form 10-K for the fiscal year
ended December 31, 1994, File No. 1-4101).
3(b) --Copy of By-Laws of Tennessee Gas Pipeline Company as amended
October 2, 1989 (Exhibit 3(b) to Form 10-K for fiscal year ended
December 31, 1992, File No. 1-4101).
4 --Included in Exhibits 3(a) and 3(b).
9 --None.
10(b)(1) --Lease Agreement, Tomahawk, dated as of January 30, 1991, between
The Connecticut National Bank, as Owner Trustee, and Packaging
Corporation of America (Exhibit 10(b)(1) to Form 10-K of Tenneco
Inc. for the fiscal year ended December 31, 1990, File No. 1-
9864).
10(b)(2) --Lease Agreement, Valdosta, dated as of January 30, 1991, between
The Connecticut National Bank, Philip G. Kane, Jr., Frank
McDonald, Jr., and William R. Monroe, as Owner Trustee, and
Packaging Corporation of America (Exhibit 10(b)(2) to Form 10-K
of Tenneco Inc. for the fiscal year ended December 31, 1990, File
No. 1-9864).
10(b)(3) --Timberland Lease dated January 31, 1991, by and between Four
States Timber Venture and Packaging Corporation of America
(Exhibit 10(b)(3) to Form 10-K of Tenneco Inc. for the fiscal
year ended December 31, 1990, File No. 1-9864).
11 --None.
12 --None.
13 --None.
16 --None.
18 --None.
21 --None.
22 --Omitted pursuant to the reduced disclosure format permitted by
General Instruction J to Form 10-K.
23 --None.
24 --None.
*27 --Financial Data Schedule.
28 --None.
99 --None.
UNDERTAKING.
The undersigned, Tennessee Gas Pipeline Company, hereby undertakes, pursuant
to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the
Securities and Exchange Commission upon request all constituent instruments
defining the rights of holders of long-term debt of Tennessee Gas Pipeline
Company and its consolidated subsidiaries not filed herewith for the reason
that the total amount of securities authorized under any of such instruments
does not exceed 10% of the total consolidated assets of Tennessee Gas Pipeline
Company and its consolidated subsidiaries.
62
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
S. D. Chesebro
By __________________________________
S. D. Chesebro
Chairman and Chief Executive Officer
Date: February 21, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
S. D. Chesebro Principal Executive Officer February 21, 1996
____________________________________ and Director
S. D. Chesebro
Robert T. Blakely Principal Financial and February 21, 1996
____________________________________ Accounting Officer
Robert T. Blakely
Dana G. Mead Director February 21, 1996
____________________________________
Dana G. Mead
63