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UNITED STATES
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 June 30, 1996
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)
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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, PanEnergy Corp (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 July 31, 1996
-------------------------- ----------------------------
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 June 30
Three Months Six Months
--------------- ----------------
Millions 1996 1995 1996 1995
- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues
Transportation and storage
of natural gas $211.2 $205.1 $437.9 $425.2
Other 10.6 7.7 23.1 15.2
------ ------ ------ ------
Total (Note 2) 221.8 212.8 461.0 440.4
------ ------ ------ ------
Costs and Expenses
Operating and maintenance 73.6 70.2 152.0 147.9
General and administrative 25.0 19.8 53.1 44.4
Depreciation and amortization 36.4 36.5 72.8 72.8
Miscellaneous taxes 10.2 9.8 21.4 20.0
------ ------ ------ ------
Total 145.2 136.3 299.3 285.1
------ ------ ------ ------
Operating Income 76.6 76.5 161.7 155.3
Other Income, Net of Deductions 1.7 0.7 3.4 1.4
------ ------ ------ ------
Earnings Before Interest and Tax 78.3 77.2 165.1 156.7
------ ------ ------ ------
Interest Expense
Parent 7.4 - 14.9 -
Other 21.8 22.3 44.2 46.2
------ ------ ------ ------
Total 29.2 22.3 59.1 46.2
------ ------ ------ ------
Earnings Before Income Tax 49.1 54.9 106.0 110.5
Income Tax 19.3 21.9 41.7 44.1
------ ------ ------ ------
NET INCOME $ 29.8 $ 33.0 $ 64.3 $ 66.4
====== ====== ====== ======
</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>
June 30, December 31,
Millions 1996 1995
- -------- -------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 0.2 $ 0.1
Accounts receivable, net 74.3 22.8
Inventory and supplies 18.8 19.1
Current deferred income tax 33.8 45.1
Other (Notes 2 and 3) 122.3 114.2
-------- --------
Total 249.4 201.3
-------- --------
Investments
Advances receivable - parent 690.8 686.1
Other 16.6 16.6
-------- --------
Total 707.4 702.7
-------- --------
Plant, Property and Equipment
Cost 3,225.3 3,218.9
Accumulated depreciation and amortization (733.4) (681.9)
-------- --------
Net plant, property and equipment 2,491.9 2,537.0
-------- --------
Deferred Charges
Goodwill, net 170.8 173.4
Other (Notes 2 and 3) 503.3 537.4
-------- --------
Total 674.1 710.8
-------- --------
TOTAL ASSETS $4,122.8 $4,151.8
======== ========
</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>
June 30, December 31,
Millions 1996 1995
- -------- -------- ------------
<S> <C> <C>
Current Liabilities
Note payable - parent $ 355.0 $ 355.0
Accounts payable 40.8 44.3
Accrued income tax - parent 32.7 41.9
Accrued interest 21.3 21.3
Other (Notes 2 and 3) 255.7 281.9
-------- --------
Total 705.5 744.4
-------- --------
Deferred Liabilities and Credits
Deferred income tax 578.7 586.0
Other (Notes 2 and 3) 395.9 444.2
-------- --------
Total 974.6 1,030.2
-------- --------
Long-term Debt 821.7 820.5
-------- --------
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 1,470.7 1,470.7
Retained earnings 150.3 86.0
-------- --------
Total 1,621.0 1,556.7
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,122.8 $4,151.8
======== ========
</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>
Six Months Ended
June 30
---------------------
Millions 1996 1995
- -------- ------- -------
<S> <C> <C>
Operating Activities
Net income $ 64.3 $ 66.4
Adjustments to reconcile net income to operating
cash flows -
Depreciation and amortization 72.8 72.8
Deferred income tax expense 4.1 11.4
Other non-cash items in net income 3.5 (0.9)
Net change in operating assets
and liabilities (117.1) (88.9)
------- -------
Net Cash Flows Provided by Operating Activities 27.6 60.8
------- -------
Investing Activities
Capital expenditures (30.2) (46.6)
Net increase in advances receivable - parent (4.7) (17.9)
Property retirements and other 5.4 (0.7)
------- -------
Net Cash Flows Used in Investing Activities (29.5) (65.2)
------- -------
Financing Activities
Accounts payable - banks 2.0 (5.8)
------- -------
Net Cash Flows Provided by (Used in)
Financing Activities 2.0 (5.8)
------- -------
Net Change in Cash
Increase (decrease) in cash and cash equivalents 0.1 (10.2)
Cash and cash equivalents, beginning of period 0.1 11.0
------- -------
Cash and Cash Equivalents, End of Period $ 0.2 $ 0.8
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 55.7 $ 43.5
Cash paid for income tax (including
intercompany amounts) 47.7 43.0
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
Texas Eastern Transmission Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
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
PanEnergy Corp (PanEnergy). The interstate gas transmission oper-
ations of TETCO are subject to the rules, regulations and accounting
procedures of the Federal Energy Regulatory Commission (FERC).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements. Certain amounts of reported revenues and
expenses are also affected by these estimates and assumptions.
Actual results could differ from those estimates. The consolidated
financial statements reflect all normal recurring adjustments that
are, in the opinion of management, necessary for fair presentation.
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 the
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 significant pending regulatory
matters.
FERC Order 636 and Transition Costs
During 1993, TETCO began providing restructured services pursuant to
FERC Order 636. This order requires pipeline service restructuring
that unbundles sales, transportation and storage services. Order 636
allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs). On July 16, 1996,
the U.S. Court of Appeals for the District of Columbia upheld, in
general, all aspects of Order 636 and remanded certain issues for
further explanation. One of the issues remanded for further
explanation is whether pipelines should be entitled to recover 100%
of gas supply realignment (GSR) costs. This matter is substantially
mitigated by TETCO's Order 636 settlement.
<PAGE>
<PAGE>
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
continues to be subject to change dependent upon natural gas prices
and deliverability levels. In 1993, the Company established an
additional provision to reflect the impact of the settlement and
increased its liabilities in 1995 upon producers' discoveries of
additional natural gas reserves.
At June 30, 1996 and December 31, 1995, the Company had recorded
$61.9 million and $289.9 million (1996), and $65 million and
$310 million (1995) of current and long-term regulatory assets,
respectively, representing transition costs incurred or estimated to
be incurred that will be recovered. At June 30, 1996 and
December 31, 1995, the Company had recorded estimated current and
long-term liabilities related to Order 636 transition costs of
$89.8 million and $153.4 million (1996), and $125 million and
$165 million (1995), respectively.
In July 1996, TETCO received $76 million for the sale of certain
Order 636 GSR surcharges, with limited recourse. In the opinion of
management, the probability that TETCO will be required to perform
under the recourse provisions is remote.
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.
<PAGE>
<PAGE>
Other - TETCO, pursuant to FERC requirements, requested FERC approval
to record the impact of adopting Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," including the
recognition of a portion of the impact as an increase to stock-
holder's equity. FERC has not yet 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) assess-
ment 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 assessment, installation of on-site source
control equipment and groundwater monitoring wells, and on- and off-
site cleanup work. TETCO expects to complete these cleanup programs
by 1998. Groundwater monitoring activities will continue beyond
1998. In addition, TETCO has conducted PCB cleanup work at certain
on- and off-site areas pursuant to separate agreements with the
states of Pennsylvania and New Jersey.
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. TETCO completed cleanup of one of its Kentucky
sites in 1994, another in 1995 and intends to complete the final site
in 1996.
At June 30, 1996 and December 31, 1995, TETCO had current and
long-term liabilities recorded of $61.2 million and $140.8 million
(1996), and $44.9 million and $168.3 million (1995), respectively,
for remaining estimated cleanup costs. These cost estimates repre-
sent 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. Estimated liabilities for
remaining TETCO PCB cleanup costs were reduced in the fourth quarter
1995 as a result of lower-than-projected cleanup costs incurred on
completed sites. As a result of the reduction in estimated cleanup
costs, the related regulatory assets were also reduced. At June 30,
1996 and December 31, 1995, TETCO had current and long-term regula-
tory assets recorded of $18.5 million and $91.1 million (1996), and
$17 million and $101.7 million (1995), respectively, representing
costs to be recovered from customers.
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,
claims have been made and numerous lawsuits have been filed in the
Superior Court of New Jersey, Middlesex County against TETCO and
other private and governmental entities by or on behalf of hundreds
of individuals and businesses. These claimants seek compensatory
damages for personal injuries and/or 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 suits against TETCO and other defendants in Superior Court
seeking to recover amounts paid under pertinent policies of
insurance. TETCO has settled the claims of the property insurers and
some of the claims of individuals and businesses while retaining the
right to seek recovery of those settlement amounts from the other
defendants. Quality Materials, Inc. (Quality), the owner of the
asphalt plant, 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 filed a counter-
claim against Quality. In April 1996, the U.S. District Court
dismissed the suit by Quality and the counterclaim by TETCO on the
grounds that all claims should be resolved in the pending Middlesex
County litigation.
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 recorded a provision in 1994 for costs
related to this incident that are not recoverable under the Company's
insurance policies.
On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in Jefferson County, Texas, against PanEnergy, Texas
Eastern Corporation and TETCO, among others. While that suit
ultimately was dismissed, one of the two original plaintiffs refiled
the suit on June 3, 1996, in the Circuit Court of the City of
St. Louis, Missouri. The defendants now have removed the suit to the
U.S. District Court for the Eastern District of Missouri, Eastern
Division. The plaintiff seeks recovery of compensatory and punitive
damages, in unspecified amounts, for personal injuries and property
damage resulting from alleged exposure to PCBs.
The Company expects the resolution of all the above litigation
matters will not have a material adverse effect on consolidated
results of operations or financial position.
<PAGE>
<PAGE>
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. The Company is defending
itself vigorously in all the above suits.
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 1996 and 1995 interim consolidated financial statements and
accompanying notes presented in Item 1. Because all of the outstanding
capital stock of TETCO is owned by PanEnergy, 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
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. TETCO's gross commitments under gas purchase
contracts that do not contain market-sensitive pricing provisions are
approximately $160 million, $115 million, $60 million and $25 million for
the years 1996 through 1999, respectively, with no significant amounts
thereafter. These estimates reflect significant assumptions regarding
deliverability and natural gas prices.
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 continues to be subject to
change dependent upon natural gas prices and deliverability levels. The
Company has established provisions to reflect the impact of the settlement.
See Note 2 of the Notes to Consolidated Financial Statements.
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, and further 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 other regulatory proceedings, environ-
mental 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 six months ended June 30, 1996 was
$64.3 million, compared with $66.4 million for the same period in 1995.
Natural gas transportation volumes, totaling 726 trillion British thermal
units for the first six months of 1996, increased 13% as compared with the
same period in 1995.
Earnings before interest and tax increased $8.4 million comparing the first
six months of 1996 with the prior-year period. Revenues increased
$20.6 million, or 5%, primarily due to colder weather and new expansion
projects. Higher operating expenses, including $2.3 million of severance
expense recorded in the first quarter 1996, partially offset the increase
in revenues.
Interest expense increased $12.9 million comparing the first six months of
1996 with the same period in 1995, reflecting higher average debt balances
outstanding.
CAPITAL EXPENDITURES
Capital expenditures totaled $30.2 million in the first six months of 1996,
compared with $46.6 million for the same period in 1995. Capital
expenditures for 1996 are expected to approximate $135 million, with
market-expansion expenditures comprising 40% of the capital budget.
Expenditures for 1996 are expected to be funded by cash from operations,
periodic sales of customer accounts with limited recourse and/or collection
of intercompany advances receivable.
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, 1995.
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: August 13, 1996
<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 June 30, 1996 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 200
<SECURITIES> 0
<RECEIVABLES> 74,300
<ALLOWANCES> 0
<INVENTORY> 18,800
<CURRENT-ASSETS> 249,400
<PP&E> 3,225,300
<DEPRECIATION> 733,400
<TOTAL-ASSETS> 4,122,800
<CURRENT-LIABILITIES> 705,500
<BONDS> 821,700
<COMMON> 0
0
0
<OTHER-SE> 1,621,000
<TOTAL-LIABILITY-AND-EQUITY> 4,122,800
<SALES> 0
<TOTAL-REVENUES> 461,000
<CGS> 0
<TOTAL-COSTS> 152,000
<OTHER-EXPENSES> 94,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,100
<INCOME-PRETAX> 106,000
<INCOME-TAX> 41,700
<INCOME-CONTINUING> 64,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,300
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
