TENNESSEE GAS PIPELINE CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-4101

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TENNESSEE GAS PIPELINE COMPANY
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 74-1056569
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)

Telephone Number: (713) 420-2600

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common stock, par value $5 per share. Shares outstanding on November 12,
2004: 208

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TENNESSEE GAS PIPELINE COMPANY

TABLE OF CONTENTS

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Below is a list of terms that are common to our industry and used
throughout this document:

/d = per day
BBtu = billion British thermal units

When we refer to cubic feet measurements, all measurements are at a pressure
of 14.73 pounds per square inch.

When we refer to "us", "we", "our", or "ours", we are describing Tennessee
Gas Pipeline Company and/or our subsidiaries.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENNESSEE GAS PIPELINE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

1

TENNESSEE GAS PIPELINE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

TENNESSEE GAS PIPELINE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

3

TENNESSEE GAS PIPELINE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are an indirect wholly owned subsidiary of El Paso Corporation (El
Paso). We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States Securities and Exchange Commission. Because
this is an interim period filing presented using a condensed format, it does not
include all of the disclosures required by generally accepted accounting
principles. You should read it along with our 2003 Annual Report on Form 10-K,
which includes a summary of our significant accounting policies and other
disclosures. The financial statements as of September 30, 2004, and for the
quarters and nine months ended September 30, 2004 and 2003, are unaudited. We
derived the balance sheet as of December 31, 2003, from the audited balance
sheet filed in our 2003 Form 10-K. In our opinion, we have made all adjustments
which are of a normal, recurring nature to fairly present our interim period
results. Due to the seasonal nature of our business, information for interim
periods may not be indicative of our results of operations for the entire year.
In addition, prior period information presented in these financial statements
includes reclassifications which were made to conform to the current period
presentation. These reclassifications had no effect on our previously reported
net income or stockholder's equity.

Our accounting policies are consistent with those discussed in our 2003
Form 10-K.

2. LIQUIDITY

El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program whereby, depending on whether
we have short-term cash surpluses or requirements, we either provide cash to El
Paso or El Paso provides cash to us. We have historically provided cash advances
to El Paso and as of September 30, 2004, we had a cash advance receivable from
El Paso of $1,020 million, classified as a non-current asset in our balance
sheet. We believe that our cash flows from operating activities will be adequate
to meet our short term capital and debt service requirements for our existing
operations, therefore we do not believe we will need to seek repayment of these
advances in the next twelve months.

If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables, if demanded. Although increases in our debt to EBITDA (as defined in
our agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us
from incurring additional debt, the equity reduction that would result if we
wrote off these receivables would not result in a default under our existing
debt agreements.

During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and changes in the manner in which it accounted for certain derivative
contracts, primarily those related to the hedging of its natural gas production.
El Paso believes the restatement of its historical financial statements would
have constituted events of default under its revolving credit facility, under
which we are eligible to borrow, and various other financings; specifically
under the provisions of those agreements related to representations and
warranties on the accuracy of its historical financial statements and on El
Paso's debt to total capitalization ratio. During 2004, El Paso received a
series of waivers on its revolving credit facility and these other financing
transactions to address these issues. These waivers continue to be in effect. El
Paso also received an extension of time from various lenders until November 30,
2004 to file its second quarter 2004 Form 10-Q which it expects to meet. If El
Paso is unable to file its second quarter 2004 Form 10-Q by that date and is not
able to negotiate an additional extension of the filing deadline, its revolving
credit facility and various other financings could be accelerated. As part of
obtaining the waivers, El Paso amended various provisions of the revolving
credit facility, including provisions related to events of default and
limitations on the ability of El Paso, as well as its subsidiaries, to prepay
debt

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that matures after June 30, 2005. Although we are a party to El Paso's revolving
credit facility, we do not have any borrowings or letters of credit outstanding
under that facility. See Note 4 below for a further discussion of the revolving
credit facility and the potential refinancing of this facility.

Based upon a review of the covenants contained in our long-term debt
agreements, we believe that a default on El Paso's revolving credit facility
would not result in an event of default under our debt agreements.

El Paso's ownership interest in us and our equity investment in Bear Creek
Storage Company (Bear Creek) serve as collateral under El Paso's revolving
credit facility and other of El Paso's financing transactions. If El Paso's
lenders under these facilities were to exercise their rights to this collateral,
our ownership could change and our investment in Bear Creek could be liquidated.
However, this change of control and liquidation would not constitute an event of
default under our existing debt agreements.

If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.

3. OTHER COMPREHENSIVE LOSS

Our comprehensive income for the nine months ended September 30, 2003,
included a loss of $1 million, representing our proportionate share of amounts
recorded in other comprehensive loss by Portland Natural Gas Transmission System
(PNGTS), our equity investee, related to its derivative hedging activities. In
the fourth quarter of 2003, we sold our 30 percent ownership interest in PNGTS
and eliminated the accumulated other comprehensive loss associated with this
investment.

4. CREDIT FACILITIES

El Paso maintains a revolving credit facility, with a $1.5 billion letter
of credit sublimit, which matures on June 30, 2005. The revolving credit
facility has a borrowing cost of LIBOR plus 350 basis points, letter of credit
fees of 350 basis points and a commitment fee of 75 basis points on the unused
portion of the facility. We, along with El Paso and our affiliates, ANR Pipeline
Company, Colorado Interstate Gas Company and El Paso Natural Gas Company, are
borrowers under the revolving credit facility. El Paso liquidated a portion of
the collateral that supported the revolving credit facility, which reduced the
overall borrowing availability from $3 billion to $2.5 billion in October 2004.
We are only liable for amounts we directly borrow under the revolving credit
facility. As of September 30, 2004, there were no borrowings and $1.1 billion in
letters of credit were issued under the revolving credit facility, none of which
were issued on our behalf. See Note 2 for a discussion regarding El Paso's
waivers on the revolving credit facility.

El Paso's equity in several of its subsidiaries, including its equity in us
and our equity in Bear Creek, collateralizes the revolving credit facility and
other financing arrangements including leases, letters of credit and other
credit facilities.

El Paso is in the process of negotiating the refinancing of this facility
as the combination of a three year revolving credit facility and a five year
term loan and currently expects to be successful in this refinancing by December
31, 2004.

Under the revolving credit facility and other financing agreements, we are
subject to a number of restrictions and covenants. The most restrictive of these
include (i) limitations on the incurrence of additional debt, based on a ratio
of debt to EBITDA (as defined in our agreements), the most restrictive of which
shall not exceed 5 to 1; (ii) limitations on the use of proceeds from
borrowings; (iii) limitations, in some cases, on transactions with our
affiliates; (iv) limitations on the incurrence of liens; and (v) potential
limitations on our ability to declare and pay dividends.

5

5. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Grynberg. In 1997, we and a number of our affiliates were named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, these complaints allege an industry-wide conspiracy
to underreport the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and heating value
been differently measured, analyzed, calculated and reported, together with
interest, treble damages, civil penalties, expenses and future injunctive relief
to require the defendants to adopt allegedly appropriate gas measurement
practices. No monetary relief has been specified in this case. These matters
have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui
Tam Litigation, U.S. District Court for the District of Wyoming, filed June
1997). Discovery is proceeding. Our costs and legal exposure related to these
lawsuits and claims are not currently determinable.

Will Price (formerly Quinque). We and a number of our affiliates are named
defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et
al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and heating content
of natural gas on non-federal and non-Native American lands and seek to recover
royalties that they contend they should have received had the volume and heating
value of natural gas produced from their properties been differently measured,
analyzed, calculated and reported, together with prejudgment and postjudgment
interest, punitive damages, treble damages, attorneys' fees, costs and expenses,
and future injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has been specified in
this case. Plaintiffs' motion for class certification of a nationwide class of
natural gas working interest owners and natural gas royalty owners was denied in
April 2003. Plaintiffs were granted leave to file a Fourth Amended Petition,
which narrows the proposed class to royalty owners in wells in Kansas, Wyoming
and Colorado and removes claims as to heating content. A second class action has
since been filed as to the heating content claim. Our costs and legal exposure
related to these lawsuits and claims are not currently determinable.

In addition to the above matters, we and our subsidiaries and affiliates
are named defendants in numerous lawsuits and governmental proceedings that
arise in the ordinary course of our business.

For each of our outstanding legal matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
As this information becomes available, or other relevant developments occur, we
will adjust our accrual amounts accordingly. While there are still uncertainties
related to the ultimate costs we may incur, based upon our evaluation and
experience to date, we believe our current reserves are adequate. As of
September 30, 2004, we had approximately $1 million accrued for our outstanding
legal matters.

Environmental Matters

We are subject to federal, state and local laws and regulations governing
environmental quality and pollution control. These laws and regulations require
us to remove or remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites. As of September
30, 2004, we had accrued approximately $43 million for expected remediation
costs and associated onsite, offsite and groundwater technical studies. Our
accrual was based on the most likely outcome that can be reasonably estimated.
Below is a reconciliation of our accrued liability as of September 30, 2004 (in
millions):

Balance as of January 1, 2004............................... $46
Payments for remediation activities......................... (3)
---
Balance as of September 30, 2004............................ $43
===

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In addition, we expect to make capital expenditures for environmental
matters of approximately $40 million in the aggregate for the years 2004 through
2008. These expenditures primarily relate to compliance with clean air
regulations. For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $2 million, which primarily will be expended
under government directed clean-up plans.

Internal PCB Remediation Project. Since 1988, we have been engaged in an
internal project to identify and address the presence of polychlorinated
biphenyls (PCBs) and other substances, including those on the EPA's List of
Hazardous Substances (HSL), at compressor stations and other facilities we
operate. While conducting this project, we have been in frequent contact with
federal and state regulatory agencies, both through informal negotiation and
formal entry of consent orders. We executed a consent order in 1994 with the
EPA, governing the remediation of the relevant compressor stations and are
working with the EPA and the relevant states regarding those remediation
activities. We are also working with the Pennsylvania and New York environmental
agencies regarding remediation and post-remediation activities at our
Pennsylvania and New York stations.

PCB Cost Recoveries. In May 1995, following negotiations with our
customers, we filed an agreement with the Federal Energy Regulatory Commission
(FERC) that established a mechanism for recovering a substantial portion of the
environmental costs identified in our internal remediation project. The
agreement, which was approved by the FERC in November 1995, provided for a PCB
surcharge on firm and interruptible customers' rates to pay for eligible costs,
with these surcharges to be collected over a defined collection period. We have
twice received approval from the FERC to extend the collection period over time,
with the current collection period set to expire in June 2006. The agreement
also provided for bi-annual audits of eligible costs. As of September 30, 2004,
we had pre-collected our PCB costs by approximately $124 million. The pre-
collection will be reduced by future eligible costs incurred for the remainder
of the remediation project. To the extent actual eligible expenditures are less
than the amounts pre-collected, we will refund to our customers the
pre-collection amount plus carrying charges incurred up to the date of the
refunds. As of September 30, 2004, we have recorded a regulatory liability
(included in other non-current liabilities on our balance sheet) of $95 million
for future refund obligations.

Kentucky PCB Project. In November 1988, the Kentucky environmental agency
filed a complaint in a Kentucky state court alleging that we discharged
pollutants into the waters of the state and disposed of PCBs without a permit.
The agency sought an injunction against future discharges, an order to remediate
or remove PCBs and a civil penalty. We entered into interim agreed orders with
the agency to resolve many of the issues raised in the complaint. The relevant
Kentucky compressor stations are being remediated under a 1994 consent order
with the EPA. Despite our remediation efforts, the agency may raise additional
technical issues or seek additional remediation work in the future.

CERCLA Matters. We have received notice that we could be designated, or
have been asked for information to determine whether we could be designated, as
a Potentially Responsible Party (PRP) with respect to four active sites under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) or state equivalents. We have sought to resolve our liability as a PRP
at these sites through indemnification by third parties and settlements which
provide for payment of our allocable share of remediation costs. As of September
30, 2004 we have estimated our share of the remediation costs at these sites to
be between $1 million and $2 million. Since the clean-up costs are estimates and
are subject to revision as more information becomes available about the extent
of remediation required, and because in some cases we have asserted a defense to
any liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in
estimating our liabilities. Reserves for these matters are included in the
environmental reserve discussed above.

It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as

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increasingly strict environmental laws and regulations and claims for damages to
property, employees, other persons and the environment resulting from our
current or past operations, could result in substantial costs and liabilities in
the future. As this information becomes available, or other relevant
developments occur, we will adjust our accrual amounts accordingly. While there
are still uncertainties relating to the ultimate costs we may incur, based upon
our evaluation and experience to date, we believe our reserves are adequate.

Rates and Regulatory Matters

Order No. 637. We filed our compliance proposal in August 2000 and
received an order on compliance from the FERC in April 2002. Most of our
compliance proposal was accepted, but the FERC rejected our proposals regarding
overlapping capacity segments, discounting and the priority of capacity. In
response, we sought rehearing and have made another compliance filing. In
October 2002, FERC issued its order responding to the United States Court of
Appeals for the D.C. Circuit's order remanding the various aspects of Order No.
637. In December 2002, we submitted a compliance filing with FERC to comply with
the October order. We also filed for rehearing of the October order.

In July 2003, the FERC issued an order on our rehearing request and
compliance filing as to the April 2002 Order, denying our request for rehearing
regarding a replacement shipper's ability to select additional primary points,
forwardhauls and backhauls to the same delivery point, and discounting. We filed
certain required tariff revisions in response to that order and sought further
rehearing of certain issues. The FERC issued an order on these filings in August
2004, accepting as in compliance certain of the tariff revisions, modifying
others, granting our rehearing and clarification requests on certain items and
denying others. We have filed for clarification and/or rehearing on certain
matters. In February 2004, the Court of Appeals for the D.C. Circuit vacated
certain FERC orders that applied its Order No. 637 discounting policy to
Williston Basin pipeline. The FERC is currently accepting industry comments in
advance of their order on remand. We cannot predict the outcome of the
compliance filings or the requests for rehearing.

Accounting for Pipeline Assessment Costs. In November 2004, the FERC
issued an industry-wide Proposed Accounting Release that, if enacted as written,
will disallow the capitalization of certain costs that are part of our pipeline
integrity program. The accounting release is proposed to be effective January
2005 following a period of public comment on the release. We are currently
reviewing the release and have not determined what impact this release will have
on our consolidated financial statements.

There are other regulatory rules and orders in various stages of adoption,
review and/or implementation, none of which we believe will have a material
impact on us.

While the outcome of our outstanding rates and regulatory matters cannot be
predicted with certainty, based on current information, we do not expect the
ultimate resolution of these matters to have a material adverse effect on our
financial position, operating results or cash flows. However, it is possible
that new information or future developments could require us to reassess our
potential exposure related to these matters.

Other

CFTC Investigation. In April 2004, we elected to voluntarily cooperate
with the Commodity Futures Trading Commission (CFTC) in connection with the
CFTC's industry-wide investigation of activities affecting the price of natural
gas in the fall of 2003. Specifically, we provided information relating to
storage reports provided to the Energy Information Administration for the period
of October 2003 through December 2003. In August 2004, the CFTC announced they
had completed the investigation and found no evidence of wrongdoing.

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6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND TRANSACTIONS WITH AFFILIATES

Investments in Unconsolidated Affiliates

We hold investments in various affiliates which we account for using the
equity method of accounting. Summarized financial information for our
proportionate share of these investments is as follows:

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(1) We sold our investment in PNGTS during the fourth quarter of 2003.

(2) Our proportionate share of net income includes our share of taxes payable by
partners recorded by our equity investments.

Transactions with Affiliates

We participate in El Paso's cash management program which matches
short-term cash surpluses and needs of participating affiliates, thus minimizing
total borrowings from outside sources. As of September 30, 2004 and December 31,
2003, we had advanced to El Paso $1,020 million and $841 million. The interest
rate at September 30, 2004 was 2.7% and at December 31, 2003 was 2.8%. These
receivables are due upon demand; however, as of September 30, 2004 and December
31, 2003, we have classified these advances as non-current notes receivable from
affiliates because we do not anticipate settlement within the next twelve
months. See Note 2 for a discussion regarding our participation in and the
collectibility of these receivables.

At September 30, 2004 and December 31, 2003, we had accounts receivable
from affiliates of $16 million and $6 million. In addition, we had accounts
payable to affiliates of $25 million and $8 million at September 30, 2004 and
December 31, 2003. These balances arose in the normal course of business. We
also received $7 million and $5 million in deposits related to our
transportation contracts with El Paso Marketing L.P. (formerly El Paso Merchant
Energy L.P.) which is included in our balance sheet as current liabilities as of
September 30, 2004 and December 31, 2003.

In the third quarter of 2004, we acquired assets from our affiliate with a
net book value of $8 million.

The following table shows revenues and charges from our affiliates for the
periods ended September 30:

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and should be read in
conjunction with, the information disclosed in our 2003 Annual Report on Form
10-K and the financial statements and notes presented in Item 1 of this
Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

Our management, as well as El Paso's management, uses earnings before
interest expense and income taxes (EBIT) to assess the operating results and
effectiveness of our business. We define EBIT as net income adjusted for (i)
items that do not impact our income from continuing operations, such as the
impact of accounting changes, (ii) income taxes, (iii) interest and debt expense
and (iv) affiliated interest income. Our business consists of consolidated
operations as well as investments in unconsolidated affiliates. We exclude
interest and debt expense from this measure so that our management can evaluate
our operating results without regard to our financing methods. We believe the
discussion of our results of operations based on EBIT is useful to our investors
because it allows them to more effectively evaluate the operating performance of
both our consolidated business and our unconsolidated investments using the same
performance measure analyzed internally by our management. EBIT may not be
comparable to measurements used by other companies. Additionally, EBIT should be
considered in conjunction with net income or other performance measures such as
operating income or operating cash flow.

The following is a reconciliation of EBIT to net income:

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(1)Throughput volumes for the quarter and nine months ended September 30, 2003
exclude volumes related to our equity investment in PNGTS which was sold in
the fourth quarter of 2003.

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OPERATING RESULTS (EBIT)

Third Quarter 2004 Compared to Third Quarter 2003

The following factors contributed to our overall EBIT decrease of $4
million for the three months ended September 30, 2004 as compared to the same
period in 2003:

Nine Months Ended 2004 Compared to Nine Months Ended 2003

The following factors contributed to our overall EBIT increase of $10
million for the nine months ended September 30, 2004 as compared to the same
period in 2003:

In November 2004, the FERC issued an industry-wide Proposed Accounting
Release that, if enacted as written, will disallow the capitalization of certain
costs that are part of our pipeline integrity program. The accounting release is
proposed to be effective January 2005 following a period of public comment on
the release. We are currently reviewing the release and have not determined what
impact this release will have on our consolidated financial statements.

AFFILIATED INTEREST INCOME, NET

Third Quarter 2004 Compared to Third Quarter 2003

Affiliated interest income, net for the quarter ended September 30, 2004,
was $2 million higher than the same period in 2003 due to higher interest rates
and higher average advances to El Paso under its cash management program. The
average advance balance on our interest bearing notes for the third quarter of
2003 of $396 million increased to $582 million for the same period in 2004. The
average short-term interest rate for the third quarter increased from 1.9% in
2003 to 2.5% during the same period in 2004.

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Nine Months Ended 2004 Compared to Nine Months Ended 2003

Affiliated interest income, net for the nine months ended September 30,
2004, was $6 million higher than the same period in 2003 due primarily to an
increase in average advances to El Paso under its cash management program and
higher short-term interest rates in 2004. The average advance balance on our
interest bearing notes for the nine months of 2004 increased to $473 million
from $118 million in 2003. The average short-term interest rates for the nine
month period increased from 1.6% in 2003 to 2.5% during the same period in 2004.

INCOME TAXES

Our effective tax rates were different than the statutory rate of 35
percent in all periods, primarily due to the effect of state income taxes in
2003 and 2004 and the expiration of certain state net operating loss carryovers
into 2004.

OTHER

In September 2004, we incurred significant damage to sections of our
offshore pipeline facilities due to Hurricane Ivan. Cost estimates are currently
in the $40 to $50 million range with damage assessment still in progress. We
expect insurance reimbursement for the cost of the damage with the exception of
our share of a $2 million deductible applied on a corporate-wide basis.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our liquidity needs have historically been provided through cash flows from
operating activities and the use of El Paso's cash management program. Under El
Paso's cash management program, depending on whether we have short-term cash
surpluses or requirements, we either provide cash to El Paso or El Paso provides
cash to us. We have historically provided cash advances to El Paso, and as of
September 30, 2004, we had a cash advance receivable from El Paso of $1,020
million, classified as a non-current asset in our balance sheet. We believe that
cash flows from operating activities will be adequate to meet our short-term
capital and debt service requirements for our existing operations, therefore we
do not believe we will need to seek repayment of these advances within the next
twelve months.

If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables if demanded. Although increases in our debt to EBITDA (as defined in
our agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us
from incurring additional debt, the equity reduction that would result if we
wrote off these receivables would not result in an event of default under our
existing debt agreements.

During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and changes in the manner in which it accounted for certain derivative
contracts, primarily those related to the hedging of its natural gas production.
El Paso believes the restatement of its historical financial statements would
have constituted events of default under its revolving credit facility, under
which we are eligible to borrow, and various other financings; specifically
under the provisions of those agreements related to representations and
warranties on the accuracy of its historical

12

financial statements and on El Paso's debt to total capitalization ratio. During
2004, El Paso received a series of waivers on its revolving credit facility and
these other financing transactions to address these issues. These waivers
continue to be in effect. El Paso also received an extension of time from
various lenders until November 30, 2004 to file its second quarter 2004 Form
10-Q which it expects to meet. If El Paso is unable to file its second quarter
2004 Form 10-Q by that date and is not able to negotiate an additional extension
of the filing deadline, its revolving credit facility and various other
financings could be accelerated. As part of obtaining the waivers, El Paso
amended various provisions of the revolving credit facility, including
provisions related to events of default and limitations on the ability of El
Paso, as well as its subsidiaries, to prepay debt that matures after June 30,
2005. Although we are a party to El Paso's revolving credit facility, we do not
have any borrowings or letters of credit outstanding under that facility. See
Item 1, Financial Statements, Note 4, for a further discussion of the revolving
credit facility and the potential refinancing of this facility.

Based upon a review of the covenants contained in our long-term debt
agreements, we believe that a default on El Paso's revolving credit facility
would not result in an event of default under our debt agreements.

El Paso's ownership interest in us and our equity investment in Bear Creek
serve as collateral under El Paso's revolving credit facility and other of El
Paso's financing transactions. If El Paso's lenders under these facilities were
to exercise their rights to this collateral, our ownership could change and our
investment in Bear Creek could be liquidated. However, this change of control
and liquidation would not constitute an event of default under our existing debt
agreements.

If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.

Our cash flows for the nine months ended September 30 were as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities was $269 million in 2004 versus
$162 million in 2003. This increase was primarily due to changes in assets and
liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities in 2004 consisted of $179 million in
advances to El Paso under its cash management program and $83 million of capital
expenditures.

CAPITAL EXPENDITURES

Our capital expenditures for the nine months ended September 30, 2004 were
approximately $83 million. We expect to spend $91 million for the remainder of
2004 for capital expenditures consisting of $17 million to expand the capacity
on our system and $74 million for maintenance capital. We expect to fund our
capital expenditures through a combination of internally generated funds and/or
by recovering amounts advanced to El Paso under its cash management program.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 5, which is incorporated herein by
reference.

13

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.

With this in mind, you should consider the risks discussed elsewhere in
this report and other documents we file with the Securities and Exchange
Commission from time to time.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 2003, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.

There are no material changes in our quantitative and qualitative
disclosures about market risks from those reported in our Annual Report on Form
10-K for the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

During 2003, we initiated a project to ensure compliance with Section 404
of the Sarbanes-Oxley Act of 2002 (SOX), which will apply to us at December 31,
2005. This project entailed a detailed review and documentation of the processes
that impact the preparation of our financial statements, an assessment of the
risks that could adversely affect the accurate and timely preparation of those
financial statements, and the identification of the controls in place to
mitigate the risks of untimely or inaccurate preparation of those financial
statements. Following the documentation of these processes, we initiated an
internal review of "walk-through" of these financial processes by the financial
management responsible for those processes to evaluate the design effectiveness
of the controls identified to mitigate the risk of material misstatements
occurring in our financial statements. We also initiated a detailed process to
evaluate the operating effectiveness of our controls over financial reporting.
This process involves testing the controls for effectiveness, including a review
and inspection of the documentary evidence supporting the operation of the
controls on which we are placing reliance. While we have identified areas where
our processes and internal controls can be improved, we have not identified any
deficiencies we believe, individually or in the aggregate, would constitute a
material weakness in our internal controls over financial reporting. As we
continue our SOX 404 compliance efforts, we may identify matters which may need
to be reported or which may constitute material weaknesses in our internal
controls over financial reporting.

We did not make any changes to our internal controls over financial
reporting during the quarter ended September 30, 2004, that have had a material
adverse affect or are reasonably likely to have a material adverse effect on our
internal controls over financial reporting. However, we have made changes to
improve our internal controls during the quarter ended September 30, 2004.

We also undertook a review of our overall disclosure controls and
procedures. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on
our evaluation, we have concluded that our disclosure controls and procedures
were effective at September 30, 2004.

14

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Financial Statements, Note 5, which is incorporated
herein by reference.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph
(4)(iii), to furnish to the U.S. Securities and Exchange Commission, upon
request, all constituent instruments defining the rights of holders of our
long-term debt not filed herewith for the reason that the total amount of
securities authorized under any of such instruments does not exceed 10 percent
of our total consolidated assets.

15

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TENNESSEE GAS PIPELINE COMPANY

Date: November 12, 2004 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)

Date: November 12, 2004 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting
Officer)

16

TENNESSEE GAS PIPELINE COMPANY

EXHIBIT INDEX

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.