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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 1-4456
------------- ------
TEXAS EASTERN TRANSMISSION CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 72-0378240
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
5400 WESTHEIMER COURT
P.O. BOX 1642
HOUSTON, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
Registrant's telephone number, including area code: 713-627-5400
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
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 __
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.
All of the Registrant's common shares are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which 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:
Number of shares of Common Stock, $1 par value, outstanding at
July 31, 1997: 1,000 shares
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Statements of Income for the Three Months Ended and Year To Date
June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for Year To Date June 30, 1997 and 1996 3
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Year To Date
June 30 June 30
------------------------------------ ------------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Transportation and storage of natural gas $ 214.2 $ 211.2 $ 442.6 $ 437.9
Other 11.2 10.6 25.4 23.1
---------------- ---------------- ---------------- ----------------
Total operating revenues 225.4 221.8 468.0 461.0
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Operation and maintenance 102.0 98.6 206.8 205.1
Depreciation and amortization 36.7 36.4 73.4 72.8
Property and other taxes 10.6 10.2 21.9 21.4
---------------- ---------------- ---------------- ----------------
Total operating expenses 149.3 145.2 302.1 299.3
---------------- ---------------- ---------------- ----------------
OPERATING INCOME 76.1 76.6 165.9 161.7
---------------- ---------------- ---------------- ----------------
OTHER INCOME AND EXPENSES 2.5 1.7 4.9 3.4
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INTEREST AND TAXES 78.6 78.3 170.8 165.1
INTEREST EXPENSE 29.0 29.2 58.5 59.1
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INCOME TAXES 49.6 49.1 112.3 106.0
INCOME TAXES 19.0 19.3 42.7 41.7
---------------- ---------------- ---------------- ----------------
NET INCOME $ 30.6 $ 29.8 $ 69.6 $ 64.3
================ ================ ================ ================
</TABLE>
See Notes to Consolidated Finanacial Statements
2
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Year To Date
June 30
------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $69.6 $ 64.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 75.8 72.8
Deferred income taxes 5.9 4.1
Net change in operating assets and liabilities (121.6) (113.6)
---------------- ----------------
Net cash provided by operating activities 29.7 27.6
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (32.7) (30.2)
Net increase in advances receivable - parent (1.3) (4.7)
Retirements and other investing 4.3 5.4
---------------- ----------------
Net cash used in investing activities (29.7) (29.5)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable - 2.0
---------------- ----------------
Net cash used in financing activities - 2.0
---------------- ----------------
Net increase (decrease) in cash and cash equivalents - 0.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - 0.1
================ ================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 0.2
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables $ 71.5 $ 77.2
Inventory 14.8 16.1
Current deferred income tax 28.5 21.9
Current portion of natural gas transition costs 64.8 64.8
Current portion of environmental clean-up costs 11.5 10.8
Other 16.3 22.5
---------------- ----------------
Total current assets 207.4 213.3
---------------- ----------------
INVESTMENTS AND OTHER ASSETS
Advances receivable - parent 910.5 909.2
Goodwill, net 158.7 161.2
Other 16.9 17.8
---------------- ----------------
Total investments and other assets 1,086.1 1,088.2
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Cost 3,338.1 3,317.5
Less accumulated depreciation and amortization 858.6 796.9
---------------- ----------------
Net property, plant and equipment 2,479.5 2,520.6
---------------- ----------------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 48.2 50.9
Natural gas pipeline transition costs 220.8 249.8
Environmental clean-up costs 84.6 90.4
Other 95.7 104.9
---------------- ----------------
Total regulatory assets 449.3 496.0
---------------- ----------------
TOTAL ASSETS $ 4,222.3 $ 4,318.1
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 44.1 $ 47.9
Taxes accrued 61.6 83.5
Interest accrued 14.1 14.1
Current portion of natural gas transition liabilities 102.1 84.4
Current portion of environmental clean-up liabilities 16.8 26.1
Other 78.2 151.3
---------------- ----------------
Total current liabilities 316.9 407.3
---------------- ----------------
LONG-TERM DEBT
Notes payable - parent 605.0 605.0
Other 599.5 599.4
---------------- ----------------
Total long-term debt 1,204.5 1,204.4
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 614.8 600.9
Natural gas transition liabilities 51.5 121.9
Environmental clean-up liabilities 133.3 136.6
Other 169.9 185.2
---------------- ----------------
Total deferred credits and other liabilities 969.5 1,044.6
---------------- ----------------
COMMON STOCKHOLDER'S EQUITY
Common stock, $1par value, 1,000 shares authorized, issued and outstanding - -
Paid-in capital 1,463.5 1,463.5
Retained earnings 267.9 198.3
---------------- ----------------
Total common stockholder's equity 1,731.4 1,661.8
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,222.3 $ 4,318.1
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
Texas Eastern Transmission Corporation and its subsidiaries (the Company) are
primarily involved in the interstate transportation and storage of natural gas
to customers in the Mid-Atlantic and New England states. The interstate natural
gas transmission and storage operations of the Company are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
The Company is a wholly-owned subsidiary of PanEnergy Corp (PanEnergy), which is
an indirect wholly-owned subsidiary of Duke Energy Corporation (Duke Energy). On
June 18, 1997, PanEnergy was merged with a wholly-owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted
into the right to receive 1.0444 shares of Duke Energy common
stock. In addition, each option to purchase PanEnergy common stock became
an option to purchase common stock of Duke Energy. The merger was accounted
for as pooling of interests.
2. ACCOUNTING POLICIES
General - The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. These quarterly financial
statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary to present fairly the financial position and results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income are not necessarily indicative of amounts expected for the
respective years principally due to the effects of seasonal temperature
variations on energy consumption.
Supplemental Cash Flow Information - Total income taxes paid for the year to
date June 30, 1997 and 1996 were $48.2 million and $47.7 million, respectively.
Interest paid, net of amounts capitalized, for the year to date June 30, 1997
and 1996 was $52.3 million and $55.7 million, respectively.
Reclassification - Certain amounts for the prior periods have been reclassified
in the consolidated financial statements to conform to the current presentation.
6
<PAGE>
3. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows :
June 30, 1997 December 31,
IN MILLIONS 1996
------------------------- ---------------- -----------------
Receivables $ 3.4 $ 10.9
Accounts payable $ 16.1 $ 19.3
Taxes accrued $ 32.7 $ 53.3
Also, interest expense includes $12.8 million and $7.4 million for the three
months ended June 30, 1997 and 1996, respectively of interest associated with
notes payable to parent. Interest expense for the year to date June 30, 1997 and
1996 include $25.3 million and $14.9 million, respectively, of interest
associated with notes payable to parent.
4. COMMITMENTS AND CONTINGENCIES
Litigation
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 the Company and certain
affiliated companies as defendants, among others. The action was brought under
the federal False Claims Act against 70 defendants, including every major
natural gas 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. The Company 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
this matter will not have a material adverse effect on the Company's results of
operations or financial position.
On December 16, 1996, the Company 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 the Company. In the Company's view, the
tendered substitute gas reserves, deliverability and leases are not subject to
the Marathon Contract and the Company 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 the Company's complaint seeking a declaratory judgment enforcing
its interpretation of the Marathon Contract.
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified the
Company 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 the Company.
7
<PAGE>
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. The Company 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 two actions have been transferred to the judge presiding over the Marathon
Contract matter.
The potential liability of the Company associated with both the Marathon
Contract and the Amerada Hess Contract should the Company 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 the Company'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 these matters on the results of operation or financial position of
the Company.
The Company is also involved in various other legal, tax and regulatory
proceedings before various courts, regulatory commissions and government
agencies arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, the Company has made accruals in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," in order to provide for such matters. Management is of the
opinion that the final disposition of these proceedings will not have a material
adverse effect on the results of operations or financial position of the
Company.
Other Commitments and Contingencies
In 1993, the US 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. The Company's
pipelines, 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 the pipelines 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, the Company's pipelines will
file with FERC to recover a portion of these costs from pipeline customers.
Management is of the opinion that this matter will not have a material adverse
effect on the financial position of the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On June 18, 1997, Duke Energy and PanEnergy consummated a stock-for-stock
merger. See Note 1 to the Consolidated Financial Statements for further
information.
The Company is involved in interstate transportation and storage of natural gas
to customers in the Mid-Atlantic and New England states. The Company continues
to advance new projects that provide expanded services to meet the specific
needs of customers. In addition, the Company offers selective discounting to
further maximize revenues from existing capacity.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1997 was $30.6 million, compared
with $29.8 million for the same period in 1996. The increase was primarily due
to market-expansion projects.
Net income for the year to date June 30, 1997 was $69.6 million, compared with
$64.3 million for the same period in 1996. The increase was primarily due to
market-expansion projects, partially offset by costs incurred in 1997 related to
the consolidation of certain administrative functions.
Revenues for the three months ended June 30, 1997 compared with the same period
in 1996 increased primarily due to new incremental projects placed in service.
Higher operating income drove the Company's $5.7 million increase in earnings
before interest and taxes for the year to date June 30, 1997 compared with the
same period for 1996. The $4.2 million operating income increase was primarily
attributable to higher revenues related to new pipeline expansion projects.
Increased other operation and maintenance costs were caused by the consolidation
of certain administrative functions and office locations during the period.
LIQUIDITY AND CAPITAL RESOURCES
Investing Cash Flow
Capital expenditures totaled $32.7 million in the first six months of 1997,
compared with $30.2 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.
In addition to a previously announced project that will begin providing firm
transportation service in 1997, PanEnergy announced the Excelsior pipeline
project, which would increase delivery capability by 500 billion British thermal
units per day through the Company's connection in New Jersey, and the Spectrum
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.
9
<PAGE>
Financing Cash Flow
Subsequent to the Duke Energy and PanEnergy merger, several rating agencies
revised their ratings for the Company. A summary of the corporate debt ratings
follows.
CURRENT PRIOR
Standard & Poor's A BBB+
Fitch A+ BBB+
Duff & Phelps BBB+ BBB+
Moody's A2 Baa1
OTHER
For information concerning litigation, and other contingencies see Note 4 to the
Consolidated Financial Statements.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 27, 1997 under Item 1,
Changes in Control of Registrant.
11
<PAGE>
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.
TEXAS EASTERN TRANSMISSION
CORPORATION
-----------------------------
Paul F. Ferguson, Jr.
Senior Vice President and
Chief Financial Officer
August 14, 1997
12
<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, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 71,500
<ALLOWANCES> 0
<INVENTORY> 14,800
<CURRENT-ASSETS> 207,400
<PP&E> 2,479,500
<DEPRECIATION> 858,600
<TOTAL-ASSETS> 4,222,300
<CURRENT-LIABILITIES> 316,900
<BONDS> 1,204,500
0
0
<COMMON> 0
<OTHER-SE> 1,731,400
<TOTAL-LIABILITY-AND-EQUITY> 4,222,300
<SALES> 0
<TOTAL-REVENUES> 468,000
<CGS> 0
<TOTAL-COSTS> 206,800
<OTHER-EXPENSES> 95,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,500
<INCOME-PRETAX> 112,300
<INCOME-TAX> 42,700
<INCOME-CONTINUING> 69,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,600
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
