===========================================================================
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 March 31, 1997
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, 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 April 30, 1997
-------------------------- -----------------------------
Common Stock, $1 par value 1,000
===========================================================================<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Texas Eastern Transmission Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
Millions 1997 1996
- -------- ------ ------
<S> <C> <C>
Operating Revenues
Transportation and storage of natural gas $228.4 $226.7
Other 14.2 12.5
------ ------
Total (Note 2) 242.6 239.2
------ ------
Costs and Expenses
Operating and maintenance 78.9 78.4
General and administrative 25.9 28.1
Depreciation and amortization 36.7 36.4
Miscellaneous taxes 11.3 11.2
------ ------
Total 152.8 154.1
------ ------
Operating Income 89.8 85.1
Other Income, Net of Deductions 2.4 1.7
------ ------
Earnings Before Interest and Tax 92.2 86.8
------ ------
Interest Expense
Parent 12.5 7.5
Other 17.0 22.4
------ ------
Total 29.5 29.9
------ ------
Earnings Before Income Tax 62.7 56.9
Income Tax 23.7 22.4
------ ------
NET INCOME $ 39.0 $ 34.5
====== ======
</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>
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
<S> <C> <C>
Current Assets
Accounts receivable, net $ 78.4 $ 77.2
Inventory and supplies 15.6 16.1
Current deferred income tax 33.1 21.9
Other (Notes 2 and 3) 94.8 98.1
-------- --------
Total 221.9 213.3
-------- --------
Investments
Advances receivable - parent 907.7 909.2
Other 16.4 17.8
-------- --------
Total 924.1 927.0
-------- --------
Plant, Property and Equipment
Cost 3,324.1 3,317.5
Accumulated depreciation and amortization (833.0) (796.9)
-------- --------
Net plant, property and equipment 2,491.1 2,520.6
-------- --------
Deferred Charges
Goodwill, net 159.9 161.2
Other (Notes 2 and 3) 470.8 496.0
-------- --------
Total 630.7 657.2
-------- --------
TOTAL ASSETS $4,267.8 $4,318.1
======== ========
</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>
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 31.4 $ 47.9
Accrued income tax - parent 17.6 53.3
Other accrued taxes 28.0 30.2
Accrued interest 14.8 14.1
Other (Notes 2 and 3) 276.0 261.8
-------- --------
Total 367.8 407.3
-------- --------
Deferred Liabilities and Credits
Deferred income tax 617.0 600.9
Other (Notes 2 and 3) 377.8 443.7
-------- --------
Total 994.8 1,044.6
-------- --------
Long-term Debt
Notes payable - parent 605.0 605.0
Other 599.4 599.4
-------- --------
Total 1,204.4 1,204.4
-------- --------
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 1,463.5 1,463.5
Retained earnings 237.3 198.3
-------- --------
Total 1,700.8 1,661.8
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,267.8 $4,318.1
======== ========
</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>
Three Months Ended
March 31
--------------------
Millions 1997 1996
- -------- ------ ------
<S> <C> <C>
Operating Activities
Net income $ 39.0 $ 34.5
Adjustments to reconcile net income to
operating cash flows
Depreciation and amortization 36.7 36.4
Deferred income tax expense 4.7 3.0
Other non-cash items in net income 1.3 1.8
Net change in operating assets
and liabilities (70.3) (75.4)
------ ------
Net Cash Flows Provided by Operating Activities 11.4 0.3
------ ------
Investing Activities
Capital expenditures (6.0) (7.1)
Net decrease in advances receivable - parent 1.5 10.7
Property retirements and other 1.6 (0.4)
------ ------
Net Cash Flows Provided by (Used in)
Investing Activities (2.9) 3.2
------ ------
Financing Activities
Net decrease in accounts payable - banks (8.5) (3.3)
------ ------
Net Cash Flows Used in Financing Activities (8.5) (3.3)
------ ------
Net Change in Cash
Increase in cash and cash equivalents - 0.2
Cash and cash equivalents, beginning of period - 0.1
------ ------
Cash and Cash Equivalents, End of Period $ - $ 0.3
====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 25.7 $ 26.2
Cash paid for income tax (including
intercompany amounts) 45.2 45.5
</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 primarily involved in the interstate transportation
and storage of natural gas. TETCO is a wholly-owned subsidiary of
PanEnergy Corp (PanEnergy). The interstate natural gas transmission
and storage operations of TETCO are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
TETCO meets the criteria and, accordingly, follows the reporting and
accounting requirements of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." Accordingly, certain net costs totaling $326 million
at December 31, 1996 have been deferred as regulatory assets for
amounts recoverable from customers, including costs related to
environmental matters, FERC Order 636 transition, certain employee
benefits and the early retirement of debt.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts in the financial
statements. 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. Rates and Regulatory Proceedings
When rate cases are pending final FERC approval, a portion of the
revenues collected by TETCO is subject to possible refund. 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
TETCO primarily provides transportation and storage services pursuant
to FERC Order 636. This order 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, including recovery of gas supply realignment (GSR)
costs, for further explanation. This decision is on appeal to the
U.S. Supreme Court. On February 27, 1997, FERC issued an order
reaffirming the right of interstate pipelines to recover 100% of GSR
costs.
<PAGE>
<PAGE>
TETCO's final and nonappealable Order 636 settlement, implemented in
1994, provides for the recovery of a significant portion of
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 contract reserve levels.
At March 31, 1997 and December 31, 1996, the Company had recorded
$64.8 million and $235.2 million (1997), and $64.8 million and
$249.8 million (1996), of current and long-term regulatory assets,
respectively, representing transition costs incurred or estimated to
be incurred that will be recovered. At March 31, 1997 and
December 31, 1996, the Company had recorded estimated current and
long-term liabilities related to Order 636 transition costs of
$115.4 million and $66.6 million (1997), and $84.4 million and
$121.9 million (1996), respectively.
The Company believes the exposure associated with gas purchase
contract commitments is substantially mitigated by transition cost
recoveries pursuant to TETCO's settlement, Order 636 and other
mechanisms, and that this issue will not have a material adverse
effect on the Company's consolidated results of operations or
financial position.
In 1993, 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 substantial time to resolve.
If required to reimburse or indemnify the producers, TETCO will file
with FERC to recover a portion of these costs from pipeline
customers. The Company believes the resolution of this matter will
not have a material adverse effect on the Company's 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
during 1997. Groundwater monitoring activities will continue beyond
1997.
<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 1996, TETCO completed cleanup of these
sites.
At March 31, 1997 and December 31, 1996, the Company had current and
long-term liabilities recorded of $21.4 million and $133.5 million
(1997), and $26.1 million and $136.6 million (1996), respectively,
for remaining estimated cleanup costs. These estimates represent
probable gross cleanup costs expected to be incurred, have not been
discounted or reduced by customer recoveries and do not include
fines, penalties or third-party claims. At March 31, 1997 and
December 31, 1996, the Company had current and long-term regulatory
assets recorded of $11.1 million and $87.5 million (1997), and
$10.8 million and $90.4 million (1996), respectively, representing
estimated 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 resolution of matters relating to the
environmental issues discussed above will not have a material adverse
effect on the Company's consolidated results of operations or
financial position based upon customer settlements and past
experience with environmental cleanup costs.
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, property losses and/or lost business
income, as well as punitive damages. The property insurers of an
apartment complex adjacent to the asphalt plant where the rupture
occurred also filed suits against TETCO and other defendants in
Superior Court seeking to recover amounts paid under pertinent
policies of insurance. Quality Materials, Inc. (Quality), the owner
of the asphalt plant, has filed a claim against TETCO seeking to
recover unspecified property damages, lost income and punitive
damages. TETCO filed a counterclaim against Quality and has settled
the claims of the property insurers and some individuals and
businesses, while retaining the right to seek recovery of those
settlement amounts from other defendants.
The findings of an investigation of the incident by the National
Transportation Safety Board indicate third-party damage to be the
cause of the rupture. The Company recorded a provision in 1994 for
costs related to this incident that are not recoverable under the
Company's insurance policies.
<PAGE>
On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in Jefferson County, Texas, against TETCO, PanEnergy and
Texas Eastern Corporation (an affiliate), 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 removed the suit to the U.S.
District Court for the Eastern District of Missouri, Eastern Division
in July 1996. In March 1997, the case was remanded to the same state
court in St. Louis. The plaintiff seeks, in addition to class
certification, recovery of compensatory and punitive damages, in
unspecified amounts, for personal injuries and property damage
resulting from alleged exposure to PCBs.
A lawsuit filed in the United States District Court for the District
of Columbia by a natural gas producer was served in July 1996 naming
TETCO and certain affiliated companies as defendants, among others.
The action was brought under the federal False Claims Act against
70 defendants, including every major pipeline, asserting that the
defendants intentionally underreported volumes and heating content of
gas purchased from producers on federal and Indian lands, with the
result that the United States was underpaid royalties. The plaintiff
seeks recovery of the royalty amounts due the United States, treble
damages and civil penalties. TETCO and its affiliated companies, and
many of the other defendants, were dismissed from the lawsuit on
March 27, 1997. The plaintiff retains the right to refile the claims
against the various defendants under certain conditions.
The Company believes the resolution of the legal matters discussed
above will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
On December 16, 1996, TETCO received notification that Marathon Oil
Company (Marathon) intended to commence substitution of other gas
reserves, deliverability and leases for those dedicated to a certain
natural gas purchase contract (the Marathon Contract) with TETCO. In
TETCO's view, the tendered substitute gas reserves, deliverability
and leases are not subject to the Marathon Contract and TETCO filed a
declaratory judgment action on December 17, 1996 in the U.S. District
Court for the Eastern District of Louisiana seeking a ruling that
Marathon's interpretation of the Marathon Contract is incorrect. On
January 7, 1997, Marathon filed an answer and a counterclaim to
TETCO's complaint seeking a declaratory judgment enforcing its
interpretation of the Marathon Contract.
<PAGE>
<PAGE>
On February 18, 1997, Amerada Hess Corporation (Amerada Hess)
notified TETCO that it intended to commence substitution of other gas
reserves, deliverability, and leases for those dedicated to its
natural gas purchase contract (the Amerada Hess Contract) with TETCO.
On the same date, Amerada Hess also filed a petition in the District
Court of Harris County, Texas, 157th Judicial District, seeking a
declaratory judgment that its interpretation of the Amerada Hess
Contract, which covers the same leases and reserves as the Marathon
Contract, is correct. TETCO removed that suit to the U.S. District
Court for the Southern District of Texas, Houston Division. TETCO
also filed a declaratory judgment action with respect to Amerada Hess
contentions in the U.S. District Court for the Eastern District of
Louisiana on February 21, 1997. The Texas action has been
transferred to the Eastern District of Louisiana. That suit and the
Louisiana action filed by TETCO have been transferred to the judge
presiding over the Marathon Contract matter.
The potential liability of the Company should TETCO be contractually
obligated to purchase natural gas based upon the substitute gas
reserves, deliverability and leases, and the effect of transition
cost recoveries pursuant to TETCO's Order 636 settlement involve
numerous complex legal and factual matters which will take a
substantial period of time to resolve. Because these matters are in
the early stages of litigation, the Company cannot estimate the
effects of this issue, based on information currently available.
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 Company's consolidated results of
operations or financial position. 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.
5. Other Matters
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," on
a prospective basis effective January 1, 1997, with no significant
impact on the Company's results of operations or financial position.
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 1997 and 1996 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.
<PAGE>
OPERATING ENVIRONMENT
TETCO continues to advance projects that provide expanded services to meet
the specific needs of customers. In addition to a previously announced
TETCO project that will begin providing firm transportation service later
in 1997, PanEnergy announced the Excelsior(sm) project, which would
increase delivery capability by 500 billion British thermal units per day
through a TETCO connection in New Jersey, and the Spectrum(sm) project,
which would utilize existing and released capacity on PanEnergy's four
interstate pipelines and provide up to 500 billion British thermal units
per day of firm transportation capacity from the Chicago area to the East
Coast. In addition, TETCO offers selective discounting to further maximize
revenues from existing capacity.
Order 636 Transition Costs - With implementation of FERC Order 636 and the
unbundling of 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 were approximately $120 million,
$55 million, $50 million and $15 million for the years 1997 through 2000,
respectively, with no significant amounts thereafter. These estimates
reflect significant assumptions regarding natural gas contract reserves and
prices.
As a result of the sale in 1996 of the right to collect certain Order 636
transition costs, above-market gas purchase contract payments by TETCO are
expected to exceed transition cost collections from customers through 2000.
For further discussion of Order 636 transition costs, see Note 2 of the
Notes to Consolidated Financial Statements.
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.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended March 31, 1997 was
$39 million, compared with $34.5 million for the same period in 1996.
Natural gas transportation volumes, totaling 381 trillion British thermal
units for the first three months of 1997, decreased 12% as compared with
the same period in 1996.
Higher operating income drove TETCO's $5.4 million, or 6%, increase in
earnings before interest and tax, comparing the first three months of 1997
with the prior-year period. The $4.7 million operating income increase was
attributable to higher revenues related to new pipeline expansion projects,
partially offset by severance costs and lower volumes due to warmer
weather.
<PAGE>
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures totaled $6 million in the first three months of 1997,
compared with $7.1 million for the same period in 1996. Capital
expenditures for 1997 are expected to approximate $170 million, with
market-expansion expenditures comprising 50% of the capital budget.
Expenditures for 1997 are expected to be funded by cash from operations
and/or collection of intercompany advances receivable.
FORWARD-LOOKING INFORMATION
This report may contain certain forward-looking information regarding the
Company, including projections, estimates, forecasts, plans, contingencies
and objectives. Although management believes that all such statements are
based upon reasonable assumptions, no assurance can be given that the
actual results will not differ materially from those contained in such
forward-looking statements.
Important factors that could cause actual results to differ include, but
are not limited to, general economic conditions, natural gas and liquids
prices, competition from other pipelines and alternative fuels, weather
conditions, state and federal regulation, legal and regulatory proceedings,
the development of new markets, services and products, and the condition of
the capital markets utilized by the Company.
PA RT 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, 1996.
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>
<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
and Treasurer
Date: May 14, 1997
<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 March 31, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 78,400
<ALLOWANCES> 0
<INVENTORY> 15,600
<CURRENT-ASSETS> 221,900
<PP&E> 3,324,100
<DEPRECIATION> 833,000
<TOTAL-ASSETS> 4,267,800
<CURRENT-LIABILITIES> 367,800
<BONDS> 1,204,400
<COMMON> 0
0
0
<OTHER-SE> 1,700,800
<TOTAL-LIABILITY-AND-EQUITY> 4,267,800
<SALES> 0
<TOTAL-REVENUES> 242,600
<CGS> 0
<TOTAL-COSTS> 78,900
<OTHER-EXPENSES> 48,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,500
<INCOME-PRETAX> 62,700
<INCOME-TAX> 23,700
<INCOME-CONTINUING> 39,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,000
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
