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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1995
Commission File No. 1-4456
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TEXAS EASTERN TRANSMISSION CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation
(State of Incorporation or Organization)
72-0378240
(IRS Employer Identification No.)
5400 Westheimer Court, P.O. Box 1642, Houston, Texas 77251-1642
(Address of principal executive offices, including zip code)
(713) 627-5400
(Registrant's telephone number, including area code)
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 twelve 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:
The Registrant meets the conditions set forth in General Instructions
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with
the reduced disclosure format. Part I, Item 2 has been reduced and
Part II, Item 4 has been omitted in accordance with such Instruction H.
The Registrant's parent, Panhandle Eastern Corporation (File No. 1-8157),
files reports and proxy materials pursuant to the Securities Exchange Act
of 1934.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Class Outstanding at October 31, 1995
-------------------------- --------------------------------
Common Stock, $1 par value 1,000
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Texas Eastern Transmission Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Periods Ended September 30
Three Months Nine Months
--------------- ---------------
Millions 1995 1994 1995 1994
- - -------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues
Transportation and storage
of natural gas $202.7 $193.5 $627.9 $578.1
Other 7.0 11.2 22.2 28.8
------ ------ ------ ------
Total (Note 2) 209.7 204.7 650.1 606.9
------ ------ ------ ------
Costs and Expenses
Operating and maintenance 74.3 66.1 222.2 197.5
General and administrative 22.4 25.1 66.8 78.3
Depreciation and amortization 36.5 32.3 109.3 105.3
Miscellaneous taxes 9.7 9.7 29.7 30.1
------ ------ ------ ------
Total 142.9 133.2 428.0 411.2
------ ------ ------ ------
Operating Income 66.8 71.5 222.1 195.7
------ ------ ------ ------
Other Income and Deductions
Interest income - parent - 9.4 - 22.8
Other income, net of deductions 1.9 (2.7) 4.6 (1.7)
------ ------ ------ ------
Total 1.9 6.7 4.6 21.1
------ ------ ------ ------
Gross Income 68.7 78.2 226.7 216.8
Interest Expense 22.2 22.0 69.7 64.7
------ ------ ------ ------
Income Before Income Tax 46.5 56.2 157.0 152.1
Income Tax 18.7 21.3 62.8 61.6
------ ------ ------ ------
NET INCOME $ 27.8 $ 34.9 $ 94.2 $ 90.5
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Texas Eastern Transmission Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
Millions 1995 1994
- - -------- ------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 0.1 $ 11.0
Accounts receivable, net 13.3 31.9
Inventory and supplies 18.9 20.1
Current deferred income tax 35.0 47.9
Other (Notes 2 and 3) 96.1 85.6
-------- --------
Total 163.4 196.5
-------- --------
Investments
Advances receivable - parent 663.5 553.8
Other 17.9 19.5
-------- --------
Total 681.4 573.3
-------- --------
Plant, Property and Equipment
Cost 3,174.6 3,122.8
Accumulated depreciation and amortization (657.3) (584.6)
-------- --------
Net plant, property and equipment 2,517.3 2,538.2
-------- --------
Deferred Charges
Goodwill, net 275.1 281.2
Other (Notes 2 and 3) 538.6 609.7
-------- --------
Total 813.7 890.9
-------- --------
TOTAL ASSETS $4,175.8 $4,198.9
======== ========
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Texas Eastern Transmission Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
Millions, except per share amounts 1995 1994
- - ----------------------------------------------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 33.1 $ 39.8
Accrued income tax - parent 35.9 37.6
Accrued interest 23.2 21.1
Other (Notes 2 and 3) 245.5 285.4
-------- --------
Total 337.7 383.9
-------- --------
Deferred Liabilities and Credits
Deferred income tax 563.3 552.3
Other (Notes 2 and 3) 473.3 557.0
-------- --------
Total 1,036.6 1,109.3
-------- --------
Long-term Debt 820.0 818.4
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 3 and 4)
Common Stockholder's Equity
Common stock, one thousand shares
authorized, issued and outstanding,
$1 par value per share - -
Paid-in capital 1,572.5 1,572.5
Retained earnings 409.0 314.8
-------- --------
Total 1,981.5 1,887.3
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,175.8 $4,198.9
======== ========
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Texas Eastern Transmission Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
Millions 1995 1994
- - -------- ------- -------
<S> <C> <C>
Operating Activities
Net income $ 94.2 $ 90.5
Adjustments to reconcile net income to
operating cash flows -
Depreciation and amortization 109.3 105.3
Deferred income tax expense 23.0 28.9
Interest income - parent - (22.8)
Other non-cash items in net income 0.8 2.3
Net change in operating assets
and liabilities (41.3) (12.7)
------- -------
Net Cash Flows Provided by Operating Activities 186.0 191.5
------- -------
Investing Activities
Additions to plant, property and equipment (80.2) (97.4)
Net increase in advances - affiliates (109.7) (36.0)
Property retirements and other 0.1 (4.3)
------- -------
Net Cash Flows Used in Investing Activities(189.8) (137.7)
------- -------
Financing Activities
Net decrease in notes payable - (18.4)
Other (7.1) -
------- -------
Net Cash Flows Used in Financing Activities (7.1) (18.4)
------- -------
Net Change in Cash
Increase (decrease) in cash and cash equivalents (10.9) 35.4
Cash and cash equivalents, beginning of period 11.0 8.2
------- -------
Cash and Cash Equivalents, End of Period $ 0.1 $ 43.6
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 62.1 $ 56.9
Cash paid for income tax (including
intercompany amounts) 44.9 58.1
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. References
Texas Eastern Transmission Corporation (TETCO) and its subsidiaries
(the Company) are involved in the interstate transportation and
storage of natural gas. TETCO is a wholly-owned subsidiary of
Panhandle Eastern Corporation (PEC). The interstate gas transmission
operations of TETCO are subject to the rules, regulations and
accounting procedures of the Federal Energy Regulatory Commission
(FERC). Certain amounts for the prior periods have been reclassified
in the consolidated financial statements to conform to the current
presentation.
2. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of
revenues collected by TETCO is subject to possible refunds. The
Company has established adequate reserves where required for such
cases. The following is a summary of certain pending regulatory
matters.
FERC Order 636 and the Termination of Merchant Services
During 1993, TETCO began providing restructured services pursuant to
FERC Order 636. This order, which is on appeal to the courts,
requires pipeline service restructuring that "unbundles" sales,
transportation and storage services. Order 636 provides for the use
of the straight fixed-variable (SFV) rate design, which assigns
return on equity, related taxes and other fixed costs to the
reservation component of rates. In addition, Order 636 allows
pipelines to recover eligible costs resulting from implementation of
the order (transition costs).
TETCO's final and nonappealable Order 636 settlement, implemented on
August 1, 1994, provides for the recovery of certain transition costs
through volumetric and reservation charges through 2002 and beyond,
if necessary. Pursuant to the settlement, TETCO will absorb a
certain portion of the transition costs, the amount of which is
dependent upon natural gas prices and deliverability levels. In
1993, the Company established a provision to reflect the impact of
the settlement.
At September 30, 1995 and December 31, 1994, the Company had recorded
approximately $50 million and $245 million (1995), and $30 million
and $290 million (1994) of current and long-term regulatory assets,
respectively, representing transition costs incurred or estimated to
be incurred that will be recovered. The Company had estimated
current and long-term liabilities recorded of approximately
$110 million and $55 million at September 30, 1995, and $125 million
and $105 million, respectively, at December 31, 1994 related to
Order 636 transition costs.
<PAGE>
<PAGE>
The U.S. Department of the Interior announced its intention to seek
additional royalties from gas producers as a result of payments
received by such producers in connection with past take-or-pay
settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. TETCO, with respect to certain producer
contract settlements, may be contractually required to reimburse or,
in some instances, to indemnify producers against such royalty
claims. The potential liability of the producers to the government
and of TETCO to the producers involves complex issues of law and fact
which are likely to take a substantial period of time to resolve. If
TETCO ultimately has to reimburse or indemnify the producers, TETCO
will file with FERC to recover these costs from pipeline customers.
In the past, during the normal course of business, TETCO entered into
certain gas purchase contracts containing take-or-pay provisions,
which may expose the Company to financial risk. The Company believes
the exposure associated with gas purchase contract commitments and
the termination of TETCO's merchant services is substantially
mitigated by transition cost recoveries pursuant to TETCO's
settlement, Order 636 and other mechanisms. As a result, the Company
believes that Order 636 transition cost issues and take-or-pay
settlement matters will not have a material adverse effect on future
consolidated results of operations or financial position.
Other
TETCO has, pursuant to FERC requirements, requested FERC approval to
record the impact of adopting Statement of Financial Accounting
Standards (Accounting Standard) No. 109, "Accounting for Income
Taxes," including the recognition of a portion of the impact as an
increase to stockholder's equity. FERC has not issued a response to
this request. The Company believes the ultimate resolution of this
matter will not have a material adverse effect on consolidated
financial position.
3. Environmental Matters
TETCO is currently conducting PCB (polychlorinated biphenyl)
assessment and cleanup programs at certain of its compressor station
sites under conditions stipulated by a U.S. Consent Decree. The
programs include on- and off-site characterization, installation of
on-site source control equipment and groundwater monitoring wells,
and on- and off-site cleanup work. TETCO expects to complete the
programs at up to 89 sites in as many as 14 states by the year 2000.
In addition, TETCO has been conducting PCB cleanup work at certain
on- and off-site areas pursuant to separate agreements with the
states of Pennsylvania and New Jersey. These agreements generally
impose cleanup levels that are more stringent than those required by
the U.S. Consent Decree.
<PAGE>
<PAGE>
In 1987, the Commonwealth of Kentucky instituted suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three
compressor station sites in Kentucky. This suit, which is still
pending, seeks penalties for violations of Kentucky environmental
statutes. The Company previously established a reserve for potential
fines and penalties. In 1991, TETCO and the Commonwealth executed a
consent order in which TETCO agreed to perform site assessments at
its sites in Kentucky, and this work has been substantially
completed. TETCO completed cleanup of one of its Kentucky sites in
1994 and another in 1995.
At September 30, 1995 and December 31, 1994, TETCO had current and
long-term liabilities recorded of $46.4 million and $270.6 million
(1995), and $56.4 million and $289.1 million (1994), respectively,
for remaining estimated cleanup costs. These cost estimates
represent gross cleanup costs expected to be incurred by TETCO, have
not been discounted or reduced by customer recoveries and do not
include fines, penalties or third-party claims. TETCO is recovering
57.5% of cleanup costs in rates pursuant to a stipulation and
agreement approved by FERC in 1992. At September 30, 1995 and
December 31, 1994, TETCO had current and long-term regulatory assets
recorded of $20.7 million and $160.5 million (1995), and
$18.6 million and $177.1 million (1994), respectively, representing
costs to be recovered.
On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in the 58th Judicial District Court, Jefferson County,
Texas, against PEC, Texas Eastern Corporation and TETCO, among other
defendants. Plaintiffs seek recovery of compensatory and punitive
damages, in unspecified amounts, for personal injuries and property
damage resulting from alleged exposure to PCBs. Additionally, TETCO,
as well as certain other PEC subsidiaries in some of the cases, are
defendants in several other private plaintiff suits in various
courts. These suits seek relief for actual and punitive damages that
allegedly resulted from the release of PCBs and other hazardous
substances in violation of federal and state laws. The Company is
defending itself vigorously in all the above suits.
The federal and state cleanup programs are not expected to interrupt
or diminish TETCO's ability to deliver natural gas to customers. The
Company believes the ultimate resolution of matters relating to the
environmental issues discussed above will not have a material adverse
effect on consolidated results of operations or financial position.
<PAGE>
<PAGE>
4. Litigation
In connection with a rupture and fire that occurred on TETCO's
36-inch natural gas pipeline on March 23, 1994 in Edison, New Jersey,
numerous lawsuits have been filed against TETCO and other defendants
in the Superior Court of New Jersey, Middlesex County, on behalf of
hundreds of individuals seeking compensatory damages for personal
injuries and property losses, as well as punitive damages. The
property insurers of an apartment complex adjacent to the asphalt
plant where the rupture occurred also have filed suit against TETCO
and other defendants in Superior Court seeking to recover
approximately $10 million for amounts paid under the pertinent
policies of insurance. TETCO also has been contacted by hundreds of
additional individuals or their attorneys with claims against TETCO.
In addition, Quality Materials, Inc., the owner of the asphalt plant,
has filed suit in the U.S. District Court for the District of New
Jersey against TETCO seeking to recover unspecified property damages,
lost income and punitive damages. TETCO has filed a counterclaim
against Quality Materials, Inc.
The findings of an investigation of the incident by the Company and
the National Transportation Safety Board (NTSB) indicate third-party
damage to be the cause of the rupture. Additionally, an NTSB report
found that TETCO's pipeline operations met or exceeded federal safety
regulations. The Company expects the resolution of these matters
will not have a material adverse effect on consolidated results of
operations or financial position.
The Company is also involved in various other legal actions and
claims arising in the normal course of business. Based upon its
current assessment of the facts and the law, management does not
believe that the outcome of any such action or claim will have a
material adverse effect upon the consolidated financial position of
the Company. However, these actions and claims in the aggregate seek
substantial damages against the Company and are subject to the
uncertainties inherent in any litigation.
5. Fair Presentation
The information as furnished reflects all normal recurring adjust-
ments that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position as of September 30,
1995, results of operations for the three and nine months ended
September 30, 1995 and 1994, and cash flows for the nine months ended
September 30, 1995 and 1994.
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information is provided to facilitate increased understanding
of the 1995 and 1994 interim consolidated financial statements and
accompanying notes presented in Item 1. Because all of the outstanding
capital stock of TETCO is owned by PEC, the following discussion has been
prepared in accordance with the reduced disclosure format permitted by Form
10-Q for issuers that are wholly-owned subsidiaries of reporting companies
under the Securities Exchange Act of 1934.
OPERATING ENVIRONMENT
TETCO's earnings have generally become more evenly distributed throughout
the year as a result of the SFV rate design required by Order 636. TETCO
continues to offer selective discounting to maximize revenues from existing
capacity.
Order 636 Transition Costs
With implementation of Order 636 and the elimination of TETCO's pipeline
merchant services, the Company is incurring certain costs related to the
transition, primarily TETCO's gas purchase contract commitments. At
September 30, 1995, TETCO's gross commitments under gas purchase contracts
that do not contain market-sensitive pricing provisions were approximately
$150 million, $135 million, $75 million, $45 million and $20 million for
the years 1995 through 1999, respectively, with no significant amounts
thereafter. These estimates reflect significant assumptions regarding
deliverability and escalation clauses.
TETCO's final and nonappealable Order 636 settlement, implemented on
August 1, 1994, provides for the recovery of certain transition costs
through volumetric and reservation charges through 2002 and beyond, if
necessary. Pursuant to the settlement, TETCO will absorb a certain portion
of the transition costs, the amount of which is dependent upon natural gas
prices and deliverability levels. In 1993, the Company established a
provision to reflect the impact of this settlement. See Note 2 of the
Notes to Consolidated Financial Statements.
During the next two years, above-market gas purchase contract payments by
TETCO are expected to exceed transition cost collections from customers.
Net cash receipts related to transition costs are expected to occur in
periods thereafter. Cash requirements related to transition costs will be
funded by cash from operations and/or available credit facilities.
The Company believes the exposure associated with gas purchase contract
commitments and the termination of TETCO's pipeline merchant services is
substantially mitigated by transition cost recovery pursuant to TETCO's
settlement, Order 636 and other mechanisms. The Company believes that
these matters will not have a material adverse effect on future
consolidated results of operations, financial position or liquidity.
For information concerning certain regulatory proceedings, environmental
matters and other contingencies, see Notes 2, 3 and 4 of the Notes to
Consolidated Financial Statements.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
Consolidated net income for the nine months ended September 30, 1995 was
$94.2 million, compared with $90.5 million for the same period in 1994.
Natural gas volumes for TETCO, totaling 863 billion cubic feet for the
first nine months of 1995, remained fairly constant when compared with the
same period in 1994.
The Company's operating income increased $26.4 million comparing the first
nine months of 1995 with the same period in 1994. Transportation revenue
increased $50.7 million, or 10%, as a result of expansion projects and the
recovery of transition costs totaling approximately $38 million, which were
offset by a corresponding increase in operating expenses. The increase in
transportation revenue was partially offset by the effect of a $6 million
reduction in the interruptible revenue retention cap in 1995, as required
by TETCO's 1994 Order 636 settlement. Operating expenses, excluding
transition costs, declined due to a $5 million charge to income in 1994
related to the Edison, New Jersey pipeline rupture and cost-management
initiatives in 1995.
Net other income decreased $16.5 million in the first nine months of 1995
compared with the same period in 1994, reflecting the elimination of
interest income from parent, as receivables for intercompany advances no
longer bear interest effective January 1, 1995. Decreased interest income
was partially offset by the 1994 write-off of $3.8 million of costs related
to the Liberty Pipeline Project.
Interest expense in the first nine months of 1995 increased $5 million
compared with the same period in 1994. This increase reflects higher
average balances of long-term debt and short-term notes payable.
CAPITAL EXPENDITURES
Capital expenditures totaled $80.2 million in the first nine months of
1995, compared with $97.4 million for the same period in 1994. Capital
expenditures for 1995 are expected to approximate $145 million, with
market-expansion expenditures expected to approximate 50% of the capital
budget. Remaining capital expenditures primarily related to further
enhancement of TETCO's pipeline integrity and reliability, including
approximately $16 million related to system modifications required by the
Clean Air Act Amendments of 1990. The Company's current estimate for 1996
capital expenditures is approximately $135 million, of which 45% represents
market-expansion projects. Expenditures for 1995 are being funded, and
expenditures for 1996 are expected to be funded, by cash from operations,
debt issuances and/or available credit facilities.
<PAGE>
<PAGE>
ACCOUNTING STANDARDS
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued in March
1995. This standard addresses the accounting for the recognition and
measurement of impairment losses for long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used. This standard also addresses the accounting for long-lived
assets and certain identifiable intangibles to be disposed of.
The Company does not expect Accounting Standard No. 121 to have a
significant effect on consolidated results of operations or financial
position upon adoption.
PAR T II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 3 and 4 of the Notes to Consolidated Financial Statements in
Part I of this Report, which are incorporated herein by reference. See
also Item 3 of TETCO's Annual Report on Form 10-K for the year ended
December 31, 1994.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K - None<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned duly authorized officer and chief accounting
officer.
TEXAS EASTERN TRANSMISSION CORPORATION
(Registrant)
/s/ Sandra P. Meyer
--------------------------------------
Sandra P. Meyer, Vice President
Date: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Texas Eastern Transmission Corporation Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000097432
<NAME> TEXAS EASTERN TRANSMISSION CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 13,300
<ALLOWANCES> 0
<INVENTORY> 18,900
<CURRENT-ASSETS> 163,400
<PP&E> 3,174,600
<DEPRECIATION> 657,300
<TOTAL-ASSETS> 4,175,800
<CURRENT-LIABILITIES> 337,700
<BONDS> 820,000
<COMMON> 0
0
0
<OTHER-SE> 1,981,500
<TOTAL-LIABILITY-AND-EQUITY> 4,175,800
<SALES> 0
<TOTAL-REVENUES> 650,100
<CGS> 0
<TOTAL-COSTS> 222,200
<OTHER-EXPENSES> 139,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,700
<INCOME-PRETAX> 157,000
<INCOME-TAX> 62,800
<INCOME-CONTINUING> 94,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,200
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
