================================================================================
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, 1998 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 72-0378240
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER 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)
</TABLE>
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 INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT. ITEMS 4, 6, 10, 11, 12 AND 13 HAVE BEEN OMITTED IN ACCORDANCE
WITH INSTRUCTION (I)(2)(C) AND ITEM 7 HAS BEEN REDUCED IN ACCORDANCE WITH
INSTRUCTION (I)(2)(A).
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, as amended.
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 25, 1999.......................................none
Number of shares of Common Stock, without par value, outstanding at
March 25, 1999........................................................1,000
================================================================================
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I.
1. Business..................................................................................1
General...............................................................................1
Natural Gas Transmission..............................................................1
Competition...........................................................................1
Regulation............................................................................2
Environmental Matters.................................................................2
Other Matters.........................................................................3
2. Properties................................................................................3
3. Legal Proceedings.........................................................................3
PART II.
5. Market for the Registrant's Common Equity and Related Stockholder Matters.................3
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.....3
7A. Quantitative and Qualitative Disclosures About Market Risk................................8
8. Financial Statements and Supplementary Data...............................................9
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....26
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................26
Signatures...............................................................................27
Exhibit Index............................................................................28
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 the actual results will
not differ materially from those expressed or implied by the forward-looking
statements. 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 "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Current Issues - Forward-Looking
Statements."
<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 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).
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's throughput volumes for the years 1994 to 1998 were 1,194 TBtu,
1,234 TBtu, 1,349 TBtu, 1,300 TBtu, and 1,148 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. Demand
for gas transmission on the Company's interstate pipeline system is seasonal,
with the highest throughput occurring during the colder periods in the first and
fourth quarters.
The Company also provides firm and interruptible open-access storage services.
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 61 Bcf on December 31, 1998.
During 1998, 1997 and 1996, total billings for transportation and storage
services provided by the Company to Public Service Electric and Gas Company
(PSE&G) accounted for approximately 14% for 1998 and 13% for each of 1997 and
1996 of the Company's consolidated revenues. PSE&G was the only customer of the
Company accounting for 10% or more of consolidated revenues in 1998, 1997 and
1996.
COMPETITION
The Company competes 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.
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.
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
1
<PAGE>
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. 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. For further discussion of regulatory
matters, see "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources" and Note 3 to the
Consolidated Financial Statements, "Regulatory Matters."
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." 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.
2
<PAGE>
OTHER MATTERS
Foreign operations and export sales are currently not material to the Company's
business as a whole.
At December 31, 1998, the Company had approximately 1,100 employees.
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 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 "Management's 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 common stock cash dividends were declared in 1998 or
1997.
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 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 following information is provided to facilitate increased understanding of
the 1998 and 1997 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.
3
<PAGE>
RESULTS OF OPERATIONS
The Company reported consolidated net income of $181 million in 1998 compared to
consolidated net income of $146 million in 1997. Operating income was $386
million in 1998 and $338 million in 1997. Earnings before interest and taxes
were $398 million in 1998 compared to $349 in 1997. 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 14% in 1998 over
the prior year. This increase was primarily due to decreased operating expenses
resulting from the favorable resolution of regulatory issues related to gas
supply realignment costs, favorable state property tax rulings and 1997
non-recurring severance costs. Market expansion projects, partially offset by
decreased throughput resulting from mild winter weather, also contributed to the
increase.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for 1998 and 1997 were $128 million and $119
million, respectively. These expenditures consist primarily of business
expansion projects and renewals and betterments which extend the useful life of
property, plant and equipment. Projected 1999 capital and investment
expenditures, including allowance for funds used during construction, are
approximately $180 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 1999 are expected to be funded by cash from operations and/or
collection of intercompany advances receivable.
Assets and liabilities recorded in the Consolidated Balance Sheets related to
natural gas transition cost recoveries and the related cash flow impacts are
affected by state and federal regulatory initiatives and specific agreements.
For more information on the natural gas transition cost recoveries, see Note 3
to the Consolidated Financial Statements, "Regulatory Matters."
On August 29, 1998, the FERC approved the Company's settlement to accelerate
recovery of natural gas transition costs and reduce depreciation expense to more
appropriately reflect the estimated useful lives of its facilities, principally
interstate natural gas pipelines. The order was effective October 1, 1998 and
includes a rate moratorium until 2004. 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. For
more information concerning the settlement, see Note 3 to the Consolidated
Financial Statements, "Regulatory Matters."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company is exposed to risk resulting from changes in
interest rates as a result of its issuance of variable-rate debt and fixed-rate
debt. The Company manages its interest rate exposure by limiting its
variable-rate and fixed-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,
"Financial Instruments" and "Long-term Debt," respectively.)
If market interest rates average 1% higher (lower) in 1999 than in 1998, the
Company's interest expense would increase (decrease), and earnings before income
taxes would decrease (increase) by approximately $6 million. This amount was
determined by considering the impact of the hypothetical interest rates on the
Company's variable-rate debt balances as of December 31, 1998. In the event of a
significant change in interest rates, management would likely take actions to
manage its exposure to the change. However, due to the uncertainty of the
specific
4
<PAGE>
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 are
expected to grow moderately, consistent with historical trends. 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.
COMPETITION. Wholesale. Currently, the interstate natural gas transmission
industry is regulated on a basis designed to recover the costs of providing
services to customers. (See Note 2 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies" for further discussion of
cost-based regulation.) On July 29, 1998, the FERC issued a Notice of Proposed
Rulemaking (NOPR) on short-term natural gas transportation services, which
proposed an integrated package of revisions to its regulations governing
interstate natural gas pipelines. "Short term" has been defined in the NOPR as
all transactions of less than one year. Under the proposed approach, cost-based
regulation would be eliminated for short-term transportation and replaced by
regulatory policies intended to maximize competition in the short-term
transportation market, mitigate the ability of companies to exercise residual
monopoly power and provide opportunities for greater flexibility providing
pipeline services. The proposed changes include initiatives to revise pipeline
scheduling procedures, receipt and delivery point policies and penalty policies,
and require pipelines to auction short-term capacity. Other proposed changes
would improve the FERC's reporting requirements, permit pipelines to negotiate
rates and terms of services, and revise certain rate and certificate policies
that affect competition.
In conjunction with the NOPR, the FERC also issued a Notice of Inquiry (NOI) on
its pricing policies in the existing long-term market and pricing policies for
new capacity. The FERC seeks comments on whether its policies are biased toward
either short-term or long-term service, provide accurate price signals and the
right incentives for pipelines to provide optimal transportation services and
construct facilities that meet future demand and do not result in over building
and excess capacity. Comments on the NOPR and NOI are due in April, 1999.
Because these notices are at a very early stage and ultimate resolution is
unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
Retail Competition. The Company currently does not provide retail natural gas
service, but changes in regulation to allow retail competition could affect the
Company's natural gas transportation contracts with local distribution
companies. Natural gas retail deregulation is in the very early stages of
development and management cannot estimate the effects of this matter on future
consolidated results of operations or financial position.
ENVIRONMENTAL MATTERS. 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. TETCO 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. TETCO
5
<PAGE>
completed the soil clean-up programs during 1998, subject to regulatory
approval. Groundwater monitoring activities will continue at several sites
beyond 1999.
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, 1998 and 1997, remaining estimated clean-up costs on the
Company's system were accrued and included in the Consolidated Balance Sheets in
Environmental Clean-up Liabilities. 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 have been deferred and included in
the Consolidated Balance Sheets 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.
Air Quality Control. In October 1998, the EPA issued a final ruling on regional
ozone control which requires revised State Implementation Plans for 22 eastern
states and the District of Columbia. This EPA ruling is being challenged in
court by various states, industry and other interests, including the Company.
Depending on the resolution of this matter, costs to the Company may range from
approximately $2 million to $18 million.
In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to achieve worldwide stabilization of greenhouse gas emissions,
including carbon dioxide emissions and methane from natural gas operations.
Further negotiations in November 1998 in Buenos Aires, Argentina, resulted in a
work plan to complete the operational details of the Kyoto agreement by late
2000. The Company is taking steps to prepare for possible action on greenhouse
gas emissions and has completed a greenhouse gas emissions inventory.
Implications of greenhouse gas emissions are being integrated into planning
processes. Because this matter is in the early stages of discussion, management
cannot estimate the effects on future consolidated results of operations or
financial position.
LITIGATION AND CONTINGENCIES. For information concerning litigation and other
commitments and contingencies, see Note 10 to the Consolidated Financial
Statements, "Commitments and Contingencies."
YEAR 2000 READINESS PROGRAM. State of Readiness. In 1996, the Company initiated
its Year 2000 Readiness Program and began a formal review of computer-based
systems and devices that are used in its business operations. These systems and
devices include customer information, financial, materials management and
personnel systems, as well as components of natural gas production, gathering,
processing and transmission.
The Company is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. The Company is employing a combination of systems repair
and planned systems replacement activities to achieve year 2000 readiness for
its business and process control systems, equipment and devices. The Company has
substantially completed the first two phases throughout its business operations,
and is in various stages of the third and final phase. The Company's goal is to
have its critical systems, equipment and devices year 2000 ready by mid-1999.
Business acquisitions routinely involve an analysis of year 2000 readiness and
are incorporated into the Company's overall program as necessary.
6
<PAGE>
The Company is actively evaluating and tracking year 2000 readiness of external
third parties with which it has a material relationship. Such third parties
include vendors, customers, governmental agencies and other business associates.
While the year 2000 readiness of third parties cannot be controlled, the Company
is attempting to assess the readiness of third parties and any potential
implications to its operations. Alternate suppliers of critical products, goods
and services are being identified, where necessary.
Costs. Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Current estimates for total costs of the
program, including internal labor as well as incremental costs such as
consulting and contract costs, are 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.
Risks. Management believes it has an effective program in place to manage the
risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which the Company
would temporarily be unable to deliver services to its customers. Management
believes that the most reasonably likely worst case scenario would be small,
localized interruptions of service, which likely would be rapidly restored. In
addition, there could be a temporary reduction in the service needs of customers
due to their own year 2000 problems. In the event that such a scenario occurs,
it is not expected to have a material adverse impact on the Company's
consolidated results of operations or financial position.
Contingency Plans. Year 2000 contingency planning is currently underway to
assure continuity of business operations for all periods during which year 2000
impacts may occur. The Company intends to complete its year 2000 contingency
plans by mid-1999. These plans address various year 2000 risk scenarios that
cross departmental, business unit and industry lines as well as specific risks
from various internal and external sources, including supplier readiness.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
the Company's business operation or consolidated results of operations or
financial position. Nevertheless, achieving year 2000 readiness is subject to
risks and uncertainties, including those described above. While management
believes the possibility is remote, if the Company's internal systems, or the
internal systems of external parties, fail to achieve year 2000 readiness in a
timely manner, the Company's business, consolidated results of operations or
financial condition could be adversely affected.
NEW ACCOUNTING STANDARD. In September 1998, Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company is required to adopt this standard by
January 1, 2000. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. The Company is currently reviewing the expected
impact of SFAS No. 133 on consolidated results of operations and financial
position.
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. Factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements include state and federal legislative and
regulatory initiatives that affect cost and investment recovery, have an impact
on rate structures and affect
7
<PAGE>
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 is subject or other external factors over which
the Company has no control; the results of financing efforts; growth in
opportunities for the Company; achievement of year 2000 readiness; and the
effect of accounting policies issued periodically by accounting standard-setting
bodies.
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."
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Transportation and storage of natural gas $ 835 $ 874 $ 867
Other 54 50 47
----- ----- -----
Total operating revenues 889 924 914
----- ----- -----
OPERATING EXPENSES
Operation and maintenance 339 402 406
Depreciation and amortization 135 147 146
Property and other taxes 29 37 41
----- ----- -----
Total operating expenses 503 586 593
----- ----- -----
OPERATING INCOME 386 338 321
OTHER INCOME AND EXPENSES 12 11 7
----- ----- -----
EARNINGS BEFORE INTEREST AND TAXES 398 349 328
INTEREST EXPENSE 110 116 119
----- ----- -----
EARNINGS BEFORE INCOME TAXES 288 233 209
INCOME TAXES 107 87 80
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM 181 146 129
EXTRAORDINARY LOSS, NET OF TAX - - (17)
----- ----- -----
NET INCOME $ 181 $ 146 $ 112
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
9
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181 $ 146 $ 112
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 140 152 153
Deferred income taxes 12 14 41
Transition cost (payments) recoveries, net (30) (39) 79
Extraordinary charge, net of tax - - 17
(Increase) Decrease in
Receivables (11) (3) (56)
Inventory 2 2 3
Other current assets (2) 3 41
Increase (Decrease) in
Accounts payable (28) (9) (1)
Taxes accrued 28 19 11
Other current liabilities (27) (53) (22)
Other, net - (45) (18)
----- ----- -----
Net cash provided by operating activities 265 187 360
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (128) (119) (125)
Net increase in advances receivable - parent (138) (64) (223)
Retirements and other 1 (4) -
----- ----- -----
Net cash used in investing activities (265) (187) (348)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for the redemption of long-term debt - - (250)
Net increase in notes payable - - 250
Other - - (12)
----- ----- -----
Net cash used in financing activities - - (12)
----- ----- -----
Net change in cash and cash equivalents - - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - - -
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ - $ -
===== ===== =====
SUPPLEMENTAL DISCLOSURES
Cash paid for interest (net of amount capitalized) $ 105 $ 105 $ 118
Cash paid for income taxes $ 77 $ 58 $ 45
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables $ 92 $ 81
Inventory 12 14
Current portion of natural gas transition costs 100 66
Current portion of environmental clean-up costs 11 12
Other 22 20
---------------- ----------------
Total current assets 237 193
---------------- ----------------
INVESTMENTS AND OTHER ASSETS
Advances receivable - parent 1,112 974
Goodwill, net 151 156
Other - 17
---------------- ----------------
Total investments and other assets 1,263 1,147
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Cost 3,493 3,411
Less accumulated depreciation and amortization 990 908
---------------- ----------------
Net property, plant and equipment 2,503 2,503
---------------- ----------------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 41 45
Natural gas transition costs 81 193
Environmental clean-up costs 68 79
Other 72 73
---------------- ----------------
Total regulatory assets and deferred debits 262 390
---------------- ----------------
TOTAL ASSETS $ 4,265 $ 4,233
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 11 $ 39
Taxes accrued 131 103
Deferred income taxes 29 4
Interest accrued 14 14
Current portion of natural gas transition liabilities - 35
Current maturities of long-term debt 49 -
Other 74 108
------- -------
Total current liabilities 308 303
------- -------
LONG-TERM DEBT
Notes payable - parent 605 605
Other 551 599
------- -------
Total long-term debt 1,156 1,204
------- -------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 584 592
Natural gas transition liabilities 4 77
Environmental clean-up liabilities 118 120
Other 109 129
------- -------
Total deferred credits and other liabilities 815 918
------- -------
COMMON STOCKHOLDER'S EQUITY
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding - -
Paid-in capital 1,464 1,464
Retained earnings 522 344
------- -------
Total common stockholder's equity 1,986 1,808
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,265 $ 4,233
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ - $ - $ -
------- ------- -------
BALANCE AT END OF YEAR - - -
------- ------- -------
PAID-IN CAPITAL
Balance at beginning of year 1,464 1,464 1,471
Goodwill adjustments - - (7)
------- ------- -------
BALANCE AT END OF YEAR 1,464 1,464 1,464
------- ------- -------
RETAINED EARNINGS
Balance at beginning of year 344 198 86
Net income 181 146 112
Common stock dividends (3) - -
------- ------- -------
BALANCE AT END OF YEAR 522 344 198
------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,986 $ 1,808 $ 1,662
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 one segment, which is 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).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of all
of the Company's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current and
expected future events, actual results could differ from those estimates.
INVENTORY. Inventory consists of materials and supplies and 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 imbalance receivables are valued at lower of
cost or market while gas imbalance payables are valued at market.
GOODWILL AMORTIZATION. Goodwill related to the purchase of Texas Eastern
Corporation (TEC) and its subsidiaries in 1989 is amortized on a straight-line
basis over 40 years. Accumulated amortization of goodwill at December 31, 1998
and 1997 was $94 million and $89 million, respectively.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost.
The Company capitalizes all construction-related direct labor and material
costs. The cost of renewals and betterments that extend the useful life of
property, plant and equipment is also capitalized. The cost of repairs and
replacements is charged to expense as incurred. Depreciation is generally
computed using the straight-line method. The composite weighted-average
depreciation rates were 3.8%, 4.3% and 4.4% for 1998, 1997 and 1996,
respectively.
When property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
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.
IMPAIRMENT OF LONG-LIVED ASSETS. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
14
<PAGE>
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Premiums, discounts and expenses
incurred in connection with the issuance of presently outstanding long-term debt
are amortized over the terms of the respective issues. 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 those items.
ENVIRONMENTAL EXPENDITURES. Environmental 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 are expected to be recovered from
the Company's customers and have, therefore, been deferred and are included in
the Consolidated Balance Sheets as Environmental Clean-up Costs.
COST-BASED REGULATION. The Company's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking process
are recorded that would not be recorded under generally accepted accounting
principles for non-regulated entities. These regulatory assets and liabilities
are classified in the Consolidated Balance Sheets as Regulatory Assets and
Deferred Debits and Deferred Credits and Other Liabilities, respectively. The
applicability of SFAS No. 71 is routinely evaluated, and factors such as the
impact of competition and the necessity to discount cost based rates charged to
customers are considered. Increasing competition might require companies to
reduce their asset balances to reflect a market basis less than cost and to
write off their associated regulatory assets. Management cannot predict the
potential impact, if any, of increasing competition on future financial position
or results of operations. However, the Company continues to position itself to
effectively meet these challenges by maintaining competitive prices.
REVENUES. Revenues on transportation and storage of natural gas are recognized
as service is provided. Revenues on sales of natural gas and petroleum products
are recognized in the period of delivery. When rate cases are pending final
approval, a portion of the revenues is subject to possible refund. Reserves have
been established where required for such cases.
Total billings for transportation and storage services provided by the Company
to Public Service Electric and Gas Company accounted for approximately 14% of
consolidated revenues for 1998 and 13% for each of 1997 and 1996. No other
customer accounted for 10% or more of consolidated revenues in 1998, 1997 or
1996.
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. 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. Investment tax credits have been
deferred and are being amortized over the estimated useful lives of the related
properties.
15
<PAGE>
EXTRAORDINARY ITEM. On October 1, 1996, TETCO redeemed $150 million, 10%
debentures and $100 million, 101/8% debentures due 2011. TETCO recorded a
non-cash extraordinary item of $17 million, net of income tax of $10 million,
related to the unamortized discount on this early retirement of debt.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
NEW ACCOUNTING STANDARD. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. The Company is
required to adopt this standard by January 1, 2000. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. The Company is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
NOTE 3. REGULATORY MATTERS
The Company primarily provides 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. Under the 1994 settlement, the Company's liability for transition
costs was estimated based on the amount of producers' natural gas reserves and
other factors. This settlement provided for the recovery of certain of these
transition costs from customers through volumetric and reservation charges. In
1995, based upon producers' discoveries of additional natural gas reserves, the
Company increased the estimated liabilities for transition costs by $126
million, increased regulatory assets by $86 million for amounts expected to be
collected from customers and recognized a $40 million charge to operating
expenses ($26 million after tax). In 1998, the Company favorably resolved all
remaining gas purchase contracts, recognizing $39 million of income ($24 million
after tax).
On August 29, 1998, the FERC approved a settlement filed by the Company, which
accelerates recovery of natural gas transition costs and reduces depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. Prior to the
settlement, 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. These facilities have a book value of
approximately $1.8 billion, net of accumulated depreciation of $2.6 billion. The
new weighted average rate of depreciation for storage and transportation plant
is approximately 1.25%. Implementation of the settlement began October 1, 1998,
and a rate moratorium will be in effect until 2004. The settlement reduces
customer rates as a result of the reduced depreciation expense offset through
2001 by the accelerated recovery of natural gas transition costs. The settlement
is not expected to have a material effect on net results of operations or
financial position.
NOTE 4. RELATED PARTY TRANSACTIONS
- ---------------------------------------------------------------------
INCOME STATEMENT TRANSACTIONS (in millions)
- ---------------------------------------------------------------------
Years Ended December 31,
------------------------------
1998 1997 1996
------------------------------
Transportation and storage of
natural gas $34 $23 $30
Other operating revenues 37 39 39
Operation and maintenance (a) 124 107 109
Interest expense 51 51 35
- ---------------------------------------------------------------------
(a) Includes allocated retirement plan costs
16
<PAGE>
- ----------------------------------------------------------
BALANCE SHEET TRANSACTIONS (in millions)
- ----------------------------------------------------------
December 31,
--------------------
1998 1997
--------------------
Receivables $10 $ 6
Accounts payable 2 21
Taxes accrued 91 69
- ----------------------------------------------------------
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, 1998 and
1997, other current assets include $16 million and $13 million, respectively,
and other current liabilities include $15 million and $10 million, respectively,
related to gas imbalances.
NOTE 6. INCOME TAXES
- -----------------------------------------------------------------------------
INCOME TAX EXPENSE (in millions)
- -----------------------------------------------------------------------------
Years Ended December 31,
-------------------------------
1998 1997 1996
-------------------------------
Current income taxes
Federal $ 85 $67 $35
State 10 6 4
-------------------------------
Total current income taxes 95 73 39
-------------------------------
Deferred income taxes, net
Federal 12 12 36
State - 2 5
-------------------------------
Total deferred income taxes, net 12 14 41
-------------------------------
Total income tax expense $107 $87 $80
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE (in millions)
- -----------------------------------------------------------------------------
Years Ended December 31,
-------------------------------
1998 1997 1996
-------------------------------
Income tax, computed at the statutory rate $101 $82 $73
Adjustments resulting from:
State income tax, net of federal income
tax effect 6 5 6
Other items, net - - 1
-------------------------------
Total income tax expense $107 $87 $80
- -----------------------------------------------------------------------------
Effective tax rate 37.2% 37.3% 38.3%
- -----------------------------------------------------------------------------
17
<PAGE>
- ------------------------------------------------------------------
NET DEFERRED INCOME TAX LIABILITY COMPONENTS (in millions)
- ------------------------------------------------------------------
December 31,
--------------------
1998 1997
--------------------
Deferred credits and other liabilities $ 38 $ 42
Natural gas transition liabilities 1 39
Environmental clean-up liabilities 43 45
Other 6 7
--------------------
Total deferred income tax assets 88 133
--------------------
Property, plant and equipment (517) (513)
Regulatory assets and deferred debits (38) (38)
Natural gas transition costs (63) (91)
Environmental clean-up costs (28) (31)
--------------------
Total deferred income tax liabilities (646) (673)
--------------------
State deferred income tax, net of federal
tax effect (55) (56)
--------------------
Net deferred income tax liability (613) (596)
Portion classified as current liability (29) (4)
--------------------
Noncurrent liability $(584) $(592)
- ------------------------------------------------------------------
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (in millions)
- ------------------------------------------------------------------
December 31,
--------------------
1998 1997
--------- ----------
Natural Gas Transmission $3,267 $3,209
Other 226 202
--------- ----------
Total property, plant, and equipment 3,493 3,411
Less accumulated depreciation and
amortization 990 908
--------------------
Net property, plant and equipment $2,503 $2,503
- ------------------------------------------------------------------
NOTE 8. FINANCIAL INSTRUMENTS
In 1996, the Company received $99 million from the financing of the right to
collect certain Order 636 natural gas transition costs, with limited recourse.
At December 31, 1998 and 1997, $17 million and $53 million, respectively,
remained outstanding related to the transition cost recovery rights and were
included in the Consolidated Balance Sheets as Other Current Liabilities and
Deferred Credits and Other Liabilities. Management believes the probability that
the Company will be required to perform under the recourse provisions is remote.
The Company's financial instruments include $600 million and $599 million of
long-term debt with an approximate fair value of $655 million and $654 million
as of December 31, 1998 and 1997, respectively. The majority of these estimated
fair value amounts of long-term debt was 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, 1998 and
1997 are not necessarily indicative of the amounts the Company could have
realized in current market exchanges.
The financing agreement for Order 636 natural gas transition cost recovery has
no fair value readily determinable since quoted market prices are not available.
The fair value of other Notes Payable - Parent are not materially different from
their carrying amounts because the stated rates approximate market rates. 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."
18
<PAGE>
NOTE 9. LONG-TERM DEBT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
LONG-TERM DEBT (in millions)
- ----------------------------------------------------------------------------------------------
December 31,
-----------------------
Year Due 1998 1997
------------------------------------
<S> <C> <C> <C>
Notes Payable-Parent
8.25% and 8.50% at December 31, 1998 and 1997,
respectively 2001 - 2006 $ 605 $ 605
Notes Payable-Other
8% - 10 3/8% 2000 - 2004 500 500
Medium term, Series A, 7.64% - 9.07% 1999 - 2012 100 100
Unamortized debt discount and premium, net - (1)
----------- -----------
Total long-term debt 1,205 1,204
Current maturities of long-term debt (49) -
----------- -----------
Total long-term portion $1,156 $1,204
- ----------------------------------------------------------------------------------------------
</TABLE>
The annual maturities of long-term debt at December 31, 1998 were $49 million,
$200 million, $116 million, $100 million and $0 million for 1999 through 2003,
respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
FUTURE CONSTRUCTION COSTS. Projected 1999 capital and investment expenditures
for the Company, including allowance for funds used during construction, are
approximately $180 million. These projections include market expansion projects
and costs relating to existing assets. These projected capital and investment
expenditures are subject to periodic review and revision and may vary
significantly from actual expenditures depending on various factors, including
business expansion opportunities, environmental regulation, weather, 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 completed the soil
clean-up programs during 1998, subject to regulatory approval. Groundwater
monitoring activities will continue at several sites beyond 1999.
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, 1998 and 1997, remaining estimated clean-up costs on the
Company's system have been accrued and are included in the Consolidated Balance
Sheets as Environmental Clean-up Liabilities. These cost estimates represent
gross clean-up costs expected to be incurred, have not been discounted or
reduced by customer recoveries and generally 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, 1998 and 1997, 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
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 consolidated results
of operations or financial position.
19
<PAGE>
LITIGATION. The Company is 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 believes that the final disposition of these
proceedings will not have a material adverse effect on consolidated results of
operations or financial position.
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 believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
LEASES. The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $7 million, $9 million and
$11 million in 1998, 1997 and 1996, respectively. Future minimum rental payments
under the Company's various operating leases for the years 1999 through 2003 are
$9 million, $6 million, $3 million, $1 million and $1 million, respectively.
NOTE 11. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN. The Company participates in PanEnergy's non-contributory
defined benefit retirement plan covering most employees with a minimum of one
year vesting service. Through December 31, 1998, the plan provided retirement
benefits for eligible employees of the Company that were generally based on an
employee's years of benefit accrual service and highest average eligible
earnings. Effective January 1, 1999, the benefit formula under the plan, for all
eligible employees, was changed to a cash balance formula. A cash balance plan
participant accumulates a retirement benefit based upon a percentage, which may
vary with age and years of service, of current eligible earnings and current
interest credits. The PanEnergy plan will merge into the Duke Energy plan in
early 1999.
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 participants. With
respect to the entire plan, the fair value of the plan assets of $819 million
and $748 million at December 31, 1998 and 1997, respectively, exceeded the
projected benefit obligations of $338 million and $290 million, as of December
31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
ASSUMPTIONS USED IN PANENERGY'S PENSION AND OTHER POSTRETIREMENT BENEFITS
ACCOUNTING (a)
- --------------------------------------------------------------------------------
(Percent) 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate 6.75 7.25 7.50
Salary increase 4.67 4.75 5.00
Expected long-term rate of return on
plan assets 9.25 9.25 9.50
Assumed tax rate, where applicable 39.60 39.60 39.60
- --------------------------------------------------------------------------------
(a) Reflects weighted averages across all plans.
20
<PAGE>
The Company's net periodic pension benefit, as allocated by PanEnergy, was $4
million, $3 million and $3 million for the years ended December 31, 1998, 1997
and 1996, respectively.
PanEnergy also sponsors, and the Company participates in, an employee savings
plan that covers substantially all employees. The Company expensed plan
contributions of $4 million each year in 1998, 1997 and 1996.
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. Under plan amendments effective late 1998 and early 1999, health care
benefits for future retirees were changed to limit employer contributions and
medical coverage.
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 is being amortized over approximately 20 years. With
respect to the entire plan, the fair value of the plan assets was $150 million
and $122 million at December 31, 1998 and 1997, respectively, and the
accumulated postretirement benefit obligation was $225 million and $256 million
at December 31, 1998 and 1997, 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 $7 million, $6 million and $7 million in 1998, 1997 and 1996,
respectively.
For measurement purposes, a 5% weighted average rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES (in millions)
- -----------------------------------------------------------------------------------------
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components $ - $ -
Effect on postretirement benefit obligation 5 (4)
- -----------------------------------------------------------------------------------------
</TABLE>
21
<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>
1998
Operating revenues $239 $222 $216 $212 $889
Operating income 108 (a) 79 115 (b) 84 386
EBIT 111 (a) 81 120 (b) 86 398
Net income 52 (a) 33 58 (b) 38 181
1997
Operating revenues $243 $225 $222 $234 $924
Operating income 90 (c) 76 87 85 338
EBIT 92 (c) 79 91 87 349
Net income 39 (c) 31 38 38 146
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of favorable state property tax rulings.
(b) Includes the effect of a favorable resolution of regulatory issues related
to gas supply realignment costs.
(c) Includes non-recurring severance expenses.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Texas Eastern Transmission Corporation
We have audited the accompanying consolidated balance sheets of Texas Eastern
Transmission Corporation and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income, common
stockholder's equity, and cash flows for the years then ended. These 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 statement of income, common stockholder's equity, and
cash flows of the Company for the year ended December 31, 1996 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 12, 1999
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Eastern Transmission Corporation
We have audited the accompanying consolidated statement of income, common
stockholder's equity, and cash flows for the year ended December 31, 1996. 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.
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 results of operations and cash flows for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Houston, Texas
January 16, 1997
24
<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.
/s/ Alan N. Harris
Alan N. Harris
Controller and Assistant Secretary
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data included
in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Common Stockholder's Equity for the Years
Ended December 31, 1998, 1997 and 1996
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 1998.
(c) Exhibits - See Exhibit Index immediately following the signature page.
26
<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 25, 1999 TEXAS EASTERN TRANSMISSION CORPORATION
(Registrant)
By /s/ Robert B. Evans
--------------------------------------
Robert B. Evans
Chairman of the Board and President
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:
By: /s/ Robert B. Evans
------------------------------------------
Robert B. Evans
Chairman of the Board and President
(ii) Principal financial officer:
By: /s/ Dorothy M. Ables
------------------------------------------
Dorothy M. Ables
Vice President, Chief Financial Officer and Treasurer
(iii) Principal accounting officer:
By: /s/ Alan N. Harris
------------------------------------------
Alan N. Harris
Controller and Assistant Secretary
(iv) A majority of the Directors:
By: /s/ Dorothy M. Ables
------------------------------------------
Dorothy M. Ables
By: /s/ Robert B. Evans
------------------------------------------
Robert B. Evans
By: /s/ Theopolis Holeman
------------------------------------------
Theopolis Holeman
Date: March 25, 1999
27
<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 1-4456
Incorporation of Texas Eastern for quarter ended
Transmission Corporation dated September 30, 1993
October 25, 1993
3.02 By-Laws of Texas Eastern 3.2 to Form 10-Q of TETCO 1-4456
Transmission Corporation as for quarter ended
adopted on August 17, 1993 September 30, 1993
*12 Computation of Ratio of
Earnings to
Fixed Charges
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of KPMG LLP
*27 Financial Data Schedule for
December 31, 1998
- ------------------------------------------------------------------------------------------
</TABLE>
28
Exhibit 12.
TEXAS EASTERN TRANSMISSION CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Before Income Taxes $ 288 $ 233 $ 209 $ 207 $ 213
Fixed Charges 112 115 119 93 83
----- ----- ----- ----- -----
Total $ 400 $ 348 $ 328 $ 300 $ 296
===== ===== ===== ===== =====
Fixed Charges
Interest on debt $ 111 $ 112 $ 116 $ 90 $ 80
Interest component of rentals 1 3 3 3 3
----- ----- ----- ----- -----
Fixed Charges $ 112 $ 115 $ 119 $ 93 $ 83
===== ===== ===== ===== =====
Ratio of Earnings to Fixed Charges 3.6 3.0 2.8 3.2 3.6
</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 12, 1999, appearing in this Form 10-K of Texas Eastern
Transmission Corporation for the years ended December 31, 1998 and 1997.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 25, 1999
Exhibit No. 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the 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 statement of income,
common stockholder's equity, and cash flows for the year ended December 31,
1996, which report appears in the December 31, 1998 annual report on Form 10-K
of Texas Eastern Transmission Corporation.
/s/ KPMG LLP
Houston, Texas
March 25, 1999
<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, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 92,000
<ALLOWANCES> 0
<INVENTORY> 12,000
<CURRENT-ASSETS> 237,000
<PP&E> 3,493,000
<DEPRECIATION> 990,000
<TOTAL-ASSETS> 4,265,000
<CURRENT-LIABILITIES> 308,000
<BONDS> 1,156,000
0
0
<COMMON> 0
<OTHER-SE> 1,986,000
<TOTAL-LIABILITY-AND-EQUITY> 4,265,000
<SALES> 0
<TOTAL-REVENUES> 889,000
<CGS> 0
<TOTAL-COSTS> 339,000
<OTHER-EXPENSES> 164,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,000
<INCOME-PRETAX> 398,000
<INCOME-TAX> 107,000
<INCOME-CONTINUING> 181,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,000
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
