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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, 1998 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)
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 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 [ ].
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, 1998.........................1,000
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TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
ITEM PAGE
- ---- ----
PART I. FINANCIAL INFORMATION
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1. Financial Statements.................................................................................1
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1998 and 1997.......................................................................1
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997................................................................................2
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.............................3
Notes to Consolidated Financial Statements........................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition..............6
PART II. OTHER INFORMATION
1. Legal Proceedings....................................................................................8
5. Other Information....................................................................................8
6. Exhibits and Reports on Form 8-K.....................................................................8
Signatures...........................................................................................9
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ----------------
Operating Revenues
<S> <C> <C> <C> <C>
Transportation and storage of natural gas $ 209.4 $ 214.2 $ 435.4 $ 442.6
Other 12.9 11.2 26.1 25.4
---------------- ---------------- --------------- ----------------
Total operating revenues 222.3 225.4 461.5 468.0
---------------- ---------------- --------------- ----------------
Operating Expenses
Operation and maintenance 95.3 102.0 191.1 206.8
Depreciation and amortization 37.6 36.7 75.1 73.4
Property and other taxes 10.2 10.6 8.2 21.9
---------------- ---------------- --------------- ----------------
Total operating expenses 143.1 149.3 274.4 302.1
---------------- ---------------- --------------- ----------------
Operating Income 79.2 76.1 187.1 165.9
---------------- ---------------- --------------- ----------------
Other Income and Expenses 1.7 2.5 4.3 4.9
---------------- ---------------- --------------- ----------------
Earnings Before Interest and Taxes 80.9 78.6 191.4 170.8
Interest Expense 27.2 29.0 55.8 58.5
---------------- ---------------- --------------- ----------------
Earnings Before Income Taxes 53.7 49.6 135.6 112.3
Income Taxes 20.4 19.0 50.2 42.7
---------------- ---------------- --------------- ----------------
Net Income $ 33.3 $ 30.6 $ 85.4 $ 69.6
================ ================ =============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
Six Months Ended
June 30
-----------------------------------
1998 1997
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
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Net income $ 85.4 $ 69.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 77.4 75.8
Deferred income taxes (8.9) 5.9
Net change in current assets and liabilities (52.7) (121.6)
Other, net 2.6 --
--------------- ----------------
Net cash provided by operating activities 103.8 29.7
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (44.8) (32.7)
Net increase in advances receivable - parent (59.4) (1.3)
Retirements and other 0.4 4.3
--------------- ----------------
Net cash used in investing activities (103.8) (29.7)
--------------- ----------------
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
Cash and cash equivalents at end of period --------------- ----------------
$ -- $ --
Supplemental Disclosures =============== ================
Cash paid for interest (net of amount capitalized) $ 53.2 $ 52.3
Cash paid for income taxes $ 73.7 $ 48.2
</TABLE>
See Notes to Consolidated Financial Statements.
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
June 30, December 31,
1998 1997
(Unaudited)
--------------- ----------------
ASSETS
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Current Assets
Receivables $ 77.2 $ 80.6
Inventory 11.8 14.3
Current portion of natural gas transition costs 66.0 66.4
Current portion of environmental clean-up costs 13.2 12.3
Other 22.0 19.8
--------------- ----------------
Total current assets 190.2 193.4
--------------- ----------------
Investments and Other Assets
Advances receivable - parent 1,033.1 973.7
Goodwill, net 153.7 156.2
Other 9.7 16.8
--------------- ----------------
Total investments and other assets 1,196.5 1,146.7
--------------- ----------------
Property, Plant and Equipment
Cost 3,452.6 3,411.0
Less accumulated depreciation and amortization 971.2 908.0
--------------- ----------------
Net property, plant and equipment 2,481.4 2,503.0
--------------- ----------------
Regulatory Assets and Deferred Debits
Debt expense 42.8 45.5
Natural gas transition costs 167.4 192.9
Environmental clean-up costs 71.9 78.6
Other 72.7 73.1
--------------- ----------------
Total regulatory assets and deferred debits 354.8 390.1
--------------- ----------------
Total Assets $ 4,222.9 $ 4,233.2
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
June 30, December 31,
1998 1997
(Unaudited)
--------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
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Current Liabilities
Accounts payable $ 9.5 $ 39.0
Taxes accrued 95.4 106.8
Interest accrued 14.1 14.1
Current portion of natural gas transition liabilities 21.1 35.0
Current portion of environmental clean-up liabilities 6.8 9.0
Other 89.4 98.8
--------------- ----------------
Total current liabilities 236.3 302.7
--------------- ----------------
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 578.3 592.0
Natural gas transition liabilities 65.6 77.3
Environmental clean-up liabilities 118.8 120.1
Other 126.6 129.3
--------------- ----------------
Total deferred credits and other liabilities 889.3 918.7
--------------- ----------------
Common Stockholder's Equity
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding -- --
Paid-in capital 1,463.5 1,463.5
Retained earnings 429.3 343.9
--------------- ----------------
Total common stockholder's equity 1,892.8 1,807.4
--------------- ----------------
Total Liabilities and Stockholder's Equity $ 4,222.9 $ 4,233.2
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
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TEXAS EASTERN TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect wholly owned subsidiary of Duke Energy
Corporation. TETCO and its subsidiaries (the Company) are primarily engaged in
the interstate transportation and storage of natural gas. 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 consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. These consolidated 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.
Certain amounts for the prior periods have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. 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, December 31,
IN MILLIONS 1998 1997
-------------------------------------------
Receivables $ 3.6 $ 6.2
Accounts payable 2.0 20.5
Taxes accrued 52.2 68.8
-------------------------------------------
Interest expense included $12.8 million and $12.8 million for the three months
ended June 30, 1998 and 1997, respectively, of interest associated with notes
payable to parent. Interest expense for the year to date June 30, 1998 and 1997
included $25.7 million and $25.3 million, respectively, of interest associated
with notes payable to parent.
3. GAS IMBALANCES
The Consolidated Balance Sheets included in-kind balances as a result of
differences in gas volumes received and delivered. At June 30, 1998 and December
31, 1997, other current assets included $10.7 million and $12.6 million,
respectively, and other current liabilities included $8.3 million and $9.8
million, respectively, related to gas imbalances.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION. 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 is correct. TETCO 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.
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On September 26, 1997, the judge presiding over the Amerada Hess contract matter
issued a summary judgment in favor of TETCO. Amerada Hess subsequently filed a
notice of appeal of the summary judgment. On July 7, 1998, the Fifth Circuit
Court of Appeals affirmed the lower court's judgment in favor of TETCO. In
August 1998, Amerada Hess and TETCO entered into an agreement terminating the
Amerada Hess Contract effective June 30, 1998. Management is of the opinion that
this matter was resolved on terms favorable to the Company.
The Company and its subsidiaries are also involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters 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 consolidated results
of operations or financial position of the Company.
OTHER COMMITMENTS AND CONTINGENCIES. 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, buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company, 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 will
file with FERC to recover a portion of these costs from pipeline customers.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, the Company may
not receive the full value of anticipated benefits under the contracts.
Management is of the opinion that these commitments and contingencies will not
have a material adverse effect on the consolidated results of operations or the
financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect wholly owned subsidiary of Duke Energy
Corporation. TETCO and its subsidiaries (the Company) are primarily engaged in
the interstate transportation and storage of natural gas. 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).
RESULTS OF OPERATIONS
For the six months ended June 30, 1998, net income was $85.4 million, up $15.8
million from the comparable period in 1997. This increase is primarily the
result of a favorable state property tax ruling in 1998 and non-recurring
severance expenses in 1997, which are included in operating expenses. Market
expansion projects, partially offset by decreased throughput, also contributed
to the increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, capital and investment expenditures
totaled $44.8 million compared with $32.7 million for the same period in 1997.
The increase is primarily due to business expansion projects, including the
Philadelphia Lateral Expansion project completed in March 1998. The Philadelphia
Lateral Expansion is a pipeline restoration which provides up to 120 million
cubic feet per day (MMcf/d) of additional natural gas service
6
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to PECO Energy Company and 8 MMcf/d of new service to Mobil Oil Corp's
Paulsboro, N.J. refinery. Projected 1998 capital and investment expenditures,
including allowance for funds used during construction, are approximately $150.0
million. These projections are subject to periodic review and revision.
Expenditures for 1998 are expected to be funded by cash from operations and/or
collection of intercompany advances receivable.
On April 28, 1998, the Company filed with the FERC a proposed settlement to
accelerate recovery of natural gas transition costs and to reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The Company reviewed
the condition of its natural gas pipeline facilities and current maintenance
practices, and concluded that extension of the useful lives was appropriate. The
proposed settlement reduces customer rates as a result of the reduced
depreciation expense offset by the accelerated recovery of natural gas
transition costs. On June 26, 1998 the FERC issued a procedural order on the
settlement requesting certain additional information which was subsequently
provided by the Company on July 13, 1998. Currently, the settlement is unopposed
and pending further Commission action.
The Company anticipates implementation of the proposed settlement sometime in
the second half of 1998. The proposed settlement is not expected to have a
material effect on the net results of operations or financial position of the
Company. As a result of the proposed settlement, cash flows from operations are
not expected to change for the first two years after implementation due to the
offsetting effect on customer rates of the reduced depreciation expense and
increased recovery of natural gas transition costs. Once the natural gas
transition costs are fully recovered, cash flows from operations are expected to
decrease during 2001 through 2003 by an estimated total of $270 million.
CHANGES FOR THE YEAR 2000
In 1996, the Company initiated a program to address Year 2000 readiness issues
relating to computer and process control systems, equipment and devices. Many of
these systems, equipment and devices are now Year 2000 ready or have been
scheduled for replacement in the Company's ongoing systems plans. The Company is
continuing its assessment of Year 2000 impacts across its business and
operations, including its customer and vendor base, and continues to develop and
implement remediation plans using established processes to avoid adverse impacts
of Year 2000 on its business and operations. Management believes it is devoting
the resources necessary to achieve Year 2000 readiness in a timely manner. Total
cost of the program, including internal labor as well as incremental costs such
as consulting and contract costs, is expected to be approximately $2 million.
These costs exclude replacement systems that, in addition to being Year 2000
ready, provide significantly enhanced capabilities which will benefit operations
in future periods.
Based on assessments completed to date, compliance plans in process and
contingency planning efforts, management is of the opinion that the Year 2000
issue, including the cost of making its critical systems, equipment and devices
ready, will not have a material adverse effect on the Company's business
operations or consolidated results of operations or financial position.
7
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning litigation and other contingencies, see Note 4 to the
Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
natural gas industry; the weather and other natural phenomena; the timing and
extent of changes in commodity prices and interest rates; changes in
environmental and other laws and regulations to which the Company and its
subsidiaries are subject or other external factors over which the Company has no
control; the results of financing efforts; growth in opportunities for the
Company's subsidiaries; and the effect of the Company's accounting policies, in
each case during the periods covered by the forward-looking statements.
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 no reports on Form 8-K during the second quarter of
1998.
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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
August 12, 1998 /s/ Richard J. Osborne
----------------------
Richard J. Osborne
Senior Vice President and
Chief Financial Officer
9
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<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, 1998 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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 77200
<ALLOWANCES> 0
<INVENTORY> 11800
<CURRENT-ASSETS> 190200
<PP&E> 3452600
<DEPRECIATION> 971200
<TOTAL-ASSETS> 4222900
<CURRENT-LIABILITIES> 236300
<BONDS> 1204500
0
0
<COMMON> 0
<OTHER-SE> 1892800
<TOTAL-LIABILITY-AND-EQUITY> 4222900
<SALES> 0
<TOTAL-REVENUES> 461500
<CGS> 0
<TOTAL-COSTS> 191100
<OTHER-EXPENSES> 83300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55800
<INCOME-PRETAX> 191400
<INCOME-TAX> 50200
<INCOME-CONTINUING> 85400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85400
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
