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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
--------------
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 (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Westheimer Court P.O.Box 1642 Houston, Texas 77251-1642
(Address of principal executive offices) (Zip Code)
713-627-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
8 1/4% Notes Due 2004 The New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes (x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 10, 11, 12 and 13 have been omitted and Item 7 has
been reduced in accordance with such Instruction I.
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.
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at February 27, 1998 .................. none
Number of shares of Common Stock, without par value, outstanding
at February 27, 1998 ................................................. 1,000
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<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
PART I.
<S> <C>
1. Business......................................................................................................1
General...................................................................................................1
Natural Gas Transmission..................................................................................1
Competition...............................................................................................1
Regulation................................................................................................2
Environmental Matters.....................................................................................2
Other Matters.............................................................................................2
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.........................3
2. Properties....................................................................................................3
3. Legal Proceedings.............................................................................................3
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters.........................................3
6. Selected Financial Data.......................................................................................4
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.........................5
7A. Quantitative and Qualitative Disclosures About Market Risk....................................................6
8. Financial Statements and Supplementary Data...................................................................8
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................24
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................24
Signatures...................................................................................................25
Exhibit Index................................................................................................26
</TABLE>
<PAGE>
PART I.
Item 1. Business.
GENERAL
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary
of PanEnergy Corp (PanEnergy), which is an indirect wholly owned subsidiary of
Duke Energy Corporation (Duke Energy). TETCO was incorporated in Delaware in
1947. 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).
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 a pooling of
interests.
Executive offices of the Company are located at 5400 Westheimer Court,
Houston, Texas 77056-5310, and the telephone number is (713) 627-5400.
NATURAL GAS TRANSMISSION
The Company, together with Algonquin Gas Transmission Company (Algonquin),
Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company
(Trunkline), all subsidiaries of Duke Energy, had consolidated natural gas
deliveries of 2,862 TBtu (Trillion British thermal units) in 1997, compared to
2,939 TBtu in 1996, which represented approximately 12% of the natural gas
consumed in the United States.
The Company's throughput volumes for the years 1993 to 1997 were 1,115
TBtu, 1,194 TBtu, 1,234 TBtu, 1,349 TBtu, and 1,300 TBtu, respectively. A
substantial majority of the Company's delivered volumes of the interstate
pipelines represents gas transported under long-term firm service agreements
with local distribution company (LDC) customers in the pipelines' market areas.
Firm transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of
end-users. In addition, the pipelines offer interruptible transportation to
customers on a short-term or seasonal basis. The Company's major customers are
located in Pennsylvania, New Jersey and New York, and include LDCs serving the
Pittsburgh, Philadelphia, Newark and New York City metropolitan areas.
The Company also provides firm and interruptible open-access storage
services. Since the implementation of the FERC Order 636 restructuring, storage
is offered as a stand-alone unbundled service or as part of a no-notice bundled
service. The Company's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. The Company also leases storage capacity. The Company's certificated
working capacity in these three fields is 70 Billion cubic feet (Bcf), and the
combined working gas in storage was 52 Bcf on December 31, 1997. For further
discussion of Order 636 see "Business, Regulation."
During 1997, 1996 and 1995, total billings for transportation and storage
services provided by the Company to Public Service Electric and Gas Company
(Public) accounted for approximately 13% for each of 1997 and 1996 and 15% for
1995 of the Company's consolidated revenues. Public was the only customer of the
Company accounting for 10% or more of consolidated revenues in 1997, 1996 and
1995.
COMPETITION
The Company's interstate pipelines compete with other interstate and
intrastate pipeline companies in the transportation and storage of natural gas.
The principal elements of competition among pipelines are rates, terms of
service and flexibility and reliability of service. The Company continues to
offer selective discounting to maximize revenues from existing capacity and to
advance projects that provide expanded services to meet the specific needs of
customers.
In the Mid-Atlantic and New England markets, the Company competes directly
with Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company,
Iroquois Gas Transmission System, CNG Transmission Corporation and Columbia Gas
Transmission Corporation.
1
<PAGE>
Natural gas competes with other forms of energy available to the Company's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
REGULATION
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. Currently, the Company's rates
recover its cost of service, transition costs resulting from Order 636,
environmental clean-up costs, and a fair return. However, competitive forces may
cause the Company to modify rates to remain competitive. For further discussion
of rate matters, see Note 3 to the Consolidated Financial Statements,
"Regulatory Matters." The FERC also has authority over the construction and
operation of pipeline and related facilities utilized in the transportation
and sale of natural gas in interstate commerce, including the extension,
enlargement or abandonment of such facilities. The Company holds
certificates of public convenience and necessity issued by the FERC,
authorizing it to construct and operate the pipelines, facilities and properties
now in operation for which such certificates are required, and to transport and
store natural gas in interstate commerce.
The Company's pipelines operate as open-access transporters of natural gas.
In 1992, the FERC issued Order 636, which requires open-access pipelines to
provide firm and interruptible transportation services on an equal basis for all
gas supplies, whether purchased from the pipeline or from another gas supplier.
To implement this requirement, Order 636 provided, among other things, for
mandatory unbundling of services that have historically been provided by
pipelines into separate open-access transportation, sales and storage services.
Order 636 allows pipelines to recover eligible costs, known as "transition
costs," resulting from the implementation of Order 636. For further discussion
of Order 636, see Note 3 to the Consolidated Financial Statements, "Regulatory
Matters."
Regulation of the importation and exportation of natural gas is vested in
the Secretary of Energy, who has delegated various aspects of this jurisdiction
to the Office of Fossil Fuels of the Department of Energy.
The Company is also subject to the Natural Gas Pipeline Safety Act of 1968,
which regulates gas pipeline safety requirements and to the Hazardous Liquid
Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard
to air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental regulations affecting the Company
include, but are not limited to:
o The Clean Air Act Amendments of 1990;
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current
Issues - Environmental" and Note 10 to the Consolidated Financial
Statements, "Commitments and Contingencies - Environmental." Except as set
forth therein, compliance with federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise protecting the environment, is not expected to have a
material adverse effect on the consolidated results of operations or financial
position of the Company.
OTHER MATTERS
Demand for gas transmission on the Company's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in the
first and fourth quarters.
2
<PAGE>
Foreign operations and export sales were not material to the Company's
business as a whole.
At December 31, 1997, the Company had approximately 1,100 employees.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company may make statements regarding its
expectations, intent 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 and
expectations about future events may and often do vary from actual results, the
differences between assumptions, projections and expectations and actual results
can be material, and there can be no assurance that the forward-looking
statements will be realized. For a discussion of some factors that could cause
actual achievements and events to differ materially from those expressed or
implied in such forward-looking statements, see "Managements' Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues -
Forward-Looking Statements."
Item 2. Properties.
The Company's gas transmission system extends approximately 1,700 miles
from producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. The Company's
system, including its gathering systems, has 73 compressor stations. The
Company's system connects with the PEPL and Trunkline systems through the
Lebanon Lateral in Lebanon, Ohio.
The Company also owns and operates two offshore Louisiana gas supply
systems, which extend over 100 miles into the Gulf of Mexico and consist of 490
miles of pipeline.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
Item 3. Legal Proceedings.
See Note 10 to the Consolidated Financial Statements, "Commitments and
Contingencies" and "Managements' Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues - Environmental" for a
discussion of legal proceedings.
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
All of the Company's outstanding common stock, $1.00 par value per share,
is owned by PanEnergy. No dividends were declared in 1997 or 1996.
3
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In Millions 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Operating Revenues $ 923.8 $ 913.6 $ 874.4 $ 826.7 $ 905.6
Statement Operating Expenses 585.6 593.0 580.3 562.0 723.7
------------------------------------------------------------------
Operating Income 338.2 320.6 294.1 264.7 181.9
Other Income and Expenses 10.4 7.1 3.7 (6.3) .7
------------------------------------------------------------------
Earnings Before Interest and
Taxes 348.6 327.7 297.8 258.4 182.6
Interest Income - Parent - - - 34.5 33.2
Interest Expense 115.6 118.5 90.6 80.0 114.7
------------------------------------------------------------------
Earnings Before Income Taxes 233.0 209.2 207.2 212.9 101.1
Income Taxes 87.4 80.2 81.0 86.8 46.4
------------------------------------------------------------------
Income Before Extraordinary 145.6 129.0 126.2 126.1 54.7
Item
Extraordinary Item, Net of Tax -- (16.7) -- -- --
------------------------------------------------------------------
Net Income $ 145.6 $ 112.3 $ 126.2 $ 126.1 54.7
=================================================================================================================
Balance Total Assets $ 4,249.8 $ 4,318.1 $ 4,208.3 $ 4,198.9 $ 4,590.6
Sheet Long-term Debt $ 1,204.4 $ 1,204.4 $ 820.5 $ 818.4 $ 717.2
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Item 7. 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 (PanEnergy), which is an indirect wholly owned subsidiary of
Duke Energy Corporation (Duke Energy). TETCO was incorporated in Delaware in
1947. 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 FERC.
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 a pooling of
interests.
The following information is provided to facilitate increased understanding
of the 1997 and 1996 consolidated financial statements and accompanying notes of
the Company, and should be read in conjunction therewith. Because all of the
outstanding common stock of the Company is owned indirectly by Duke Energy, the
following discussion has been prepared in accordance with the reduced disclosure
format permitted by Form 10-K for issuers that are wholly owned subsidiaries of
reporting companies under the Securities Exchange Act of 1934 set forth in
General Instruction I(1)(a) and (b) for Form 10-K.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $145.6 million in 1997
compared to consolidated net income of $112.3 million in 1996. Operating income
was $338.2 million in 1997 and $320.6 million in 1996. Earnings before interest
and taxes were $348.6 million in 1997 compared to $327.7 in 1996. Operating
income and earnings before interest and taxes are not materially different, and
are affected by the same fluctuations for the Company.
Earnings before interest and taxes for the Company increased 6.4% in 1997
over the prior year primarily due to market-expansion projects placed in
service. Revenues increased $10.2 million in 1997 over the prior year due to
market-expansion projects placed in service. In 1997, operating expenses were
down $7.4 million from the prior year primarily due to a favorable state ad
valorem tax ruling and lower employee and executive incentive expenses,
partially offset by higher severance costs in 1997.
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures and its
$100 million, 10 1/8% debentures both due 2011. TETCO recorded a non-cash
extraordinary item of $16.7 million (net of income tax of $10.3 million) related
to the unamortized discount on this early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for 1997 and 1996 were $119 million and
$125.2 million, respectively. The Company plans to maintain its facilities and
pursue business expansion as opportunities arise. Projected 1998 capital and
investment expenditures, including allowance for funds used during construction,
are approximately $156.1 million. These projections are subject to periodic
review and revision. Actual expenditures incurred may vary from estimates due to
various factors, including business expansion opportunities and environmental
matters. Expenditures for 1998 are expected to be funded by cash from operations
and/or collection of intercompany advances receivable.
Duke Energy is participating in and responsible for overall development of
the $1 billion project to construct approximately 800 miles of pipeline
facilities from the Sable Island natural gas project through Maine. In July 1997
and September 1997, the FERC approved Phase I and Phase II of this project,
respectively. Duke Energy received notice in October 1997 that the Joint Review
Panel of the Canadian government and the Maritime provinces had recommended
plans for the Sable Offshore Energy Project to proceed. The Sable Island project
will develop the natural gas reserves which lie off the coast of Nova Scotia,
near Sable Island, and will provide natural gas resources to the Company's
customers in the northeast U.S.
5
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company is exposed to changes in interest rates as
a result of significant financing through its issuance of variable-rate debt and
fixed-rate debt. The Company manages its interest rate exposure by limiting its
variable-rate exposure to a certain percentage of total capitalization, as set
by policy, and by monitoring the effects of market changes in interest rates.
All of the Company's variable-rate debt is due to PanEnergy. (See Notes 8 and 9
to the Consolidated Financial Statements.)
If market interest rates average 1% more in 1998 than in 1997, the
Company's interest expense would increase, and income before taxes would
decrease by approximately $6.1 million. This amount has been determined by
considering the impact of the hypothetical interest rates on the Company's
variable-rate debt balances as of December 31, 1997. These analyses do not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. In the event of a significant change in
interest rates, management would likely take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity analysis assumes
no changes in the Company's financial structure.
CURRENT ISSUES
Operations Outlook. The Company's natural gas transmission operations is
expected to grow moderately, consistent with historical trends. The Company
continues to offer selective discounting to maximize revenues from existing
capacity and to advance projects that provide expanded services to meet the
specific needs of customers. Several projects have been announced that position
the Company to meet increasing demand for gas in northeast markets by connecting
new sources of supply in eastern and western Canada to the existing pipeline
system.
Environmental. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
Superfund Sites. The Company is considered by regulators to be a
potentially responsible party and may be subject to future liability at one
federal Superfund site. The federal claims for this site have been settled,
however state claims are now being asserted. The Company will share in any
liability associated with remediation of contamination at this site with other
potentially responsible parties. Management is of the opinion that resolution of
these matters will not have a material adverse effect on the consolidated
results of operations or financial position of the Company.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. The
Company is currently conducting PCB assessment and clean-up 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 clean-up work. The Company expects to complete these clean-up programs
during 1998. Groundwater monitoring activities will continue at several sites
beyond 1998.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the Company's systems, which were included
in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These
cost estimates represent gross clean-up costs expected to be incurred, have not
been discounted or reduced by customer recoveries and do not include fines,
penalties or third-party claims. Costs expected to be recovered from customers
are included in the Consolidated Balance Sheets as of December 31, 1997 and
1996, as Environmental Clean-up Costs.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against the Company, alleging improper disposal of PCBs at the Company's three
compressor station sites in Kentucky. This suit is still pending. In 1996, the
Company completed clean-up of these sites under the U.S. Consent Decree.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
6
<PAGE>
Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 10 to the Consolidated Financial
Statements.
Computer Systems Changes For The Year 2000. The Company is incurring
incremental costs to modify existing computer systems to accommodate the year
2000 and beyond. The Company is currently making modifications to its programs
and is of the opinion that remaining modifications will be completed before they
become problematic. Management is of the opinion that the costs associated with
these modifications will not have a material adverse effect on the consolidated
results of operations or financial position of the Company.
Forward-Looking Statements. From time to time, the Company may make
statements regarding its expectations, intent 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 and expectations about future events may and often do vary from
actual results, the differences between assumptions, projections and
expectations and actual results can be material, and there can be no assurance
that the forward-looking statements will be realized. 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
7
<PAGE>
Item 8. Financial Statements and Supplementary Data.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
---- ---- ----
Operating Revenues
<S> <C> <C> <C>
Transportation and storage of natural gas $874.4 $867.2 $843.2
Other 49.4 46.4 31.2
------ ------ ------
Total operating revenues 923.8 913.6 874.4
------ ------ ------
Operating Expenses
Operation and maintenance 401.6 405.6 398.3
Depreciation and amortization 147.3 145.8 143.9
Property and other taxes 36.7 41.6 38.1
------ ------ ------
Total operating expenses 585.6 593.0 580.3
------ ------ ------
Operating Income 338.2 320.6 294.1
------ ------ ------
Other Income and Expenses 10.4 7.1 3.7
------ ------ ------
Earnings Before Interest and Taxes 348.6 327.7 297.8
Interest Expense 115.6 118.5 90.6
------ ------ ------
Earnings Before Income Taxes 233.0 209.2 207.2
Income Taxes 87.4 80.2 81.0
------ ------ ------
Income Before Extraordinary Item 145.6 129.0 126.2
------ ------ ------
Extraordinary Item, Net of Tax -- (16.7) --
------ ------ ------
Net Income $145.6 $112.3 $126.2
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $145.6 $112.3 $126.2
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 152.1 152.5 151.0
Deferred income taxes 14.3 40.9 36.4
Natural gas transition cost recoveries (38.7) 79.0 (81.9)
Extraordinary charge, net of tax -- 16.7 --
(Increase) Decrease in
Receivables (3.4) (55.5) 6.7
Inventory 1.8 3.0 1.0
Other current assets 2.7 41.1 47.0
Increase (Decrease) in
Accounts payable (8.9) (0.9) 9.6
Taxes accrued 19.2 11.4 4.3
Other current liabilities (52.5) (22.3) (36.0)
Other, net (44.8) (17.8) (9.8)
------ ------ ------
Net cash provided by operating activities 187.4 360.4 254.5
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (119.0) (125.2) (135.3)
Net increase in advances receivable - parent (64.5) (223.1) (132.3)
Retirements and other (3.9) 0.4 2.2
------ ------ ------
Net cash used in investing activities (187.4) (347.9) (265.4)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for the redemption of long-term debt -- (250.0) --
Net increase in notes payable -- 250.0 --
Other -- (12.6) --
------ ------ ------
Net cash used in financing activities -- (12.6) --
------ ------ ------
Net decrease in cash and cash equivalents -- (0.1) (10.9)
Cash and cash equivalents at beginning of year -- 0.1 11.0
------ ------ ------
Cash and cash equivalents at end of year $ -- $ -- $ 0.1
====== ====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 104.5 $ 117.6 $ 85.0
Cash paid for income taxes $ 58.4 $ 45.3 $ 45.2
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31
----------------
1997 1996
---- ----
ASSETS
Current Assets
<S> <C> <C>
Receivables $ 80.6 $ 77.2
Inventory 14.3 16.1
Current deferred income taxes -- 21.9
Current portion of natural gas transition costs 66.4 64.8
Current portion of environmental clean-up costs 12.3 10.8
Other 19.8 22.5
-------- --------
Total current assets 193.4 213.3
-------- --------
Investments and Other Assets
Advances receivable - parent 973.7 909.2
Goodwill, net 156.2 161.2
Other 16.8 17.8
-------- --------
Total investments and other assets 1,146.7 1,088.2
-------- --------
Property, Plant and Equipment
Cost 3,411.0 3,317.5
Less accumulated depreciation and amortization 908.0 796.9
-------- --------
Net property, plant and equipment 2,503.0 2,520.6
-------- --------
Regulatory Assets and Deferred Debits
Debt expense 45.5 50.9
Natural gas transition costs 192.9 249.8
Environmental clean-up costs 78.6 90.4
Other 89.7 104.9
-------- --------
Total regulatory assets and deferred debits 406.7 496.0
-------- --------
Total Assets $4,249.8 $4,318.1
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable $ 39.0 $ 47.9
Taxes accrued 106.8 83.5
Interest accrued 14.1 14.1
Current portion of natural gas transition liabilities 35.0 84.4
Current portion of environmental clean-up liabilities 9.0 26.1
Other 98.8 151.3
-------- --------
Total current liabilities 302.7 407.3
-------- --------
Long-term Debt
Notes payable - parent 605.0 605.0
Other 599.4 599.4
-------- --------
Total long-term debt 1,204.4 1,204.4
-------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 592.0 600.9
Natural gas transition liabilities 77.3 121.9
Environmental clean-up liabilities 120.1 136.6
Other 145.9 185.2
-------- --------
Total deferred credits and other liabilities 935.3 1,044.6
-------- --------
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 343.9 198.3
-------- --------
Total common stockholder's equity 1,807.4 1,661.8
-------- --------
Total Liabilities and Stockholder's Equity $4,249.8 $4,318.1
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
1997 1996 1995
---- ---- ----
Common Stock
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ --
-------- -------- --------
Balance at end of year -- -- --
-------- -------- --------
Paid-in-Capital
Balance at beginning of year 1,463.5 1,470.7 1,572.5
Goodwill adjustments -- (7.2) (101.8)
-------- -------- --------
Balance at end of year 1,463.5 1,463.5 1,470.7
-------- -------- --------
Retained Earnings
Balance at beginning of year 198.3 86.0 314.8
Net income 145.6 112.3 126.2
Common stock dividends -- -- (355.0)
-------- -------- --------
Balance at end of year 343.9 198.3 86.0
-------- -------- --------
Total Common Stockholder's Equity $1,807.4 $1,661.8 $1,556.7
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
Notes to Consolidated Financial Statements
For The Years Ended December 31, 1997, 1996 and 1995
Note 1. Nature of Operations
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary
of PanEnergy Corp (PanEnergy), which is an indirect wholly owned subsidiary of
Duke Energy Corporation (Duke Energy). 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).
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 a pooling of
interests.
Note 2. Summary of Significant Accounting Policies
Cash and Cash Equivalents. All liquid investments with maturities at date
of purchase of three months or less are considered cash equivalents.
Consolidation. The consolidated financial statements reflect consolidation
of all of the Company's majority-owned subsidiaries after the elimination of
intercompany transactions.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles appropriate in the circumstances to
reflect in all material respects the substance of events and transactions which
should be included. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported. However, actual results could differ from these
estimates.
Inventory. Inventory, which consists of materials and supplies,
is recorded at the lower of cost or market, primarily using the average cost
method.
Gas Imbalances. Gas imbalances occur as a result of differences in volumes
of gas received and delivered. Gas imbalances receivables are valued at lower of
cost or market while gas imbalance payables are valued at market or contract
price.
Goodwill Amortization. The Company amortizes goodwill related to
PanEnergy's purchase of Texas Eastern Corporation (TEC) and its subsidiaries in
1989 on a straight-line basis over 40 years. Accumulated amortization of
goodwill at December 31, 1997 and 1996 was $88.6 million and $83.6 million,
respectively.
Property, Plant and Equipment. Property, plant and equipment is stated at
cost. The Company capitalizes all construction-related direct labor and
materials. The cost of renewals and betterments that extend the useful life of
property is also capitalized. The cost of repairs and replacements is charged to
expense. Depreciation is computed using the straight-line method. The Company's
composite weighted-average depreciation rates were 4.27, 4.35 and 4.39 percent
for 1997, 1996 and 1995, respectively.
At the time property, plant and equipment maintained by the Company's
FERC-regulated operations are retired, the original cost plus the cost of
retirement, less salvage, is charged to accumulated depreciation and
amortization. When entire FERC-regulated operating units are sold or
non-regulated properties are retired or sold, the property and related
accumulated depreciation and amortization accounts are reduced and any gain or
loss is recorded in income, unless otherwise required by the FERC.
13
<PAGE>
Unamortized Debt Premium, Discount and Expense. Expenses incurred in
connection with the issuance of presently outstanding long-term debt, and
premiums and discounts relating to such debt, are amortized over the terms of
the respective issues. Also, any call premiums or unamortized expenses
associated with refinancing higher-cost debt obligations used to finance
regulated assets and operations are amortized consistent with regulatory
treatment of these items.
Environmental Expenditures. Expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Environmental expenditures relating to current
or future revenues are expensed or capitalized as appropriate. Liabilities are
recorded when environmental assessments and/or clean-ups are probable and the
costs can be reasonably estimated. Certain of these environmental assessments
and clean-up costs have been deferred and are included in Regulatory Assets and
Deferred Debits as they are expected to be recovered from the Company's
customers.
Cost-Based Regulation. The regulated operations of the Company are subject
to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly, the
Company records certain assets and liabilities that result from the effects of
the ratemaking process that would not be recorded under generally accepted
accounting principles for non-regulated entities. The regulatory assets and
regulatory liabilities of the Company are classified as Regulatory Assets and
Deferred Debits and Deferred Credits and Other Liabilities, respectively, in the
Consolidated Balance Sheets. The Company regularly evaluates the continued
applicability of SFAS No. 71, considering such factors as the impact of
competition and necessity to discount cost based rates charged to customers.
Increased competition might require entities to reduce their asset balances to
reflect a market basis less than cost and would also require entities to write
off their associated regulatory assets. Management cannot predict the potential
impact, if any, of increased competition on the Company's future financial
position and results of operations. However, the Company continues to position
itself to effectively meet these challenges by maintaining prices that are
competitive.
Revenues. The Company recognizes transportation and storage revenues in the
period service is provided. When rate cases associated with the transportation
of natural gas are pending final FERC approval, a portion of the revenues
collected by the Company is subject to possible refund. The Company has
established reserves where required for such cases. See Note 3. Regulatory
Matters.
During 1997, 1996 and 1995, total billings for transportation and storage
services provided by the Company to Public Service Electric and Gas Company
(Public) accounted for approximately 13% for each of 1997 and 1996 and 15% for
1995 of the Company's consolidated revenues. Public was the only customer of the
Company accounting for 10% or more of consolidated revenues in 1997, 1996 and
1995.
Allowance for Funds Used During Construction (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation.
Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
Income Taxes. Prior to the merger, PanEnergy and its subsidiaries filed a
consolidated federal income tax return. Subsequent to the merger, Duke Energy
and its subsidiaries file a consolidated federal income tax return. Federal
income taxes have been provided by the Company on the basis of its separate
company income and deductions in accordance with established practices of the
consolidated group.
Deferred income taxes have been provided for temporary differences.
Temporary differences occur when events and transactions recognized for
financial reporting result in taxable or tax-deductible amounts in different
periods.
Reclassifications. Certain amounts have been reclassified in the
consolidated financial statements to conform to the current presentation.
14
<PAGE>
Note 3. Regulatory Matters
The Company's interstate natural gas pipelines primarily provide
transportation and storage services pursuant to FERC Order 636. Order 636 allows
pipelines to recover eligible costs resulting from implementation of the order
(transition costs). In 1994, the FERC approved the Company's settlement
resolving regulatory issues related primarily to Order 636 transition costs and
a number of other issues related to services prior to Order 636. The Company's
liability for transition costs is estimated based on the amount of producers'
natural gas reserves and other factors. The Company's final and nonappealable
settlement provides for the recovery of certain of these transition costs from
customers through volumetric and reservation charges through 2002 and beyond, if
necessary. Pursuant to the settlement, the Company 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 1995, based upon
producers' discoveries of additional natural gas reserves, the Company increased
the estimated liabilities for transition costs by $125.8 million. Under the
terms of the existing settlement, regulatory assets were increased $85.8 million
for amounts expected to be collected from customers and the Company recognized a
$40 million charge to operating expenses ($26 million after tax).
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. On February 27, 1997 FERC issued an order reaffirming the right of
interstate pipelines to recover 100% of GSR costs. This matter is substantially
mitigated by the Company's transition cost settlements.
The Company believes the exposure associated with gas purchase contract
commitments is substantially mitigated by transition cost recoveries pursuant to
customer settlements, Order 636 and other mechanisms, and that this issue will
not have a material adverse effect on consolidated results of operations or
financial position of the Company.
Note 4. Related Party Transactions
A summary of related party transactions included in the consolidated
statements of income for each of the three years in the period ended December
31, 1997 is as follows:
- --------------------------------------------------------------------------------
In Millions 1997 1996 1995
- --------------------------------------------------------------------------------
Transportation and storage of natural gas $ 23.3 $ 30.3 $ 18.0
Other operating revenues 38.9 38.5 16.3
Operation and maintenance(a) 106.7 108.5 90.9
Interest expense 51.0 34.7 0.3
- --------------------------------------------------------------------------------
(a) Includes allocated retirement plan costs
A summary of certain balances due to or due from related parties included
in the consolidated balance sheets at December 31, 1997 and 1996 is as follows:
- ----------------------------------------------------------------------
In Millions 1997 1996
- ----------------------------------------------------------------------
Receivables $ 6.2 $ 10.9
Accounts payable 20.5 19.3
Taxes accrued 68.8 53.3
- ----------------------------------------------------------------------
Advances Receivable-Parent do not bear interest. Advances are carried as
open accounts and are not segregated between current and non-current amounts.
Increases and decreases in advances result from the movement of funds to provide
for operations, capital expenditures and debt payments of the Company.
Note 5. Gas Imbalances
The consolidated balance sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At December 31, 1997 and
1996, other current assets include $12.6 million and $3.1 million, respectively,
and other current liabilities include $9.8 million and $5.7 million,
respectively, related to gas imbalances.
15
<PAGE>
Note 6. Income Taxes
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consisted of the following:
- --------------------------------------------------------------------------------
In Millions 1997 1996 1995
- --------------------------------------------------------------------------------
Current income taxes
Federal $ 66.6 $ 34.9 $ 40.2
State 6.5 4.4 4.4
------ ------ ------
Total current income taxes 73.1 39.3 44.6
------ ------ ------
Deferred income taxes, net
Federal 12.2 36.4 31.4
State 2.1 4.5 5.0
------ ------ ------
Total deferred income taxes, net 14.3 40.9 36.4
------ ------ ------
Total income tax expense $ 87.4 $ 80.2 $ 81.0
====== ====== ======
- --------------------------------------------------------------------------------
Total income tax differs from the amount computed by applying the federal
income tax rate of 35% to income before income taxes. The reasons for this
difference are as follows:
- --------------------------------------------------------------------------------
In Millions 1997 1996 1995
- --------------------------------------------------------------------------------
Income tax, computed at the statutory rate $ 81.6 $ 73.2 $ 72.5
Adjustments resulting from:
State income tax, net of federal income tax
effect 5.6 5.8 6.1
Other items, net 0.2 1.2 2.4
------ ------ ------
Total income tax expense $ 87.4 $ 80.2 $ 81.0
====== ====== ======
Effective tax rate 37.5% 38.3% 39.1%
- --------------------------------------------------------------------------------
The tax effects of temporary differences that resulted in deferred income
tax assets and liabilities, and a description of the significant items that
created these differences as of December 31, 1997 and 1996, are as follows:
- --------------------------------------------------------------------------------
In Millions 1997 1996
- --------------------------------------------------------------------------------
Deferred credits and other liabilities $ 56.7 $ 39.3
Natural gas transition liabilities 27.1 42.7
Environmental clean-up liabilities 42.0 47.8
Other 7.2 20.1
------- -------
Total deferred income tax assets 133.0 149.9
------- -------
Property, plant and equipment (512.5) (511.6)
Regulatory assets and deferred debits (65.8) (44.0)
Natural gas transition costs (67.5) (87.4)
Environmental clean-up costs (27.5) (31.6)
------- -------
Total deferred income tax liabilities (673.3) (674.6)
------- -------
State deferred income tax, net of federal tax effect (55.7) (54.3)
------- -------
Net deferred income tax liability (596.0) $(579.0)
Portion classified as current
asset (liability) (4.0) 21.9
------- ------
Noncurrent portion $(592.0) $(600.9)
======== ========
In 1990, PanEnergy established a provision for certain tax issues related
to the purchase of TEC, which resulted in an increase in TETCO's goodwill and
paid-in capital. Following discussions with the Internal Revenue Service,
PanEnergy revised its tax reserve and TETCO's related goodwill and paid-in
capital by $7 million and $100 million in 1996 and 1995, respectively.
16
<PAGE>
Preliminary Draft - For Review Purposes Only
Note 7. Property, Plant and Equipment
A summary of property, plant and equipment by classification as of December
31, 1997 and 1996 is as follows:
- --------------------------------------------------------------------------------
In Millions 1997 1996
- --------------------------------------------------------------------------------
Transmission $ 3,208.7 $ 3,098.7
Underground storage 108.6 100.9
General plant 52.5 57.7
Construction work in progress 41.2 60.2
--------------------------
Total property, plant, and equipment 3,411.0 3,317.5
Less accumulated depreciation and amortization 908.0 796.9
--------------------------
Net property, plant and equipment $ 2,503.0 $ 2,520.6
================================================================================
Note 8. Financial Instruments
In 1996, the Company received $98.6 million from the financing of the right
to collect certain Order 636 natural gas transition costs, with limited
recourse. At December 31, 1997 and 1996, $52.8 million and $87.3 million,
respectively, remained outstanding related to the transition cost recovery
rights and were included in Other Current Liabilities in the Consolidated
Balance Sheets. In the opinion of management, the probability that the Company
will be required to perform under the recourse provisions is remote.
During 1997, the Company terminated its agreement to sell accounts
receivable which was entered into in 1996. At December 31, 1996, $56 million was
outstanding under this agreement.
The Company's financial instruments include $599.4 million and $599.4
million of Long-term Debt with an approximate fair value of $654.0 million and
$658.6 million as of December 31, 1997 and 1996, respectively. The majority of
these estimated fair value amounts of long-term debt were obtained from
independent parties. Judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates determined as of
December 31, 1997 and 1996 are not necessarily indicative of the amounts the
Company could have realized in current market exchanges.
The fair value of other Notes Payable - Parent are not materially different
from their carrying amounts because of the short-term nature of these
instruments or the stated rates approximating market rates.
The following financial instruments have no book value associated with them
and there are no fair values readily determinable since quoted market prices are
not available: sales agreements for trade accounts receivables and Order 636
natural gas transition cost recovery. The fair values of Advances Receivable -
Parent are not readily determinable since such amounts are carried as open
accounts. See Note 4, Related Party Transactions.
Note 9. Debt and Credit Facilities
Long-term debt outstanding as of December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In Millions Year Due 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes Payable-Parent
8.50% and 8.25% at December 31, 1997 and 1996, respectively 2001-2006 $ 605.0 $ 605.0
Notes Payable-Other
8% - 10 3/8% 2000 - 2004 500.0 500.0
Medium term, Series A, 7.64%-9.07% 1999 - 2012 100.0 100.0
Unamortized debt discount and premium, net (0.6) (0.6)
-----------------------
Total long-term debt $1,204.4 $1,204.4
=================================================================================================================
</TABLE>
The annual maturities of consolidated long-term debt at December 31, 1997
were $0, $49 million, $200 million, $116 million and $100 million for 1998
through 2002, respectively.
17
<PAGE>
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures and its
$100 million, 10 1/8% debentures due 2011. TETCO recorded a non-cash
extraordinary item of $16.7 million (net of income tax of $10.3 million) related
to the unamortized discount on this early retirement.
Note 10. Commitments and Contingencies
Future Construction Costs. The Company plans to maintain its regulated
facilities, and pursue business expansion of its regulated operations as
opportunities arise. Projected 1998 capital and investment expenditures for the
Company are approximately $156.1 million. These projections are subject to
periodic review and revisions. Actual expenditures incurred may vary from such
estimates due to various factors, including business expansion opportunities,
environmental matters and cost and availability of capital.
Environmental. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal,
and other environmental matters.
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and
clean-up 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 clean-up work. TETCO expects to complete
these clean-up programs during 1998. Groundwater monitoring activities will
continue at several sites beyond 1998.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against the Company, alleging improper disposal of PCBs at the Company's three
compressor station sites in Kentucky. This suit is still pending. In 1996, the
Company completed clean-up of these sites under the U.S. Consent Decree.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the Company's systems which are included
in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These
cost estimates represent gross clean-up costs expected to be incurred, have not
been discounted or reduced by customer recoveries and do not include fines,
penalties or third-party claims. Costs to be recovered from customers are
included in the Consolidated Balance Sheets as of December 31, 1997 and 1996, as
Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Litigation. In December 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; therefore 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. Marathon filed a counterclaim seeking a declaratory
judgment enforcing its interpretation of the Marathon Contract. On January 7,
1997, Marathon filed an answer and a counterclaim to TETCO's complaint seeking
declaratory judgment enforcing its interpretation of the Marathon Contract.
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 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.
On September 26, 1997, the judge presiding over the Marathon and Amerada
Hess contract matters issued summary judgments in both actions in favor of
TETCO. Marathon and Amerada Hess subsequently filed notices of appeal of the
summary judgments. On January 5, 1998, TETCO entered into an agreement with
Marathon settling all issues associated with the Marathon Contract. The
potential liability of the Company associated with the Amerada Hess Contract
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 involves numerous
complex legal
18
<PAGE>
and factual matters which will take a substantial period of time to resolve.
However, the Company does not believe that Amerada Hess will prevail on its
appeal of the lower court's summary judgment. Management is of the opinion that
the final disposition of this matter will not have a material adverse effect on
the consolidated results of operations or financial position of the Company.
The Company and its subsidiaries are also involved in 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 SFAS No. 5, "Accounting for
Contingencies," in order to provide for such matters. Management is of the
opinion that the final disposition of these matters 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, and 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, including for example attempted transfers of
contractual obligations to less creditworthy subsidiaries of 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.
Leases. The Company utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $9.3 million, $11
million, and $10.5 million in 1997, 1996, and 1995, respectively. Future minimum
rental payments under the Company's various operating leases for the years 1998
through 2002 are $8.3 million, $5.8 million, $3.1 million, $1.4 million, and $.9
million, respectively.
Note 11. Benefit Plans
Retirement Plan. The Company participates in PanEnergy's non-contributory
defined benefit retirement plan covering most employees with minimum of one year
vesting service. The plan provides retirement benefits for eligible employees of
the Company that are generally based on an employee's years of benefit accrual
service and highest average eligible earnings. PanEnergy's policy is to fund
amounts, as necessary, on an actuarial basis to provide assets sufficient to
meet benefits to be paid to plan members. With respect to the entire plan, the
fair value of the plan assets of $747.8 million and $ 857.5 million at December
31, 1997 and 1996, respectively, exceeded the actuarially computed present
value of the vested and non-vested accumulated benefit obligations of $205.6
million and $384.4 million at December 31, 1997 and 1996, respectively.
Assumptions used in the PanEnergy's pension and other postretirement benefits
accounting include:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Percent (%) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25 7.50 7.50
Salary increase 4.75 5.00 5.00
Expected long-term rate of return on plan assets 9.25 9.50 9.50
Assumed tax rate, where applicable 39.60 39.60 39.60
- ------------------------------------------------------------------------------------------
</TABLE>
The Company's net periodic pension benefit, as allocated by PanEnergy, was
$3 million, $2.8 million and $2.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
19
<PAGE>
PanEnergy also sponsors, and the Company participates in, an employee
savings plan which covers substantially all employees. The Company expensed plan
contributions of $3.8 million, $3.7 million and $3.6 million in 1997, 1996 and
1995, respectively.
Other Postretirement Benefits. The Company, in conjunction with PanEnergy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements as defined in the
plans.
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years. With respect to the entire plan,
the fair value of the plan assets was $121.7 million and $97.7 million at
December 31, 1997 and 1996, respectively, and the accumulated post retirement
benefit obligation was $256.2 million and $232.7 million at December 31, 1997
and 1996, respectively.
It is the Company's and PanEnergy's general policy to fund accrued
postretirement health care costs. PanEnergy's retiree life insurance plan is
fully funded based on actuarially-determined requirements.
The Company's net periodic postretirement benefit cost, as allocated
by PanEnergy, was $6.3 million, $6.9 million and $7.2 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The assumed health care cost trend rate used to estimate postretirement
benefits was 6.5% in 1997. This rate is expected to decrease, with a 5.5%
ultimate trend rate expected to be achieved by 1999. The effect of a 1% increase
in the assumed health care cost trend rate for each future year would result in
a $0.3 million increase in the annual aggregate postretirement benefit cost and
a $4.6 million increase in PanEnergy's accumulated postretirement benefit
obligation attributable to the Company at December 31, 1997.
20
<PAGE>
Note 12. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
First Second Third Fourth
In Millions Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Operating revenues $ 242.6 $ 225.4 $ 221.5 $ 234.3 $ 923.8
Operating income 89.8 76.1 87.6 84.7 338.2
Net income 39.0 30.6 38.3 37.7 145.6
1996
Operating revenues $ 239.2 $ 221.8 $ 220.5 $ 232.1 $ 913.6
Operating income 85.1 76.6 80.4 78.5 320.6
Income before extraordinary item 34.5 29.8 32.3 32.4 129.0
Net income 34.5 29.8 32.3 15.7 112.3
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Amounts reported on a quarterly basis are not necessarily indicative of
amounts expected for the respective years due to the effects of seasonal
temperature variations on energy consumption.
21
<PAGE>
Independent Auditors' Report
Texas Eastern Transmission Corporation
We have audited the accompanying consolidated balance sheet of Texas
Eastern Transmission Corporation (the Company) as of December
31, 1997, and the related consolidated statements of income, common
stockholder's equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audit. The consolidated financial statements of the Company for the years
ended December 31, 1996 and 1995 were audited by other auditors whose report,
dated January 16, 1997, expressed an unqualified opinion on those financial
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Charlotte, North Carolina
February 13, 1998
22
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Texas Eastern Transmission Corporation:
We have audited the accompanying consolidated balance sheet of Texas
Eastern Transmission Corporation as of December 31, 1996, and the related
consolidated statements of income, common stockholder's equity, and cash flows
for the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Eastern Transmission Corporation as of December 31, 1996, and the results of
their operations and their cash flows for the years ended December 31, 1996 and
1995 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Houston, Texas
January 16, 1997
23
<PAGE>
Responsibility for Financial Statements
The financial statements of Texas Eastern Transmission Corporation (the
Company) are prepared by management, which is responsible for their integrity
and objectivity. The statements are prepared in conformity with generally
accepted accounting principles appropriate in the circumstances to reflect in
all material respects the substance of events and transactions which should be
included. The other information in the annual report is consistent with the
financial statements. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, the Company's accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or are detected by employees within a timely period as
they perform their assigned functions. The Company's accounting controls are
continually reviewed for effectiveness. In addition, written policies, standards
and procedures, and a strong internal audit program augment the Company's
accounting controls.
Jeffrey L. Boyer
Vice President and Principal Accounting Officer
24
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company filed a report on Form 8-K on July 7, 1997 under Item 4,
Changes in Registrant's Certifying Accountant.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements, Supplemental Financial Data and
Supplemental Schedules included in Part II of this annual report are as
follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Common Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited) (included in Note 12 to the
Consolidated Financial Statements)
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) Exhibits - See Exhibit Index immediately following the signature page.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 1998 TEXAS EASTERN TRANSMISSION CORPORATION
(Registrant)
By____________________________________
Richard J. Osborne
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
Fred J. Fowler
President and Director
(ii) Principal financial officer:
Richard J. Osborne
Senior Vice President and Chief Financial Officer
(iii)Principal accounting officer:
Jeffrey L. Boyer
Vice President and Principal Accounting Officer
(iv) A majority of the Directors:
Paul M. Anderson
Paul F. Ferguson, Jr.
Date: March 27, 1998
Richard J. Osborne, by signing his name hereto, does hereby sign this
document on behalf of the registrant and on behalf of each of the above-named
persons pursuant to a power of attorney duly executed by the registrant and such
persons, filed with the Securities and Exchange Commission as an exhibit hereto.
By_________________________________
Richard J. Osborne
Senior Vice President and Chief
Financial Officer
26
<PAGE>
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not
so designated are incorporated by reference to a prior filing, as indicated.
<TABLE>
<CAPTION>
============================================================================================================
Exhibit Number Description Originally Filed as Exhibit Exhibit Number
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3.01 Restated Certificate of 3.1 to Form 10-Q of TETCO for 1-4456
Incorporation of Texas quarter ended September 30, 1993
Eastern Transmission
Corporation dated October
25, 1993
3.02 By-Laws of Texas Eastern 3.2 to Form 10-Q of TETCO for 1-4456
Transmission Corporation as quarter ended September 30, 1993
adopted on August 17, 1993
12 Computation of Ratio of
Earnings to Fixed Charges
23.1 Consent of Deloitte &
Touche LLP
23.2 Consent of KPMG Peat
Marwick LLP
*24.1 Power of Attorney authorizing
Richard J. Osborne and others
to sign the annual report on
behalf of the registrant and
certain of its directors and
officers.
*24.2 Certified copy of resolution of
the Board of Directors of the
registrant authorizing power of
attorney.
*27 Financial Data Schedule for
December 31, 1997
=============================================================================================================
</TABLE>
27
<PAGE>
Exhibit 12
TEXAS EASTERN TRANSMISSION CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars In Millions)
<TABLE>
<CAPTION>
12 Months Ended
--------------------------------------------------------------
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings Before Income Taxes $233.0 $209.2 $207.2 $212.9 $101.1
Fixed Charges 114.6 118.7 93.2 83.0 117.7
------- ------- ------- ------- -------
Total $347.6 $327.9 $300.4 $295.9 $218.8
======= ======= ======= ======= =======
Fixed Charges
Interest on debt $111.8 $115.4 $ 90.2 $ 80.0 $114.7
Interest component of
rentals 2.8 3.3 3.0 3.0 3.0
------- ------- -------- -------- -------
Fixed Charges $114.6 $118.7 $ 93.2 $ 83.0 $117.7
======= ======= ======== ======= =======
Ratio of Earnings to Fixed
Charges 3.0 2.8 3.2 3.6 1.9
</TABLE>
EXHIBIT NO. 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-67690 of Texas Eastern Transmission Corporation on Form S-3 of our report
dated February 13, 1998, appearing in this Form 10-K of Texas Eastern
Transmission Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 27, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Texas Eastern Transmission Corporation:
We consent to incorporation by reference in the registration statement
(No. 33-67690) on Form S-3 of Texas Eastern Transmission Corporation of our
report dated January 16, 1997, relating to the consolidated balance sheet of
Texas Eastern Transmission Corporation and Subsidiaries as of December 31, 1996,
and the related consolidated statements of income, common stockholder's equity,
and cash flows for each of the years ended December 31, 1996 and 1995, which
report appears in the December 31, 1997 annual report on Form 10-K of Texas
Eastern Transmission Corporation.
KPMG PEAT MARWICK LLP
Houston, Texas
March 27, 1998
TEXAS EASTERN TRANSMISSION CORPORATION
POWER OF ATTORNEY
-----------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
(Annual Report)
The undersigned Texas Eastern Transmission Corporation, a Delaware
corporation and certain of its officers and/or directors, do each hereby
constitute and appoint Richard J. Osborne, W. Edward Poe, Jr. and Jeffrey L.
Boyer, and each of them, to act as attorneys-in-fact for and in the respective
names, places, and stead of the undersigned, to execute, seal, sign and file
with the Securities and Exchange Commission the Annual Report of said Texas
Eastern Transmission Corporation on Form 10-K and any and all amendments
thereto, hereby granting to said attorneys-in-fact, and each of them, full
power and authority to do and perform all and every act and thing whatsoever
requisite, necessary, or proper to be done in and about the premises, as fully
to all intents and purposes as the undersigned, or any of them, might or could
do if personally present, hereby ratifying and approving the acts of said
attorneys-in-fact.
Executed the 18th day of March, 1998.
TEXAS EASTERN TRANSMISSION CORPORATION
By (Signature of Fred J. Fowler)
-----------------------------------
Fred J. Fowler
President
<PAGE>
(Signature of Fred J. Fowler) President
- ------------------------------- (Principal Executive Officer and
Fred J. Fowler Director
(Signature of Richard J. Osborne) Senior Vice President and Chief
- ------------------------------- Financial Officer (Principal
Richard J. Osborne Financial Officer)
(Signature of Jeffrey L. Boyer) Vice President and Principal
- ------------------------------- Accounting Officer
Jeffrey L. Boyer
(Signature of Paul M. Anderson) (Director)
- -------------------------------
Paul M. Anderson
(Signature of Paul F. Ferguson, Jr.) (Director)
- -------------------------------
Paul F. Ferguson, Jr.
<PAGE>
Certified Copy of Resolutions Adopted by
Unanimous Written to Action Without a Meeting
of the Board of Directors of
Texas Eastern Transmission Corporation
Effective March 16, 1998
FURTHER RESOLVED, That the Power of Attorney as presented to and
executed by the Directors in connection with the execution of this written
consent be, and hereby is, approved in form and content for purposes of
filing the Form 10-K Annual Report for the year ended December 31, 1997
with the Securities and Exchange Commission
* * * * * *
I do hereby certify that the above is a full, true and complete extract
from a unanimous written consent to action without a meeting of the Board of
Directors of Texas Eastern Transmission Corporation, effective March 16, 1997
IN WITNESS WHEREOF, I have hereunto set my hand affixed the Corporate Seal
of said Texas Eastern Transmission Corporation this 27th day of March, 1998.
(Signature of Robert T. Lucas III)
----------------------------------
Robert T. Lucas III
Assistant Secretary
[SEAL]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Texas Eastern Transmission Corporation Annual Report on Form 10-K for the year
ended December 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 80,600
<ALLOWANCES> 0
<INVENTORY> 14,300
<CURRENT-ASSETS> 193,400
<PP&E> 3,411,000
<DEPRECIATION> 908,000
<TOTAL-ASSETS> 4,249,800
<CURRENT-LIABILITIES> 302,700
<BONDS> 1,204,400
0
0
<COMMON> 0
<OTHER-SE> 1,807,400
<TOTAL-LIABILITY-AND-EQUITY> 4,249,800
<SALES> 0
<TOTAL-REVENUES> 923,800
<CGS> 0
<TOTAL-COSTS> 401,600
<OTHER-EXPENSES> 184,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,600
<INCOME-PRETAX> 348,600
<INCOME-TAX> 87,400
<INCOME-CONTINUING> 145,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,600
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
